SPEAKERS CONTENTS INSERTS
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94–364 PDF
2004
SAFEGUARDING AMERICANS FROM A LEGAL CULTURE OF FEAR: APPROACHES TO LIMITING LAWSUIT ABUSE
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
JUNE 22, 2004
Serial No. 95
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
MELISSA A. HART, Pennsylvania
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
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RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
C O N T E N T S
JUNE 22, 2004
OPENING STATEMENT
The Honorable Lamar Smith, a Representative in Congress From the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
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The Honorable John Conyers, Jr., a Representative in Congress From the State of Michigan, and Ranking Member, Committee on the Judiciary
WITNESSES
Mr. Philip K. Howard, Chair, Common Good
Oral Testimony
Prepared Statement
Ms. Karen R. Harned, Executive Director, National Federation of Independent Business Legal Foundation
Oral Testimony
Prepared Statement
Professor Theodore Eisenberg, Henry Allen Mark Professor of Law, Cornell Law School
Oral Testimony
Prepared Statement
Mr. Victor E. Schwartz, General Counsel, American Tort Reform Association
Oral Testimony
Prepared Statement
APPENDIX
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Material Submitted for the Hearing Record
Statement from the U.S. Chamber of Commerce
Statement from the American Medical Association
American Tort Reform Association, Bringing Justice to Judicial Hellholes 2003, submitted by witness Victor Schwartz
Prepared Statement of the Honorable Elton Gallegly, a Representative in Congress From the State of California
Letter from Public Citizen organization to Judiciary Committee Chairman F. James Sensenbrenner, Jr.
Letter from the American Bar Association to Chairman Sensenbrenner
Letter from witness Victor Schwartz to Chairman Sensenbrenner in response to Public Citizen letter
Letter with attachments from witness Karen R. Harned to Chairman Sensenbrenner
Journal of Harvard Law and Public Policy article submitted by witness Victor Schwartz
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SAFEGUARDING AMERICANS FROM A LEGAL CULTURE OF FEAR: APPROACHES TO LIMITING LAWSUIT ABUSE
TUESDAY, JUNE 22, 2004
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:05 a.m., in Room 2141, Rayburn House Office Building, Hon. Lamar S. Smith presiding.
Mr. SMITH. The Committee on the Judiciary will come to order. Chairman Sensenbrenner, unfortunately, cannot be here. He has asked me to take his place. We will proceed with the hearing at hand.
I will recognize myself for an opening statement, then the Ranking Member, Mr. Conyers. And other Members' opening statements, without objection, will be made a part of the record. After the opening statements, we will proceed to hear from our witnesses. I will recognize myself.
Our hearing today examines how we can protect Americans from lawsuit abuse. Frivolous lawsuits harm our economy and threaten to put business owners out of business. This is especially true of small business owners who do not have the money to fund prolonged lawsuits.
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The alarming trend of frivolous lawsuits has made a mockery of our legal system. Many of the frivolous suits we will discuss today were brought despite flimsy facts or evidence that show no negligence on the part of the defendant.
Of course, there are many Americans with legitimate legal grievances, from someone horribly disfigured during an operation to a company responsible for contaminating a community's water supply, but these examples are not why we are here today.
Americans deserve their day in court. No one who deserves justice should be denied justice.
However, the aggressive nature of some personal injury attorneys and their gaming of the system drives up the cost of doing business and drives down the integrity of the judicial system. The examples are numerous. I will only mention a few.
In my hometown of San Antonio, a man crashed his car into the house of a couple who he had argued with and knocked the house off its foundation. The couple sued the engineer who designed the foundation. Despite the fact that it met the city's legal requirements, a judge awarded the plaintiffs $40,000.
The chief executive officer of San Antonio's Methodist Children's Hospital has seen his medical malpractice premiums increase from less than $20,000 to $85,000 over the last 10 years. He has been sued three times. In one case, his only interaction with the person suing was that he stepped into her child's hospital room and asked how he was doing. Each jury cleared him of any wrongdoing, and the total amount of time all three juries spent deliberating was less than an hour.
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A Pennsylvania man sued the Frito-Lay company, claiming that Doritos chips were ''inherently dangerous'' after one stuck in his throat. Only after 8 years of costly litigation, did the Pennsylvania Supreme Court throw out the case with one justice writing that there is, ''a common sense notion that it is necessary to properly chew hard foodstuffs before swallowing.''
At a New Jersey Little League game, a player lost sight of a fly ball hit to him because of the sun. He was injured when the ball struck him in the eye. The coach was forced to hire a lawyer after the boy's parents sued, and the coach settled the case for $25,000.
Today, almost any party can bring any suit in practically any jurisdiction for any reason without regard to the facts and without regard to the potentially harmful impact on the defendant. That is because plaintiffs and their attorneys have nothing to lose. This is legalized extortion. It is lawsuit lottery.
Some Americans have filed lawsuits for reasons that can only be described as absurd. They sue a theme park because its haunted houses are too scary. They sue the Weather Channel for an inaccurate forecast, and they sue McDonald's, claiming a hot pickle dropped from a hamburger caused a burn and mental injury.
Our national motto might as well be: ''When in doubt, file a lawsuit; it is always someone else's fault.''
Defendants, on the other hand, can lose their careers, their business and their reputation. In short, they can lose everything. This is not justice, and there is a remedy.
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Last week, I introduced the Lawsuit Abuse Reduction Act, legislation that requires judges to sanction those who file frivolous lawsuits. The act applies sanctions to both plaintiffs and defendants. A plaintiff who files a suit merely to extract a financial settlement can face sanctions, but so can a defendant who files motion after motion for unnecessary documents just to prolong the process.
The bill also reduces ''court-friendly'' shopping. Plaintiffs can sue only where they live or where injured or where the defendant's principal place of business is located.
One of the many reasons why this legislation is necessary is because of the adverse impact of frivolous lawsuits on every-day Americans.
Today, pastors refuse to counsel parishioners behind closed doors because they fear an accusation of inappropriate behavior.
Doctors forego high-risk procedures such as setting broken bones and delivering babies because of the litigation threat they pose.
Companies place warning labels on their products that should be absolutely unnecessary. A baby stroller label reads, ''Remove child before folding.'' A snow sled label reads, ''Beware, sled may develop a high speed under certain snow conditions.'' A dishwasher label reads, ''Do not allow children to play in the dishwasher.'' And an iron warns, ''Never iron clothes while they are being worn.''
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I believe we would be a better and more prosperous America if we discouraged frivolous lawsuits. The Lawsuit Abuse Reduction Act is sensible reform that will help restore confidence in America's justice system.
That concludes my opening remarks, and the gentleman from Michigan, Mr. Conyers, the Ranking Member of the Judiciary Committee, is recognized for his opening statement.
Mr. CONYERS. Thank you, Chairman Smith and Members of the Committee.
This is an important matter that we are dealing with here. We think that there may be some other considerations that might be taken in determining how we deal with frivolous lawsuits and the abuses of lawsuits that are going on. I am going to be asking the witnesses to comment, if they have time, on several considerations. The first is that the number of lawsuits are going down in the United States, in some measure thanks to those who have been working on this matter in the Congress, and I include the Chairman from Texas. The number of lawsuits are going down. They are not staying the same. They are not going up.
The second consideration I would like to find out from our distinguished witnesses is why jury awards, on average, are going down. Jury awards are not staying the same. They are not going up. They are going down. And it seems to me that these concerns could lead us to do something other than come up with measures that may seem logical when you listen to the selected anecdote that we could bring forward.
We have a number of horror stories that are not so happy to report. I have not called the President to task yet today, so I think I will do so now. In Youngstown, Ohio, he talked about health care on May 25. And he was complaining about junk and frivolous malpractice suits which, he said, are discouraging good doctors from practicing medicine. And he introduced a local doctor to his audience at Youngstown State University, an obstetrician, 21 years of practice, who he claimed had been driven out of his practice because of the high costs of malpractice insurance. And the President praised him and thanked him for his compassion.
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The only problem was that it turned out that this is the same doctor, wow, he was at dinner when a cesarean delivery occurred that created permanent injury. The baby was born with brain damage. Another patient on which he operated, the incision was closed and a sponge with a cord and a ring was attached to it and left inside. And then on another example, the woman, again, we have a sponge left inside and tremendous problems in that case, too. This was all the same doctor that was praised. And the White House was very sorry that they had raised this example saying that, if they had known these things, they would not have mentioned him as an example of what high insurance rates do to doctors.
So what I am seeking is, other than informed, rational discussion from our expert witnesses here about this subject, it is not a matter of parading nutty label warnings or recounting horrific instances where housewives and infants, who have little economic earning capacities and, therefore, recoveries are severely limited in serious permanent damages, but that we struggle toward some mid-ground which we understand and deal with as intelligently as we can, a very important and serious medical set of issues that challenge us today.
I thank you, Mr. Chairman.
Mr. SMITH. Thank you, Mr. Conyers.
Our first witness is Philip Howard. Mr. Howard is Chair of Common Good, a bipartisan coalition dedicated to restoring commonsense to American law. Common Good's Advisory Board includes former Senator George McGovern, former Carter Administration Attorney General Griffin Bell and former Clinton Administration Deputy Attorney General Eric Holder. Mr. Howard has advised those of both parties on reform initiatives, including Al Gore's Reinventing Government Program, Georgia Governor Zell Miller, Governor Bill Weld of Massachusetts, and Florida Governors Lawton Chiles and Jeb Bush. He is the author most recently of The Collapse of the Common Good: How America's Lawsuit Culture Undermines our Freedom.
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Our second witness is Karen Harned. Ms. Harned is the executive director of the National Federation of Independent Business Legal Foundation, a post she has held since 2002. Prior to joining the NFIB, Ms. Harned was an attorney in private practice specializing in food and drug law where she represented several small and large businesses and their representative trade associations before Congress and Federal agencies.
Our third witness is Theodore Eisenberg. Mr. Eisenberg is Henry Allen Mark professor of law at Cornell Law School where he specializes in bankruptcy, civil rights and the death penalty. He currently teaches bankruptcy and debtor/creditor law, constitutional law and Federal income taxation. Following law school, professor Eisenberg clerked for Chief Justice Earl Warren of the U.S. Supreme Court and, after 3 years in private practice, began his teaching career at UCLA.
Our fourth and final witness is Victor Schwartz. For over two decades, Mr. Schwartz has been co-author of the most widely used torts case book in the United States, Prosser, Wade & Schwartz's Torts, now in its tenth edition.
As chairman of the Federal Interagency Task Force on Product Liability, he received the Department of Commerce Secretary's award for professional excellence in Government service. Mr. Schwartz has been professor and dean at the University of Cincinnati College of Law. He serves as general counsel to the American Tort Reform Association, and he chairs the American Bar Association's Legislative Subcommittee on the Product Liability Committee. He is also a partner in the Washington office of Shook, Hardy & Bacon.
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We welcome you all.
So let me say, it is the practice of this Committee to swear in witnesses before they testify.
[Witnesses sworn.]
Mr. SMITH. Mr. Howard, we will begin with you.
TESTIMONY OF PHILIP K. HOWARD, CHAIR, COMMON GOOD
Mr. HOWARD. Thank you, Mr. Chairman and Congressman Conyers. Thank you for holding this hearing.
I think it is an important new direction in looking at the effects of law and the importance of law on the lives, the daily lives of Americans. As you suggested, our Board of Common Good is very bipartisan, and our goal is not to achieve any arbitrary limitations on lawsuits but to restore the foundation of reliable law. This debate has tended to focus over the years, as Mr. Conyers suggested, on the extreme cases of one sort or another on both sides. Our focus is not on the cases themselves, because you can find cases on both sides, because we think that the harm is not mainly the crazy verdicts or the amount of litigation; we think the harm here is the fear that has infected American society. It is one of the prime drivers for what most people consider a meltdown of our health system.
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Doctors, because they fear and distrust the system of justice, are ordering tens of billions of dollars of unnecessary tests. We conducted a Harris Poll in which four out of five doctors said that they ordered tests that they did not believe were necessary. It has also affected the quality of health care. The leading patient safety advocates in the Country are now working with Common Good because their studies have shown them that the distrust of justice has chilled the professional interaction needed for good health care. Doctors and nurses are not admitting their uncertainties and mistakes to each other, and as a result, stupid mistakes made in prescription doses and other things sometimes lead to tragic results because people are scared that anything they say might be used against them in litigation later.
In schools, teachers find it, particularly in inner city schools, very difficult to maintain order in the classroom. A recent Public Agenda Poll sponsored by Common Good showed that 79 percent of teachers had been threatened with legal claims, not for money damages, just to be dragged into hearings by, ''You couldn't have done that, you shouldn't have disciplined me in that way.'' And the threat of being dragged into a hearing and cross-examined by a lawyer is sufficient to undermine the authority of teachers.
And going a little further, today in America, a teacher will not put an arm around a crying child because who will defend you if someone says it was an unwanted touching?
It has affected the workplace in many ways. Most businesses, including my own law firm, don't give out personal references anymore. It has affected ordinary incidences of life-like playgrounds. There is no athletic equipment left in the playground, no jungle gyms, even seesaws have disappeared, leading or contributing to the crisis of childhood obesity.
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This is not about lawsuits. We are talking about people's daily lives here. What's happened is that Americans no longer trust the system of justice, and the reason is because there is a kind of open-season philosophy which is that people believe correctly that, if someone is angry enough, they can haul you into court. They may not win, but they can nonetheless haul you into court, and the threat of that is so horrible to people that it's literally undermined their freedom, particularly of those who deal with the public, like ministers and teachers and doctors and the like.
