Business Liability

and Economic Damages
Business Liability
and Economic Damages

Second Edition

Scott D. Gilbert
Business Liability and Economic Damages, Second Edition
Copyright © Business Expert Press, LLC, 2020.

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First published in 2020 by

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 Abstract
Businesses exist to provide goods and services to customers, and in doing
so they take risks. Among these risks is the chance of losing money in
lawsuits filed by customers, employees, and others negatively impacted by
the business. Insurance provides some protection against these liabilities,
but lawsuits still take their toll. This book covers the subject of economic
damages and its role in insurance claims, lawsuits, and injunctions against
businesses. After reading and understanding this book, the reader will be
able to identify economic damages as a component of business liability,
describe the business risk posed by economic damages, explain some key
determinants of economic damages, and estimate economic damages and
business loss in a variety of cases.

Keywords
business dispute; business liability; economic damages; economic model;
insurance claim; lawsuit; personal injury; present value; risk; wrongful
death; antitrust
 Contents
Preface to the First Edition......................................................................ix
Preface...................................................................................................xi
Chapter 1 Business Liability...............................................................1
Chapter 2 Economic Loss.................................................................17
Chapter 3 Compensation for Loss....................................................37
Chapter 4 Evidence of Loss...............................................................71
Chapter 5 Loss to Workers and Families.........................................107
Chapter 6 Antitrust and Harm to Competition..............................119
Afterword............................................................................................151
Glossary..............................................................................................153
Bibliography........................................................................................159
About the Author.................................................................................165
Index..................................................................................................167
 Preface to the First Edition
Let’s be honest. There’s not a business anywhere that is without problems.
Business is complicated and imperfect. Every business everywhere is
staffed with imperfect human beings and exists by providing a product
or service to other imperfect human beings.
—Bob Parsons (Go Daddy founder)

Businesses exist to provide goods and services to customers, and in doing

so they take risks. Among these risks is the chance of losing money in
lawsuits filed by customers, employees, and others negatively impacted by
the business. Insurance provides some protection against these liabilities,
but lawsuits still take their toll. This book covers the subject of economic
damages and its role in insurance claims and lawsuits against businesses.
Economic damages are a loss to society that can be usually valued
in terms of some market equivalent. As such, economic damages are a
reasonably objective and predictable component of liability risk. Business
managers and students working toward a business degree can and should
get a handle on economic damages as a business liability. This book shows
you how, by introducing the relevant economic fundamentals and apply-
ing them to a range of lawsuit examples, including business interruption,
contract disputes, wrongful employment practices, and claims of personal
injury and wrongful death.
My goal is for you to be able to do the following, by the end of this
book.

1. Identify economic damages as a component of business liability.

2. Describe the business risk posed by economic damages.
3. Explain the key determinants of economic damages.
4. Estimate economic damages and business loss in a variety of cases.

To accomplish these goals, we apply economic principles and some

understanding of financial, insurance, and labor markets. We identify
x PREFACE TO THE FIRST EDITION

roles for statistics and probability to clarify issues of economic damages.

Also, the idea of economic damages is part economics and part law, so we
need some understanding of legal principles and institutions. It is com-
mon these days for economists to discuss legal principles and for legal
scholars to discuss economics principles, the confluence of which is the
research field known as law and economics. There is even talk of having
an economist serve on the U.S. Supreme Court! But I am no lawyer and
nothing in this book constitutes legal advice. If you need legal advice,
consult a lawyer. Also, the book discusses business decisions as they gen-
erally relate to economic damages, but does not contain advice for any
specific business faced with a particular liability issue.
This book took much longer to finish than I had intended, and for
their great patience and support I thank the folks at Business Expert Press,
including Executive Acquisitions Editor Scott Isenberg. I also thank my
family (Barbara and Sydney) for their support and forgiveness for stolen
nights and weekends devoted to this project.
 Preface
I am delighted to have the opportunity to prepare this second edition.
Since writing the first edition, I completed another book—Multi-Market
Antitrust Economics—that focused on some themes important for busi-
nesses worried about liability and economic damages. This edition of
Business Liability and Economic Damages includes a new chapter on this
topic. Also, some topics in the first edition have expanded discussion in
this edition, reflecting recent research and published works. These ex-
panded topics include worklife expectancy and hedonic damages.
I am grateful to Business Expert Press for this opportunity, and for
detailed comments on the first edition, I thank David Schap, who also
published a review of the book in the Journal of Legal Economics.
 CHAPTER 1

Business Liability

Liability does apply with respect to the amount of the oil spill.
—Ken Salazar, U.S. Secretary of the Interior,
addressing the Gulf Oil Spill in 2010

Learning Objectives
1. Describe the concept and scope of business liability.
2. Summarize the effects of insurance and business organization
on liability.
3. Explain the role of courts, mediation, and arbitration in
addressing liability claims.

