October 29, 2003

Lube, UL and Lawsuits

Posted by shonk at 02:31 AM in Politics | TrackBack

In response to my Lubrication is not the Solution to Bad Law post, Curt has opined that a private issuer of security ID cards would have no economic incentive to make discriminating choices in who it issued cards to. I initially planned merely to respond to his comment, but I think it would be good to bring the discussion out into the light of the main page. Curt's case is well-reasoned, but ultimately, in my opinion, flawed. The root of his argument is this:

The ID card market would not exist in order to improve safety and security; rather that is what the security lines are for. The ID cards do not exist to improve security but rather to improve convenience, so in the market for ID cards the consumer is only purchasing increased convenience. So you have to see the two different functions, security and convenience, as two different markets.
I disagree with this claim that security and convenience are separate markets. A security card ceases to be convenient when it stops providing security. Andy makes the same point with reference to a concrete example:

Does that mean UL (Underwriter's Laboratories) doesn't have an incentive to reject the applications of unsafe products?

They do. Any ID Card company whose product becomes a joke loses future sales, as their cards have as much value as a novelty item printed at home.

To further explain this example, UL has a short-term incentive to give their blessing to all products, regardless of their safety. After all, there are surely many manufacturers that would be willing to slip them some cash in exchange for that little UL decal (this need not be under-the-table, incidentally; research grants serve can serve the same purpose as cash bribes). However, if they were to do that, though they might realize a short-term boom in revenue, people would quickly realize that the UL stamp of approval had no relevance to a product's actual safety and would turn to other means for appraising the product's safety. UL would quickly become irrelevant and, in the business world, irrelevant = bankrupt.

The same holds true for a private producer of security IDs. When people begin to realize that having Company X's card is no indication of security, people (e.g. airlines, office managers, etc.) will stop granting special privileges to carriers of those cards. With these special privileges gone, the cards become mere novelty items.

The other factor that would encourage X to actually screen people before issuing cards can be summed up in one word: lawsuits. The day after McDonalds lost the infamous hot-coffee-in-the-lap lawsuit, every McDonalds in the country was brewing coffee at 158 degrees (the day before, the official standard was 190). This was done without passage of a law and there were no health inspectors ensuring that coffee was dispensed at the lower temperature; McDonalds simply recognized a potential liability and took immediate action to reduce their risk. Now, one might argue that they should have sold cooler coffee all along, but I imagine McDonalds execs didn't dream that a customer could actually win a lawsuit (or even pursue a lawsuit) against them for spilling coffee on her own lap. Security ID card vendors are unlikely not to recognize their own potential liability in the same way, as the liability they face is much more obvious. Imagine, if you will, the sheer magnitude of the lawsuit that would be vigorously pursued if it came to light that X had issued a card to someone who ended up hijacking a plane. I imagine the contemplation of a hundred million dollar lawsuit would, shall we say, encourage X to exercise some diligence in their card-issuing procedure.

The threat of a lawsuit is a much stronger incentive for diligence than state regulation, in general, as lawsuits incur far greater financial losses than regulatory fines and tend to generate far more publicity. This publicity factor is not be be underestimated, especially in the case of a company whose sole selling point is their good name, such as an issuer of security IDs.

In discussing lawsuits here I am, of course, arguing from the current paradigm, but I will mention in passing that a lawsuit is really just a civil court action and that the entire civil law tradition in this country is descended from the English Common Law, which does not derive from legislation or a centralized state.

All of that is not to say that I endorse the particular private security scheme mentioned in my earlier post. My reasons for not doing so were, I hope, explained sufficiently clearly that I need not reiterate them.

Further discussion is, of course, welcomed.