So the most important reform—well, first, I think it is very important to have sanctions for frivolous lawsuits. If you do not sanction the conduct, people, some people at least, will continue to do it. So I applaud the draft legislation.
But the most important reform is to restore the responsibility of judges to act as the gatekeepers. Today, judges don't have that idea. In order to sanction for frivolous conduct, a judge first has to decide that the case is frivolous. And judges today don't believe they have that authority.
So I applaud what the Committee is doing. I applaud this legislation and this debate. I think it is an important first step, and I think, in looking at the legislation, the goal here is to restore—is not to get rid of lawsuits but to restore the confidence of Americans in the legal system because, today, it is as if we've built a monument to the unknown plaintiff who looms high above the Country casting a dark shadow across everyone's daily choices. And it's very important to restore trust in our great legal system. Thank you.
[The prepared statement of Mr. Howard follows:]
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PREPARED STATEMENT OF PHILIP K. HOWARD
Thank you for the opportunity to speak with you today on the issue of ''Safeguarding Americans from a Legal Culture of Fear.'' I believe these hearings will play a significant role in raising public awareness of this issue, and the need for a basic shift in approach to restore predictability to our legal system.
While I'm a lawyer in private practice, I appear here as pro bono Chair of Common Good, a bipartisan legal reform coalition dedicated to restoring the foundation of reliable law. Common Good's advisory board includes former Attorneys General Griffin Bell and Dick Thornburgh, former Deputy Attorney General Eric Holder, and former political leaders such as Newt Gingrich, George McGovern, Alan Simpson, and Tom Kean. I've written a fair amount on the subject, including two books, The Death of Common Sense and The Collapse of the Common Good, and an essay on recent legal history in the new Oxford Companion to American Law.
In the past two years, Common Good has hosted five forums jointly with the American Enterprise Institute and Brookings Institution and sponsored a number of polls. What we have found is that, in dealings throughout society, Americans no longer feel free to act on their reasonable judgment. The reason is that they no longer trust our system of justice.
According to a Harris Poll, five out of six doctors do not trust the system of justice. As a result, doctors are ordering billions of dollars worth of unnecessary tests and procedures—not to address the health of their patients but to protect themselves from potential lawsuits. The nation's leading patient safety advocates, such as Dr. Troy Brennan at Harvard, are working with our coalition because their studies show that legal fear has chilled the professional interaction needed for quality care.
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In schools, teachers are unable to maintain discipline in their classrooms, fearful that they may be sued by students or parents. A recent Public Agenda poll, sponsored by Common Good, found that 78% of teachers have been threatened with legal proceedings by their students. In America today, teachers are told not to put a comforting arm around a crying child.
No part of society is immune. Playgrounds have been stripped of anything athletic. Even seesaws are disappearing because town councils can't afford to be sued if someone breaks an ankle.
Greenwich, Connecticut, is considering outlawing winter sports on public property after one resident broke his leg sledding. In that case—a good example of what's wrong with American justice—a father took one last run with his young son down a popular sledding hill and was tossed off his plastic dish when he hit a shallow drainage ditch at the end of the run. Falling in an awkward way, the father badly broke his leg. He sued the town, claiming that it should have taken better care of the hill. The judge gave the issue to the jury to decide, and it rendered a verdict of $6.3 million, including $1.5 million for pain and suffering.
The harm to society in this case is not mainly the monetary verdict, which, I suspect, will be reduced in the end by the judge. The harm is the resulting legal fear, undermining everyone's freedom to enjoy winter activities. Greenwich is now considering banning not only sledding but all winter sports on town property. Awareness of possible sledding claims has undoubtedly spread to other towns, and indeed to any private property owner who allows sledding. Why take the legal risk?
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There is a missing link in American justice—rulings on who can sue for what. Any legal system requires deliberate choices, binding on behalf of society, of what is reasonable behavior and what is not. That's what the law is supposed to provide. Justice Oliver Wendell Holmes, Jr. famously defined law as ''the prophesies of what courts will do.'' Today, no one has any idea what a court will do—that's why Americans are fearful.
Current legal orthodoxy is that in civil cases, as in criminal cases, juries should make the ultimate decision. But juries can't set precedent; every jury is different, and their decisions are often inconsistent. One jury may make a huge award in a particular case, and another, in a similar case, may make no award at all.
Perhaps it is useful to remember that, in a criminal case, the jury is our protection against abusive prosecution using state power. A civil case, by contrast, is a use of the state's coercive powers by a private citizen against another private citizen. A lawsuit is just like indicting someone, except that the penalty is money. The mere possibility of a lawsuit changes people's behavior.
That's why judges must continually act as gatekeepers, interpreting the principles of common law to draw the boundaries of reasonable claims. Justice Benjamin Cardozo wrote that this kind of ''judicial legislation'' was essential to the functioning of the common law. Holmes put it this way: ''Negligence is a standard we hold people bound to know beforehand, not a matter dependent on the whim of the particular jury . . .''
The flaw in the sledding case is not that this particular jury went off the tracks, but that the jury was given the case at all. The threshold legal question in any accident case is whether we as a society tolerate certain risks—including sledding on a hill with its predictable imperfections of nature and of landscapes. That decision must be made by someone with authority to make it stick. Judges and legislatures have that authority. Juries do not.
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The role of juries in civil cases is to decide disputed facts, such as whether someone is lying, not standards of conduct. Whether a seesaw is a reasonable risk should be decided on behalf of society as a whole, in a written ruling. The Seventh Amendment of the Constitution protects the right to a jury trial but only in ''suits at common law.'' A judge must first decide what is a valid claim under the common law.
Trial lawyers like the unpredictability of juries, because it gives them a lever for settlement, and argue that juries are ''democracy in action.'' But that's exactly what's wrong with the current legal system. Justice is supposed to be rendered by the rule of law, with consistent rulings and predictable outcomes, not rendered in mini-elections, jury by jury, tolerating wildly inconsistent results for the same conduct. To quote former Yale Law Professor Eugene Rostow, the ''basic moral principle, acknowledged by every legal system we know anything about . . . is that similar cases should be decided alike.''
The point of reform is not to put arbitrary barriers on lawsuits. Lawsuits are a vital component of the rule of law. By making people potentially liable when they are negligent, law provides incentives for reasonable conduct. But the converse is also true. Allow lawsuits against reasonable behavior, and pretty soon people no longer feel free to act reasonably. And that's what's happening in America today.
There's a lot of discussion about the need to deter frivolous lawsuits and excessive claims. Fulfilling that task, however, requires judges to make decisions of what's frivolous. Anytime there's an accident, it couldn't be easier to come up with a theory of what someone might have done—there could have been a warning, or more supervision, or a stronger lock on the door. Judges mustn't be so reticent to use their common sense. It would probably help if legislatures would make clear that this is their job, for example, with legislation to the effect that, ''It is the responsibility of judges to draw the boundaries of reasonable dispute, under the precepts of common law.''
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Judges also must not hesitate to impose penalties when the case is frivolous. A recent case over a car accident in Indiana involved a claim that Cingular should be liable because it was foreseeable that the customer might use the phone in the car. After the case was properly dismissed, the plaintiff appealed. While the phone company won the case, the court refused to award attorney's fees on the basis that the claim was ''not frivolous.'' That's not, I submit, how we are going to restore respect for our legal system.
All life's activities involve risk, and therefore the inevitability of accident and disagreement. The role of law is not to provide a consolation forum for those who have felt the misfortune of risk; it is to support the freedom of all citizens to make reasonable choices, including taking reasonable risks. Setting limits on lawsuits is not an infringement of freedom but a critical tool of freedom. Otherwise one angry person, by legal threat, can bully everyone else.
The main loser in the current situation is the American people. It is their healthcare that is increasingly unaffordable, their schools that are disrupted by disorder, their sympathy that is chilled by fears that someone may misinterpret a kind word, or an arm around the shoulder of a crying child . . . and their fun that is lost when the snow blankets a nearby hill.
Thank you for the opportunity to appear before you.
Mr. SMITH. Thank you.
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Ms. Harned.
TESTIMONY OF KAREN R. HARNED, EXECUTIVE DIRECTOR, NATIONAL FEDERATION OF INDEPENDENT BUSINESS LEGAL FOUNDATION
Ms. HARNED. Thank you, Mr. Chairman and distinguished Committee Members.
My name is Karen Harned, and I serve as executive director of the National Federation of Independent Business Legal Foundation, the legal arm of NFIB. NFIB represents 600,000 small businesses with about five employees. NFIB's average member nets $40,000 to $60,000 annually. We applaud the Committee for holding this hearing on the ever-growing problem of lawsuit abuse.
Small business ranks the cost and availability of liability insurance as the second most important problem facing them. The only problem ranked higher is the rising cost of health care. Many small businesses fear getting sued even if a suit is not filed. For the small business with five employees or less, the problem is the $5,000 and $10,000 settlements, not the million dollar verdicts. When you consider that many small businesses only net $40,000 to $60,000 a year, $5,000 paid to settle a case immediately eliminates about 10 percent of its annual profit.
In my experience, the greatest abuses occur in lower-dollar suits which often target small businesses. In many instances, a plaintiff's attorney will just take a client at his word, performing little, if any, research regarding the validity of the plaintiff's claim. As a result, a small-business owner must take time and resources out of their business to do the plaintiff's attorney's homework. They must prove their innocence in cases where a few hours of research at most would lead the attorney to conclude that the lawsuit is unjustified.
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Small business is the target of frivolous suits because trial lawyers understand that they are more likely than a large corporation to settle a case rather than to litigate. Small businesses do not have in-house counsels to inform them of their rights, write letters responding to allegations made against them or provide legal advice. They do not have the resources needed to hire an attorney nor the time to spend away from their business fighting many of these small claim lawsuits. Often, they do not have the power to decide whether or not to settle a case. The insurer makes that decision.
I place frivolous lawsuits into four categories: Pay me now, or I'll see you in court; somebody has to pay, and it might as well be you; let's not let the facts get in our way; and Yellow Page lawsuits.
Pay me now or I'll see you in court: An increasingly popular tool is the demand letter. Demand letters are particularly attractive when the plaintiff can sue a small business for violating a State or Federal statute. They allege the small business violated a particular statute and are replete with cites to statutes and case law. At some point, the letter says that the small business has an opportunity to make the whole case go away by paying a settlement fee upfront and provides time frames for paying the fee. If these demands are not met, the letter threatens a lawsuit.
Somebody has to pay, and it might as well be you: This is where the plaintiff may have been harmed but is suing the wrong person. For example, Bob Carnathan, an NFIB member, owns Smith Staple and Supply Company, a small nail and staple fastening business in Harrisburg, Pennsylvania. Mr. Carnathan's business leases space in a strip small. After a snow storm, one of the tenants slipped and fell in the parking lot on the icy pavement. The medical bills from his injury totalled a little over $3,000. The man sued every tenant in the complex as well as the landlord and the developer for $1.75 million. Mr. Carnathan was sued, though he was not at fault, because his rent included maintenance on the facilities and grounds. After 2 years of endless meetings and conference calls, Mr. Carnathan's business was released from the lawsuit. He says that there is no compensation for the time he was forced to spend away from his business to fight this unfair lawsuit. He firmly believes that ''the smaller your business, the more you're impacted when a frivolous lawsuit lands on your doorstep.''
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Let's not let the facts get in the way: Plaintiffs and even attorneys sometimes stage injuries for prospective lawsuits. In these suits, if the business does not catch the plaintiff in a lie early in the process, the small business owner must suffer the cost of litigation or settle a fabricated claim.
Yellow Page lawsuits: In these cases, hundreds of defendants are named in a lawsuit, and it is their responsibility to prove that they are not culpable. Plaintiffs name defendants by using vendor lists or even lists from the Yellow Pages from businesses operating in a particular jurisdiction.
Legislation is sorely needed to reform our Nation's civil justice system. H.R. 4571, recently introduced by Representative Lamar Smith, would be particularly helpful in curbing if not stopping many of the types of lawsuits I have described.
Thank you for asking us to testify today.
[The prepared statement of Ms. Harned follows:]
PREPARED STATEMENT OF KAREN R. HARNED, ESQ.
Thank you, Mr. Chairman and distinguished Committee members for inviting me to provide testimony regarding the tremendous negative effects lawsuits, and particularly the fear of lawsuits, are having on the millions of small-business owners in America today. My name is Karen Harned and I serve as Executive Director of the National Federation of Independent Business (NFIB) Legal Foundation, the legal arm of NFIB. The NFIB Legal Foundation is charged with providing a voice in the courts for small-business owners across the nation.
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NFIB has 600,000 members, and is represented in each of the fifty states. NFIB represents small employers who typically have about five employees and report gross sales of $300,000–$500,000 per year. NFIB's average member nets $40,000–$60,000 annually. NFIB members represent an important segment of the business community—a segment with challenges and opportunities that distinguish them from publicly traded corporations.
Although federal policy makers often view the business community as a monolithic enterprise, it is not. NFIB members, and hundreds of thousands of small businesses across the country, do not have human resource specialists, compliance officers, or attorneys on staff. These businesses cannot pass on to consumers the costs from taxes, regulations, and liability insurance without suffering losses.