What Is Business Liability?

For business owners, opportunities to sell goods and services are exciting.
But revenue and profit usually require significant resources, and many
businesses incur liabilities—debts or other obligations owed to others—
along the way. Liability includes loans borrowed to finance the business
and other obligations spelled out in business contracts. If a business fails
to meet its contractual obligations, a liability remains and those owed will
seek compensation so long as it remains profitable to do so.
Sometimes the consequences of business liability are easy to predict and
plan for; other times not. For a business loan backed by equity in the busi-
ness, the lender goes after the equity if the loan goes unpaid—a predictable
outcome. Actual debt recovery may take considerable time and expense,
but this contingency is relatively easy to plan for. Many other standard
2 BUSINESS LIABILITY AND ECONOMIC DAMAGES

business contracts entail liabilities that are fairly easy to foresee, but not all.
Furthermore, the scope of business liability extends beyond contracts, and
the great reach of potential liability makes it even harder to foresee. This
book focuses on business liabilities whose consequences are relatively hard
to predict, but can nevertheless be identified and prepared for in some way.
Business liability comes from many directions, so many that a detailed
account of all possibilities is impossible. A business cannot foresee every
form of liability, but its managers and owners should develop an intuitive
understanding of liability by considering the business’s relationships with
society. It is not just desired relationships that might be listed in a business
plan, but actual ones.
To get a grip on the real scope of business liability, you have to think big,
have a big picture in mind, a big idea. One big idea discussed in this book
is the social contract. For a business owner or manager who wants to avoid a
business liability mistake, it is useful to take the view that businesses have li-
ability because they are bound by a social contract to avoid certain harms to
others. The social contract does not take the form of a tidy 5-page or 10-page
document that a business signs and sends to the government. It does not
necessarily stay the same over time, and may or may not ultimately be fair. It
does reflect and signify the body of laws and regulations that a business faces
and is colored by the economic, social, and political institutions of the day.
A social contract can serve as a theme or umbrella for myriad elements of
business liability—and so can serve as a conceptual model to simplify some
aspects of liability faced by business owners and managers. As a practical
matter, for the purposes of this book a social contract is an idea or framework
that serves to define and limit the rights and responsibilities of society’s members.1

1
The origins of the philosophical idea of social contract lie in the classical works of
Hobbes (1651), Rousseau (1762), Locke (1689), and others, with more recent con-
tributions by Rawls (1971) and Sen (2009). An essential point in this literature is
that people collectively enter into a social contract in order to get some benefits from
others, while giving up some personal liberties along the way. The existence of a social
contract, in these terms, seems obvious, but the existence of a grand, encompassing,
and comprehensible social contract is unclear, which sinks the idea that society might
actually be actively participating in it. As a practical matter, a social contract neces-
sitates an agreement among members of society, defining and limiting the rights and
duties of each. In the narrow focus of business liability, particularly in a given indus-
try, this specialized notion of social contract is intelligible and useful.
 Business Liability 3

The scope of possible liabilities that a typical business faces is

mind-boggling. It is key to have some hunch, or intuition, about where
liability comes from and the impact it has on businesses. A good hunch
about business liability can be formed by thinking about how a business
stands in social contract with others. Each business has some implicit
social contract with society, with liability for its actions (or inactions) that
cause harm or loss to others. Relationships between a business and society
are always sources of liability, as shown in Figure 1.1.

Customers Employees Owners

Business

Other
Public Government
businesses

Figure 1.1  Sources of business liability

In the United States, a social contract is partly framed by the U.S.

Constitution and its amendments, as well as other laws introduced by the
federal government and upheld by the courts, treaties and agreements with
other nations, the laws of state and local governments, and the opinions of
the court on cases tried before it. Each of these foundational elements may
create rights and duties that collectively frame the social contract. A busi-
ness that breaches the contract causes a loss to society, a liability.
The American social contract, as a catchall for the various rights and
responsibilities we bear to one another, is formidable and far-reaching.
Our system of justice, our rule of law, acts to right imbalances and provide
opportunity for wrongs to be righted. America’s legal system supports the
social contract—or rather the rights and responsibilities it is intended to
signify—with remarkable commitment and vigilance, despite the system’s
imperfections. The same is not true in all countries. In the Philippines, a
country in southeast Asia, I spent a year in high school in the 1980s and
lived with a host family. My host father was a trained lawyer, but could
4 BUSINESS LIABILITY AND ECONOMIC DAMAGES

