Post Date: August 23, 2005

The following op-ed co-written by HLS Professor Steven Shavell and Stanford Professor A. Mitchell Polinsky, Vioxx verdict’s dark side, appeared in the Boston Globe on August 23, 2005.

A TEXAS JURY’s Texas-size message to the drug manufacturer Merck last week may mean more than meets the eye. The jury awarded a $24 million base amount for the death of Robert Ernst and $229 million in punitive damages, apparently for Merck’s failure to adequately disclose the risk of heart problems from Vioxx. Merck’s stock market value declined by $5 billion on Friday. Lawyers say that Merck may face up to 100,000 other Vioxx-related suits.

Ernst’s death was a tragedy. Nonetheless, there is cause for concern about the size of the Texas award and about many similar judgments imposed on corporations in this country. The concern is that when corporations have to pay large damage awards, three things happen that may be disadvantageous to us as consumers.

First, the prices that we pay for goods and services will tend to rise. Drug companies have to charge enough to cover their costs, and when these costs include large liability bills, the result is higher prices. For instance, one study found that the price of the DPT vaccine for infants rose 6,000 percent mainly because of potential liability.

The second problem is that products might not be developed, or might be withdrawn from the market, even though they are valuable to us.

Merck halted sales of Vioxx last fall, and Pfizer stopped selling a similar drug, Bextra, shortly thereafter, but the public still needs pain-relieving drugs that are easy on the stomach. Other examples of withdrawn products and services abound: for example, some physicians refuse to deliver babies due to the threat of malpractice liability.

The third difficulty caused by large damage awards is excessive producer caution, adding to costs and prices. A classic example is defensive medicine, such as the ordering of unneeded tests due to the fear of lawsuits.

The jury in the Vioxx case apparently did not have these problems in mind when it decided on its $253 million award. It was probably focusing on the two standard advantages of liability awards: sending a message to companies to reform their behavior and compensating victims of harm.

But does a $253 million message need to be sent to Merck for the death of Ernst? The usual figure courts use to deter wrongful deaths, say, from automobile accidents is rarely more than a few million dollars. Economists have suggested that there is no reason to beef up usual damage awards unless there is a chance that a company can escape liability for harm. If a company covertly dumps pollutants and we happen to catch it, a penalty exceeding the harm done ought to be imposed in order to deter more dumping. But the argument that Merck might escape liability for harm does not seem to apply to Vioxx, for it was sold to millions of individuals, Merck is regulated by the FDA, and epidemiologists and lawyers are on the watch for problems with drugs.

What about compensation for victims? There is no reason to think that Mrs. Ernst has a much greater need for compensation than the surviving spouse of an automobile accident victim, who typically receives no more than several million dollars.

It is also worth noting that our legal system is an extremely expensive way to go about compensating individuals. To deliver $100 to a plaintiff through the legal system costs about $100 in legal expenses. It is as if the fee for withdrawing $100 from an ATM machine was $100. A better way to ensure that people are compensated for losses is to encourage them to buy insurance, or perhaps for the government to supply them with insurance.

In all, the lesson to be drawn from the Vioxx case is that if the Vioxx award is writ large, it will probably do more harm to consumers than good — presumably not the intention of the Vioxx jury.

Steven Shavell and A. Mitchell Polinsky, who are economists, are professors at Harvard Law School and Stanford Law School, respectively.