Being a small-business owner means, more times than not, you are responsible for everything—taking out the garbage, ordering inventory, hiring employees, dealing with the mandates imposed upon your business by the federal, state and local governments, and responding to threatened or actual lawsuits. For small-business owners, even the threat of a lawsuit can mean significant time away from their business. Time that could be better spent growing their enterprise and employing more people.
The NFIB Legal Foundation applauds the Committee for holding this hearing in order to focus on the ever-growing problem of frivolous lawsuits.
FRIVOLOUS LAWSUITS CREATE A CLIMATE OF FEAR FOR AMERICA'S SMALL BUSINESSES
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Small-business owners rank the ''Cost and Availability of Liability Insurance'' as the second most important problem facing small-business owners today, according to a survey just released by the NFIB Research Foundation.(see footnote 1) The only problem ranked higher is rising health-care costs.
This number two ranking represents a significant increase from the thirteenth position it held in the 2000 ''Small Business Problems and Priorities'' survey.(see footnote 2) More than 30% of businesses today regard the ''Cost and Availability of Liability Insurance'' as a critical issue, compared to 11% in 2000—a threefold increase.(see footnote 3) With a dramatic rise in the cost of lawsuits,(see footnote 4) it is not surprising that many small-business owners 'fear' getting sued, even if a suit is not filed.''(see footnote 5) That possibility—the fear of lawsuits—is supported by a recent NFIB Research Foundation National Small Business Poll, which found that about half of small-business owners surveyed either were ''very concerned'' or ''somewhat concerned'' about the possibility of being sued.(see footnote 6) The primary reasons small-business owners fear lawsuits are: (1) their industry is vulnerable to suits; (2) they are often dragged into suits in which they have little or no responsibility; and (3) suits occur frequently.(see footnote 7)
The bottom line is that the escalating numbers of lawsuits (threatened or filed) are having a negative impact on small-business owners. For two years, as Executive Director of NFIB's Legal Foundation, I have heard story after story of small-business owners spending countless hours and sometimes significant sums of money to settle, defend, or work to prevent a lawsuit.
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For the small-business owner with five employees or less, the problem is the $5,000 and $10,000 settlements, not the million dollar verdicts. When you consider that many of these small businesses only net $40,000–$60,000 a year, $5,000 paid to settle a case immediately eliminates about 10% of a business' annual profit. Small-business owners also are troubled by the fact that they often are forced to settle a case at the urging of their insurer. In most cases, if there is any dispute of fact, the insurer will perform a cost-benefit analysis. If the case can be settled for $5,000 the insurer is likely to agree to the settlement because generally it is less expensive than litigating, even if the small-business owner would ultimately prevail in the suit.
Once the suit is settled, the small-business owner must pay with higher business insurance premiums. Typically, it is the fact that the small-business owner settled a case, for any amount, which drives insurance rates up; it does not matter if the business owner was ultimately held liable after a trial. Not surprisingly, a recent NFIB Research Foundation National Small Business Poll shows that 64% of small employers believe that the biggest problem with business insurance today is cost.(see footnote 8) Many small-business owners understand this dynamic, and as a result, will settle claims without notifying their insurance carriers.
In addition to the financial costs of settling a case are the psychological costs. Small-business owners threatened with lawsuits often would prefer to fight in order to prove their innocence. They do not appreciate the negative image that a settlement bestows on them or on their business.
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THE IMPACT OF FRIVOLOUS LAWSUITS ON SMALL BUSINESS
We would all like to think that attorneys comply with the highest ethical standards; unfortunately, that is not always the case. In my experience, this seems particularly true of plaintiffs' attorneys who bring lower-dollar suits—the type of suits of which small businesses are generally the target. In many instances, a plaintiff's attorney will just take a client at his word, performing little, if any, research regarding the validity of the plaintiff's claim. As a result, small-business owners must take time and resources out of their business to prove they are not liable for whatever ''wrong'' was theoretically committed. As one small-business owner remarked to me last year, ''What happened to the idea that in this country you are innocent until proven guilty?''
Although that mantra refers to a defendant's rights in our criminal justice system, problems with our civil justice system can no longer be ignored. It is incumbent upon the attorney representing a plaintiff to get the facts straight before sending a threatening letter or filing a lawsuit, not after the letter is sent or the lawsuit is filed. Sadly, due in large part to the ineffectiveness of Rule 11 in its current form, we have a legal system in which many plaintiffs' attorneys waste resources and place a significant drain on the economy by making the small-business owner do the plaintiff's attorney's homework. It often is up to the small-business owner to prove no culpability in cases where a few hours of research, at most, would lead the attorney for the plaintiff to conclude that the lawsuit is unjustified.
Small business is the target of so many of these frivolous suits because trial lawyers understand that a small-business owner is more likely than a large corporation to settle a case rather than litigate. Small-business owners do not have in-house counsels to inform them of their rights, write letters responding to allegations made against them, or provide legal advice. They do not have the resources needed to hire an attorney nor the time to spend away from their business fighting many of these small claim lawsuits. And often they do not have the power to decide whether or not to settle a case—the insurer makes that decision.
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FRIVOLOUS LAWSUITS COME IN MANY SHAPES AND SIZES
Frivolous lawsuits take different forms, and I will highlight those types of suits that have been brought to my attention. I place these suits into four categories—''Pay me now, or I'll see you in court;'' ''Somebody has to pay, and it might as well be you;'' ''Let's not let the facts get in our way,'' and ''Yellow Page lawsuits.''
''Pay me now, or I'll see you in court.''
An increasingly popular tool, which can be quite effective against the small-business owner, is the ''demand'' letter. In my experience, plaintiffs and their attorneys find ''demand'' letters particularly attractive when they can file a claim against a small-business owner for violating a state or federal statute. Generally, on behalf of a plaintiff, an attorney will send a one and a half to two-page letter alleging the small business violated a particular statute. The letter is replete with cites to statutes and case law. At some point, the attorney's letter states that the business owner has an ''opportunity'' to make the whole case go away by paying a settlement fee up front. Timeframes for paying the settlement fee are typically given. In some cases, there may even be an ''escalation'' clause, which raises the price the business must pay to settle the claim as time passes. So, a business might be able to settle for a mere $2,500 within 15 days, but if it waits 30 days, the settlement price ''escalates'' to $5,000. At some point, however, a suit is threatened. Legal action is deemed imminent.
An example of such a case was a suit threatened against Custom Tool & Gage, Inc. owned by Carl T. Benda and located in Cleveland, Ohio. The plaintiff in the case ultimately withdrew his complaint one week after threatening legal action against Custom Tool & Gage, Inc. The company's attorney sent a response letter and noted that the plaintiff in the case, James Brown, was neither the owner nor the buying agent for Miller Bearing Company Inc., the business that received the fax. Miller Bearing Company is a regular customer of Custom Tool & Gage, Inc. and had placed five orders with Custom Tool and Gage, Inc. in 2004 alone. James Brown was a truck driver for Miller Bearing Company, and not authorized to file such a lawsuit on behalf of the company. That fact would have taken little time for Mr. Brown's attorney, Joseph Compoli, Jr., to uncover.
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Below are excerpts of the ''demand'' letter sent to Custom Tool & Gage. The letter was accompanied by a signed complaint, which was ready to be filed in the Court of Common Pleas for Portage County, Ohio. I request that a copy of the letter, the complaint, the subsequent correspondence leading to the withdrawal of the suit, and a March 3, 2004 newspaper article discussing the tactics employed by Mr. Joseph Compoli, Jr. in similar ''do not fax'' suits be admitted into the record.
This office represents the above referenced client. We have been retained to bring a lawsuit against Custom Tool & Gage, Inc., in connection with your transmitting of one unsolicited facsimile (''fax'') advertisement to our client. . . .
Kindly be advised that it is a violation of the Telephone Consumer Protection Act (TCPA), Title 47, United States Code, Section 227, to transmit fax advertisements without first obtaining the 'prior express invitation or permission' of the recipient. See, 47 U.S.C. 227(a)(4) and 227(b)(1)(C). In addition, Ohio courts have declared that a violation of the TCPA is a[n] [sic] 'unfair or deceptive' act or practice under the Ohio Consumer Sales Practices Act (CSPA), Section 1345.02(A) of the Ohio Revised Code.
We are sending you this letter for the purpose of offering you an opportunity to resolve this matter without the expense of court litigation and attorneys['] [sic] fees. We are authorized to amicably settle this claim for the amount of $1,700. This amount represents the sum of $1,500 under the TCPA and $200 under the CSPA for each unsolicited fax advertisement[,] [sic] which was received by our client.
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We believe that our proposed settlement is very fair and reasonable under the circumstances. We will leave this offer open for fifteen (15) days from the date of this letter.
Recently, in the case of Nicholson v. Hooters of Augusta, a court in Georgia awarded over $11.8 million in a class action lawsuit under the TCPA. Also, more recently, in the case of Gold Seal Termite & Pest Control v. Prime TV LLC, a court in Indiana has certified a nationwide class action against Prime TV for sending unsolicited fax advertisements.
If it becomes necessary for our office to file a lawsuit, we will pursue all legal remedies, including seeking certification of the case as a Class Action under the TCPA. This could result in a court order for you to pay $1,500 to each and every person to whom you have sent unsolicited fax advertisements.
If you have an insurance agent or company, please forward this letter to your agent or insurance company. If not, please contact our office directly.(see footnote 9)
Even though this case was completely baseless, Mr. Benda still was required to spend $882.60 (over half the amount of the settlement costs) to his attorney to draft the letter and avoid payment of the settlement.
''Somebody has to pay, and it might as well be you.''
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These frivolous suits are the type in which the plaintiff may have been harmed, but is suing the wrong person.
For example, Bob Carnathan, an NFIB member, owns Smith Staple and Supply Co., a small nail and staple fastening business located in Harrisburg, Pennsylvania. Mr. Carnathan's business leases space in a strip mall. After a snowstorm, one of the tenants in the complex was walking across the parking lot when he slipped and fell on the icy pavement injuring his back and head. The medical bills from his injury totaled a little over $3,000. The man sued every tenant in the complex, as well as the landlord and the developer, for $1.75 million. Mr. Carnathan was sued even though he was not at fault because his rent included maintenance on the facilities and grounds.
After two years of endless meetings and conference calls, Mr. Carnathan learned that his business was released from the lawsuit. He says that there is no compensation for the time that he was forced to spend away from his business to fight this unfair lawsuit. Mr. Carnathan firmly believes that ''the smaller your business, the more you are impacted when a frivolous lawsuit lands on your doorstep.''(see footnote 10)
Another NFIB member is in the midst of litigation and likely will be dropped from the lawsuit shortly. This member asked that the business' story remain anonymous, so as not to jeopardize dismissal of the lawsuit. The NFIB member, an optometrist, referred a patient who needed cataract surgery to an ophthalmologist. The patient died in pre-op. Although this is a tragic story, the death was not caused by the optometrist's appropriate referral. Despite this fact, the optometrist was named as a defendant in the wrongful death lawsuit filed by the deceased's mother. The litigation has been ongoing for two years, and the NFIB member recently completed a lengthy deposition. In addition to time spent preparing for and attending the deposition, this NFIB member has spent many hours completing paperwork related to the suit and meeting with the member's attorney. As a result of the deposition, it appears that the optometrist will be dismissed from the wrongful death lawsuit.
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''Let's not let the facts get in our way.''
Plaintiffs, and even attorneys sometimes, go to great lengths to stage injuries for prospective lawsuits. These lawsuits pose severe difficulties for small-business owners. In these suits, if the business does not catch the plaintiff in a blatant lie early in the process, the small-business owner must suffer the costs of litigation or settle a fabricated claim.
For example, an NFIB member was threatened (in a ''demand'' letter) with a lawsuit for an injury that could not have possibly occurred. This roofing company, which requested to remain anonymous, delivered supplies to a convenience store parking lot in preparation for a future roofing job. A customer of the convenience store noticed the materials in the parking lot, and contacted an attorney. The attorney threatened the roofing company with a lawsuit claiming a rock fell from the roof striking the plaintiff and her car's windshield. The roofing company was not working on the project at the time of the alleged accident. Upon notification, the plaintiff's attorney immediately withdrew the threatened legal action. By catching the falsehood early, this company avoided any further threats or litigation.
Some members have not been so lucky. Four former employees of a small family owned restaurant sued the owners for sexual harassment after abruptly quitting. The NFIB members who own the restaurant have requested to remain anonymous. Two months prior to quitting, the four employees consulted an attorney who coached them on how to set up the lawsuit. Sent to work with secret tape recorders, the four employees gathered no useful evidence in the two months prior to quitting. The plaintiffs' attorney filed a complaint with the Equal Employment Opportunity Commission, and the state human rights agency. The restaurant owners went to mandatory mediation, and attended costly hearings and depositions.
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Suddenly, one of the plaintiffs decided to withdraw. During depositions the plaintiff had generally denied any allegations raised by the complainants. In a sworn affidavit, the former plaintiff recanted all of her allegations, explained how the complaint filed on her behalf was untrue, and further explained the planning stages for the lawsuit during which she was routinely encouraged to lie by her former coworkers. The plaintiffs' attorney still would not withdraw the case. After $100,000 in defense fees, a second mortgage, and negative press, the defendants settled with the three remaining plaintiffs to avoid bankruptcy and further humiliation.
''Yellow Page Lawsuits''
These lawsuits are more commonly found in class action cases. In these cases, hundreds of defendants are named in a lawsuit, and it is their responsibility to prove that they are not culpable. In many cases, plaintiffs name defendants by using vendor lists or even lists from the Yellow Pages of certain types of businesses (e.g., auto supply stores, drugstores) operating in a particular jurisdiction.
