Compensating Market Value Losses: Rethinking the Theory of Damages in a Market Economy

Florida Law Review, Dec 2011

The BP Deepwater Horizon oil spill and the Toyota car recalls have highlighted an important legal anomaly that has been overlooked by scholars: judicial inconsistency and confusion in ruling whether to compensate for the loss in market value of wrongfully affected property. This Article seeks to understand this anomaly and, in the process, to build a stronger foundation for enabling courts to decide when-and in what amounts-to award damages for market value losses. To that end, this Article analyzes the normative rationales for generally awarding damages, adapting those rationales to derive a theory of damages that covers market value losses, not only of financial securities (such as stocks and bonds) but also of ordinary products (such as automobiles and lightbulbs).

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Compensating Market Value Losses: Rethinking the Theory of Damages in a Market Economy

Compensating Market Value Losses: Rethinking the Theor y of Damages in a Market Economy Steven L. Schwarcz - Article 1 Follow this and additional works at: http://scholarship.law.ufl.edu/flr Formerly University of Florida Law Review VOLUME 63 SEPTEMBER 2011 NUMBER 5 COMPENSATING MARKET VALUE LOSSES: RETHINKING THE THEORY OF DAMAGES IN A MARKET ECONOMY Steven L. Schwarcz* The BP Deepwater Horizon oil spill and the Toyota car recalls have highlighted an important legal anomaly that has been overlooked by scholars: judicial inconsistency and confusion in ruling whether to compensate for the loss in market value of wrongfully affected property. This Article seeks to understand this anomaly and, in the process, to build a stronger foundation for enabling courts to decide when—and in what amounts—to award damages for market value losses. To that end, this Article analyzes the normative rationales for generally awarding damages, adapting those rationales to derive a theory of damages that covers market value losses, not only of financial securities (such as stocks and bonds) but also of ordinary products (such as automobiles and lightbulbs). 1054 INTRODUCTION The turmoil in financial markets has revealed a fundamental legal anomaly that, notwithstanding its increasing practical importance, has been overlooked by scholars: judicial confusion and inconsistency in ruling whether to include the loss in market value (hereinafter, “market value loss” or “market value losses”) of wrongfully affected property as legally compensable damages. Although market value losses can arise in a multitude of contexts, the concept is perhaps easiest to understand by dividing the wrongfully affected property into two categories: financial-market securities (like stocks and bonds), and ordinary products (like automobiles and light bulbs). In the context of financial-market securities, market value loss represents a loss in the resale value of the securities, in contrast to a loss in the value of what the owner of the securities would be paid if the owner continues to hold the securities. In the context of ordinary products, market value loss represents a loss in the resale value of the product, in contrast to a loss in the value of the product’s utility to its owner if the owner continues to hold the product. More generically, market value loss represents a loss in the resale value of any affected property, in contrast to a loss in the value of the property’s utility to its owner if the owner continues to hold the property. As discussed in Part I below, courts sometimes include, but often 2011] 1055 exclude, market value loss as legally compensable damages without meaningfully articulating the reasons for inclusion or exclusion. Indeed, most judicial opinions do not even explicitly recognize the concept of market value loss, at most giving it implicit recognition in the calculation of damages. This Article seeks to derive a normative theory of when market value loss should be included in legally compensable damages. Part I of the Article reviews and examines the applicable judicial precedents. Parts II and III then attempt, informed in part by those precedents, to derive a more normative theory of when to compensate for market value loss. Finally, Part IV proposes a rule, based on this theory, that courts can use when considering market value losses and also provides examples of how that rule could be applied. In the discussion below, one should not conflate market value loss with “pure economic loss” (sometimes called “economic loss”), a term used to refer to negligently caused financial losses to a person without other injury to that person—the classic example being an employee who loses wages when a negligent tortfeasor’s action damages a factory where the employee is working.1 Although some have argued that awarding damages for pure economic loss might create “disproportionate penalties for wrongful behavior”2 and “raise[] the specter of widespread tort liability,”3 most jurisdictions in the United States now allow at least some recovery for pure economic loss.4 This Article does not, and it should not, engage that debate because market value loss and pure economic loss are fundamentally different concepts.5 A market-value-loss inquiry can arise in connection 1. See Adams v. S. Pac. Transp. Co., 123 Cal. Rptr. 216, 217 (Ct. App. 1975). 2. Robert L. Rabin, Tort Recovery for Negligently Inflicted Economic Loss: A Reassessment, 37 STAN. L. REV. 1513, 1534–36 (1985) (arguing that “the proximate cause limitation on negligence liability illustrates [this] concern about proportionality between act and responsibility,” and that where there is an “exceedingly low risk of an extremely high magnitude of harm”—such as a careless driver causing a fender-bender accident that brings traffic to a standstill in the Brooklyn Battery Tunnel during rush hour, thereby causing massive financial losses—awarding negligence liability damage (...truncated)


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Steven L. Schwarcz. Compensating Market Value Losses: Rethinking the Theory of Damages in a Market Economy, Florida Law Review, 2011, Volume 63, Issue 5,