not find work because the legal system had become weak and lawyers
were of little use, so he ran a convenience store instead at the University
of the Philippines. Matters have improved greatly since that time, but
weak legal institutions and corruption continue to be problems for law
in the developing world.2 In many countries, a business can bribe its way
out of many obligations to society. In America the bribe is less reliable, in
part because government officials are better paid and so less benefitted by
bribes economically and also because a centuries-old tradition of govern-
ment propriety still carries momentum—despite many lapses.
For a business manager pondering the scope of the company’s liability,
it is useful to develop an intuitive and informed sense of what is owed to
society, as if the company were bound by a social contract that could be
spelled out, at least in principle. This sense of obligation does not require
a knowledge of all U.S. laws—not even lawyers or judges have that. The
relevant social contract includes a set of rights and limitations on be-
havior that protect people from harm, and a basic understanding of the
legal scope of harm is a must. As noted in the Preface, the book you are
reading is no form of legal advice, but the economics of business liability
and damages is framed by the legal system, so a discussion of the legal
landscape is inevitable.
A good starting point for assessing business liability is to briefly detail
the six relationships shown in Figure 1.1. Loans and other business con-
tracts create business-to-business liability, but each business has custom-
ers and—like it or not—potential liability in their customer relationships.
Employees are owed paychecks but also owed fair and respectful treat-
ment, a form of liability shaped by the social contract between the em-
ployer and the employee. For businesses big enough so that their actions
are not one and the same as that of their owners, business owes its owners,
and so is liable to them. All businesses know about taxes—one sort of
debt owed to the government, and some end up with other ties to assets
that lie in the government’s reach, and so more liability. Furthermore,

2
The Philippines and many other relatively poor countries have relatively high levels of
corruption, while the United States and other relatively rich countries like Germany,
Japan, and Australia have relatively low levels of corruption. See, for example, the
Corruptions Perception Index 2014 available from Transparency International online.
 Business Liability 5

general members of the public hold a potential relationship with a given

business, by sharing the same road space on a given day, the same com-
munication network, water supply, or other component of our common
space. All of these relationships carry potential liability.
To illustrate, consider my business activity as the author of this book.
I get paid royalties by my publisher, to whom I have sold the rights to
this book. The publisher is my customer and our contract spells out my
obligations, including publication deadlines, quality guidelines, and book
length. I have no ghostwriter or other employees, nor other business own-
ers, so no liability there. I do have liability to other businesses, as I am a
university professor and my book counts as a scholarly contribution that
my university takes credit for supporting. Shared credit implies some lia-
bility on my part to ensure quality and protect the university’s reputation.
This book deal on my part is straightforward tax wise, and my liability to
the government is otherwise transparent.
Where do you, dear reader, fit into my liability as book author? You
are part of the public at large. I am obliged to avoid having boxes of my
books fallout of the trunk of my car and smack your car’s fender on the
roadway. The publisher owns the words you are reading, but I profit from
book sales. Do I not also bear obligation to the reader, for the book itself?
That is the hardest part of my liability puzzle. I have designed the book to
improve your understanding of business liability and economic damages,
with no intent to harm anyone. It is advertised as a book of ideas, not ad-
vice, so cannot be said to poorly advise. This book contains examples but
omits names and identifying details of real people, so it cannot wrongly
characterize anyone in the general public. For these reasons my legal duty
to you is pretty limited.

Insurance
In this book we will be talking mostly about business liabilities that are
hard to anticipate; for example, product defects, which unlike debts and
interest payments, are hard to predict.
To deal with unexpected liabilities, an elegant solution is insurance—
a contract in which one party meets the obligations of another, under specific
conditions. Pay a premium and the nightmare of ruinous mistaken harm
6 BUSINESS LIABILITY AND ECONOMIC DAMAGES