Unfortunately, Tom McCormick, President of American Electrical, Inc. in Richmond, Virginia, knows these tactics all too well. Mr. McCormick's company was named in an asbestos lawsuit. According to Mr. McCormick, attorneys for the plaintiffs simply named as defendants vendors from a generic vendor library. If the lawyers had performed a simple review of the facts, they would have discovered that American Electrical did not yet exist during the period in which the plaintiffs allege the exposure occurred. Furthermore, American Electrical has never sold any products that contain asbestos. Fortunately, Mr. McCormick successfully had American Electrical removed from the defendant list. It still cost Mr. McCormick $8,000 in attorney's fees to resolve this dispute.
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A petroleum company, an NFIB member who wishes to remain anonymous, has been sued twice in the past few years. In each lawsuit the plaintiff, suffering from cancer, sued over 100 companies, most listed as John Doe defendants. The product believed to contribute to the cancer was allegedly manufactured by Chevron. The petroleum company merely barreled the product. Yet the liability insurance carriers for each defendant settled the case for $1,500–$1,800 a piece. By distributing the costs of settling, the plaintiff received a huge payout, while the insurance companies and businesses avoided the large costs of a lawsuit.
''Yellow Page Lawsuits'' also provide examples of forum shopping. Hilda Bankston, former owner of Bankston Drugstore in Jefferson County, Mississippi, saw her business named as a defendant in hundreds of Fen-Phen lawsuits brought by plaintiffs against a number of pharmaceutical manufacturers.(see footnote 11) Ms. Bankston said that Bankston Drugstore was the only drugstore in Jefferson County and, by naming it in these lawsuits, the plaintiffs' attorneys were able to keep these cases in ''a place known for its lawsuit-friendly environment.''(see footnote 12)
SOLUTIONS FOR SMALL BUSINESS
Surveys, statistics, and stories show that lawsuit abuse is alive and well in the United States, and small businesses are often the victims. It is for this reason that legislation is sorely needed to reform our nation's civil justice system. There are many bills pending before Congress that would take positive steps forward in stemming the tide of lawsuit abuse. However, one bill—H.R. 4571, recently introduced by Representative Lamar Smith, stands out, in my opinion, as particularly helpful in curbing, if not stopping, many of the types of suits I have described.
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H.R. 4571 would put teeth back into Rule 11. Rule 11 sets forth requirements that attorneys must meet when bringing a lawsuit and permits judges to sanction attorneys if they do not meet those conditions. Specifically, Rule 11 requires every pleading to be signed by at least one attorney.(see footnote 13) It also states that when an attorney files a pleading, motion, or other paper with a court he or she is ''certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances [that:]
(1) it is not being presented for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, . . . are warranted by existing law or by a nonfrivolous argument for [a change] of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, . . . are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, . . . are reasonably based on a lack of information or belief.''(see footnote 14)
Importantly, it also provides attorneys with a 21-day window to withdraw a frivolous lawsuit after opposing counsel provides notice of intent to file a motion for sanctions. This is commonly referred to as Rule 11's ''safe harbor'' provision.(see footnote 15)
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Rule 11, in its current form, is the product of revisions made in 1993. These revisions rendered it nothing more than a ''toothless tiger.'' As a result, unscrupulous attorneys, out to make a quick buck, know that the odds of being sanctioned under Rule 11 are remote. The 21-day ''safe harbor'' provision, in particular, provides an easy way for plaintiffs' attorneys to avoid sanctions by simply withdrawing a lawsuit. Unscrupulous attorneys receive something more like a ''get out of jail free'' card when they bring frivolous lawsuits.
H.R. 4571 would remedy this and other problems by:
(1) Making Rule 11 sanctions mandatory when an attorney or other party files a lawsuit before making a reasonable inquiry;
(2) Eliminating the ''safe harbor'' provision;
(3) Allowing for Rule 11 sanctions to be filed during discovery; and
(4) Permitting monetary expenses, including attorneys' fees and compensatory costs, against a represented party.
The legislation also would extend these protections to state cases that affect interstate commerce and curb forum shopping by only permitting the plaintiff to sue where he or she lives, was injured or in the location of the defendant's principal place of business.
CONCLUSION
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Frivolous lawsuits are hurting small-business owners, new business formation, and job creation. The growing number and costs of lawsuits, particularly those not based in fact, threaten to stifle significantly the growth of our nation's economy by hurting a very important segment of that economy, America's small businesses. We must work together to find and implement solutions that will stop this wasteful trend. On behalf of America's small-business owners, I thank this Committee for holding this hearing and providing us with a forum to tell our story.
We are hopeful that through your deliberations you can strike the appropriate balance to protect those who are truly harmed and the many unreported victims of our nation's civil justice system—America's small businesses.
Thank you.
Mr. SMITH. Thank you, Ms. Harned.
Mr. Eisenberg.
TESTIMONY OF THEODORE EISENBERG, HENRY ALLEN MARK PROFESSOR OF LAW, CORNELL LAW SCHOOL
Mr. EISENBERG. Thank you, Mr. Chairman.
There is a little bit of disjunction between the system we seem to be hearing about and what all major studies of litigation systems seem to reveal. So my job is trying to summarize, from the academic point of view, what the findings are.
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First, the notion of awards increasing and lawsuits increasing just seems belied by the facts. The Rand Institute of Civil Justice researchers in a recent article in the Journal of Empirical Legal Studies did a 40-year long-term study of awards. They found, and I quote, it is on the page 4 of my testimony, ''The growth or decline in awards does not appear to be substantial enough to support claims of radically changing jury behavior over the past 40 years.''
The Government's Bureau of Justice Statistics confirms this, showing a 10-year decline in median tort awards. The National Center For State Courts, which is the leading clearinghouse for State court statistics, shows tort filings have declined in recent years, over the last decade. The increase in frivolous suits is remarkable since filings are down.
Americans are perceived as highly litigious. Mr. Howard refers to the culture. It turns out, Americans are far from the most litigious large industrialized nation. You can see a table, table 1 on page 3 of my testimony. All serious studies of punitive damages find they are rarely awarded. They are awarded largely in cases of intentional misbehavior. They are modest, and they are strongly correlated with the harm done by the defendants. These studies are done by the Rand Institute for Civil Justice, the Bureau of Justice Statistics, the American Bar Foundation, the General Accounting Office and Judge Richard Posner.
So it may turn out that our perceptions about the tort system have little to do with reality and much more to do with the rhetoric we are fed by tort reform advocates who rarely base it on systematic study of the system.
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One of the key issues I think facing everyone is the connection between insurance premiums and tort outcomes, and we have some experience with this. First, looking at the cost of insurance through premiums without looking at insurance company investment returns is, of course, just economically naive. We are in an era of low inflation rates, insurance companies are getting much lower returns on their investments. They still have costs. They increase their premiums, at least in part because their investment yields are down.
The estimates that some witnesses and students of the system make of the tort system simply look at insurance premiums and never look at insurance company sources of income. It is not necessarily liability increases that are generating increased premiums.
Yesterday, the Supreme Court rendered an already famous decision on health maintenance organizations limiting severely the amount that can be recovered against HMO's. Today, The Washington Post has a spokesman for the health maintenance organizations, and I will quote him, ''In the industry, you may''—I underline—''see the premiums go down or not go up as much.'' That is, the insurance industry understandably has never been willing to link reductions in premiums, which is what a lot of the concern is, to tort reform.
When the Florida insurance industry in the last round of tort crisis was offered the following deal, ''We will give you tort reform if you reduce insurance rates,'' they said, ''No, we can't guarantee that.'' So it may be a pipe dream that tort reform is somehow going to eliminate the increase in insurance premiums, and the data, to date, do not support it.
Increased sanctions against lawyers: We had old rule 11, and it was in operation for a while, and we had studies of it. What it showed, as is suggested in my testimony, is that tort, if anything, was an area with less abuse than other areas. Where rule 11 fell hardest and, I believe, probably the reason for its modification, was it fell hardest on most civil rights plaintiffs, not on tort plaintiffs. That is, the most serious empirical study of rule 11 showed excess sanctions against civil rights claimants and indeed a rather low rate of sanctions against tort claimants.
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A lot of what we are talking about today has to do with so called judicial hell holes. Serious study of formerly alleged hell holes revealed most of that to be myth. We've been told that the Bronx is a crazy jurisdiction for plaintiffs. In fact, Professors Vidmar and Roe have studied the Bronx and found no unusual damage patterns. We were told that Alabama was crazy on punitives. The Rand Institute of Civil Justice studied that and found no unusual pattern of punitive awards in Alabama. We just don't have the evidence to back up the behavior.
With respect to H.R. 4571, with all due respect, and I know it is well intentioned, I would label it not the Lawsuit Abuse Reduction Act. I would label it the Lawsuit Cost Increase Act because what is built into this bill is multiple hearings by the judge to decide if interstate commerce is affected and to decide the best way of doing things. Each one of those hearings is going to be an expensive matter before a State court judge, simply driving up the cost of the system, perhaps with a change in forum as a result, but the hearings will be unavoidable because the defense will come in and use every tactical advantage they can to raise the costs of the plaintiff. That's what the game is all about. Thank you.
[The prepared statement of Mr. Eisenberg follows:]
PREPARED STATEMENT OF THEODORE EISENBERG
Eisen2.eps
Eisen3.eps
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Eisen4.eps
Eisen5.eps
Eisen6.eps
Eisen7.eps
Eisen8.eps
Eisen9.eps
Eisen10.eps
Eisen11.eps
Eisen12.eps
Eisen13.eps
Eisen14.eps
Eisen15.eps
Eisen16.eps
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Eisen17.eps
Eisen18.eps
Eisen19.eps
Eisen20.eps
Eisen21.eps
Eisen22.eps
Eisen23.eps
Eisen24.eps
Eisen25.eps
Eisen26.eps
Eisen27.eps
Mr. SMITH. Thank you, Mr. Eisenberg.
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Mr. Schwartz.
TESTIMONY OF VICTOR E. SCHWARTZ, GENERAL COUNSEL, AMERICAN TORT REFORM ASSOCIATION
Mr. SCHWARTZ. Good morning, Mr. Chairman, Mr. Conyers. I always enjoy coming before this Committee. I remember dialogues with Mr. Scott, Mr. Watt, Mr. Keller. I'm glad that you're addressing frivolous lawsuits.
Frivolous lawsuits are kind of a death by a thousand cuts. Lawyers like myself have large clients, but we also have small ones. And I remember, about 14 years ago, being called by a little pub in Atlantic City by Cathy Burke, and she was getting lawsuits, and she claimed they were absolutely baseless. These were so-called Dram Shop acts where somebody claimed that they were served while they were intoxicated. They went out and had an accident, and then they sued her.
I looked at these cases that she had, and I found that many of them were baseless. In one, a person had not even been in her bar. The police report showed that. And we were able, under rule 11, to have a sanction put against the lawyer who brought the claim. But under the weaker rule 11—that happened later—that would not have happened.
Frivolous claims today have a way of really hurting small businesses, and this is why: Some plaintiffs' lawyers—and it is really just some, just like some bad doctors, some bad engineers—understand how to work this system. So they will make an offer that is just under the defense costs. And then the insurer is put in a predicament. If he does not settle the case and it goes to court and something goes wrong, that insurer can be subject to a bad faith claim. If they settle the case, then the costs of insurance—and it will, I mean, insurance pays out over time—will go up for that small businesses. And there is nothing really left to defend it.
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Rule 11 was weakened, and it was weakened in a very severe way. And when it was weakened, as my testimony will show, there were studies that said it worked very well. And in the beginning, when rule 11 first came in, there were some problems, but they were corrected. And rule 11 only applies when a lawsuit is completely baseless or when a suit is based not on existing law or any reasonable extension of that law.
So if somebody is moving in a new area of law and it is a reasonable extension, the sanctions of rule 11 do not apply at all. There are correctives purported to change when judges make the corrections, but corrections don't work. The Supreme Court itself and Justice Rehnquist has said, when we are dealing with these rules, we don't really have time to look at them. And these changes are not really approved by the Supreme Court, particularly this one. And then Congress has 7 months to try to correct what the Committee on Rules does.
And Members here, think of how many bills that you've worked on that were enacted into law in this body in 7 months that didn't deal with a national crisis. So there really is no corrective.
We've had now 11 years to look at the changes, and they aren't very good. And what Mr. Smith's bill does is deal with these changes in a very good way. First, the changes were to weaken the judges' power to impose sanctions. This restores it. Second, the change in the rule allowed a plaintiff's lawyer to play ''heads, I win; tails, you lose.'' They could withdraw the frivolous claim within 21 days and pay absolutely no penalty. And this has been a devastating thing because there's no cost to bring a frivolous claim. This is a rule that needs to be addressed. It doesn't deprive anyone of their rights.
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There is a second part to your bill, sir, that is very important and that deals with what I call litigation tourists. Litigation tourists visit certain areas of our country that we do call judicial hell holes. And unlike some of the things that the professor referred to—and I ask that this be entered in the record, Mr. Chairman.
Mr. SMITH. That will be made a part of the record.
[The information referred to follows in the Appendix]
Mr. SCHWARTZ. It is entertaining reading, but it's also disturbing reading.
