Economic Effects of Product Liability and Other Litigation Involving the Safety and Effectiveness of Pharmaceuticals

by Steven Garber

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Research Questions

  1. In addition to product liability, what kinds of litigation impose costs on drug companies for allegedly undermining product safety?
  2. How does such litigation affect incentives of drug companies when they make decisions that affect product safety, effectiveness, prices, and innovation?
  3. How do litigation-based changes in incentives affect decisions of pharmaceutical companies?
  4. How do responses to liability incentives affect the health benefits of prescription drugs?
  5. How do responses to liability incentives affect the nature and extent of drug-related injuries?
  6. What changes in the legal system could increase health benefits net of injury costs?

Many people are concerned about the economic effects of product liability in the United States, and there has been a contentious policy debate about this issue for several decades. Liability effects in the pharmaceutical industry have played a central role in this debate. More recently, concerns have grown about other kinds of litigation in which drug safety and effectiveness are central issues. Such other safety- and effectiveness-related litigation includes criminal and civil complaints brought by the U.S. Department of Justice and lawsuits brought by state attorneys general and private plaintiffs under state consumer protection acts and other causes of action. Much of this other litigation alleges deceptive, misleading, and (illegal) off-label product promotion. This monograph examines the economic incentives of pharmaceutical companies stemming from product liability and other forms of litigation and infers likely effects on company decisions that determine product safety and effectiveness, availability, prices, and the mix of research and development activities. The monograph reviews and critiques earlier empirical analyses of pharmaceutical product liability and presents and interprets new empirical information. In the case of product liability, the monograph offers case histories of several mass torts since 1990, including Fen-phen diet pills, Baycol, Rezulin, Vioxx, hormone-replacement therapies, and Zyprexa. To improve the economic performance of the industry, public policymakers should attempt to strengthen desirable effects of liability, such as increasing regulatory compliance, and attenuate undesirable effects, such as those due to ineffective product warnings and vague standards for punitive damages.

Key Findings

Earlier Studies of Pharmaceutical Product Liability

  • Opponents of product liability claim that liability reduces product availability, increases prices, discourages innovation, and undermines economic efficiency by encouraging detailed but ineffective warnings and increases in safety for which the social benefits fall short of the social costs.
  • Supporters of product liability claim that liability uncovers information about drug hazards and deters socially undesirable corporate behavior such as withholding information from the U.S. Food and Drug Administration (FDA).
  • There is no empirical evidence suggesting that any such effects are ubiquitous or dominate a social cost-benefit calculus.
  • Almost all plausible examples of reductions in product availability and price increases occurred before 1990.

New Empirical Analyses

  • Mass drug-related injuries, and associated pharmaceutical mass torts involving thousands or tens of thousands of claimants, continued into the 1990s and 2000s.
  • Much, but not nearly all, litigation brought against drug companies by the U.S. Department of Justice and state attorneys general alleges off-label promotion and/or deceptive marketing.

Implications for Public Policy

  • Whether the social benefits of pharmaceutical liability exceed its social costs cannot be determined.
  • With the possible exception of restrictions on truthful off-label promotion, increasing compliance with major FDA regulations seems likely to promote economic efficiency.
  • Imposing legal liability for company failures to provide safety-related information to the FDA and prescribers tends to discourage such failures.
  • Other features of the liability system encourage socially undesirable company decisions, including incentives to provide ineffective product warnings and vague standards for availability of punitive damages.

Table of Contents

  • Chapter One


  • Chapter Two

    Conceptual Framework for the Analyses

  • Chapter Three

    The Legal and Institutional Settings

  • Chapter Four

    Pharmaceutical Mass Torts During the 1990s and 2000s

  • Chapter Five

    Preemption of Pharmaceutical Failure-to-Warn Claims

  • Chapter Six

    Incentives Stemming from Other Litigation Affecting Safety and Effectiveness

  • Chapter Seven

    In Conclusion

The research reported here was conducted in the RAND Institute for Civil Justice, a program of RAND Justice, Infrastructure, and Environment.

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