Tort Reform -- Past Its Time

Last month we wrote about tort reform in New Zealand (Reasons to Love New Zealand, Part III: Tort Reform), which concluded that "the reason that the US will never adopt the New Zealand system, because too many lawyers make too much money from the current system; the power rests not with the people but with the tort attorneys." Is that really true?

To the extent that 'special interests' drive the agenda of lawmakers, it seems so. But, what if we could cast aside the tort bar objections and adopt tort reform in the United States? What would happen? Ted Frank argues that it would be the real economic stimulus we need.

The direct costs to the United States of tort litigation are $252 billion a year, 1.8 percent of GNP, twice that of a typical industrialized nation. But the indirect costs caused by excessive litigation far outweigh the direct costs of paying attorneys and the occasional jackpot justice verdict. Businesses incur nonlegal expenses to comply with the tort system, from document management systems, to executive time lost in depositions and pretrial preparation, to activities foregone because of legal risk. Businesses and individuals change their behavior in inefficient ways because of the misaligned incentives of the tort system.

With the expansion of employment litigation, every hire of an employee (and every decision not to hire) is a potential lawsuit. Employers are rational economic actors and factor in these additional costs by reducing wages and substituting more capital for labor in their capital-labor mix. Fear of liability causes doctors to engage in defensive medicine, manufacturers to refrain from innovation, and pharmaceutical companies to cut back on R&D.

Economists have studied all of these effects. As I discussed in recent testimony on Capitol Hill, if one takes conservative estimates from these economic studies and adds it all up, the total cost to the economy from excessive litigation can be estimated to be between $600 billion and $900 billion a year, the vast majority of which is simply wealth destruction. That is between 4 and 6 percent of GNP, a tort tax of between $8,000 and $12,000 a year for an average family of four.

In other words, without spending a dime of taxpayer money, comprehensive tort reform could do more for the economy every year than the entire stimulus package would. In fact, we could still come out ahead if the government spent half of the increased tax receipts on bailing out the trial lawyers who would lose income from real tort reform.

He underscores important points which echo my beliefs:

• Our nation’s tort system is the most expensive in the world. Yet there is no evidence that it provides benefits superior to those of other nations.
  
• The total cost to the economy from excessive litigation is an estimated $900 billion a year.
  
• Fear of liability causes doctors to engage in defensive medicine, manufacturers to refrain from innovation, and pharmaceutical companies to cut back on R&D.
  
• ...we have a litigation brain drain: many of the best and brightest college graduates choose to become attorneys rather than join professions where people produce or invent things rather than work to promote or prevent wealth transfers.

How many times have you heard people say "thank God for that class action suit it really saved my bacon"? I sure have not, but I do have a stack of coupons I will never use sitting in my desk drawer. In the comments on our article on New Zealand, TrialDog argues that class action torts provide a societal benefit:

Now, there are reasons why class action cases are important. Suppose your internet provider is charging some small $1 fee fraudulently. On a grand scale, they make millions off the scam. No individual can do anything about it. A class action lawyer can. Thus, the class action suit provides a great social benefit. Can such cases be abused? Sure, especially when the government gets involved as they did in smoking cases. Can the lawyers be overpaid? Yes.

Not to pick on TrialDog who is a regular reader; this perspective underscores the typical tort bar argument -- they provide a service to the community. In the same comments, I argued benefit to the consumer in this case is de minimus, while the benefit to the attorney is presumably moderate to very great. I argue further now that in the case of fraudulent charges by service provider, we have criminal laws that can be enforced.

Other than put a bunch of attorneys to work in another profession (which most of them clearly are capable of adapting to) what are the downsides of tort reform? The only one that I can think of is it will never happen. I just don't see anyone going to Washington on that bandwagon. No matter how truthful or beneficial tort reform might be... the road to Washington is well lit only for bleeding hearts.

Finally -- Attorneys Paid in Discount Coupon for Feminine Products

Nah, sorry, that's just too good to be true. Almost though...

Actually, the Ca Supremes dealt a setback to tort reform, legislating from the bench again. More on that later.

Who among us hasn't received that notice where you get a discount coupon for your next movie, only to find out attorneys bounce out of court with millions? Why don't those lawyers also get paid in discount coupons?

Los Angeles County Superior Court Judge Brett Klein thought so as well. Asked to approve a class-action settlement, he ruled the plaintiffs attorneys be paid in same kind as plaintiffs. Ten dollar gift cards to the Windsor Fashion Store, which sells womens dresses for every occasion.

Makes you want to say: Yes! In your Face!

An ex-girlfriend once told me that 'woman' or 'womens' in the name of the store is code for 'plus size'. Doesn't apply here, but it would make it funnier...

Then, wouldn't you know, another judge overturned the order in February and "awarded Yorba Linda lawyer Neil B. Fineman $125,000 in fees instead of gift cards." So it didn't last.

California Supremes Deal Setback to Tort Reform

In 2004 California passed Proposition 64, designed to limit attorney fees as well as promote tort reform. Prop 64, along with support from judges like Brett Klien, had put CA on the road to leading the nation in tort reform.

On Monday, the California Supreme Court reversed the tort reform trend. "The ruling was the state high court’s most significant interpretation of Proposition 64, the 2004 initiative that limited suits under a major consumer law to people who claimed they had lost money or property as a result of a company’s wrongdoing."

In other words, the California Supremes are legislating from the bench again.