These are areas that are magnets for plaintiffs, and the plaintiffs are litigation tourists because they have absolutely nothing to do with where they are visiting. They go to Madison County. They don't pay taxes there. They don't live there. They weren't hurt there. They have nothing to do with the place. The only reason they're there is because it's perceived that the court will give them a very favorable ruling.
What the second part of your bill does wisely is, a person can sue where they were hurt, where they lived, the defendant's principal place of business. That's fair. There's no reason to shop around and go anywhere else.
You were kind to give my introduction. One thing was it mentioned is that, for 14 years, I have done plaintiffs work. And there was a plaintiffs lawyer who is a very well-known plaintiffs lawyer, and I will just close with this, who said the following—one of the best plaintiffs lawyers of the United States of America, he is not practicing any more—he said that ''frivolous lawsuits waste people's time and hurt real victims.'' That's why he has proposed that lawyers who bring frivolous lawsuits should face tough mandatory sanctions, and that's exactly what your bill does. And the plaintiffs lawyer who said that is named John Edwards. I believe he is now a senator from North Carolina.
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Thank you very much for your attention.
[The prepared statement of Mr. Schwartz follows:]
PREPARED STATEMENT OF VICTOR E. SCHWARTZ
Mr. Chairman, thank you for inviting me today to share my views regarding ''Safeguarding Americans from a Legal Culture of Fear: Approaches to Limiting Lawsuit Abuse.'' There is a dire need for legislation to address this very problem, and H.R. 4571, the Lawsuit Abuse Reduction Act of 2004, is a positive step toward that goal.
By way of background, I have been an active participant in the development of personal injury or tort law since I served as law clerk to a federal judge in 1965. I was a professor of law and dean at the University of Cincinnati College of Law. I practiced law on behalf of injured persons for fourteen years. I also served at the U.S. Department of Commerce under both Presidents Ford and Carter, and chaired the Federal Inter-Agency Task Force on Insurance and Accident Compensation. For the past 25 years, I have been a defense lawyer. I have co-authored the most widely used torts casebook in the United States, Prosser, Wade & Schwartz's Torts (10th ed., 2002).
I have had a deep interest in improving our civil justice system and currently serve as General Counsel to the American Tort Reform Association, on whose behalf I am testifying today. I wish to make clear that the views I am expressing today are my own.
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THE PROBLEM OF FRIVOLOUS LAWSUITS
The expression, ''Death by a Thousand Cuts,'' fits the problem of frivolous lawsuits. Most frivolous lawsuits are not high-ticket items, but relatively modest. They are brought against small businesses including mom and pop stores, restaurants, schools, dry cleaners and hotels. Let's take an example that occurred to one of my clients over a decade ago. The client, who runs a successful Irish pub, called me because a barrage of frivolous claims threatened her business. For example, an individual who alleged that he had been served alcoholic beverages when he was already inebriated brought a claim against the pub. The individual drove while intoxicated, and was involved in an automobile accident. He sued the pub. Police records showed, however, that he had visited numerous bars. Omitted from the list was my client's place of business.
Working with the pub's own lawyer, we were able to get the claim dismissed and have the plaintiff's lawyer pay the legal costs generated by the frivolous claim brought by his client. Those costs were several thousand dollars. Unfortunately, that would not be likely to occur today because, as I will show, the rules against frivolous lawsuits have been materially weakened.
This is what occurs today when a small business is hit with a frivolous claim. The defendant contacts a lawyer, usually one supplied by his insurer. The defendant's lawyer would call the plaintiff's lawyer, and suggest that there is proof that the plaintiff was never at the client's establishment. The plaintiff's lawyer could respond, ''Well, I know there is a dispute about this, and I have asked for $50,000, but I think we can settle this for about $10,000.'' The plaintiff's lawyer realizes that the cost to the insurer of defending the case will be more than $10,000.
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The defendant's insurer is then placed in a dilemma—if it fights the case and a judge allows the case to go to a jury, and the jury renders a verdict above policy limits, the insurer could be subject to a claim by its insured for wrongful failure to settle. On the other hand, if the insurer settles such a case, over time such action will cause the defendant's insurance costs to increase exponentially. Because there is currently no swift and sound sanction against frivolous claims, the ''death by a thousand cuts'' will continue. It can destroy a small business.
The scenario just outlined makes clear why the alleged ''screening effect'' of the contingency fee does not work. In debates, some plaintiffs' lawyers often say that the contingency fee screens out frivolous claims. As plaintiffs' lawyers have said, ''Why would a personal injury lawyer bring a claim on a contingency fee, when he knows it is baseless; he will not recover any money.'' In the real world, this is not true. It costs little more than a $100 filing fee and often takes little more time than generating a form complaint to begin a lawsuit. Additional defendants, who may have nothing to do with the case, can be named at no charge, as in the case of my client. It costs much more for a small business to defend against it. The system is rigged to allow, in effect, legal extortion.
THE WEAKENING OF RULE 11: UNSOUND POLICY FALLING BETWEEN THE CRACKS OF CORRECTION
Slightly more than ten years ago, the Federal Rules Advisory Committee, an extension of the federal judiciary which has the primary responsibility to formulate the Federal Rules of Civil Procedure, announced an amended and weakened Rule 11. The Advisory Committee recommended weakening the rule despite the result of a survey it conducted of federal court judges, those who deal with the problem of lawsuit abuse on a day-to-day basis. That survey found that 95% of judges believed that the now abandoned version of Rule 11 had not impeded development of the law.(see footnote 16) Eighty percent found that the prior rule had an overall positive effect and should not be changed.(see footnote 17) Three-quarters of those judges surveyed felt that the former Rule 11's benefits in deterring frivolous lawsuits and compensating those victimized by such claims justified the use of judicial time.(see footnote 18) The Advisory Committee itself recognized that while there was some legitimate criticism of Rule 11's application, such criticism was ''frequently exaggerated or premised on faulty assumptions.''(see footnote 19) The Advisory Committee has made many sound decisions, but it did not do so when it revised Rule 11 in 1993.
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There are in place so-called ''systems for correction of mistakes,'' made by the Federal Rules Advisory Committee. The first is that the Advisory Committee decisions about rule changes are reviewed by the Supreme Court of the United States. That occurred after Rule 11 was weakened. But when the weakened Rule 11 was transmitted by the Supreme Court to Congress for its consideration, Chief Justice William Rehnquist included a telling disclaimer: ''While the Court is satisfied that the required procedures have been observed, this transmittal does not necessarily indicate that the Court itself would have proposed these amendments in the form submitted.''(see footnote 20) Justice White warned that the Court's role in reviewing proposed rules is extremely ''limited'' and that the Court routinely approved the Judicial Conference's recommendations ''without change and without careful study, as long as there is no suggestion that the committee system has not operated with integrity.''(see footnote 21) Justices Scalia and Thomas went even further, and criticized the proposed amendment to Rule 11 as ''render[ing] the Rule toothless by allowing judges to dispense with sanction, by disfavoring compensation for litigation expenses, and by a providing a 21-day 'safe harbor' [entitling] the party accused of a frivolous filing . . . to escape with no sanction at all.''(see footnote 22) The bottom line is that the Supreme Court corrective against unsound rule changes did not work in this instance.
THE FEDERAL RULES ENABLING ACT: THE PLACE FOR FINAL CORRECTION MAY NOT WORK
The Federal Rules Enabling Act of 1938 created a system where Congress delegated its power to the Federal Rules Advisory Committee to formulate Federal Rules of Civil Procedure. Congress has maintained the ultimate authority to change proposals from the Federal Rules Advisory Committee. In the mid-1970s, it did so with respect to the Federal Rules of Evidence. But with the system established in 1938, Congress only has seven months to make a ''correction.''(see footnote 23) Apart from matters of urgent national concern, it is rare in 2004 that a bill can be passed by the Congress within seven months. Often, significant legislation that impacts the courts requires debate that can span one or more Congresses in order to reach consensus. Despite the introduction of legislation in both the House and Senate to delay the effective date of the proposed changes to Rule 11, time ran out before Congress could act and the revisions went into effect on December 1, 1993.(see footnote 24)
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Shortly after the revised Rule 11 took effect, Congress attempted to repeal the Federal Rules Advisory Committee's action to weaken Rule 11.(see footnote 25) By that time, some practitioners had already referred to the new Rule 11 as a ''toothless tiger.''(see footnote 26) The repeal passed the House.(see footnote 27) Those opposing the bill, however, felt that there had not yet been adequate time to determine the effectiveness of the amended rule in practice.(see footnote 28)
It is now more than a decade since the Federal Rules Advisory Committee acted to weaken Rule 11, and the problem of frivolous claims has only increased. We know the consequences that flow from the weakening of the Rule. They are adverse to our society.
Since Rule 11 has been weakened, frivolous claims have led to higher health costs, job losses, and an almost total failure of attorney accountability. As officers of the court, personal injury lawyers should be accountable to basic, fair standards: they should be sanctioned if they abuse the legal system with frivolous claims.
SANCTIONS AGAINST FRIVOLOUS CLAIMS WILL NOT IMPEDE JUSTICE
Some consumer groups have argued that placing sanctions against frivolous claims will somehow impede justice and hurt the ordinary consumer. This is simply not true. If we look to the words of Rule 11 of the Federal Rules of Civil Procedure and congruent state rules, frivolous claims include those ''presented for improper purpose'' or to ''harass or cause unnecessary delay or needless increase in the cost of litigation.''(see footnote 29) They also include claims that are not ''warranted by existing law''(see footnote 30) or those with an absence of factual or evidentiary basis.(see footnote 31) But they do not include claims based on ''nonfrivolous argument[s] for the extension, modification, or reversal of existing law or the establishment of new law.''(see footnote 32) This last point is important, because certain groups have argued, incorrectly, that sanctions against frivolous claims will stifle the growth of law. The very words of Rule 11 allow for growth, but not for frivolous extensions of the law.
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WHAT REPRESENTATIVE SMITH'S BILL DOES, AND WHY IT IS SOUND
Chairman Sensenbrenner, Representative Lamar Smith of Texas has introduced a vitally needed bill that restores Rule 11 to its strength and purpose prior to the 1993 changes. That bill, the Lawsuit Abuse Reduction Act of 2004, H.R. 4571, reverses the 1993 amendments that made sanctions discretionary rather than mandatory. Unfortunately, the 1993 amendments allowed judges to ignore or forget sanctions. For that reason, irresponsible personal injury lawyers could game the legal system: They knew that it would be unlikely that they would have to pay for bringing frivolous claims.
The 1993 amendments also allowed unscrupulous plaintiffs' attorneys to play the game, ''heads I win and tails you lose.'' They could bring a frivolous claim and hope that they could succeed in getting an unjust settlement just as I outlined above. But if a Rule 11 motion was brought against the personal injury lawyer, they had 21 days to withdraw their lawsuit without the imposition of any sanction. When the 1993 amendments weakening Rule 11 were admittedly rubber stamped, as I have indicated, Justice Scalia dissented from the process, noting that,
In my view, those who file frivolous suits and pleadings, should have no 'safe harbor.' The Rules should be solicitous of the abused (the courts and the opposing party), and not of the abuser. Under the revised Rule [11], parties will be able to file thoughtless, reckless, and harassing pleadings, secure in the knowledge that they have nothing to lose: If objection is raised, they can retreat without penalty.(see footnote 33)
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Finally, Representative Smith's proposed legislation wisely reverses the 1993 amendments to Rule 11 that prohibited money sanctions for discovery abuses. Perhaps more than any other abuse that has become worse in the last decade has been the rampaging, harassing abuse of discovery. A small or even a large business could be devastated by such activity. They are often asked to produce materials that have nothing to do with the merits of the case. It is another weapon to force an unfair settlement. An example is going on now in Madison County, Illinois. There, a plaintiff's lawyer in an asbestos case is trying to ''discover'' the names of civil justice organizations to which the defendants are affiliated, and how much money is given to those organizations. This information has absolutely nothing to do with the case before the Madison County court. We desperately need the legal power to stop such discovery abuses.
THE DOMINO EFFECT OF THE MODIFICATIONS IN RULE 11
If the 1993 weakening of Rule 11 only affected the federal courts, that would be bad enough. In that regard, it has had a domino effect on state procedures because many states routinely accept modifications to the Federal Rules of Civil Procedure and implement them into their state's law.(see footnote 34) There is some general wisdom to such provision, so that state procedural rules will not vary between state and federal courts. In this instance, that general wisdom resulted in state courts being unwittingly led into the same problem that face federal courts—they lacked adequate force to stop frivolous claims.
While Rule 11 has worked fairly well in its current form . . . , the federal rules have been amended and create both procedural and substantive differences between state and federal court practices. . . . On balance, the Committee believes that the amendment of the Rule to conform to its federal counterpart makes the most sense, given this Committee's long-standing preference for minimizing the differences between state and federal practice unless compelling local interests or long-entrenched reliance on the state procedure makes changing a rule inappropriate.
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Minn. R. Civ. Proc. 11, Advisory Comm. Comments—2000 Amendments; see also N.D. R. Civ. Proc. 1 (''Scope of Rules''), Explanatory Note (''As will become readily apparent from a reading of these rules, they are the Federal Rules of Civil Procedure adapted, insofar as practicable, to state practice.'') and Rule 11, Explanatory Note (''Rule 11 was revised, effective March 1, 1996, in response to the 1993 revision of Rule 11.''); Tenn. R. Civ. Proc. 11, Advisory Comm'n Comment 1995 (noting that Tennessee amended its Rule 11 to track the 1993 federal revision, despite the fact that the state had seen not seen widespread abuse of the previous rule).
