Issue: Apr 2005


Urgent Need for Tort Reform



Greedy lawyers abuse the system to milk American business dry.

by Gary Witzenburg


The American civil justice system fundamentally changed in the 1960s and 70s, when social activism led to legal activism, litigation became a means to achieve public good, and lawyers morphed themselves into champions of the little guy. Before then, lawsuits were viewed as conflicts between private parties to be avoided whenever possible. Before then, it was considered unethical for attorneys to seek suits instead of fair and equitable settlements.


 


It is unprofessional for a lawyer to volunteer advice to bring a lawsuit, stated Canon 28 of the American Bar Association (ABA) Canons of Professional Ethics of 1936. It is disreputableto breed litigation by seeking out those with claims for personal injuries or those having any other grounds of action in order to secure them as clients.


 


Contrast that with todays environment, where young American men and women flock to the countrys flourishing lawyer farms in hopes of striking it rich; where freshly-minted graduates desperately seek someone, anyone, to sue to make a living; where it seems every other TV ad is another law firm brazenly trolling for victims: Have you been injured in a fall or an accident? Have you suffered medical malpractice? You may have a right to collect money! Well get you more than the other guys! You pay nothing unless we win! Call Lee Free!


 


Not to suggest that those who have suffered injury or death as a result of someones carelessness or incompetence should not be fairly compensated. Or that companies that make and distribute genuinely unsafe products should not be punished severely, if they did so knowingly. Of course they should! But were discussing the unfortunate evolution of Americas lawsuit industry into a multi-billion dollar business that benefits mostly itself while bankrupting businesses, hobbling Americas economy and killing thousands of jobs every day.


 


The Problem


A tort is any private or civil wrong by act or omission for which a civil suit can be brought. Tort lawyers too often invest little, risk nothing and cash in big. Plaintiffs are people with physical or mental injuries, real or imagined. Defendants are entities with deep pockets to be picked businesses, public utilities, cities and towns, doctors and hospitals, home and auto owners with insurance. Who is actually responsible, or whether there is any real fault, has become irrelevant. Someone needs or wants money. Someone else has money. The system moves it from here to there minus the lawyers typically outrageous fees.


 


A tort is any private or civil wrong by act or omission for which a civil suit can be brought. Tort lawyers too often invest little, risk nothing and cash in big.


 


The idea was that deep-pockets defendants would simply treat the growing costs of settling and/or defending such suits as additional costs of doing business to be passed along to the public in increased prices, rates and taxes. And they would quickly learn to prevent future expensive suits by adopting safer practices and making and selling safer products.


 


With a new philosophical and moral mandate, the law was transformed, and lawyers heralded the dawning of a new age of liberty through litigation, justice through jurisprudence and, not coincidentally, civic virtue through contingency fees, wrote James M. Wootton of Mayer, Brown, Rowe & Maw, LLP, in his 2004, Washington Legal Foundation paper, How We Lost Our Way: The Road to Civil Justice Reform. Plaintiffs and their attorneys had been recast as the defenders of the interest in improved health and safety by deterring bad behavior.


 


Semi-noble intentions, perhaps, but with devastating consequences to American business once the now multi-billion-dollar lawsuit industry began to mushroom out of control.


 


The Business of Law


Wootton identifies six key milestones on the way to todays company-killing, job-destroying, economy-hobbling legal environment: 1) the business of law, 2) law as just another business, 3) lawyers and society, 4) class and mass actions, 5) activist state attorneys general and 6) magic jurisdictions and judicial elections.


 


He points out that the relaxation of ethical rules guiding Americas lawyers has turned the practice of law into an immensely profitable business primarily due to contingency fees from 30 to as much as 70 percent which provide lawyers with a powerful incentive to: maximize their fees-to-hour ratio; settle earlyto develop a war chest for other suits or prolong litigation; and fish for sympathetic jurisdictions.


 


With more and more clients, Wootton continues, came consolidation of tort cases as mass actions that clogged the courts and forced settlements, resulting in huge fees for the attorneys and next to nothing for individual plaintiffs [who] themselves had been reduced to mere contingency fee delivery vehicles.