vanishes. Indeed, insurance markets have made possible much business

activity that could not otherwise take place. But the insurance company
is not your friend. It plays a risk game that it wins on average, but you are
a risk, not a business partner.
Insurance makes the social contract more workable by lessening the
burden on courts to enforce the contract’s obligations. Insurance compa-
nies can quickly assess damages and provide remedies, but courts cannot.
Insurance works so well that it has been assigned a special place in the
social contract, an institutional role alongside the courts. All drivers must
buy automobile liability insurance; many businesses must buy workman’s
compensation insurance, which presupposes the existence of insurance
markets. Additionally, the government provides insurance to cover un-
employment and disruptions in the market for insurance itself, such as
insurance company bankruptcy.
Insurance is good, but insurance markets are like casinos. The insurer’s
pursuit of profit is good for the social contract and business, but insurers
know the contract better than most of their customers do. Big insurance
companies have armies of lawyers. They know today’s law and anticipate
its changes tomorrow.
Insurance companies cover some business liabilities, but not all. The
insurance agent will sit down with a business owner and discuss a range
of liabilities, touching on some or all of the points shown in Figure 1.1.
But liability is a thing to be identified by the business itself, preferably
with a lawyer’s input, before any meetings with insurance agents. Insur-
ance helps to mitigate the business’s risk of liability, but insurers lack the
exhaustive knowledge of any specific business that would be needed to
fully address this risk. Mitigation is not absolution. The liability buck
never gets fully passed from business to its insurer.
Businesses look to their insurance policies for peace of mind, but the
insurer sees them as loaded guns. Every policy is written to cover some
stated form of liability, but is otherwise designed to minimize liability’s
scope. This scope is whittled down until it just meets the demands of the
social contract. Anything extra would present more risk for the insurer,
and less profit.
When a business causes harm, society comes after it and not after its
insurer. I illustrate this in Figure 1.2. Business has an obligation to society,
 Business Liability 7

Obligation
Business Society

Obligation

Insurer

Figure 1.2  Business, society, and the insurer

and its insurer has an obligation to the insurer. It is easy to suppose in-
stead that the insurer assumes the business’s obligation. For example, in
routine car accidents a claim is usually made against a driver’s insurer and
not against the driver directly. This saves time and money, but the true
obligation lies with the party that caused harm. The less a business knows
about how this works, and the more it relies on an insurance company to
advise and guide it, the more money the insurance company makes and
the greater liability the business faces. Insurers do not want businesses to
read this book!
Insurance companies want to cultivate ongoing relationships with
most businesses they serve, but this goodwill dries up for customers who
become stand-out risks. Businesses that cause harm become less desirable
insurance customers, because they pose a greater perceived risk of future
harm. Stand-out risks are lemons to the insurer. For lemons, insurance
companies have no goodwill, and they will minimally service their poli-
cies. They may also drag out the process, with years of court proceedings
needed to settle a matter, and regardless of the damage, such proceed-
ings may diminish a business’s reputation. In states like New York, where
anyone can track almost every lawsuit’s progress online, and chat online
about it, dragged-out liability disputes carry a potentially huge reputation
cost for businesses.
Insurance policies are just business contracts—agreements that can
be breached. The insurer will try to avoid breach or risk the ire of regula-
tors. Deep pockets help, but some insurance companies still go belly up.
8 BUSINESS LIABILITY AND ECONOMIC DAMAGES

State governments know this and provide some backup insurance funds.
These create a possible economic problem of moral hazard—an exces-
sive shift of risk from one party to another, due to risk avoidance, by
which businesses underinsure with the confidence that the government
will pick up the remaining tab. But governments are onto that trick, and
woe to the insurer that thinks otherwise. Every business should, however,
be aware of any such backups, and should carefully study the financial
health and customer satisfaction of would-be insurers, before buying li-
ability insurance.

Business Forms
Business liability is a burden with the potential to cripple innovation and
economic growth. Mindful of this, the framers of America’s social con-
tract capped financial liability via the corporation. A potential customer
or service provider that does commerce with a corporation has limited
recourse if commerce goes bad, but the existence of corporations also
provides more economic opportunity and choice. The same idea applies
to other forms of limited liability business entities, including the limited
liability company (LLC), type S corporation, and limited liability part-
nership (LLP).
The existence of corporations demonstrates a sort of hands-off, or
laissez faire, approach of lawmakers to financial gain and loss. With this
hands-off approach, lawmakers concede that a full dose of liability in the
social contract would be toxic to the economy. But it is an uneasy conces-
sion, with limited scope. The corporation’s structure protects its owners
from losing their homes if a business deal fails, but does not absolve them
of responsibility for harms that the corporation may cause. Recalling the
diverse forms of liability shown in Figure 1.1, every corporation has li-
abilities that exceed its financial commitments. All these extra liabilities
can potentially pierce the corporate veil and pass through its owners, as
shown in Figure 1.3.
The prospect of the corporation’s owners bleeding cash from their
savings accounts, to cover corporate liabilities, may seem unfair. But
the threat of such pass-through liability protects society from having
every business formally pose itself as a corporation, or a bunch of
 Business Liability 9

Corporation

Society
Owners

Figure 1.3  Corporate liability to society

them, with modest assets that seriously under-represent the capabil-

ity of the business to meet its obligations to society. Abuse of cor-
porate structure is a moral hazard, which the corporate veil piercing
discourages.
Mindful of chinks in their armor, corporations guard themselves—
and their owners—from liability risk via insurance. This double armor
provides stability, but not quite peace of mind. As discussed earlier, in-
surance markets provide only limited protection from liability claims. A
corporation’s true scope of liability is not known to its insurers, only to
itself. Knowing this scope of business liability requires careful self-study
and good understanding of the social contract.

