Skewering the lawyers

Tort reform

Feb 17th 2005 WASHINGTON, DC
From The Economist print edition

Congress deals a blow to class actions—but the basic tort system is unchanged

DICKIE SCRUGGS, a Mississippi trial lawyer who led the charge against Big Tobacco in the 1990s, helping 46 states win a $246 billion settlement, once described the features of a “magic jurisdiction” in America's tort system. Speaking at an asbestos conference in 2002, he said that such a place would have judges elected with “verdict money”, trial lawyers who were cosy with those judges, and huge numbers of voters “in on the deal”. In this trial lawyers' paradise, “cases aren't won in the courtroom,” Mr Scruggs assured his audience. “They're won on the back roads long before the case goes to trial.”

In the view of corporate America, many doctors and George Bush's Republican Party, there are too many magic jurisdictions in America. Places like Madison County, Illinois, have become famous for awarding large punitive damages and for cosy relationships between trial lawyers and judges. They thus become magnets for class-action lawsuits, which bundle hundreds—even hundreds of thousands—of small claims that would not justify the costs of a stand-alone case. These suits have surged in Madison County from just two in 1998 to 106 in 2003.

Trial lawyers and Democrats have long protested that Big Business is exaggerating the woes of America's tort system in order to tilt the system in favour of rich defendants. If so, this dastardly plan is certainly working. On February 10th, the Senate approved by 72 votes to 26 the Class Action Fairness Act, which is designed to push class-action suits away from places like Madison County to the fairer federal system. As The Economist went to press, it looked as if the House would pass the bill too, giving Mr Bush a chance to sign it into law when he returns from Europe.

One for the president

In political terms, this is a big victory for Mr Bush, who pushed class-action reform in his re-election campaign. He can also boast bipartisan support: 18 Democratic senators deserted the lawyers' lobby, which has given their party so much. Indeed, in general the lawyers were out-muscled by the US Chamber of Commerce, which cleverly focused its fire on the former Democratic minority leader, Tom Daschle, last November, forcing this blocker of tort reform out of his seat in South Dakota.

Mr Bush and his business allies are now keen to move on to the other two parts of his tort-reform plan: sorting out the asbestos-litigation mess and medical-liability reform. But what exactly will this week's new measure achieve? Opinion, inevitably, is split between lawyers, who think it goes too far, and reformers, who wish it had gone much further.

The bill hits trial lawyers in their pockets, by limiting their fees to a proportion of the amount of money the plaintiffs actually collect rather than the theoretical amount awarded to them, if the award is in coupons rather than cash. (In a big case, companies often compensate plaintiffs with coupons, which are either fiddly or too small to redeem.)

But the bill's main aim is to stop “forum-shopping”—looking for magic jurisdictions. It says that any big class action (one that has more than 100 plaintiffs and more than $5m at stake) must go to federal court. An important exception, won by Democrats, ensures that a class-action suit must be filed in a state court if the chief defendant and at least two-thirds of the plaintiffs come from that state.

Part of the debate about the effect of the new bill still revolves around how bad forum-shopping actually was. Democrats protest that “judicial-hellhole” states usually tidy up their act sooner or later: eight have recently passed laws making class actions harder to file. Republicans reply that barely has one hellhole been closed than another opens up elsewhere. The merry-go-round has moved from Alabama and Texas to Mississippi and now to southern Illinois and West Virginia.
Looking forward, both sides agree that it will be virtually impossible now to get a nationwide class-action suit off the ground. The bill, if passed, would bar such suits from being filed in state courts. Meanwhile, federal judges face all sorts of constraints before they can certify multi-state suits. Consumer-protection law, often the basis of class-action suits, varies too much from state to state, and is often vague.

Some exceptions exist: securities-law class actions, for instance, are dealt with at the federal level. But lawyers whinge that the federal courts are generally kinder (or less tough) on defendants than places like Madison County. And there is also a huge backlog in federal cases. Federal judges, who opposed the bill because they were overburdened, may well decide to give civil class actions a far lower priority than criminal cases or lazily dismiss them on technicalities.

All this explains why the new Senate Minority Leader, Harry Reid, claims that the bill “slams the courthouse door on a wide range of injured plaintiffs.” But wait a moment. The new law still leaves open the possibility for single-state class actions in state courts; the minimum requirement for in-state plaintiffs is quite low. George Priest of Yale Law School says that trial lawyers will simply duplicate their actions, filing simultaneous class actions in separate state courts if they are forbidden to bundle them together.

Less tough than it looks

Indeed, the claim that this is the toughest tort-reform package in a decade is no great boast. Since trial lawyers have kept all chance of reform locked in their vice-like grip, there is virtually nothing to compare it with. The new law may well restrict the number of class-action lawsuits, but it does nothing about the underlying principles of the tort system, especially the ability to sue for punitive damages (on top of the actual compensatory damages suffered for the victim) and the fact that those punitive damages, which tend to be the spectacular ones, are shared by the victims and their lawyers.

A more radical plan might simply have changed the system to remove the punitive incentive to sue—for instance, by paying all punitive damages to the state in the form of a fine for bad behaviour. In the absence of such fundamental change, a lot still depends on whether Mr Bush can push through his other two proposals.

In the case of asbestos, various lawsuits on behalf of victims have bankrupted more than 70 companies. The Republican solution is to establish a $140 billion industry-backed trust fund to settle all the claims in exchange for ending all litigation. Unfortunately, the consensus to do this is “eroding very fast”, says Michael Greve of the American Enterprise Institute. One problem is a brawl between insurers and manufacturers: each wants the other to pay more into the fund. Conservatives also worry that trial lawyers will get a cut.

With medical-liability cases, Mr Bush wants to cap awards for “pain and suffering”, which are given after patients have been reimbursed for lost earnings and medical expenses, at $250,000. That would bring some certainty to doctors, but it strikes many people as too low a limit for botched operations, so Mr Bush may have to compromise. Even if they get most of what they want, the Republicans will merely have curbed the more outrageous abuses; they will not have pushed through structural reform.

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