The Self-Fulfilling Prophecy of Social Inflation

“It is contagion that determines the fate of a theory in social science, not its validity.” — Nassim Taleb, from his book, The Black Swan.

Google “social inflation” and you will find a phenomenon presented as scientific and established.  You will read that there is a trend of increasing jury verdicts and social inflation is the cause.  You will also see social inflation presented as an effect.  It is, we are told, the effect of various far-reaching changes in our society—economic changes, technological changes, generational changes.  There are countless articles about how litigation funding for plaintiffs is more prevalent, how people are more desensitized to large jury awards through mass media and social media, and how there is a growing negative public sentiment toward larger businesses and corporations, particularly among millennials.  But insofar as there is a trend of increasing case values, there is one factor which is arguably most responsible for driving that trend: the endorsement of the concept of social inflation as valid.

The possibility cannot be discounted that jury verdicts have been or could be affected by juror exposure to news regarding “nuclear verdicts,” by the juror’s general disdain for corporations, or by litigation funded through third-party lenders, factors that may or may not be present in any particular case.  But even in cases where these factors exist, there are numerous other—and likely, more compelling—factors that affect the outcome of a case.  They include the specific facts of the case (and the emotions they evoke in jurors), the particular jurisdiction you are in, the judge’s role in admitting or excluding evidence, the caliber of the attorneys on both sides, and the expectations of the parties and their counsel.  It is as to this last factor that the concept of social inflation becomes most significant.

People generally understand the power of suggestion:  If someone suggests to you a specific outcome will occur and that leads you to expect that outcome, your expectations of that outcome will likely play a significant role in its occurrence.  In other words, it is often the case that the expectation or suggestion alone will influence your behavior and help bring about the expected outcome.  If you go out on the field thinking that you are going to lose the game, you have probably lost it already.

In the case of social inflation, the creation and persistence of the theory depends not on its validity, but its popularity.  It is, for obvious reasons, a very popular concept in the plaintiffs’ bar.  If the theory of social inflation is valid, plaintiffs’ cases are worth more and plaintiff attorneys make more money.  But the endorsement of social inflation as valid is becoming popular amongst the defense as well.  Social inflation is being used as a justification for increased settlement values and as an excuse as to why things do not, or might not, go as planned at trial.  Indeed, the autopsy of an unfavorable verdict is easier to get through when you can deflect the focus away from past missteps and cast the verdict as a symptom on an uncontrollable societal force.  Prospectively, social inflation can be used as a safety blanket, pushing cases toward settlement in the name of sound discretion, and away from trial where the skills, or lack thereof, of attorneys are on full display.

The result, of course, is that regardless of whether social inflation has any scientific validity, defendants who buy into the theory will act accordingly and, over time, expectations of claim values—which serve as reference points in valuing claims—will rise.  This leads to increased costs associated with resolving claims, i.e., social inflation.  It becomes a self-fulfilling prophecy:  contagion drives expectation which drives cost.

This influence on reference points is likely a much more direct cause of rising case values than any individual theorized component of social inflation.  We hear a lot about nuclear verdicts and the trend of jurors itching to punish corporate defendants.  One heavily publicized example is last year’s $2 billion verdict against Bayer AG for injuries related to its weed killer, Roundup.  But nuclear verdicts are nothing new.  For example, in 2002, a Los Angeles jury awarded Betty Bullock, a 50-year smoker, $28 billion against a tobacco company.  That same year, a Missouri jury awarded more than $2.25 billion to a plaintiff, Georgia Hayes, in her suit against a pharmacist who diluted cancer drugs.  There have been massive and well-publicized jury verdicts for decades.

We also hear a lot about litigation financing.  But juries don’t know whether litigation financing is at play in any particular case.  While the presence of a litigation loan might influence what a plaintiff is willing to accept in order to settle a case (similar to the way in which a lien would), that is not social inflation.  Similarly, to the extent litigation financing allows plaintiffs to obtain medical treatment they otherwise would not have or retain experts they otherwise could not afford, that is not social inflation either.  In fact, linking litigation funding to social inflation exposes the specious nature of the social inflation theory itself.

In sum, there is considerable room for speculation as to how influential the factors we collectively call “social inflation” will be when a jury deliberates, if they are influential at all to that particular jury.  Social inflation is far from being scientifically established, to the extent it is scientific at all.  What is valid, however, is that expectation of a particular outcome influences reference points which, in turn, influence the outcome itself.  Unlike many aspects of a case, whether to endorse social inflation as valid when valuing your case is completely within your control.

James Gordon is a Partner in our Pennsylvania and Ohio offices.
Michael E. Bonner is a Partner in our Pennsylvania office.