The Legal System

Most business liabilities that go unpaid never end up in court. Instead
they get negotiated, settled via insurance, or quashed in bankruptcy. But
liability negotiations are, in effect, always done on the courthouse steps. If
negotiations break down, the courthouse is a step away. Insurance settle-
ment, for sizeable liabilities, is always a negotiation between the claimant
and the insurer, and again takes place on the courthouse steps. If the
claimant faces a lowball insurance offer, they can hire a lawyer who can
further negotiate or go after the insurer directly in court. The choice of
bankruptcy, too, is made with a view to liability claims that might other-
wise play out in court.
10 BUSINESS LIABILITY AND ECONOMIC DAMAGES

Whether or not they end up in court, all business liabilities are framed
by the legal system. The business manager needs a basic understanding of
the system when dealing with each liability claim. The American legal sys-
tem identifies unpaid liabilities as a harm to society, a breach of the social
contract. The civil law system3 provides opportunities for those harmed
to seek a remedy. Anyone seeking a remedy must tell the court which
sort of harm is claimed. These include torts—one party’s wrongful harm
to another, notwithstanding any business contract between them, and also
breach of contract—one party’s wrongful harm to another caused by failure
to uphold a business contract between them.
Torts are a catchall that covers almost every business liability other
than those specified in a business contract. Torts, each a harm inflicted
on society, include intentional harm, negligence, nuisance, and trespass,
and each works pretty much as its name suggests. A manufacturer that
foolishly uses the wrong screws to hold its product together, causing
injury to customers, commits negligence. An ageing paper mill that de-
cides to keep operating despite a broken fan system—thereby polluting
a nearby town—commits nuisance. If the mill’s staff crosses a farmer’s
land with heavy trucks, in a rush to fix the fans, they commit trespass.
Related to the idea of trespass is the wrongful taking or laying hold of
property, itself a tort.
The scope of torts is as broad as the sorts of harm that the courts intent
to remedy. For example, consider the general idea of property—anything
tangible or intangible that is owned by a person or an entity, and the right to
possess, keep, hold, use, enjoy, and dispose of what is owned. A farmer’s land
is property, but so is a special method that the farmer may have devised to
process his crop for delivery to market4—a form of intellectual property.
Claims of tort and contract breach are brought to a court, and if deemed
in good order will trigger a trial or other court-ordered proceeding. At the

3
Substantively, civil law means the set of laws concerning actions that are noncriminal
yet against society’s interests.
4
For example, this nation’s first president George Washington developed and im-
plemented improvements on the common sort of drill, plow, barn, and threshing
method in his days of farming.
 Business Liability 11

trial’s end the court will rule on the claim, based on evidence presented by
the claimant and defendant legal teams. To make its ruling, the court will
weigh and interpret the evidence in light of existing law, and also in light
of existing court decisions and commentary on similar past cases—the
common law tradition.5
For torts and contracts, past cases form an important source of law.
The U.S. Constitution, and its 27 amendments, says nothing specifically
about torts or business contracts. This is because the framers of these
documents saw in the existing court system a sound means of addressing
these wrongs. For business liabilities, the claimant acts as plaintiff, bring-
ing the case to common law court, and the business is called to answer
in its defense.
Each U.S. state has had, since its inception, a common law court sys-
tem to deal with torts and contracts, and while states’ approaches to these
matters vary, the federal government has not found the discrepancies so
egregious as to impose a national standard or code.6 It has, however, sup-
planted state courts with a system of federal courts. The decisions of both
state and federal courts can be challenged by the litigants (plaintiff and
defense teams), with appeal to the corresponding appellate court. If un-
satisfied there, litigants can further appeal to the corresponding supreme
court—state or federal. Some state supreme court cases can be appealed
to the federal supreme court.
A legal liability is any situation, identified by law, where an individ-
ual, a group, or an organization is found to bear obligation to another.
A business’s legal liability is then any situation, identified by law, where
a business is found to bear obligation to an individual, a group, or an
organization. To try a liability claim, the court often spends a lot of