Hopefully, if Representative Smith's legislation were enacted into law, it might trigger reversals of the 1993 amendments in some states. But a number of states may not be covered by that process. For that reason, Representative Smith's bill covers state court decisions that involve interstate commerce. That will assure that those state courts use their power to impose sanctions against frivolous claims. This aspect of Representative Smith's bill is needed because if only federal courts receive the power to block frivolous claims, much of the lawsuit abuse problem would continue unabated.
FRIVOLOUS CLAIMS SANCTIONS AND LOSER PAYS DISTINGUISHED
Some have advocated that judges in the United States adopt a ''loser pays'' system. Under the ''loser pays'' system, the party who loses must pay the other party's attorney's fees. There is a great deal of controversy about such a process. Some believe that it could chill bringing legitimate lawsuits because plaintiffs would fear having to pay very large defense costs. Regardless of the merits of the ''loser pays'' argument, it is important to note that Rule 11 comes into play long before a jury is ever impaneled. The decision about whether a claim is frivolous is in the hands of a judge. As I indicated by quoting the Rule, it only applies when the claim has no basis in existing law or any reasonable extension of that law.
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Mr. Chairman, in sum, for the United States economy, the wellbeing of our legal system and the preservation of small business, the strength of Rule 11 needs to be reinforced now.
STOPPING LITIGATION TOURISTS FROM VISITING JUDICIAL HELLHOLES
Apart from dealing with frivolous claims, Representative Smith's bill addresses a major problem in our current national judicial system: forum shopping. Forum shopping occurs when what I call ''litigation tourists'' are guided by their attorneys into bringing claims in what the American Tort Reform Association (''ATRA'') has called ''judicial hellholesTM.''
As indicated in ATRA's Judicial Hellholes Report, which I ask to be made part of the record, there are certain jurisdictions in the United States where law is not applied even-handedly to all litigants. The words carefully chiseled on the top of the Supreme Court, ''Equal Justice Under Law,'' are ignored in practice. As ATRA's ''Judicial HellholesTM'' (Report documents, a few courts in the United States consistently show ''a systematic bias against defendants, particularly those located out of the state.''(see footnote 35) Objective observers are remarkably candid about the nature of these ''Judicial HellholesTM.'' For example, some are located in West Virginia. Former West Virginia Court Justice and currently plaintiff's lawyer Richard Nealey said that when he sat on the Court,
As long as I am allowed to redistribute wealth from out-of-state companies to injured state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone else's money away, but so is my job security, because the in-state plaintiffs, their families and their friends will re-elect me . . . It should be obvious that the in-state local plaintiff, his witnesses and his friends, can all vote for the judge, while the out-of-state defendants cannot be relied upon [even] to send a campaign donation.(see footnote 36)
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My friend and very prominent Mississippi plaintiff's lawyer, Dickie Scruggs, did not disagree with ATRA's designation that some places are judicial hellholes. He disagreed with what they should be called.
As he stated,
What I call the ''magic jurisdiction,'' . . . [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected; they're State Court judges; they're popul[ists]. They've got large populations of voters who are in on the deal, they're getting their [piece] in many cases. And so, it's a political force in their jurisdiction, and it's almost impossible to get a fair trial if you're a defendant in some of these places. The plaintiff lawyer walks in there and writes the number on the blackboard, and the first juror meets the last one coming out the door with that amount of money. . . . These cases are not won in the courtroom. They're won on the back roads long before the case goes to trial. Any lawyer fresh out of law school can walk in there and win the case, so it doesn't matter what the evidence or law is.(see footnote 37)
While comedians may make fun of what goes on in these hellholes, they thwart the fundamentals of basic justice and fairness. As the ATRA Report documents, the hellholes have become a powerful magnet for out-of-state plaintiffs that have absolutely nothing to do with a local judicial hellhole jurisdiction. The plaintiff was not injured in the jurisdiction, he never lived in the jurisdiction and he does not work in the jurisdiction. He has absolutely nothing to do with the place. With the guidance of his plaintiff's attorney, he is a pure ''litigation tourist.'' The litigation tourist is only there to sue.
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Litigation tourists do not help the states that they visit. They pay no taxes, only burdening the courts of that state that are paid for by local taxpayers. They delay justice to those who live there.
Fortunately, some states that have been a haven for judicial hellholes, such as Mississippi, have recently enacted local legislation to block litigation tourists. If we were to wait for state-by-state action on this issue, however, it could be decades before—if ever—the situation is properly corrected. Frequently, the plaintiffs' lawyers who bring these out-of-state cases have local and very strong political power to thwart even the most basic of reforms that would stop the very worst type of forum shopping.
What Mr. Smith's bill provides is what is needed: a national solution to end unjustifiable forum shopping to ''judicial hellholesTM''. It does so with equity and justice. It allows a plaintiff to file a case where he resides at the time of filing, or where he resided at the time of the alleged injury, or the place where circumstances giving rise to the injury occurred and also in the defendant's principal place of business.
For the welfare of our economy and basic fairness in our legal system, your bill to prevent reckless forum shopping should be enacted now.
I thank you very much for the opportunity to testify today.
Mr. SMITH. Thank you, Mr. Schwartz. You actually used a quote that I was planning to use later so thank you for bringing that out.
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Mr. Howard, let me direct my first question to you. You mentioned, both in your written and oral testimony, the role of judges when it comes to determining the outcome of frivolous lawsuits. You said that judges are required to make decisions of what's frivolous, and they should not hesitate to impose penalties when the case is frivolous. How much of a problem do we have with attorneys who try to game the system? How much of a problem do we have with judges who fail to recognize or act on frivolous lawsuits?
Mr. HOWARD. Well, there are many responsible attorneys, a great majority, I believe, and there are some who game the system in ways that I believe are unethical. I think there are few trial judges in this country who believe it is their job to do what Justice Holmes and Justice Cardoza and the great liberal Justice Roger Taney admonished them to do which is to act as gatekeepers issuing rulings to give life to the common law principles.
If the fly ball gets lost in the sun, it is not sufficient to simply read the instruction on assumptions of risk and give it to the jury. Because what happens in most cases is there never is a verdict. The person settles rather than face the 1 percent chance of the million dollar verdict, in that case for $25,000.
I believe that judge in that case and in all cases has the duty to say, to ask the question, ''will my allowing this case to go forward affect the freedom of other people who want to coach Little League in this country,'' and to render a ruling that says I hold, under the undisputed facts here, that, under the doctrine of assumption of risk, this either was or was not an assumption of risk. And judges are simply not doing that in this country today.
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Mr. SMITH. Thank you, Mr. Howard.
Ms. Harned, you mention in your testimony that in a poll of small business owners, that the cost and availability of liability insurance has gone from 13 in 2000 to number two today. You didn't explain why you think that is. Why is that such a growing concern among small business owners? And what has happened to cause that concern to increase?
Ms. HARNED. I think it is twofold. I think that, as Mr. Howard so ably discussed this morning, the fear that is out there really is driving everyday decision-making. And also, for the small business owner, settlements are a big issue, and if they have not had to settle a case, they know somebody that has. In addition, they have seen their insurance, their liability insurance rates go up.
In a poll that was conducted recently, we found that about half of the small business owners surveyed were either ''very concerned'' or ''somewhat concerned'' about the possibility of being sued. This is something that they really do think about every day.
Chairman SMITH. Thank you, Ms. Harned.
Mr. Schwartz, in some ways, we already know how the Lawsuit Abuse Reduction Act would work because that is the way things were largely prior to 1993 when rule 11 was changed. Another reason we know how well it would work, according to a survey done back then, 95 percent of the judges believed that the now-abandoned version of rule 11 had not impeded development of the law, but, most importantly, 80 percent found that the prior rule had an overall positive effect and should not be changed.
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Given the good experience we had with rule 11 before it was changed, given that I would like to see it returned to the point where we have a rule 11 as it existed prior to 1993, why was rule 11 ever changed? And was there a good reason it was ever changed? And was there really a focus on and the implications considered before it was changed?
Mr. SCHWARTZ. Well, I think it was a problem of people dealing with yesterday's newspaper. There had been a problem when rule 11 was first changed until the bugs got out of it and people knew how to use it. And it was, in some instances, used in civil rights cases where it should not have been used. I know that your bill does not affect civil rights cases. But by the time the Committee acted in 1993, the rule was working well. It was not impeding in any way development of existing law. But people were dealing with the problem from the mid-80's that had been corrected by the judges themselves, and the judges knew that. And that is why, in that survey, you had this overwhelming response to the judges saying that it worked well.
Now it does not work well because, if somebody files a frivolous lawsuit—just think about this: They file a frivolous lawsuit. They know it is frivolous. They hope that it will get a settlement. A motion is made against them, and they have 21 days just to say, ''Oh, I'm sorry.'' Meanwhile, you have been subject to $5,000, $6,000 in legal bills, and so it doesn't work very well at all.
Mr. SMITH. Thank you, Mr. Schwartz.
The gentleman from Michigan, Mr. Conyers, is recognized for his questions.
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Mr. CONYERS. Thank you, Mr. Chairman.
I appreciate the testimony of all of the witnesses.
Ms. Harned, everyone on this Committee is very concerned about the health of small businesses. I mean, they are the economic backbone of this Country. So we are very interested in what they say and what is happening to them and how we can make their economic plight stronger.
Now, have you ever received a copy of H.R. 4571, the bill that is before us today?
Ms. HARNED. I am somewhat familiar with it, yes.
Mr. CONYERS. But you never got a copy of it?
Ms. HARNED. I have received a draft version.
Mr. CONYERS. A draft version. Did you know it was introduced exactly 1 week ago?
Ms. HARNED. Yes, I believe so.
Mr. CONYERS. Could I ask Attorney Howard, have you seen H.R. 4571?
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Mr. HOWARD. Yes, sir.
Mr. CONYERS. Did you read it?
Mr. HOWARD. I did. I couldn't recite it.
Mr. CONYERS. Well, most of us cannot either, so don't feel badly about that.
Now, we are honored to have Attorney Schwartz, professor, writer of law, and I think you're counsel or one of the leaders in the American Tort Reform Association.
Mr. SCHWARTZ. Yes, sir, I'm general counsel, and I'm testifying on their behalf today.
Mr. CONYERS. And we have 50 representative members of ATRA, the American Tort Reform Association founded in 1986, and I would like to put the names of these multinational corporations and national corporations into the record.
Chairman SMITH. Without objection, they will be made a part of the record.
[The information referred to was not received by the Committee at time of press]
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Mr. CONYERS. Now, Attorney Schwartz, the tobacco industry isn't mentioned in this list of the 50 representative ATRA membership. Is that because they are not a member?
Mr. SCHWARTZ. Well, those are founding members, sir.
Mr. CONYERS. Yes.
Mr. SCHWARTZ. Well, they may not have been a founding member, and I think they probably are members, and I don't have that information—I can supply it—as to who, which companies are members.
Mr. CONYERS. Well, the ATRA, the sheet that came from your organization, said the following are 50 representatives of ATRA's membership. They did not say founding.
Mr. SCHWARTZ. Okay.
Mr. CONYERS. Why was tobacco left off?
Mr. SCHWARTZ. I do not know, sir.
Mr. CONYERS. You don't know.
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Now, we are dealing with these lawsuits that Mr. Howard started off with. For so many, the fear of litigation—let me ask you this question, Mr. Howard, who files more lawsuits, businesses against individuals and consumers or consumers against businesses in America?
Mr. HOWARD. I believe there is far more business litigation than there is tort litigation.
Mr. CONYERS. Thank you very much.
And do you ever find or any of your reading or organizations find any necessity to criticize excessive business litigation, or do you find that there is excessive business litigation?
Mr. HOWARD. The legal system can be abused by businesses as well as individuals.
Mr. CONYERS. But that is not what I asked you, is it? I asked if you find a need to criticize excessive business litigation, because you are here criticizing excessive consumer citizen litigation.
Mr. HOWARD. Well, actually, I am here talking about the effect on the culture, and our focus in our coalition has been health care and schools, which has not been—which were not areas where the businesses are typically involved.
Mr. CONYERS. So, in other words, corporations are free to sue everybody's pants off with the biggest lawyers, but the thing that bothers you in the culture is all the little people threatening lawsuits?
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Mr. HOWARD. I would not agree with that characterization.
Mr. CONYERS. Would you correct my characterization?
Mr. HOWARD. Yes, we believe that the legal system should be based on rulings that all can read and see about what's right and reasonable and what is not. We think that, in an open-season type litigation philosophy, anyone, whether it is an individual seeking to gain an advantage, perhaps someone injured when the doctor didn't make a mistake, as well as by a company, which either may be suing or trying to avoid liability when it did something terrible by dragging out litigation for 5 years. So, for example, in our coalition, we have been advocating the idea of specialized medical health courts with neutral experts which, among other things, with a liberalized standard of recovery that would allow patients who are injured by mistakes to recover more quickly and with lower attorneys fees. That is one of our principal focuses.
So again, I would not agree with the characterization that we are just trying to eliminate or stop litigation. We are trying to separate the wheat from the chaff.
Mr. SMITH. Mr. Coble is recognized for his questions.
Mr. COBLE. Mr. Chairman, I have had to alternate my time between Transportation and Judiciary, so I may have to go back to transportation. As a result, I missed most of the testimony, but I appreciate you all being here.
