Fixing the legal system - CEO Agenda 2004 - litigious climate hurts economy

Chief Executive, The, Dec, 2003 by M.R. Greenberg

EVEN THOUGH growth is picking up, the U.S. economy is suffering greatly because of the nation's tort system. With the explosion of litigation, our legal system is out of control. Courts are clogged with frivolous lawsuits. According to the most recent figures, about 15 million suits are filed in state courts each year, or one every two seconds. This litigious climate costs about 2 percent of our Gross Domestic Product and will rise to 2.4 percent. That means costs of about $200 billion a year could reach $300 billion by 2005. While insurers, including AIG, are directly affected by the tort problem, this is an issue for every CEO as we head into 2004.

The core of the problem is that trial lawyers have led many in our country to believe we live in a "riskless" society, lf you trip, become ill, lose money in a speculative investment or gain weight, someone else has to pay for it. A sense of accountability has been lost. Americans expect to be reimbursed by somebody. They don't recognize that in reality, everybody is paying.

The major beneficiary in all this has been the trial bar. They are profiting at the expense of the broader economy. Look at what's happening in the medical malpractice field. Many doctors have given up their practices because of malpractice costs. Even some hospitals can't afford the insurance. Republican Senator Bill Frist of Tennessee has talked about getting a federal law change to bring that problem under control and bring some standards to the negligence field. The problem will have to be dealt with on a state-by-state basis. That will be a long, hard struggle.

Two other major issues are asbestos and class-action lawsuits. So far, the asbestos morass has taxed the economy with $54 billion in litigation costs. Some 70 companies have gone bankrupt, causing 60,000 jobs to be lost. Moreover; it's estimated that 128,000 jobs have not been created. Having bankrupted the asbestos manufacturers, the trial lawyers are now going after the distributors and retailers. Businesses that had anything to do with asbestos, no matter how remotely, are on the hit list for the trial bar.

Since early this year, Congress has been considering action on the asbestos issue. Meaningful asbestos reform would centralize all pending and future asbestos claims in a federal court. We would have uniform medical criteria, and plaintiffs would have to demonstrate impairment. And there would be limitations on attorney fees.

Senate Judiciary Chairman Orrin Hatch decided in the spring to support a trust-fund approach in which defendants and insurers would contribute a finite amount of capital to pay all asbestos claims on a no-fault basis. The at traction to this idea is that compensation would be paid on a timely basis, and there would be an end to this decades-old issue. That presumes that enough money will be available to pay victims over the anticipated 50 years of the life of the fund. A successful trust-fund approach would have to bring together not only the defendants and the insurance industry, but also organized labor and the trial bar. Senator Frist has been working to achieve a compromise.

Class-action reform also has been under consideration at the federal level. Class actions were originally conceived as a means for people with similar grievances to join a common suit and receive compensation. But now, they've turned into a lucrative avenue for lawyers to attack companies on behalf of clients who may be unaware that they're being represented and, thus, never really compensated. In most settlements, consumers receive only a small fraction of the total award. In a recent award involving a cereal manufacturer, lawyers received $2,000 an hour, while class members got coupons for cereal. In a settlement last year with a large video retailer, trial lawyers took in $9.25 million in fees and expenses. Plaintiffs got two free movie rentals and $1-off coupons.

In addition to federal legislation, we need to focus on the state level, where there has been some modest progress. Just recently, Texas passed changes in its tort law as it affects medical malpractice. It took a constitutional amendment to bring this about. Nobody would have thought that possible. Many other states are now looking at their legal systems.

To accelerate change on a state-by-state basis, the U.S. Chamber of Commerce has ranked every state, from best to worst. Companies that operate internationally typically rank countries, particularly developing countries, on the adequacy of their legal systems, on how they treat foreign investment and on the transparency of the regulatory process. Why shouldn't we also do this for every state? The general counsels of several hundred companies took part in this effort.

Then the chamber ran an ad with its ranking. You'd be surprised at the number of governors and legislators who called and asked, "Why are we No. 40?" or "Why are we No. 45"?" It got their attention. Why would business invest in those states? Why would any company want to invest in a state that treats you like the enemy and where the court system is rigged against you? Why would an insurer buy their municipal bonds? Virtually every state is confronting a budget deficit and job losses. There has never been a better season to bring about some change.