5
Common law, manifest operationally as a civil procedure, relies on the court’s current
and past actions to determine case outcomes. This contrasts with the civil law proce-
dure in which the judge relies on written laws—rules and statutes—rather than on
past case decisions. In practice, the U.S. legal system’s procedures permit judges some
latitude in their use of statute versus precedent.
6
A model code of torts and contracts has been developed by the American Law
­Institute—a group of legal scholars, lawyers, and judges, over the last 90 years, and is
sometimes cited in court decisions.
12 BUSINESS LIABILITY AND ECONOMIC DAMAGES

time dealing with evidence and protocol, and must complete the chal-
lenging task of interpreting liability in terms consistent with the will
of Congress and the court’s prior opinions. Legal teams, for plaintiff
and defense, know that judges look to laws (statutes) and past court
opinions (precedent) to decide matters, and so they research statutes
and precedents as they prepare their cases. Legal research, preparation
of evidence, and performance in court are all costly for the legal teams,
and so costly for their clients.
A bench trial—a trial with a judge and no jury—is work for the court,
a jury trial is more so. The jury examines evidence but knows little of rele-
vant statutes, legal precedent, or court procedure. The judge must instruct
the jury so that their opinion, or findings, reflects the logic of the relevant
law. If it does, then the judge’s decision, or holding, generally agrees with
the jury’s findings, otherwise not.
Our legal system is an expensive way to deal with business liability
claims. It is cheaper to settle a case before it reaches trial. In economic
terms, the claimant should accept any negotiated offer that leaves them
with more money than they would get by going through the court sys-
tem. The profit-minded business sued for liability should never make
an offer that leaves the claimant much better off than they would be
if they went through the court system, since a lower offer would still
keep the lawsuit out of the courts. The same maxim holds for the busi-
ness’s insurer.
The relatively few business liability cases that end up in court do so
because the claimant anticipates a higher net gain from going to trial than
any settlement offer they have received from the business or its insurer.
Knowing how costly trials are, the business should prefer instead to raise
the settlement offer above the threshold value that induces settlement,
unless the business believes that the claimant’s expected trial outcome is
too optimistic. In a simplified economic world where everybody holds
the same expectations about what will happen, no business liability case
would go to trial!
Substantial differences in expectations, which bring business liability
cases to trial, can reflect differences in the information held by plaintiff
 Business Liability 13

and defense teams. However, the court’s rules of discovery usually serve
to expose secrets and minimize differences in information. The teams
might also have different opinions about the legal merits of the posi-
tions advanced by each side, or how these positions will be received by
the court. This can happen, for example, if the defense lawyer has lots of
experience with the judge and court at hand, while the plaintiff lawyer
does not.7
For business liability claims that do not get settled immediately, the
threat of a costly lawsuit often looms above further negotiations, but
cheaper forms of dispute resolution exist. Mediation—dispute resolution
facilitated by a neutral nonbinding third party—is relatively quick and pro-
cedurally simple. For business liability mediation to be useful, the busi-
ness and its liability claimant must have different expectations about the
mediation outcome; otherwise their common ground would beg settle-
ment beforehand. Successful mediation leads to discovery of evidence
that establishes common ground, so ending the dispute. The same holds
true of a court trial, but the court’s decision is binding. Between these two
forms of dispute resolution is arbitration—dispute resolution facilitated by
a neutral binding third party, cheaper than a trial and sometimes built into
contracts as a required substitute for trials.

Example
In this book we will explore a range of business liability examples, some
more complex than others. As a simple starting point, consider a hypo-
thetical company called Rent that rents trailers to construction compa-
nies. Rent does business in the Midwest and leases all its trailers from a
national manufacturer called Best, with each trailer leased for 5 years.

7
For liability cases that go to trial, a bench trial is quicker and less costly than a jury
trial, and carries more uncertainty. To prefer a jury trial, the plaintiff or defense must
expect that the jury’s findings will deviate favorably from what the judge’s holding
would be in a bench trial, yet not so much as to cause the judge to set aside the
findings.
14 BUSINESS LIABILITY AND ECONOMIC DAMAGES

Over time, Rent gets more and more trailers from Best, but then finds a
better deal from a local manufacturer. Rent returns all the Best trailers,
most of which have time left on their 5-year leases. The lease contract al-
lows such a return, but specifies that all unpaid installments on the trailers
are due at the time of return. Rent pays none of these future installments,
and so faces a business liability claim equal to the total of all unpaid future
installments; suppose this is $500,000.
Best, having a half million dollar claim against Rent, tries to collect. If
it has some other form of business engagement or contract with Rent, it
may try to prompt payment by business retaliation, or a threat of retalia-
tion. If no such “stick” is in its arsenal, Best will consider filing a lawsuit
against Rent, a costly undertaking that will hopefully still net Best a good
share of the claimed half million. Contract law provides this opportu-
nity via a claim of contract breach. There is some uncertainty about the
lawsuit’s outcome: Will the judge find it reasonable that payment for all
future (but void) rental periods was actually due at the time of the rental
property’s return? Will Best collect interest on the debt, and if so at what
interest rate?
In this deadbeat renter dispute there is an economic principle—
the time value of money—that can help the court decide the outcome.
According to this principle, there is usually an advantage to receiving
money earlier rather than later, and so the payment of all rent at once
leaves the renter in worse shape (and the rental company in better shape)
than if rent had been paid on its regular schedule. The value of this extra
advantage depends on market rates of interest and can be estimated. The
court might hold that the deadbeat renter pay its due without paying
the “extra,” or not, depending on the wording of the contract.
This simple example illustrates business liability, with some uncer-
tainty and economics involved, but the liability itself is predictable—a
company bails on a rental contract, thereby triggering a liability claim for
unpaid rent. In the remainder of this book, I focus more on economic
damages that arise in liability cases where the liability claim itself is not
so easy to predict. Such cases include personal injury, wrongful death,
wrongful termination, and intellectual property loss.
 Business Liability 15