 


With more and more clients, Wootton continues, came consolidation of tort cases as mass actions that clogged the courts and forced settlements, resulting in huge fees for the attorneys and next to nothing for individual plaintiffs [who] themselves had been reduced to mere contingency fee delivery vehicles.


 


The floodgates were thrown wide open in 1976-77 when the ABA relaxed its rules on advertising and the Supreme Court upheld the right of attorneys to advertise like any other business. What was once as unseemly as it was prohibited had become a standard tool of the trade. Now, these ads are commonplace, many unabashedly inflammatory, he writes.


 


The runaway proliferation of class actions began in 1966 when a new federal rule allowed all individuals sharing a common attribute use of a particular product, for example to be automatically deemed to have joined a class unless they expressly withdrew from it. This has had the inevitable effect of vastly increasing the sizes of classes and, therefore, awards.


 


Not surprisingly, class action suits quadrupled from 1966 to 1971, and between 1997 and 2000, U.S. businesses saw a 300 percent increase in federal class actions and an incomprehensible 1000 percent spike in state class actions filed against them. Why the state case explosion? Because the standard to move a case to federal court has required complete diversity -- no major plaintiff could be a citizen of the same state as any defendant and that each plaintiff assert a claim for more than $75,000.


 


The ability to file class actions in state courts has enabled rampant forum shopping. Plaintiffs lawyers, Wootton writes, game the system in their search for courts with the most sympathetic judges and juries , the most lax rules of evidence, the most plaintiff-friendly procedural rules, and the most limited examination of attorneys fees. As a result, certain magnet courts have become the favored venues for class attorneys And the many thousands of suits overwhelming these courts have resulted in only a tiny percentage being heard, forcing defendants to settle most out of court regardless of their merit.


 


In addition, the rise of activist attorneys general has profoundly altered our legal system, he continues. Like the contingency fee for trial lawyers, state attorneys general are drawn to the massive sums of money involved, as these cases generate considerable revenue for states without raising taxes and political capital for state attorneys general. Equally menacing is the practice of state attorneys general granting contingency fee lawyers the power to sue on behalf of the state and these private lawyers having the right to act as though they were attorneys general These lawyers are sometimes awarded the right to sue in recognition of their political contributions to the state attorney general.


 


Finally, Wootton asserts, judicial elections threaten the impartiality of judges and lend a false sense of mandate to activist judges who aspire to be the architects of social and economic policy [And] there is a strong incentive for judges to regulate through litigation. What have come to be called magic jurisdictions are those where lawyers have established relationships with judges, who, he says, are often elected with verdict money.


 


The Scope of the Problem


Jackpot justice has saddled America with the most expensive tortsystem in the world, costing $246 billion a year or 2.23 percent of GDP, wrote former Michigan Governor John Engler, now president of the NationalAssociation of Manufacturers, and Dan Pero, president of NAMs newly founded American Justice Partnership in a January 28, 2005, Washington Times commentary. Our lawsuit-happy culture is a growing disadvantage for U.S. businesses that must compete in a global marketplace [and] is a drag on our entire economy except for the trial lawyers industry, which rakes in $40 billion annually more than Microsoft or Intel and nearly double Coca-Cola revenues. More than 16million lawsuits are filed annually in state courts one about every two seconds. The judicial systems in certain states and jurisdictions are so far out of balance it is almost impossible for corporate defendants to get a fair trial. And these jurisdictions have become magnets for lawsuits from other areas around the country.


 


The average U.S. family of four pays a "tort tax" of $3,380 a year in higher prices, insurance rates and health-care costs. 


 


The average U.S. family of four pays a "tort tax" of $3,380 a year in higher prices, insurance rates and health-care costs. When U.S. businesses incur the price of an unfair liability system, it is eventually passed on to all Americans when they pay more for nearly everything they buy, take home smaller paychecks from their employers and earn less as shareholders. The cost of frivolous lawsuits also discourages companies from hiring more people and launching new ventures.