Tort Reform will never happen as long as attorneys make the rules.

Reasons to Love New Zealand, Part III: Tort Reform

The list is getting longer for the reasons to love New Zealand:

1. New Zealand is the new home of capitalism.
2. They speak English in New Zealand.
3. Fat nurses unwelcome in New Zealand. Gotta love that! Helloooooooo Nurse!
4. How about Miss New Zealand? (at right)
5. And now: Tort Reform!

Actually, this is not news. Tort law was eliminated forty years ago in New Zealand. Peter Schuck at Yale wrote a great description of the Kiwi replacement for tort law -- it is worth quoting from at length:

When ordinary Americans think of New Zealand (which is hardly at all), they probably envision the breathtaking mountains, glaciers, and lakes panoramically depicted in the film version of Lord of the Rings. For legal scholars, however, it is radical tort reform that distinguishes New Zealand.

Sounds over-the-top and all... but no:

New Zealand, after all, essentially abolished tort law more than three decades ago, and its people seem quite happy with the result. In stark contrast, the American tort system continues to expand and flourish, while representing (depending on whom you ask) the essence of popular justice or a symbol of all that is wrong with our law.

At this point, I'd like to pause and point out a few famous tort lawyers:

1. John Edwards: Ann Coulter has a good summary of his tort law experience. Go read it if you haven't already.
2. Texas attorney Reed Morgan. Not familiar? You know him by his other name: the McDonalds Coffee Crotch Burn Attorney. (In all fairness to Reed, he did attempt to settle for far less than his client eventually received. It is the system that is screwed up.)
3. Erin Brockovich (Ok, technically not an attorney.)
4. Every attorney that made partner in his firm by getting you a coupon from a class action settlement. Here’s but one infamous case: In a settlement of a class-action suit against Blockbuster, plaintiff attorneys received $9.25 million while each class-action member received two coupons for movie rentals and one $1 off coupon. The case was about late movie return charges.
5. Every lawyer in a story over at overlawyered.com.

Sure, these are champions of the people. The champion of the little guy. They make a living suing the deep pockets. They made a connection between someones supposed suffering and some deep pockets. That's all -- the suffering does not have to be real, the connection does not have to be real. The Tort Bar does not care.

There are some stunning examples, as in the supposed silicosis tort boon, the 'next asbestos'.

In 2003 alone ... U.S. Silica [a company that mines and sells sand] was served with nearly 20,000 lawsuits claiming it had caused silicosis -- a serious, if rare, lung disease. The tort bar saw silica as the "new asbestos," says Mr. Ulizio, and he had visions of his century-old concern going bankrupt, along with dozens of others.

Instead what ensued was a legal thriller, in which the defendants not only beat the suits, but exposed a mob of lawyers and doctors who were fabricating cases, and who are now under investigation. This year his company has been hit by only one silicosis claim. "We hoped the truth would prevail eventually," he says, back in the conference room of the company's modest headquarters. The realist adds: "It worked, but it didn't have to."

And that might be the most disturbing part of Mr. Ulizio's tale. "When you have an entire system that condones these lawsuits, that does nothing to police its own, where there are no consequences, right or wrong has nothing to do with it. It's a coin flip."

And guess what: It came out that two-thirds of those claiming to have silicosis had previously claimed to asbestosis -- a near medical impossibility. It was just fraud. So, tort attorneys may -- or may not -- make a 'contribution to society' (is that coupon for a dollar off of a Blockbuster rental meaningful?) but they all got rich on tort law. And, US Tort costs are the highest in the world, amounting to 2.2% of Gross Domestic Product (GDP).

More from Schuck about the New Zealand approach:

In 1972, the National Party government...pushed through the Accident Compensation Act. It enjoyed bipartisan support and passed quite easily - a fact that will astonish any American lawyer observing the endless struggles over even the mildest tort reforms in the U.S.

I'm thinking about making the fact that this legislation passed easily as Reason Number 6 on the list of Reasons to Love New Zealand. Read on from Schuck about the New Zealand Accident Compensation Corporation:

The ACC provides generous no-fault benefits, including hospital and medical costs; wage replacement starting only one week after injury and at a rate of 80% of average weekly earnings; rehabilitation and transportation costs; and lump-sum payments for permanent loss or impairment, surviving spouses and children, and certain other losses. Pre-approval is not required for most medical and dental services, and service providers, not the victims, do the paperwork for the ACC.

So, everyone that is injured is compensated? How much does this cost? In New Zealand, the annual budget for the Accident Compensation Corporation is about $1.5B NZD, or about $858M (see page 5 of Schuck). In New Zealand, they deal with tort claims with (at the official exchange rate) a scant 0.6% of the New Zealand GDP. That is about a quarter of the 2.2% of GPD we spend in the US.

Why the US will never adopt the New Zealand system: Many is the tort case that concludes "let's send the big guy a message -- let's change the system!" Come a little closer, I'm going to share a secret. Torts are the remora of the legal world. Suits filed under tort law usually don't kill the shark -- and forget about punitive damages teaching those bad corporations a lesson -- tort lawyers would never want to dam the river of pain and suffering from which their income flows. And, that is the reason that the US will never adopt the New Zealand system, because too many lawyers make too much money from the current system; the power rests not with the people but with the tort attorneys.

No, the New Zealand system isn't perfect. But it is a lot better than what we have, and now we have another fine reason to Love New Zealand: Tort Reform.