Exercises

1. Two friends set up a bagel bakery—Big O Bagels—in a rented build-

ing in a downtown area. The bakery is run as a partnership. It has
three employees, and the owners take turns coming into the bakery
each day to manage it. Give an example of a liability in each of the
following groups, and the debt owed by the business in each case.
a. Customers
b. Employees
c. Owners
d. Other businesses
e. Government
f. General public
2. Suppose that a veterinarian wants to set up a veterinary clinic in
Memphis, Tennessee.
a. With regard to its relationships with customers, employees, and
the general public, what forms of liability insurance is it required
to hold? (Check online.)
b. Does the state of Tennessee provide a liability insurance guar-
anty fund that kicks in if the veterinarian’s insurance company
goes broke? (Again, check online.)
c. Find an insurance company online that provides one of the li-
ability insurance types required of the clinic in Memphis. Are a
sample insurance policy and pricing available online? Why or
why not?
3. U.S. courts have a love–hate relationship with corporations. Con-
cerning the publically traded corporation, courts have refused law
offices to take this business form, or even to take on nonlawyer
owners. Explain the court’s likely intent here, in terms of the social
contract.
4. In the Gulf of Mexico oil spill in the year 2010, five million barrels
of oil reportedly leaked into the Gulf due to an oil rig explosion
that also reportedly killed 11 people and injured 17 more. Leaked
oil also killed fish, birds, and other wildlife and polluted private
16 BUSINESS LIABILITY AND ECONOMIC DAMAGES

and public lands. A claimed cause of the explosion was a defective

cement wall on the oil rig.
a. Using appropriate legal terms defined in this chapter, identify
the basic types of wrongful actions that may have occurred in
the oil spill.
b. Describe the potential scope of business liability for the oil com-
pany in terms of possible harm to society via its constituents:
i. Customers
ii. Employees
iii. Owners
iv. Other businesses
v. Government
vi. General public
5. Businesses can be liable for harm they do to most anyone. Figure 1.1
lists six groups that may be harmed by a business’ actions. For each
group, name a type of business that might have a special liability for
harm or damages done to that group.
6. One way that a business can deal with liability is to let their insur-
ance company be in charge of identifying any such liability and
arranging insurance coverage for it. Discuss possible problems with
this approach by contrasting the information and incentives of the
business owner with the information and incentives of the insur-
ance company.
7. Over the last two centuries, changes in the U.S. legal system have
increased the scope of businesses liability, imposing a greater bur-
den on businesses to avoid harming others. Why might this be true?
 Index
Affordable Care Act, 117 Consumer surplus, 124–125
Alcohol, 27–28, 138 Consumption, 24–27
Amazon, 135 Contract law, 14, 88
American social contract, 3, 8 Court’s eyes, 75–79
American Time Use Survey (ATUS),
113 Damn lies evidence, 90–92
Antitrust cases, 87, 141 Deadweight loss, 126
Apple Inc., 135 Demand and supply, 124–125
ATUS. See American Time Use Survey Downstream market, 140
(ATUS)
Earnings and returns, 53, 54
Baker biker, 115–117 Economic
Bakery’s contract, 83 damages, 79–83
Black–Scholes model, 66 expert, 101
Blue chip case, 54–57, 60 harms, 30, 38, 41, 44, 46–48, 51,
Blue collar 58, 60–63, 72, 74, 75
loss, 49 loss, 19–23
worker, 49 consumption, 24–27
Burger King, 139, 140 economic damages, 31–34
Business liability economic opportunity, 19–23
example to, 13–14 externality, 27–28
forms, 8–9 legal system, 31–34
harm, 60 market principles, 28–31
insurance, 5–8 utility, 24–27
legal system, 9–13 model, 116–117, 120
society/insurer, 7 opportunity, 19–23
sources of, 3 Economist’s voice, 86–89
Evidence damages, 79–83
Cheap eats, 139–141 Expected sales, 92
Colluding gas stations, profit of, 133 Externality, 27–28
Collusion, 129–136, 142–146
Competition, antitrust and harm to Farm loss, 28–31, 43–44
collusion, 129–136 Federal Rules of Evidence, 78, 79
competitive marketplace, 121–129 Firms, 129, 131, 134, 137, 139, 140,
economic damages, 141–146 142, 145
foreclosure, 136–138 First Fundamental Welfare Theorem,
multimarket antitrust economics, 122
138–141 Foreclosure, 136–138
Competitive equilibrium, 122–123, Forensic economist, 101–102
125, 129 Friedman, David, 91
Competitive marketplace, 121–129 Fuzzy evidence, 92–97
168 INDEX

