Oreffice, Paul F.

English

Case Western Reserve University School of Law

Canada-United States Law JournalVolume 15 | Issue Article 6January 1989The Importance of Innovation to the U.S. in theWorld Competitive ContextPaul F. OrefficeFollow this and additional works at: https://scholarlycommons.law.case.edu/cusljPart of the Transnational Law CommonsThis Speech is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons.It has been accepted for inclusion in Canada-United States Law Journal by an authorized administrator of Case Western Reserve University School ofLaw Scholarly Commons.Recommended CitationPaul F. Oreffice, The Importance of Innovation to the U.S. in the World Competitive Context, 15 Can.-U.S. L.J. 7 (1989)Available at: https://scholarlycommons.law.case.edu/cuslj/vol15/iss/6The Importance of Innovation to the U.S. in the WorldCompetitive ContextPaul F. Oreffice*It is appropriate that I am in Cleveland, Ohio to speak about innovation,because without Cleveland the Dow Chemical Company would not ex-ist. Dow was started because Dr. Herbert Dow, while at Case Instituteof Technology, discovered a new process to extract bromine from saltbrine. He went to Michigan because there are oceans of salt brinetrapped underground in Michigan, and he tapped those like you tap oilwith wells. After several business failures, the Dow Chemical Companywas created in 1897, with money and technology from Cleveland.The world's technological advances in the last fifty years are trulymind-boggling. They are certainly beyond my imagination. I rememberwhen I first landed in the United States in 1940. One of the first things Idid was to go to the World's Fair with my family. At the World's Fair in1940 we saw a little flickering round screen called "tele-vision." We allagreed it would never make it. It was the consensus of the day that thisthing, technologically, was too difficult to perfect to a point where itwould become a commercial reality. When we first started talking aboutsending a man to the moon, the great problem of the day was not how toget him up there, but rather how to get him back. How would we everget enough fuel up there to start the booster rockets from the moon? Sothe advances we have seen were beyond the imagination of most people,and it took the inventive spirit of a few individuals to really make themsucceed.Innovation is a way of life. You never think about the advances inmedicine like organ transplants, laser surgery, heart bypass operationsand microsurgery. Some new drugs improve our lifestyle, others are life-saving. In this century, life expectancy has gone from thirty-eight to sev-enty-six years. The advances are tremendous. The United States hasalways been strong technologically and we are still the world leader. Agreat number of innovations have come from the United States. Our re-search expenditures are very high and will continue, but there are someproblems.I think innovation is being threatened in a very pernicious way by agood set of principles gone haywire - our legal system. Imagine themad chemist who starts with a small experiment in a glass tube andwinds up with foam and smoke all over the lab. That as much as any-* Chairman of the Board, The Dow Chemical Company.1Oreffice: The Importance of Innovation to the U.S. in the World CompetitivePublished by Case Western Reserve University School of Law Scholarly Commons, 1989CANADA-UNITED STATES LAW JOURNALthing reminds me of what has happened. Our founding fathers presentedus with probably the best set of laws in the world, all nicely contained inthat test tube. But successive additions to the test tube by judges andothers with their own agendas have made the system into a monster thatis overrunning the laboratory, and the direct result is a scary reduction ininnovation in many fields.Everything in life entails some risk, but the safest road is usually torepeat what has been done before. Innovation, on the other hand, alwaysentails a risk. The more forward-looking the innovation, the greater therisk.Legislators would like us to have a risk-free society. Legislators donot want a fault-based system, but simply believe that when someone isinjured, someone else should pay, regardless of fault. If all these peoplehad set out to purposely slow down innovation in this country, theycould not have done a better job of it. I don't believe the purpose was todamage innovation, but damage it they did. They certainly haven't givenus a safer world. As a matter of fact, they have given us quite the con-trary. More litigation is keeping safer and better products from themarket.I do not want to give you a litany of examples, but I do want to giveyou a few examples, because I think they make some important points.In the last five years, over one-third of all U.S. corporations have discon-tinued product lines because of liability concerns. What is worse, morethan one-third admit to deciding against the introduction of new prod-ucts for the