January 1, 1995
MARK R. TWOMBLY
I'll wager that on January 17 it will have been five months since the President of the United States has thought about little airplanes. But that's okay, because the last time Bill Clinton paid any attention to the kind of airplanes you and I fly, it was quality time. That was on August 17, 1994, and the few minutes he devoted to our favorite subject were spent signing and commenting on Public Law 103-298, the General Aviation Revitalization Act of 1994.
This relatively simple, two-page-long piece of federal legislation simply mandates that, with certain limited exceptions, an aircraft or parts manufacturer cannot be held liable for an accident if it occurs more than 18 years after the new aircraft is first sold or a new part is installed. This reasonable 18-year statute of repose holds the promise of great things for general aviation, such as — well, here is how the President saw it as he signed the bill:
"...this is a job-creating and job-restoring measure that will bring good jobs and economic growth back to this industry..."
Terrific. So, has anything happened in five months as a result of passage of the General Aviation Revitalization Act? Have product liability insurance premiums for manufacturers dropped? Are more airplanes in production now? Are more people buying new airplanes? Is it morning in general aviation America again?
Not exactly. The one piece of good news that can be tied directly to passage of the act is Cessna's plan to restart production of the 172, 182, and 206 in the next couple of years. Other than that, there is little evidence that liability reform has started to defibrillate general aviation.
But let's be reasonable. Five months is hardly enough time for plaintiffs' attorneys to read the act — short as it is — and compare notes on possible soft spots in this new set of liability-protection armor, much less witness a resurgence in aircraft development and production. We must be patient. It is going to take time before we begin to see results.
These first months after passage of the act are the time to take stock of the situation, to examine the legal issues raised, to contemplate industry response. In other words, this is a time for punditry.
I've heard some interesting analyses of the potential effects of the statute of repose. They are interesting not only for the thinking involved, but also because of who is doing the thinking. E. Glenn Parr is general counsel for Piper Aircraft Corporation, a company with a keen interest in the statute of repose. Along with Cessna and Beech, Piper stands to benefit mightily from product liability reform. Consider this: On January 1, 1995, the number of airplanes for which Piper will still be responsible from a liability standpoint will decrease by 80 percent, thanks to the statute of repose.
A second opinion is from First Equity Development Incorporated, based in Stamford, Connecticut, a young and aggressive financial firm active in general aviation. First Equity handled Bombardier Inc.'s acquisition of Canadair, which has proven to be a stunningly successful marriage. Ironically, First Equity also represented investors interested in acquiring bankrupt Piper, but who backed away partly because of concerns over Piper's product liability exposure.
Two important questions about the statute of repose have been raised. First: Is it constitutional? Second: Will parts and engine manufacturers, engine overhaulers, and aviation service companies now be the prime targets of litigation resulting from accidents involving older aircraft?
The constitutionality question centers on the guarantees of due process and equal protection provided in the fifth and fourteenth amendments to the United States Constitution. Does limiting a citizen's ability to seek redress in the courts for an alleged product defect violate due process and equal protection? Not according to legal precedent, says Parr. As long as there is a valid governmental purpose for imposing a statute of repose that limits access to the courts, the U.S. Supreme Court has and therefore should buy off on it. That "governmental objective" was clearly stated when President Clinton referred to the General Aviation Revitalization Act as jobs-creating legislation.
Question two — will parts and service providers now take the brunt of liability litigation involving older aircraft — may be the more difficult to answer. First Equity advises that the industry must work together, to the point of establishing an industry war chest to protect its interests. It is important to pick cases early on that could establish legal precedents on the issue of the liability exposure of parts and service companies.
Parr believes that experience has shown it will be difficult for plaintiffs' attorneys to build convincing cases that place the blame for an accident on a specific replacement part or component. One issue still to be resolved is whether an overhauled part or engine said to be zero- timed is considered new and therefore subject to the provisions of the statute of repose. By the way, Parr reports that the courts previously have determined that a pilot operating handbook or information manual is not considered a product or replacement part.
First Equity underlines the significance of the statute of repose by citing a few statistics: Some $2 billion to $2.5 billion was spent on product liability claims and expenses by general aviation manufacturers and insurers from 1981 to 1993. This is perhaps twice what was spent on product research and development efforts. Others in the industry, such as FBOs and service providers, spent an estimated $400 to $500 million over the same period.
These figures should plummet in the next few years. According to First Equity, general aviation manufacturers in 1994 have a liability tail of nearly 95,000 aircraft. In six years that will decline by 73 percent, to 26,000 aircraft. It follows that the real costs of product liability — insurance premiums and litigation expenses — will drop.
Cessna could reap a double benefit from the statute of repose. The company spends an estimated $20 million a year on product liability, according to First Equity. Cessna also has an estimated $180 to $200 million stashed away in reserves to cover product liability expenses. The company should be able to reduce that huge amount. First Equity even speculates that the "found" income from lower liability expenses and reserves would more than cover any potential losses from light airplane production.
Cessna's decision to proceed with piston production is the kind of good-news story that can stimulate buying interest among Wall Street investors, according to First Equity. That is an opinion shared by Jacques Esculier, president and CEO of Mooney Aircraft. Mooney should benefit from the statute of repose not from reduced insurance or litigation costs — those have not been as burdensome for the Kerrville, Texas, manufacturer as they have been to the big three — but from a more positive attitude in the investment community. Tort reform "will bring confidence and legitimacy to the marketplace," Esculier says. "It should give Mooney access to investment money for long-term goals."
Judging by the opinions of informed and influential participants — the chief counsel for a major manufacturer, an investment firm active in aviation, and a manufacturing CEO — the newly enacted statute of repose is playing as well in Peoria as it is in Vero Beach, Kerrville, and Wichita.
Parr believes the statute of repose will help restore a "degree of predictability in product liability and thus create the environment for growth necessary for the future of general aviation..." First Equity describes passage of the Act as a "watershed event" that has started the pendulum swinging in the right direction. Cessna's impending re-entry in the lightplane market is a positive signal to the financial community, according to First Equity. Investment money should be more available, which will enable manufacturers to conduct better research and development programs to advance the state of the art.
Of course, it would be foolish to believe that all of general aviation's problems were solved five months ago with the stroke of President Clinton's pen. Opinions about what should happen next are as varied as the problems. Parr is promoting a potentially incendiary proposal: Require all pilots to carry liability insurance coverage. In Parr's view this would go a long way toward reducing accidents and liability expenses.
First Equity points to other factors attenuating the growth of general aviation — purchase and operating cost increases that have far outstripped increases in the consumer price index, and stagnant technology, among others — in charting the future for light aircraft. But, like Parr, First Equity's Michael Culver looks to tighter regulation of pilots — specifically, mandatory recurrent training — as a way to further rein in liability costs.
It may take some time, but general aviation liability reform should bear some tasty fruit for the industry and the flying community. The next few steps on the path to growth are not so clearly defined.
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