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
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Article 1
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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).
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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
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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)