Economic Analysis of Personal Jurisdiction

Daniel Klerman, Personal Jurisdiction and Product Liability, 85 S. Cal. L. Rev. ___ (forthcoming 2013).

Here is a practical problem: Where should a person who was harmed by a product be able to sue the manufacturer of that product?

Here is a complex judicial answer to that problem: Combine ½ cup state sovereignty and ½ cup due process, cook on low simmer and stir with circular reasoning, adding three or four new factors every twenty years. After ingesting this concoction you might feel a bit ill, as did one civil procedure student who wrote on an exam: “personal jurisdiction is a pain in the _____” (original language omitted). Felix Cohen said it more eloquently when he described the kind of reasoning that still passes for personal jurisdiction doctrine as “transcendental nonsense,” but the student’s reaction is more direct.

Daniel Klerman’s new article, Personal Jurisdiction and Product Liability, is a welcome antidote to the combination of creeping transcendentalism in the Case of the Giant Shears (the Supreme Court’s most recent personal jurisdiction case, more commonly known as J. McIntyre v. Nicastro), and the proliferation of factors that characterizes personal jurisdiction doctrine today. Personal jurisdiction is an area of law for which economic analysis especially well-suited because of the policy implications entailed. As hard as it is to imagine, Klerman’s is the first article to apply economic analysis to personal jurisdiction doctrine. I am glad he was the one to do it.

At the start of the piece, Klerman points out that previous work on where a manufacturer should be sued approached the problem ex post. The contribution of much of the law-and-economics literature, however, is to take an ex ante approach to analyzing problems of this type. This is Klerman’s main contribution, and it is masterfully done. He first analyzes the question based on an assumption of low transactions costs, and then loosens this assumption to address the high transactions costs that more accurately reflect lived reality.

The bottom line is that it is extremely unlikely that consumers will take the time to figure out the likely forum and applicable law at the time they purchase a product. As a result, if personal jurisdiction is based on where manufacturers choose to locate their activities, manufacturers will have incentives to make locational decisions that select procedural and substantive law that favors them, as well as forums that are convenient for defendants but inconvenient for plaintiffs. Laws allowing consumers to sue only in the distributor’s state will lead manufacturers to hire distributors in states with the most pro-manufacturer “product liability laws and procedures, and, as a result, [manufacturers] would have insufficient incentives to design and manufacture safe products.” Rules favoring jurisdiction in the manufacturer’s home state or in the state of design or manufacture of the product are likely to produce similar results, as manufacturers either move or influence the laws where they already are.

Klerman argues that the most efficient rule allows suit where the product is sold to the consumer. He recognizes this rule might lead to a slight pro-plaintiff bias, but argues that this bias can be mitigated by defendant’s price adjustments and is the most likely to lead to optimal product liability laws.

In reaching this conclusion, Klerman examines a number of underlying questions, including whether manufacturers would be responsive to these rules and adjust their prices accordingly, how manufacturers could deal with the problem of cross-jurisdictional arbitrage, and the effect of manufacturers producing products for national or international markets, not individual states. To each of these concerns he provides a sustained analysis and a persuasive answer. For example, he argues that a rule requiring foreign manufacturers to submit to jurisdiction in any state in which their products are sold will prevent them from insulating themselves against liability by choosing distributors in states with sub-optimal product liability laws and discourage domestic manufacturers from relocating in order to avoid liability. He notes that cross-jurisdictional arbitrage is unlikely to be a problem because most people outside the northeast are unlikely to travel to a different state in order to purchase a product and because price differentials are likely to be small. If this is a problem, he suggests a rule permitting jurisdiction in the place where the plaintiff resided at the time of purchase. Finally, he argues that states are unlikely to take advantage of product standardization to eliminate product liability altogether (ultimately leading to national under-regulation) because manufacturers will not reduce prices so much to make this tactic worthwhile for citizens.

Even if you do not ultimately agree with Klerman’s underlying supposition that product liability laws are useful and necessary to regulate product safety (he builds on the work of others), his economic analysis of personal jurisdiction is important because it lays the foundation for healing the doctrine. As he writes at the end of the piece, his mode of analysis is novel because “[i]nstead of focusing on defendants’ contacts or intentions, it focuses on real world consequences.” That focus may be just the cure for a personal jurisdiction doctrine suffering from a mixture of legal fictions, formalism, and factoritis.