OUT-OF-CONTROL CLASS-ACTION SUITS COST US ALL -- PLENTY

Date: Saturday, February 5, 2005

The Denver Metro Chamber of Commerce sponsored a panel discussion Wednesday on the "tort tax" -- the unconscionable costs imposed on American society by out-of-control class-action lawsuits.

Since this was a presentation intended largely for business leaders, you won't be surprised to learn the panelists cast trial lawyers in the chief villains' roles (which is not the same as saying that all trial lawyers are villains). The Sopranos are Italian, but not all Italians are mobsters. (Hey, I'm part Italian. Don't get in a huff.)

Jim Copland, director of the Center for Legal Policy at the Manhattan Institute, summed up the results of a 2003 study of the tort industry, Trial Lawyers Inc. (available at TrialLawyersInc.com online).

First, it's a huge industry -- estimated at close to $250 billion in 2004. And the plaintiff's bar takes a huge chunk of it, nearly 20 percent. True, plaintiffs in a product liability case get more in the aggregate, but when there's one team of lawyers who get millions in a settlement, and thousands of plaintiffs who get pennies, only the plaintiffs' lawyers really benefit.

And sometimes the actual plaintiffs don't get even pennies. They get coupons, good on their next purchase, if any, from the same manufacturer who supposedly wronged them. No surprise that few of the coupons are ever redeemed.

Second, tort costs consume a bigger share of our economy than that of our international competitors -- nearly 2 percent, twice as high as Japan and three times as high as Britain. In low-margin industries, that may determine whether a business survives or dies.

Third, the industry is growing much faster than the economy, so the burden is increasing. As the report wryly puts it, the industry relies on mature product lines, like asbestos -- $54 billion in awards, much of it to people who aren't sick, and 67 bankruptcies -- and medical malpractice. There are hot new product lines, like mold. And there is new product development, like suing fast-food companies for obesity.

The next panelist was Steven Hantler, assistant general counsel for DaimlerChrysler and chairman of the American Justice Partnership, a new industry trade group formed under the auspices of the National Association of Manufacturers. It will coordinate efforts to reform the legal system.

Hantler, author of The Seven Myths of Highly Effective Plaintiffs' Lawyers, noted a few common-sense reforms that would restore some predictability to the legal system for companies that are sued. One is to change the rules about what information jurors are allowed to hear at trial. In 32 states, he said, jurors are not permitted to know that an injured plaintiff was driving drunk, or ran a red light.

Reasonable limits on punitive and non-economic damages would also help.

The third panelist was Preston Oade, a partner in the Denver law firm Holme Roberts and Owen LLP and a member of the board of the Colorado Civil Justice League (ccjl.org online).

Colorado has benefited from being one of the earliest states to ban some of the worst abuses, Oade said, because it makes the state more attractive to business. But with the state legislature now under Democratic control, he expects the legislature to begin rolling back past reforms.

Indeed, several such bills have already been introduced. One that died in committee would have allowed a defendants' insurance company to be named as a defendant as well, thus ensuring that jurors know that money is available to pay a large judgment. Another, which encourages plaintiffs to reject settlement offers, passed its second reading in the state House Friday. And more such attempts can be expected, possibly including one to resurrect a version of the construction-liability initiative Colorado voters rejected decisively in November.

The legal system is overused, Hantler said, because the cost of abusing it is so low. He's not so much in favor of "loser pays" -- the norm in other countries -- as "loser's lawyer pays." I don't think he was entirely joking.

DaimlerChrysler is willing to go to trial rather than settling cases that have no merit, he said. And it will sue lawyers. "We want the message to be that a meritless lawsuit against Daimler Chrysler is a bad investment."

The difficulty is, Oade explained, that the pressure to settle a big case is intense. A company doesn't know what a jury will do, even if the case has no merit, and prospect of unlimited punitive damages in a class-action suit puts the company's existence at risk. Consequently, even meritless cases are filed for their settlement value. Judges can impose penalties, but seldom do.

Ultimately the cost of the tort tax is passed along to consumers. And that's one tax hike Coloradans won't get to vote on.