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May 1, 2005

Tort Reform

Do legal costs really drive up the cost of doing business in North America? And is this the year all that will change?

After more than two decades of trying, corporate America this year is beginning to see what advocates are calling meaningful tort reform measures enacted into law in Washington. On Feb. 18, President Bush signed the Class Action Fairness Act, a measure designed to address some of the most egregious abuses that business groups say have permeated the U.S. justice system.

Backers also expect Congress to enact this year the Lawsuit Abuse Reduction Act (LARA), which will impose significant penalties on attorneys for filing frivolous lawsuits. The measure passed the U.S. House last year, but the Senate adjourned before considering it. Backers expect passage by both houses in the current Congressional session, although trial lawyers think the Senate will not pass the measure.

Indeed, while many business organizations continue to lobby for legal reform, other groups say such efforts are misguided and will do little to reduce legal costs.

“What these people are talking about has nothing to do with reform,” says Carlton Carl, director of media relations for the Association of Trial Lawyers of America (ATLA). Small business owners will be hurt, not helped, by so-called tort reform because they will have fewer, and more costly, options open to them when they need to turn to the courts in civil actions against larger corporations, Carl contends.

Whichever side you are on, there's no doubt the issue of the tort system—or in layman's language the system that allows injured parties to seek damages from those guilty of wrongful acts—will be aggressively debated in Washington this year. “The issue of legal reform has never been hotter,” says Sean McBride, vice president of communications with the U.S. Chamber of Commerce's Institute for Legal Reform. “I think this year is really going to be a watershed year for legal reform both in Washington and the states.”

The two federal measures will help business on the national level, but the tort reform battle will be far from over, say a variety of business and tort reform groups. Business owners and their trade associations will need to remain vocal—both nationally and on the state level—on medical liability, asbestos claims and other issues such as obesity-related lawsuits against food companies. “We would like to see an effort made for a more comprehensive approach to product liability,” for example, says Lawrence Fineran, vice president of regulatory and competition policy with the National Association of Manufacturers (NAM).

Getting to that point will take continued efforts from groups like NAM and the U.S. Chamber as well as individual lobbying by business owners. “The most important thing business owners can do is share their concerns and horror stories about the legal system with legislators,” says the Chamber's McBride.

The most compelling argument for tort reform is the cost to business of the current tort system. The U.S. tort system cost $246 billion in 2003, the equivalent of $845 per person for every person in the country, says Tillinghast, a Towers Perrin company.

The company's 2004 report notes that “over the last 50 years, tort costs in the U.S. have increased more than a hundredfold. In contrast, overall economic production (as measured by GDP) has grown by a factor of 37 and population has grown by a factor of less than two.”

BEYOND DIRECT

Tort costs go beyond direct financial outlays, contend groups that have been vocal on the reform issue.

CORPORATE ATTORNEYS RATE STATE LEGAL CLIMATES

BEST:
1. Delaware
2. Nebraska
3. North Dakota
4. Virginia
5. Iowa

WORST:
46. Illinois
47. Louisiana
48. Alabama
49. West Virginia
50. Mississippi

In a survey done by Harris Interactive for the U.S. Chamber, more than 81% of respondents said the legal climate is a factor in business location decisions, says McBride. “State legal climate (See chart, left) is a very important indication of where they should expand or relocate their businesses,” he says. “The issue of legal fairness is vaulting to the top of the list.”

The report noted that Mississippi, which ranked last, has now enacted legal reform legislation. The Mississippi legislation is “probably the most comprehensive piece of state legislation that we've seen in recent years,” McBride says. It included venues, joint liability questions, innocent seller issues and premise liability, among other measures to reduce frivolous lawsuits. As a result of Mississippi's changes, 96% of survey respondents expected an improvement there.

The Chamber's study is similar to another study done by the American Tort Reform Association (ATRA), a Washington, D.C.-based business group also backing tort changes. The ATRA study, “Judicial Hellholes 2004,” looked at specific venues such as Madison County, Illinois, where personal injury lawyers are more apt to file suits expecting a favorable outcome for their cases. Madison County also ranked poorly—the sixth worst local jurisdiction—in the U.S. Chamber survey. The southern Illinois county has seen major increases over the last five to seven years in asbestos lawsuits, class actions, personal injury and mass action lawsuits, explains McBride. “There is a perception on the part of plaintiffs' attorneys that the judges in Madison County look favorably on plaintiffs and plaintiffs' attorneys. Most defense attorneys believe they can't get a fair trial in Madison County.”

The recently enacted Class Action Fairness Act (CAFA) is designed to limit suits being filed in such “hellholes.” CAFA curbs venue shopping of class action suits, forcing suits that involve class members from several states into federal rather than state courts.

“It's the most significant reform in 10 years. These magnet jurisdictions will no longer be able to get these large class action cases. I think it will make a significant difference,” says Jim Copland, director of the Center for Legal Policy at the Manhattan Institute, a New York-based conservative think tank.

Copland expects eventual passage of the Lawsuit Abuse Reduction Act to put teeth back into attorney sanctions that were loosened in the 1990s. The act restores mandatory sanctions on attorneys, law firms or other parties who file frivolous suits. It also abolishes a safe harbor provision that allows attorneys to avoid sanctions by withdrawing a suit within 21 days after a motion for sanctions has been filed.