 


A frank examination of the need for tort reform is presented in the 2003 booklet Trial Lawyers Inc., a Report on the Lawsuit Industry in America, published by the Center for Legal Policy at the Manhattan Institute for Policy Research. The lawsuit industry today is truly a behemoth, wrote Center Director James R. Copland in his introduction, but unlike major corporations in our regular market economy -- it remains financially opaque. He concluded that the biggest differences between the lawsuit industry and most others are that the former is in a noncompetitive market and its takings are necessarily zero-sum -- it creates no wealth, just confiscates and redistributes it and offered additional comparisons:


 


Although not centrally organized, the plaintiffs bar tends to be dominated by tort kingpins who carve up their markets a practice that in a non-litigation context would be called collusion, a violation of anti-trust law.


 


Just as corporations are organized around different lines of business, plaintiffs lawyers target different industrial sectors. These include: -- Traditional profit centers like asbestos, tobacco, pharmaceuticals and insurance; -- Potential growth markets like lead paint and mold; and -- Suits that today seem outrageous, like those against the fast-food industry, but might well be called new product development.


 


Plaintiffs lawyers are increasingly sophisticated in targeting their customer base; they aggressively and cooperatively solicit potential claimants through the Internet and traditional print, radio and television media outlets.


 


Although the trial bar likes to accuse corporations of having undue influence, the government relations and public relations arms of Trial Lawyers, Inc. are more powerful and focused than those of any other industry.


 


Legal systems in almost every other country operate on a loser pays principle. If you sue someone and lose, said Manhattan Institute Senior Fellow Walter Olson in a February, 2004 lecture at Michigans Hillsdale College, you cant just walk away. You have to contribute something to making the victim of the lawsuit whole for what he has paid. We had that same principle in our legal system throughout much of American history, but it gradually died out. We also had procedural rules discouraging ill-conceived litigation.


 


Trial Lawyers, Inc. calls the practice of predatory litigation a racket designed to do little more than advance the incomes and interests of its members everyone else be damned a racket whose impact on American business and the U.S. economy is ruinous. It points out that asbestos litigation alone has driven 67 companies [73 at last count] bankrupt, including many that never made or installed asbestos, costing tens of thousands of jobs and soaking up billions of dollars in potential investment capital.


 


On medical malpractice, it asserts that Trial Lawyers, Inc. often takes between 40 percent and 70 percent of the award for its fees and cost. [And] in 2002, a dozen states experienced medical emergencies because doctors and hospitals could no longer afford malpractice insurance. Women scrambled for doctors to deliver their babies, seriously injured patients had to be airlifted out of some locations because there were no practicing emergency-room physicians available, and hospitals closed maternity wards to protect themselves. On the well-publicized 1998 tobacco settlement, it calls the mega-fees collected (in some cases as much as $30,000 an hour) nothing but egregious, adding that some 300 lawyers from 86 firms will pocket as much as $30 billion over the next 25 years even though, for many of them, the suits posed minimal risk and demanded little effort. That staggering sum comes right out of taxpayers pockets enough money to hire 750,000 teachers. When it comes to big corporations ripping off the public, no one holds a candle to Trial Lawyers, Inc.


 


Federal Reform


On top of runaway health-care costs (which GM says amounted to $1,400 per vehicle in 2003 and continue to grow at double-digit rates), retiree legacy costs, higher labor rates, higher (total) taxes and (federal and local) regulatory burdens, U.S. automakers shoulder increasingly heavy litigation costs not borne by any off-shore competitor. We cant raise prices to accommodate these costs, one industry attorney says. So we have to take them out of other priorities wages, profit sharing, the number of jobs we can offer.


 


While legal reforms in general must be attacked state by state, industry attorneys point to three priorities that can and must be dealt with at the federal level: 1) class actions, 2) asbestos litigation and 3) medical malpractice reform. All are high on the Bush Administrations priority list and the first was addressed by the Class Action Fairness Act of 2005 that passed both houses of Congress this February.


 


This law: 1) closes the loophole in federal jurisdiction that permitted forum shopping and the filing of overlapping cases and 2) enacts a Consumer Class Action Bill of Rights to protect consumers from abusive settlements, which (among other things) requires special scrutiny for settlements that involve low-value coupons in lieu of cash payments.