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I will just make a brief statement, Mr. Chairman. I will not use my 5 minutes.
It appears to me that aggrieved parties who have been injured, who have incurred damages to which they did not contribute, should be made whole. On the other hand, parties who initiate lawsuits who have not been injured, who have not suffered damages and whose lawsuits involve only nuisance value, I think those matters should be examined very carefully. And I believe, Mr. Chairman, that is the purpose of, the purport of your bill. I don't mean to be speaking for you, but that nonetheless is my comment.
Since I missed most of the testimony, I will not put questions, but I will stay as long as I can.
Thank you, Mr. Chairman.
Mr. SMITH. Thank you Mr. Coble.
The gentleman from Virginia, Mr. Scott, recognized for his questions.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. Eisenberg, you indicated some data relating premiums, malpractice premiums, to the awards actually given. Where can we find out whether or not the amount of awards, increase in awards, was the reason the premiums went up substantially over the last couple of years?
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Mr. EISENBERG. I think that is one of the very important questions about the tort system, and I believe you could find it out from the insurance companies; that is, get their libraries of revenue, what comes in from premiums, what comes in from investment income and try and relate the two.
Mr. SCOTT. Do you have that information?
Mr. EISENBERG. I tried to do that in the 1990's and could not get beyond—the public data about insurance companies' losses and revenues is opaque. And in an article I wrote about product liability in the early 1990's, I tried very hard to get behind it, and I couldn't.
What I do know is, when the insurance industry has been offered tort reform in exchange for guaranteed reductions in premiums, they rejected the deal.
Mr. SCOTT. Mr. Howard, you mentioned teachers hugging students. If you have a sex-abusing teacher, is litigation appropriate?
Mr. HOWARD. Of course, and firing the teacher and criminal sanctions.
Mr. SCOTT. And civil cases?
Mr. HOWARD. And a civil case as well. I believe, in conduct like that, it depends on the nature of the harm, that the principal, the traditional method of accountability was through the State and its criminal process in putting people in jail because it is sometimes hard to measure damages.
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Mr. SCOTT. In terms of a civil suit, how would you know it is frivolous until you have heard the evidence?
Mr. HOWARD. You would not.
Mr. SCOTT. If the teacher is believed and the child is not believed, does that convert it into a frivolous case?
Mr. HOWARD. If it turns out that a case has been brought which did not have a foundation in fact, but you could not determine that until after all of the evidence and such, I believe that is an extremely important case for sanctions, not because the claim was frivolous, but because it was unfounded. It had no basis in fact. But you couldn't have made that determination at the outset.
Mr. SCOTT. If the teacher lied, and the jury believed the teacher's lies, that would convert what was a bona fide case into a frivolous case?
Mr. HOWARD. Well, you changed the facts on me here. We have a court system that—where there will be, in a case like that, a finding of facts. And if the facts found, which is the best the justice system can be, if the facts found are, there was never a basis for the claim, that it was made up, then I believe that is an appropriate case for sanctions. If the facts found are, maybe, there was smoke, but there was no fire, then perhaps it is not a case for sanctions.
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Mr. SCOTT. No, there is just a conflict in testimony. The child says, ''I was sexually abused.'' The teacher says, ''It didn't happen,'' and they found for the teacher.
Mr. HOWARD. Then it is probably not a case for sanctions. There are cases of sexual abuse where it is clear at the end of case that there was never any foundation for the claim, and if it were clear that there was never any foundation, not just a credibility difference, then if it is clear, I think it would be appropriate for sanctions. If it is not clear, it is not appropriate in my view.
Mr. SCOTT. Mr. Schwartz, does this rule apply to frivolous defenses?
Mr. SCHWARTZ. Yes, it does, sir.
Mr. SCOTT. And how do you—if a case is brought up, inconsistent with established law, does that make the case frivolous? Like when Brown v. Board of Education was brought, everybody knew what the law of the land was. Was that a frivolous case?
Mr. SCHWARTZ. No, it wasn't because as——
Mr. SCOTT. If it had been thrown out, as it was in lower court, would it have been frivolous?
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Mr. SCHWARTZ. No, it wouldn't. And that is why the rule is very, very carefully worded about allowing claims that are based on some reasonable extension of existing law. I have read the briefs in Brown v. Board. Those briefs are very powerful briefs. That case took a long, long time to develop. We are not talking about that.
Mr. SCOTT. I am running out of time, and I just want to get just one other question in. What about defending the partial birth abortion ban without a health exception?
Mr. SCHWARTZ. I think that is a matter of controversy, and it is not frivolous. The words of rule 11, I hope they are in the record, so we know what we are talking about. We are talking about cases that are being presented for improper purposes, such as to harass or to cause unnecessary delay. The claims, defenses and other legal contentions are not warranted by existing law or by a nonfrivolous argument for extension, modification of the law, or the factual contentions have no evidentiary support. This is a very narrow area, sir.
Mr. SMITH. The gentleman's time has expired.
Mr. SCOTT. My time has expired, but that would apply to trying to defend the partial birth abortion law when it doesn't have a health exception.
Mr. SMITH. Mr. Schwartz, would you want to respond to that very briefly?
Mr. SCHWARTZ. I think that is a controversial area of law, and I don't think there would be a judge in America that would deem that frivolous.
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Mr. SMITH. Thank you.
The gentleman from Ohio, Mr. Chabot, is recognized for his questions.
Mr. CHABOT. I thank the Chairman.
The purpose of this act, of course, is it aims at preventing frivolous lawsuits that victimize innocent people. Under the act, represented parties can be sanctioned, including monetarily, from these frivolous lawsuits. And my question is, does this mean that clients would be sanctioned for the frivolous legal theories that are put forward by their attorneys? So how do you protect the clients from their attorneys? Because, oftentimes, it's going to be the attorney that would come up with this theory, and is there a chance that the plaintiff is victimized? In other words, who would be responsible for this?
Mr. SCHWARTZ. Under rule 11, the attorney is responsible.
Mr. CHABOT. So the plaintiff would essentially be protected?
Mr. SCHWARTZ. That's correct.
Mr. CHABOT. Next question, relative to federalism, what this does, of course, is it limits where lawsuits can be brought, to a certain extent. Would anybody want to comment on federalism here?
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Mr. EISENBERG. I would. In fairness to the bill, I haven't had a chance to sit and contemplate it. It was recently proposed, and I only recently looked at it.
It strikes me as perhaps the most aggressive intrusion on State court systems since Reconstruction. It will affect every personal injury case in State court. It will require State courts to hold hearings on whether there is interstate commerce and where the most appropriate forum is.
And, I mean, I think it sort of turns federalism on its head. I am not aware of such a far-reaching sort of intrusion on State prerogatives, even in recent tort reform proposals.
Mr. CHABOT. I see the other panel members wouldn't necessarily agree with that.
Mr. SCHWARTZ. We will submit to you an article that was done for the Journal of Harvard Law and Public Policy that will outline case support that is crystal clear for the measures that are in this bill.
I don't want to get into a professor war here. I have great respect for the professor. But I think you will find that those cases support what is in the bill.
[The information referred to follows in the Appendix]
Mr. EISENBERG. I'm not saying it is unlawful. I am saying, as a matter of policy, it is a massive intrusion.
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Mr. CHABOT. Thank you.
Excuse me. Under this act, the plaintiff would be able to—to bring an action in his location or the principal business where the defendant is located. Could you compare that with, under existing law, where one can bring cases?
Mr. SCHWARTZ. That's a good question. A number of States now have—this is—lawyers call it venue. I know there are lawyers on this Committee, but some may not know what the word is. Venue defines where you can bring a case.
In many States, you can bring a case where you live, where you have been hurt or the defendant's principal place of business. But in some States, that is not true. As long as somebody does business in that State—and that can be as much as just selling food—a person can bring a claim in that State, even though he or she has nothing to do with that State.
And you get to the issue of, why? If you live in Massachusetts, and you're hurt in Massachusetts, why would you bring a case in Madison County, Illinois, a place you have never been to? Think about it. The only reason would be that you think this is a particular place where the words on the top of the Supreme Court, ''equal justice under law,'' may not be applied. And it is not you, the injured person, it is your lawyer who is figuring this out.
And I believe that there is full, complete power under interstate commerce to regulate what is this rampant forum shopping that is going on in this country right now. And from the point of view of the individual State in your State, why would you want somebody coming in, using your court system, your State's tax dollars, for somebody who doesn't live there and has nothing to do with the jurisdiction? I don't think you would want that.
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Mr. CHABOT. I note the yellow light is on, and I yield back the balance of my time.
Mr. SMITH. Thank you, Mr. Chabot.
The gentleman from North Carolina, Mr. Watt, is recognized for questions.
Mr. WATT. Thank you, Mr. Chairman.
Ms. Harned, you haven't been asked any questions. You have been sitting quietly. You talk about, as one of your four points, a situation where you don't let the facts get in the way. Has your foundation bothered to take a look at the facts that have been recited by Mr. Eisenberg?
Ms. HARNED. I have read Mr. Eisenberg's testimony, and I'm aware of these studies.
Mr. WATT. I'm not talking about Mr. Eisenberg's testimony. I'm talking about the studies which would be, I presume, the facts that might get in the way of some of your conclusions.
Ms. HARNED. I do not want to impugn these studies because quite honestly——
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Mr. WATT. Have you read the studies? Has your foundation reviewed the studies? That's all I am asking now.
Ms. HARNED. We have not. But it is relatively easy to——
Mr. WATT. That's fine. I just was interested whether you all might be interested in letting some facts get in the way. That's all.
Mr. Schwartz.
Mr. SCHWARTZ. Yes, sir, Mr. Watt.
Mr. WATT. I am especially interested, and I am going to direct this question to you because you know you are a fine lawyer and you would do——
Mr. SCHWARTZ. Uh-oh, something bad is coming.
Mr. WATT. No, no, and I think you will deal with this fairly. Even though, you know, your testimony is contrary to many of my beliefs. I think you do tend to deal with things fairly.
Have you looked at the language on page 3 of the bill? I'm especially fascinated with this section that starts at line 11 and goes through line 18, ''In any civil action in State court, the court, upon motion, shall determine whether, 30 days after the filing of such motion, whether the action affects interstate commerce. Such court shall make such determination based on an assessment of the cost to the interstate economy, including the loss of jobs, were the relief requested granted.''
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Now, as a fair plaintiff's lawyer or defense lawyer, for that matter, what would it take for you to get ready for a hearing on this issue? How would you marshal the facts, having walked into court, sued somebody on a tort claim, an automobile accident claim, let's say, and all of a sudden you are having a hearing about the loss of jobs and the economy and the impact on interstate—I'm just—I'm just fascinated with how you, as a lawyer, would approach marshalling the facts. What would you do to prepare for that hearing?
Mr. SCHWARTZ. Well, good question, Mr. Watt. And first and I've done, as you know, both plaintiff and defense work, and now I'm principally doing defense work——
Mr. WATT. Okay. As a defense lawyer, how would you prepare for it? As a plaintiff's lawyer, how would you prepare for it?
Mr. SCHWARTZ. Well, a plaintiff's lawyer doesn't have to do anything. The burden of proof is on the defense lawyer.
Mr. WATT. Okay. Put on your defense hat. Let's hear what you would do to get ready for this.
Mr. SCHWARTZ. I think that you would have a very, very difficult burden to assess the type of findings that would be made here. You might be——
Mr. WATT. How would you prepare?
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Mr. SCHWARTZ. I think—I think I would try to find out from insurers some cost of what frivolous claims were in that particular jurisdiction. I don't know, sir. You know that I'm always—I answer straight.
Mr. WATT. That's why I asked you the question.
Mr. SCHWARTZ. Whether I could assemble that material, I think it would be a very, very difficult job to do it.
Mr. WATT. It would take a lot of time and drive up the cost of this litigation, I presume.
Mr. SCHWARTZ. I think it would be a very difficult burden. And I think it is going to be an unusual case where this rule were, as written, to apply in State courts.
Mr. WATT. Now, let me just talk about my experience, because, I mean, you know, I did a lot of trial work in the 22 years I was in the practice of law.
Mr. SCHWARTZ. Yes, sir.
Mr. WATT. And I met a lot of defense lawyers on the other side, all of whom were on the clock with some insurance company, some deep-pocket defendant, who would just love to spend 5 or 6 days preparing for this kind of motion, because in a lot of cases, they weren't about to settle a case, even a meritorious case, until they had milked every dime out of the defense of that case.
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Now, I take it you have never—honestly now, Mr. Schwartz, you know some defense lawyers that have been in that posture, don't you?
Mr. SCHWARTZ. There are defense lawyers——
Mr. SMITH. Mr. Schwartz, after you answer this question, the gentleman's time has expired. But I do want you to answer the question.
Mr. WATT. I want him to answer the question, too, because I know he is going to answer it honestly.
Mr. SMITH. The gentleman's time has expired, but the witness will respond to the question.
Mr. SCHWARTZ. Thank you, Mr. Chairman and Mr. Watt.
Yes, there are defense lawyers who run up costs. I don't think they would do so here because we are talking about smaller claims.
Mr. SMITH. Thank you.
Thank you, Mr. Watt.
The gentleman from Florida, Mr. Keller, is recognized for questions.