Gas station twins, 130–135 statistics evidence, 90–92

Google’s android problem, 137–138 taxing matter, 83–85
workers and families
Hedonic damages, 93 household services, 112–114
Hidden spiders, 76–79 life care plan, 115–117
Highest utility U(C), 43 personal consumption, 114–115
High-stakes cases, 86–87 worklife expectancy, 108–112
Horizontal linkages, 138–139 Lost contract, 81–83
Household services, 112–114
Human capital, 121 Malpractice, 93–94
Hump-shaped function, 131 Market principles, 28–31, 44–45
McDonald’s, 139, 140
Insurance, 5–8 Mean and standard deviation, 54
claim, 74, 75, 79, 99 Methodology, 78
Insurer’s eyes, 73–75 Modern market-based economy, 37
Intellectual property loss, 14 Monopolistic, 120
Intentional harm, 79 Monopoly
Inverse demand, 133 deadweight loss, 144
market, 133
Land developer, 61–62, 64–66 Multimarket antitrust economics,
Lawsuit, 7, 12, 13, 14, 32, 33, 38, 42, 138–141
73, 77, 78, 81, 87, 99, 141
Legal system, 9–13, 31–34 NASA. See National Aeronautics
Liability evidence, 90–92 and Space Administration
Life care plan, 115–117 (NASA)
Limited liability company (LLC), 8 National Aeronautics and Space
Limited liability partnership (LLP), 8 Administration (NASA),
LLC. See Limited liability company 137
(LLC) Nature, states of, 24, 51–52
LLP. See Limited liability partnership
(LLP) Oligopoly, 130, 138
Loss, 19–23
compensation for Personal consumption, 114–115
court’s approach to, 38–42 Personal injury, 14, 84, 85, 87, 89,
market approach to, 42–44 93, 94, 96, 108, 113
options, 60–66 economic damages, 89
price formulas, 44–47 economist in, 99–105
return, implicit rate of, 59–60 present value, 89
risk, 47–59 Pop star loss, 48
evidence of Present value, 51, 59, 60, 70, 81,
court’s eyes, 75–79 84–85, 89, 93, 116
damn lies evidence, 90–92 Price formulas, 44–47
economic damages, 79–83 Pricey e-books, 135–136
economist’s voice, 86–89 Producer surplus, 126
evidence damages, 79–83 Profit maximization, 132
fuzzy evidence, 92–97 Pulp fiction market, 123–129
insurer’s eyes, 73–75
liability evidence, 90–92 Real-life harm assessment, 44
scientific evidence, 89–90 Resale price maintenance, 139
 INDEX
169

Risk, 47–59 Taxing matter, 83–85

-averse asset pricing, 68–70
-neutral pricing model, 59 U.S.
Risky and riskless, 53 Federal Rules of Evidence, 77
Robinson Crusoe, 25–26 Postal Service, 137
Rum Ruin, 58–59 Social Security program, 108
Unintentional harm, 73
Scientific evidence, 89–90 Utility, 24–27
Sharpe ratio, 55–56 function U(C), 39–40
Sherman Act, 130 number U(C), 24–27, 39
Sherman Antitrust Act, 122
Social Value of a statistical life (VSL),
contract, 2–4, 6, 9, 10, 26, 31–32, 95–96
37, 40, 41 Vertical linkages, 138–139
utility U(C), 39
welfare, 26, 38–40, 92 Warehouse club bust, 62–64
Societal harm, 28 Window washer, 95–97
Society Worklife expectancy, 108–112
business’s relationships, 18 Wrongful death, 14, 87, 112–115
corporate liability to, 9 Wrongful termination, 14, 88, 91
utility U(C), 26–28
Stake cases, 87 Yardstick market, 143, 145, 146
Statistics evidence, 90–92
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