 


Under the previous rules, to prevent a case from being moved to federal court, a popular tactic has been to bring in at least one local defendant -- in a pharmaceutical case, for example, a local drug store that sold the prescriptions. Our dealers are routinely sued in class actions for that purpose, says one industry attorney. We designed the product, we built it, we sold it. Yet theyll drag in some local dealer who had nothing to do with the issue for the sole purpose of making it harder to remove to federal court.


 


Lawyers further abused the system by filing multiple repetitive suits. After Firestone announced its tire recall in August, 2000, the onslaught of overlapping suits began within hours, and in days Ford and Firestone had been named in about 100 class actions. Some firms filed multiple cases in different jurisdictions, one attorney says. Plaintiffs lawyers competed with other plaintiffs lawyers to be the first to file. The vast majority alleged the same thing -- damages related to tires -- on behalf of the same people: all tire owners in the country. Having 100 different class actions filed in different courts serves no legitimate purpose, and it gives the plaintiffs lawyers repeated opportunities, multiple bites of the same apple. You file ten cases, determine which judge you like best, then push that case. It also harasses defendants by multiplying the costs of litigation.


 


If multiple cases are filed in federal court, they can be consolidated for pre-trial purposes. You only go through discovery once. You can get class certification heard one time. If 100 cases are filed in state courts, the defendant needs to re-litigate them over and over and over again. This drives up the cost to where many defendants find its much cheaper to settle than defend them. And weve seen plenty of situations where plaintiffs lawyers basically trip over each other to sell out the class so they can be first to settle and collect their fees.


 


To bring ruinous asbestos litigation under control, a Fairness in Asbestos Injury Resolution Act is also being developed. It would provide swift and fair compensation to (truly) injured workers and certainty and finality to defendants by establishing a no-fault trust fund, paid by defendant companies, and eliminating waste in the system. Medical liability reform measures are also under development.


 


How have asbestos cases impacted the auto industry? Until about 1999 or so, one industry lawyer says, we were rarely named in asbestos litigation. Then in 2001, when asbestos bankruptcies skyrocketed, we started seeing a huge increase in cases against us because those other defendants werent around any more. The principal theory in most of our cases is that mechanics have been exposed to asbestos by changing brake pads.


 


Never mind that multiple scientific studies have demonstrated that mechanics are not at increased risk from exposure to brakes. For one thing, the type of asbestos used in brake materials is far less carcinogenic than others. For another, the brake shoes and pads are encapsulated when they come out of the box. Also, the asbestos is burned off and turned into a harmless substance during braking. Recent research shows that 80 to 90 percent of all pending asbestos cases in the country are fraudulent, this lawyer adds. The proposed compensation system would establish clear medical criteria that would screen out fraudulent cases and free up more money for victims who have real injury.


 


In addition to class actions, asbestos and medical liability, The American Tort Reform Association (ATRA at www.atra.org) is pushing for product liability reform, limits on punitive and non-economic damages, abolition of the rule of joint and several liability and a whole lot more. Product liability suits have become hugely expensive to the auto industry, and joint and several liability enables courts to find deep-pockets defendants responsible for as much as 100percent of damages if ruled even one percent at fault.


 


Product Liability


Over the past 20 years, there has been a drift in the law that permits creative plaintiffs lawyers to point the finger at people other than the two responsible parties, one expert says. If I were a plaintiffs lawyer, I would advise anyone in a serious auto accident to consult with a lawyer. It is not difficult for creative lawyers to dream up theories that can get compensation for any particular accident. And even the cases we ultimately win cost a ton of money to defend.


 


Ted Boutrous, Jr., a partner at the Los Angeles law firm Gibson, Dunn and Crutcher, LLC and co-chair of the firms appellate and constitutional law practice group, has been heavily involved in civil justice reforms efforts his entire career. Vehicles are made to be driven at rapid speeds, he says, and everyone knows theres a possibility of an accident even when the vehicle has been built perfectly and every effort has been made to make it safe. Its a fact of life. Yet lawsuits are filed all the time, no matter what.