same reason.The implications are staggering, especially when one looks at thepharmaceutical field. The story of vaccines has been well documented.Only two major companies, Merck and Lederle, are still investing in vac-cine research. That's down from sixteen companies twenty years ago.For most vaccines we are down to one producer. The price, in this dec-ade alone, has gone up as much as one hundredfold, all because of poten-tial liability. For the diphtheria vaccine that sells for twelve dollars, thecost of liability is between seven and eleven dollars per dose.Vaccines are by no means the only example. Our own pharmaceuti-cal company, Merrill-Dow, has discontinued any product that is used bypregnant women, and so have many others. We have discontinued theexisting products and all research. In doing this we have denied doctorssome very useful products, but the legal and insurance costs were just toohigh to continue.We all know of the examples companies and institutions have beenwilling to talk about. What we don't know is how many simply pulledtheir resources from this or that field or just stopped researching anddidn't say anything, like the company that discovered a substitute forasbestos, better and safer, but decided not to market it because they weretoo afraid of the liability.Vol. 15:7 19892Canada-United States Law Journal, Vol. 15 [1989], Iss. , Art. 6https://scholarlycommons.law.case.edu/cuslj/vol15/iss/6Oreffice-U.S. INNOVATIONIf that isn't worrisome enough, consider this. Lab work is disap-pearing from U.S. schools because of the liability crisis. Many schoolsystems have given up physics and chemistry experiments that requireheat such as the Bunsen burner because they cannot get insurance cover-age. Where are our scientists and innovators of the future going to learn?None of these are good trends. All of them hurt innovation.Before you think that I am just a prophet of gloom, let me quicklyadd that The Dow Chemical Company will spend more than $850 mil-lion on research and development this year. We are innovators. We be-lieve in taking risks. We believe in discovering and manufacturing newproducts. We believe in technology. Some of The Dow Chemical Com-pany's better known discoveries include Styrofoam, Saran, extractingmagnesium from sea water, Seldane - an allergy product that doesn'tcause drowsiness or other side-effects, Dursban - a tremendously effec-tive insecticide that is relatively safe to the environment, and several newplastics. There is a broad spectrum of products with a myriad ofapplications.Most of our major technical breakthroughs have been made in theUnited States, but U.S. competitiveness is constantly being put to thetest. We sell the same products inside the United States as outside, yetDow has 55% of its sales outside of the United States. In 1987, the lastyear for which I have the statistics, Dow was sued 1663 times, sevenabroad and all of the rest in the United States. The extra cost in our U.S.business over our foreign business in that same year was between $120million and $150 million. This is the extra cost of insurance, the legalcost of settlements, and so forth. But despite all the problems, U.S. in-ventiveness has done very well.When we look at the state of innovation in the United States, wemust conclude that we are still the most inventive country in the world.However, it is also fair to say that our lead has shrunk. Of the top fortycorporations receiving U.S. patents in 1988, twenty-six were U.S.-basedcompanies, eleven were Japanese, and three were European. Signifi-cantly, for someone in my business, fifteen of the twenty-six were chemi-cal companies.Inventing is not enough. It is just as important to carry the inven-tion to market in a practical fashion and to improve the manufacturingtechnology. It is in these phases that the United States has sometimesfallen behind other countries in the world. For instance, how many re-member that videotape recorders, currently made only in Japan and Ko-rea, are a U.S. invention? There are many other examples where.something invented in the United States was developed by others. TheJapanese have been particularly adept at taking someone else's basic ideaand making it a commercial success through improvements, quality con-trol and great attention to detail.When it comes to manufacturing technology, U.S. companies in thechemical industry have probably done the best job in retaining techno-3Oreffice: The Importance of Innovation to the U.S. in the World CompetitivePublished by Case Western Reserve University School of Law Scholarly Commons, 1989CANADA-UNITED STATES LAW JOURNALlogical leadership through constant innovation. The primary reason whythe U.S. chemical industry has had a positive trade balance is that we aretechnologically the best in the world. Others are good, but we are rightup there. I am pleased to say that Dow is in the lead. I think we are thebest at designing, building and operating basic