Thursday, November 9, 2006

Polinsky & Shavell on Voluntary Disclosure of Product Risks

Posted by Alan Childress

Law-and-econ giants A. Mitchell Polinsky (Stanford, law) and Steven Shavell (Harvard, law) have posted on SSRN-LSN Tort & Prod. Liab. Law their new article, "Mandatory versus Voluntary Disclosure of Product Risks."  It is obviously not about the ethics issues as such, but rather the liability implications involved in mandatory versus voluntary disclosure rules.  But it seems to be indirectly important to legal ethics--at the very least in the sense of a proper calculus of the risks and benefits of risk disclosure in advising clients, as well as the Rule 1.6 confidentiality implications of disclosure (now that newer versions of the MR exception cover long-term personal harm and not just criminal acts producing imminent harm).  Its abstract:

We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess - since such information has value to consumers - voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.

My 'legal ethics' red flags went up on reading this abstract because I, like many legal profession profs, teach confidentiality by reference to the Belge buried-body case (can you disclose the location of your client's victim's body?  should you?  would you?  well, then, advise the client to?).  Then we segue to the modern reality that the same difficult gut-check of legal- versus real- ethics is not avoided by saying "I don't do crim law."  Products liability and malpractice defense pose the same dilemma, and invoke (or not) similar exceptions in states which have updated their Model Rules. 

One easy "out" that the students always look for is the convenience that it's best for the client's own interest to disclose early and avoid the public relations and liability firestorm of hiding it (cover up worse than crime, exposure to punitive damages, Ford Pinto, etc.).  That's not a bad out and it may be supported by this article, but at the least the calculus should be informed by the economic and liability consequences of voluntary disclosure.  A bit more after the jump...

Of course, the article seems more about how liability rules drive incentives for various rules for disclosure, a la Coase Theorem, rather than the other way around.  Its implications fall more directly to regulatory regimes and encouraging efficient behavior.  [Further, I am facially skeptical that a strict liability rule does not change disclosing behavior (even recognizing that it would not change safety behavior, a la Coase), because there are still different fears of inviting suit.  And anyway the postulate that there is full information in the market does not hold true if a firm successfully hides defects).]  But this should prove to be helpful reading on the unwittingly related ethics issues of disclosure and advising clients about risk.

http://lawprofessors.typepad.com/legal_profession/2006/11/polinsky_shavel.html

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