 


Plaintiffs lawyers have a modus operandi to get as many lawsuits against manufacturers as they can, in part because they can hit the jackpot irrespective of what really happened in the case. They know that if they can get their case to jury, it doesnt really matter what the facts are. They have a chance of getting some huge verdict with punitive damages.


 


Punitive damages, originally intended to teach deep-pocket defendants expensive lessons for (real or presumed) negligence, are awards over and above remuneration for medical expenses, loss of income, etc. Pain and suffering awards compensate injury victims for exactly those (highly sympathetic) intangibles. Both are unlimited in most jurisdictions.


 


One key problem is unlimited punitive and pain and suffering damages, Boutrous says, because theyre totally unpredictable. Even though the Supreme Court has laid down some due process guidelines, that doesnt protect a company from facing a massive verdict even in a case where they had built a very safe product and had prevailed many times. Ford, for example, has won 13 Explorer cases in a row, but that doesnt protect them from a verdict in an aberrational case. So theres this unpredictability -- when will there be liability; how much will it be? Even if a company does everything perfectly, when its going to have repeat litigation just by the nature of its business, it has to invest in lawyers and legal fees for almost every case because it doesnt know which case is going to be the one that produces the huge verdict. That increases the cost tremendously for companies based in the United States.


 


We need serious reform and a good-faith effort on all sides to stop these abuses and bring things under control because, at the end of the day, its bad for consumers and bad for the legal system. In many of these cases, there could be swift compensation that would help people who have been injured, but instead the plaintiffs lawyers want to hit the jackpot. They want to play Robin Hood, except instead of taking from the rich and giving to the poor, they want to give to themselves. Its a terrible situation if youre seeking justice and a fair system.


 


What can the federal government do? It could pass legislation putting limits on punitive damages, limiting the size of awards, he says, and tighten up liability standards for awarding them. Where theres a dispute where reasonable people can disagree on whether the product was dangerous or safe, maybe you can get compensatory damages; but to punish a company under those circumstances is extremely unfair. In other areas of law where government imposes punishment, its always done within statutory limits because deciding the proper punishment is a classic example of what legislatures are supposed to do.


 


Boutrous agrees that the rule of joint and several liability, which allows a manufacturer to be fleeced if its found even minimally responsible, is another area badly needing reform. In many cases, he says, you have situations where its undisputed that some other driver was drunk or driving recklessly and caused the accident, but the plaintiffs sue the manufacturer saying that, in retrospect, it could have made some part a little differently.


 


And what can be done about so-called frivolous suits? Ive always been an advocate for tighter standards at the filing stage of complaints and giving judges greater ability to dismiss cases early if they dont have merit, Boutrous says, and of [disallowing] attorneys fees in certain circumstances where they come into court with frivolous claims. There is that authority now, but courts are reluctant to exercise it.


 


I want to be clear that I think the legal system is there to protect peoples rights and compensate injured people who deserve compensation, he adds. We need to balance that against the need for reform, but were a long way from being in danger of prostrating those rights. There is more that can be done to tell courts that they have a responsibility to clear out frivolous cases so people who really need to be in court and need compensation can get it.


 


Nearly everyone outside the legal system, and many inside it, agree that tort reform is urgently needed to protect American companies and their employees against predatory and frivolous suits and outrageous awards that can drive them out of business.


 


Nearly everyone outside the legal system, and many inside it, agree that tort reform is urgently needed to protect American companies and their employees against predatory and frivolous suits and outrageous awards that can drive them out of business. Yet there is strong resistance from politicians who accept huge campaign contributions from lawyers anxious to maintain their gravy trains. Also those advocates who cling to the dangerous notion that any action to protect business is necessarily bad for the people.


 


Then theres the fact that judges and the vast majority of lawmakers are themselves lawyers who have been elected for a period of time. Why should they want to reform a system that so effectively enriches their friends and colleagues and -- once their terms are over and they have returned to private practices -- will likely line their very own pockets?


 


Still, President Bush and Congress have succeeded in passing class action reform, are working on medical liability reform, and should have more to come in the next couple of years. None too soon for American businessbut way too late for some.


 


 



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