Wednesday, February 24, 2010

High Cost of Tort Litigation

I recently read a notice of a settlement of a securities lawsuit, that I was a  member of by default.  This settlement cost the company $40 million of which the tort lawyers received $10 million and I was to receive 29 cents.  How much the defense lawyers got  was not disclosed. Needless to say, the multiple, multi-page notices I received over the period of a few years, the cost of the defense lawyers and thousands of hours of preparation by the company's employees, along with the $40 million settlement was borne by the company at the expense of its current shareholders and future research.  This was a pharmaceutical company that does much good, and was a violation of regulations that did not involve medical harm.  Needless to say, I did not claim the 29 cents - couldn't afford the stamp.

Excerpt:  America’s litigation-friendly legal system continues to impose a heavy burden on our economy. The annual direct cost of American tort litigation—excluding much securities litigation, punitive damages, and the multibillion-dollar settlement reached between the tobacco companies and the states in 1998—exceeds $250 billion, almost 2 percent of gross domestic product.[1] The indirect costs of excessive litigiousness (for example, the unnecessary tests and procedures characterizing the practice of “defensive” medicine, or the loss of the fruits of research never undertaken on account of the risk of abusive lawsuits) are probably much greater than the direct costs themselves.[2]

Of course, tort litigation does do some good, and it does deter some bad behavior. The problem is that it deters a lot of good behavior, too. Indeed, the legal system does such a poor job of distinguishing between good and bad behavior that the high cost of litigation is effectively a “tort tax” paid by every American. The share of America’s economy devoted to lawsuits is far higher than that of other developed nations such as Germany and Japan (see graph, left). Yet America is hardly safer as a result.

Of course, the growth in federal regulation and law has made it necessary for Trial Lawyers, Inc. to lobby Congress as well. Thanks to large contributions, both to the Democratic Party and to individual legislators, lawyers have not only blocked most federal efforts at tort reform but are also working to coax goodies from Congress that pad their bottom line. Such efforts include:

  • Lengthening statutes of limitations in employment law to make it easier to file discrimination suits;[4]
  • Spurring securities litigation by allowing suits to be filed against the vendors of corporations accused of fraud;[5]
  • Cutting contingent-fee lawyers a tax break worth over a billion dollars;[6]
  • Gutting arbitration contracts designed to encourage resolution of disputes that are too expensive to take to trial;[7] and
  • Allowing state juries to override federal regulations.[8]

Read interesting article here.

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