chemical and plasticplants.The creation of our "rust belt" came about in great part because ourindustry became complacent and forgot that the worst axiom in businessis, "If it ain't broke, don't fix it." In practical terms, it is essential toinnovate because someone else is probably gaining on you. The examplemost often cited in our country is the steel industry, which continued touse old methods when new technologies were being developed abroad.Taking invention, development and manufacturing technology to-gether one must conclude that the United States has been a world leaderin innovation. But the real question is whether we will continue to be. Ifmy overall conclusion is that the state of U.S. innovation is quite good,why am I so worried?I have already mentioned the problems brought about by our liabil-ity explosion, but they are not the sole reason for a decline in U.S. inno-vation. This country is the only country in the world that continues toreduce incentives to research at almost every tax modification. In fact,the 1986 Tax Act actually encourages U.S. firms to do research abroad.The whole regulatory system is set up so that the safe thing for the bu-reaucracy to do is slow down the process of innovation. The ability toprotect our intellectual property in many parts of the world is constantlybeing put to the test. Without this protection we cannot afford the mas-sive research and development investments that are needed.So, the bottom line is that while the state of U.S. innovation is stillgood, we are in for some rude surprises unless some important changesare made. First among these are some major reforms in our tort liabilitysystem. Some of these changes are desperately needed. What progresshas been made has occurred very slowly, and mostly at the state level.Almost nothing has happened at the federal level.What are some of the steps needed to help restore innovation to itsformer level? First, we need to do away with strict liability and return tothe negligence standard. In just the last six to ten years we have changedfrom a standard based on whether or not companies and their employeesused reasonable care to a strict liability system which is generally hostileto innovation and change. Second, we need to do away with joint andseveral liability. The deep-pocket theory has created a tremendous prob-lem for innovation. Third, we need to do away with "junk science." Weneed to accept what the body of scientists says and not listen to extremesat either end of the spectrum. Fourth, we need to restore the authority ofthe regulatory agencies, for instance, the Food and Drug Administration("FDA"). If a drug has gone through the FDA process, has been ap-proved by the authorities and reasonable care has been shown, thatVol. 15:7 19894Canada-United States Law Journal, Vol. 15 [1989], Iss. , Art. 6https://scholarlycommons.law.case.edu/cuslj/vol15/iss/6Oreffice-US. INNOVATIONshould be an acceptable defense to a product liability claim. Finally, weneed to make it more expensive to sue. It is just too easy to bring suitwhen the plaintiff does not have to pay a defendant company's legalcosts. This has resulted in "settlement blackmail," the knowledge on thepart of the plaintiff's lawyers that it is just too expensive and time con-suming for companies to defend these lawsuits. Companies are willing topay something just to get out of the lawsuit.Now, how are we doing on tort reform? As I mentioned before, atthe state level we have seen some progress. Not as much progress as isneeded, but progress always spawns more progress. Five years ago tortreform on the federal level died within days of being proposed. Last yeara bill advanced almost to completion in the House of Representatives.This year we are already seeing people like Senator Biden introducing anew bill, and the House is hard at work on another version. Nothing hasresulted yet, but a lot is happening. I have no real hope that we will see afederal bill this year or next, but I think the efforts to resolve the problemare becoming more focused.In conclusion, over the last century U.S. entrepreneurship and in-ventiveness have been unique in the world. The distortion in our legalsystem and the litigious society which that has created are like a cancereating away at the U.S. ability to innovate. We all need to work towardmaking major changes in the system if we are to once again be the leadersin the world of innovation.5Oreffice: The Importance of Innovation to the U.S. in the World CompetitivePublished by Case Western Reserve University School of Law Scholarly Commons, 19896Canada-United States Law Journal, Vol. 15 [1989], Iss. , Art. 6https://scholarlycommons.law.case.edu/cuslj/vol15/iss/6

The Importance of Innovation to the U.S. in the World Competitive Context

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The Importance of Innovation to the U.S. in the World Competitive Context

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