Copland thinks a “loser's pay” rule for lawsuits would be a more significant reform, but doesn't expect such a measure to gain traction in the current Congress.

TRIAL LAWYER CLOUT

Looking at other tort issues, Copland notes that “the president wants to have a federal medical malpractice bill,” which should move that issue up on the Congressional agenda this year. Copland doubts, however, that the president will get the $250,000 limit of non-economic damages in medical liability cases he's seeking, and others agree. Republican control of Congress isn't strong enough to overcome a filibuster in the Senate where 60 votes are needed to end such stalling tactics, notes NAM's Fineran. Sherman Joyce, president of ATRA, agrees: “The challenge will be in the Senate.”

Plaintiffs attorneys carry considerable influence in the Senate, Fineran and other tort reform advocates argue. Lawyers respond that painting them as the bad guys is preposterous.

“What we need is insurance reform and we need to crack down on medical errors,” says the ATLA's Carl.

The trial lawyers' Web site is filled with examples of lawsuits that helped eliminate dangerous products, such as flammable pajamas or defective cribs, from
the marketplace.

“It's hard to get our voice out there because the discussion is so lopsided in favor of insurance companies,” Carl contends. He says there's been no leveling off or dropping of medical malpractice premiums in states that have enacted medical liability limits, an argument echoed by the ATLA's Carl. Medical malpractice premiums in states without caps are actually slightly lower than in states with damage caps, he contends.

A study released in March questioned whether medical malpractice claims were rising as fast as some believed before Texas enacted its limit on medical malpractice payouts. The study was done by law professors from the University of Texas, University of Illinois and Columbia University, looking at Texas Department of Insurance records. “The clear implication is that ‘runaway medical malpractice litigation' makes a poor poster child for the cause of tort reform,” the study states.

Such debate likely will only intensify as Congress looks at the issue of medical tort reform.

$1 MILLION AD CAMPAIGN

NAM has formed the Fair Litigation Action Group to keep members and their employees informed on the costs of liability laws and the need for reform. The U.S. Chamber early this year launched a $1 million advertising campaign to publicize the results of its Harris Interactive survey. Ads ran in such national publications as USA Today and Newsweek and in local papers in states pinpointed by the study as having the worst legal climates—places such as Illinois, West Virginia, Florida and California, says McBride. “The sole mission of the U.S. Chamber's Institute for Legal Reform is to promote relief in Congress and the states,” he explains.

The activist groups actively seek other business groups and business owners who feel strongly about tort reform to join the effort for reform this year. “It will be incumbent on us and others to make that sale,” says ATRA's Joyce.

While the climate for reform seems favorable in Washington, no major legal change is certain until it's enacted and the bills are signed into law.

 PAYING THE BILL

Tillinghast, a Towers Perrin research company, produces an annual report on U.S. tort costs that has become the bible for those championing reform. Its 2004 study, released in January 2005, found that the U.S. tort system cost $246 billion in 2003. Tillinghast compiles its data by looking at insurance industry payouts and administrative costs.

U.S. tort costs rose 5.4% in 2003, following a 13.4% rise in 2002 and a 14.7% increase in 2001, Tillinghast reports. A drop in asbestos-related costs in 2003 accounts for the slower pace of increase, says Russ Sutter, a Towers Perrin principal and Tillinghast consultant, which is headquartered in New York. There's no way to predict whether asbestos-related costs will continue to slow or disappear in future years, he adds, so the 2003 numbers shouldn't be seen as a sign that tort system costs are dropping long-term.

Tillinghast last compared U.S. tort costs to costs in other countries by looking at data from 1998 and 1999, Sutter says. It found that U.S. tort costs were higher, as a percentage of GDP, than the comparable costs in 11 other countries spanning Western Europe, Australia, Canada and Japan. The National Association of Manufactures, in its 2003 report, “How Structural Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness,” took those Tillinghast international estimates and did some of its own calculations to show manufacturing tort costs as a percentage of manufacturing output. It found that U.S. manufacturing tort costs represent 4.5% of manufacturing output, higher than in nine countries analyzed. Germany was second at 3.8%. Developing economies such as Mexico and China were at only 0.6%.

The trial lawyers' association disputes the validity of the Tillinghast data, however, noting that it includes insurance company administrative costs and that insurance companies will not open their records for closer examination. The Tillinghast study “measures the cost of the insurance system, not the tort system,” says Carlton Carl, director of media relations for the Association of Trial Lawyers of America.

THE TORT REFORM LANDSCAPE IN WASHINGTON

Enacted

Class Action Fairness Act (CAFA)

  • Will force more class action cases into federal courts
  • Designed to reduce attorneys shopping for favorable venues and sympathetic judges
  • Will not eliminate class actions against business

Likely to Pass

Lawsuit Abuse Reduction Act (LARA)

  • Reimposes penalties on attorneys for filing frivolous suits
  • Ends an attorney's ability to withdraw a case deemed frivolous before sanctions can be imposed
  • Trial lawyers expect this bill to die in the Senate

Sought by Tort Reform Advocates

  • Medical lawsuit payment caps—faces a tough fight in the Senate despite the president's backing
  • Obesity-related suits against food companies—some predict action may be taken this year
  • Comprehensive product liability reform—a long-range goal for tort reform advocates