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Mr. KELLER. Well, thank you, Mr. Chairman. I think Ms. Harned was really right here, based on my observations, that the biggest problems we face are the small suits against the small businesses. And I base that as someone who is a litigator my whole life and a partner in a litigation firm. I have tried cases of every type and against every kind of lawyer, the elite super-highly-paid plaintiff's personal injury lawyer, like the John Edwards type, and the guy who scrapes by on a few phone calls from the Yellow Pages and barely pays his rent.
I have not seen a lot of the frivolous suits against the elite—by the elite personal injury lawyers. They get paid a contingency, and they want a big hit, and they don't bring a lot of frivolous suits, frankly. And I will say that, sometimes, a contingency fee is a good thing, because it is a key to the courthouse for a lot of people.
But I have seen a heck of a lot of suits from the low-end lawyers against small employers. I am not going to go through a nightmare list of things. You heard those. But just to give you a microcosm of the problem, first of all, you always hear about tort claims. My biggest observation, the most frivolous suits I have ever seen—and it is not politically correct to say it, but I am going to say it—is in the employment context and so-called civil rights claims. And I'll just give you an example.
I represented an employer. And a lady, who was a very weak employee with frequent absences and poor job performance and an abrasive personality, didn't get a promotion. And she filed a big Federal lawsuit saying that it was because she is black, and that it was age discrimination. Well, and the person who got the promotion was black and was older than she was. But nevertheless, to show that we are going to allow all claims to go forward, the judge allowed exhaustive discovery, and after spending $100,000 and giving this lady her day in court, the suit was thrown out on summary judgment.
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The employer won. And what did he win? He paid $100,000. Under Civil Rights Attorneys Fee, Provision 42 USC 1988, the case law in my jurisdiction, as in most, is, when the employer loses, they usually pay the fees. When the employee loses, they don't. And no fees were ruled under rule 11. Courts are reluctant to award fees to the prevailing party. This is a big problem, and I share your concern with that. So what do we do about this type of problem?
Mr. Schwartz, let me make an observation and ask for your opinion. I like the loser-pays provision, like they have in England. But frankly, one of my concerns, take a med-mal case, when the doctor loses, he's got the money to pay. When the plaintiff loses, they almost never do. So it has not been a big deterrent.
One of the things we did in Florida to combat that is, when a person loses and you also have a finding of frivolousness by the judge, the attorney who brought the frivolous suit is required to pay half the attorneys' fees to chill these type of suits from being brought. What is your opinion about that sort of approach, requiring the person bringing the suit to pay half the fees if there is a finding of frivolousness?
Mr. SCHWARTZ. Well, I believe the responsibility is with the officer of the court, whether it is a defense attorney who makes a frivolous defense as Mr. Watt was referring to or whether it is a plaintiff's lawyer who is bringing a frivolous claim. And I do distinguish in my written testimony between the so-called English rule, the loser-pays rule, and frivolous claims. Loser-pays has not been something that I think can work well in this country, because it ends up exactly, Mr. Keller, as you said, when the loser is the defendant, he pays. When the loser is the plaintiff, he doesn't.
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But rule 11 is at a level of seriousness of frivolousness that is very, very high. It is very, very important for this Committee to appreciate that this only comes in when there is absolutely a baseless suit, no possible reasonable extension of the law. Judges are reluctant to apply it. But when they do, it has an effect against the part of the bar that you are talking about. It is not John Edwards and Dickie Scruggs and Fred Barron. They never bring a frivolous claim. It is that marginal claim against a school. It is that marginal claim against a restaurant. And by the way, for the record, I will be very brief, the National Restaurant Association and its 400,000 members has endorsed this bill. Those are the people who are concerned about these frivolous claims, little businesses.
Mr. KELLER. One of the things we are doing, we are making these sanctions mandatory under rule 11. Is there anything else under rule 11 that we could do to strengthen our ability to prevent frivolous suits?
Mr. SCHWARTZ. I think you have done the three most important things. You have made it mandatory. You have also gotten rid of that very bad provision that lets people withdraw the frivolous claim and escape punishment. You also have sanctions against discovery abuses on either side.
Mr. KELLER. Thank you. Mr. Chairman, I yield back.
Mr. SMITH. Thank you, Mr. Keller. The gentlewoman from California, Ms. Waters, is recognized for questions.
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Ms. WATERS. Thank you very much, Mr. Chairman.
I note that Professor Eisenberg's testimony seems to indicate that the cost to the tort system appears to be declining as a percentage of income or sales, not expanding. So there does not appear to be any evidence that this problem is getting worse or that any action is required. And if that is true, is there anything in these tort reform proposals that would require insurance companies to lower their insurance premiums to the extent that claims experience pools lower because of the changes that are being proposed? Where is the evidence that small businesses or anyone else could save one dime in premiums if any of these proposals are adopted?
I guess I would like Mr. Howard to comment on that. And after you comment on that, I'd like to get some discussion going on some of what I'm reading in the Collapse of the Common Good, some interesting observations about the problem with discrimination lawsuits and African-Americans.
Mr. HOWARD. Well, to answer your first question, the area that we focused on and the only one I can really comment on is health care where the verdicts have increased significantly in the last 10 years and where, obviously, the premiums have also increased. I do think it is an important area to understand as to what, you know, why the premiums have increased.
The studies that I've seen suggest that it's partially due to the investment environment, but that it's primarily due to the actuarial reality of the increase in the cost of verdicts and the costs of settlements and in the costs of defense. And while it's also true, as Professor Eisenberg suggested, that tort suits have declined somewhat in the last 10 years, by far the largest component of that has been the result of the passage of no-fault insurance laws which was a great reform which got many automobile accident cases—which is the largest component, out of the——
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Ms. WATERS. I'm going to interrupt you for a moment. If you would hold that for a moment, I'd like Mr. Eisenberg to respond. I don't have the empirical data that he is alluding to. Do you know anything about the health care data that he——
Mr. EISENBERG. I guess, there are excellent studies of how the medical malpractice system operates. And one of the difficulties of basing tort reform on external views of the legal system without studying how the legal system operates is that you may get it wrong.
Basically, medical malpractice litigation is one of the best studied areas because we have the opportunities, after the fact, for doctors, after the fact, to review charts and see whether neutral medical adjudicators found negligence.
Almost all of those studies suggest that the medical malpractice system in court—maybe there are frivolous cases being filed, but when they get to court, the system works quite well. The strongest cases are the ones that get the largest settlements. The weakest cases are weeded out.
We have studies from excellent researchers, Professor Farber at Princeton, Professor Vidmar at Duke, who really got into the State medical systems and found, if anything, the systems were overly favorable to defendants.
Ms. WATERS. All right, then I will go back to you, Mr. Howard, so that we can get into the second part of your observation on African-Americans and the system. And I guess you are referring to discrimination lawsuits in your book?
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Mr. HOWARD. Well, in my book, I have a section on discrimination law in which I discuss, based on other people's studies—I didn't do the empirical research myself—what is perceived as a chilling of relations that were, I think, never great to begin with in the workplace between the races.
And one of the things I address in the book is the prospect that the fear of litigation, as it has in health care and in other areas, has—has created a kind of invisible barrier that prevents candor or impedes candor in the workplace so that it is very hard to have mentoring relationships and the like with people in the workplace. And all one has to do is go to a workshop that most big companies hold, so-called diversity workshops, in which you are trained not to say what you really think.
Ms. WATERS. What is the point of this discussion, I'm sorry, as it relates to litigation?
Mr. HOWARD. Well, the point that I made in my book is that, while discrimination laws are obviously incredibly important in the society, if we don't—that perhaps letting one angry person bring a claim into court that is very hard to prove and very hard to disprove has had a counterproductive effect on race relations. That is the point. It's not a point that my group is undertaking, because I understand it's kind of a third rail, and so it's nothing I ever talk about. And indeed the book reviewers never mentioned it, because it is a difficult subject to discuss. But I thought it was important to put it on the table, and I did so in the book, and so that is what I suggest.
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Ms. WATERS. Sir, the part that I was able to read did not discuss whether or not there are angry people filing lawsuits because of this lack of mentoring and this lack of discussion. And I did not see any discussion about whether or not there appeared to be valid criticisms of those in power who have the possibility to make the workplace better, who have the possibility of correcting attitudes in the workplace that would not lead to lawsuits. Because most of these claims are documented cases of racism and acts that are taken that can be proven in court.
Mr. HOWARD. Well, I don't—again, it is not the reason I'm here. But I was recently at the Second Circuit Judicial Conference in which they had a program on employment cases, and they showed the rapid—how much of the docket consists of employment cases. And it appeared to be the view of the Federal judges in that conference that a great many of those cases were baseless and that were using up a lot of their time.
So I think there are, clearly, valid claims. I don't think this is an area that this bill or this hearing is particularly addressing, because it is a very difficult area. But I will just—like I say, again, it is very hard to prove and very hard to disprove a claim of unlawful discrimination when you only have one person. And that makes it a very tricky area of the law to try to manage, because the ultimate goal is, obviously, to minimize or eliminate discrimination. And, you know, and that's—that's the important goal here.
Mr. SMITH. Thank you, Ms. Waters.
The gentleman from Virginia, Mr. Forbes, is recognized for his questions.
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Mr. FORBES. Thank you, Mr. Chairman.
And thank you, ladies and gentlemen, for being here today.
I had the privilege of practicing law for a number of years before I came here, and I can attest to the fact that there are just as many bad insurance lawyers as there are plaintiff lawyers. But that is really not our issue today.
And one of the things that I think I could also tell you, my good friend and colleague from Virginia, Congressman Scott, could come in here today with charts and tell you how, from the time that President Bush was sworn into office, the economy went to hell in a hand basket and make a case for that. I could come in with charts that could tell you how wonderful the economy is doing today.
But if somebody in my district comes to me and their company is closed and they are out of business, I can't just cite those statistics to them. I have to tell them something to help them.
Mr. Eisenberg, let me just tell you, just from personal experience, and also what I hear from my constituents of some true cases. I've seen situations where we will have plaintiffs sit on the other side, and they will say, ''We don't have a claim, but we think you ought to settle with us anyway because the cost of this is going to be enormous to you.'' That happens in the real world all the time.
I have doctors that sit through 4 years of litigation when they know that they have no claim, but their stomachs turn. Their families worry through that whole process, even though it is a frivolous suit, and the jury is out 3 minutes and comes back in with a decision in their favor. But they have had 4 years of their lives just gone.
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We are getting more and more political suits today where, when somebody doesn't do what you want, they think they can file a suit against somebody. And recently, I saw one filed by a lady who just had a stroke because somebody didn't like the political positions she has had. A small businessman I saw 2 years ago, he was faced with a $300,000 suit, but his litigation costs were going to be $500,000. He ended up having to settle, even though everybody acknowledged, including his lawyers, it was a frivolous suit. It cost too much. I could go on and on.
Mr. Eisenberg, if not this legislation, what do I tell these individuals when they come to me and they tell me their lives have been ruined by frivolous lawsuits? You look in their eyes. These are not insurance people. They are not plaintiffs. These are just people that you represent whose lives have been ruined. Do I just cite to them the statistics around the country and tell them that everything is fine? What do we do if not this legislation?
Mr. EISENBERG. If you believe, think this legislation will fix the truly unscrupulous lawyer from bringing a weak claim and not hiding somehow, it is a pipe dream. There will always be people who abuse the system.
On the other side, when we had rule 11 studied in Alaska, we had approximately 20 percent of the lawyers who said, ''We failed to bring a meritorious claim that we believed in or failed to assert a meritorious defense that we believed in, because of the possibility of fee shifting and sanctions.''
So I don't have a happy answer for people who are done in by the system on either side. It is a balance. It is an awesome burden that Members of Congress have to strike. What one hears as the motivating force behind the current list is increasingly abusive lawsuits, an increase in the frivolous numbers. The individual anecdotes cannot get behind that; only large-scale statistics can.
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What I need to hear, if I were a policymaker, is, ''You are telling me frivolous suits are up and the filings are down, please explain that.''
Mr. FORBES. And for the rest of you on the panel—Mr. Eisenberg doesn't think this legislation will help. To these individuals, they are real. They are hurting their lives. They're, in many cases, destroying their lives. Do you believe this legislation will help in those cases?
Mr. SCHWARTZ. I think it will help, Mr. Forbes. And it is important right now to put aside the data wars. If there are a million claims, and they are all good, there should be a million claims. But if there are 10,000 claims and half of them are frivolous, they shouldn't be brought. And your constituencies, and the same State as I am, are facing a situation where they have no remedy, where there is legal extortion.
And it is the one, two, tens and hundreds, what happened to Cathy Burke up in Atlantic City. So it is not data that says whether that person has a problem or not. It is whether that person has a problem or not and whether there is some remedy in the law to stop it. And that is why this reform is very, very important.
One other point that has not been made. When the Federal rule was changed, automatically the rule was changed in a number of States because the States' procedural laws will mirror changes in the Federal law. So there was no hearing, no real thought given to it. All of a sudden, State persons didn't have a weapon to stop a totally baseless claim. That needs to be changed. If the law is changed, some States will change almost automatically to mirror this law.
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Ms. HARNED. If I may, I would like to say the thing that makes this bill attractive, from my perspective, is that it does level the playing field for the small-business owner because it provides them legal resources that they do not have right now when these claims are brought against them.
And to your point and the others have made against the studies Professor Eisenberg has brought to our attention, all I can tell you is what I am hearing from small-business owners every day. And it is not surprising to me that the studies—well, his studies do not capture a critical number that I don't think they can, which is, how many of these claims are settled out of court? Those are the folks I'm talking to. Those are the statistics that you really can't get at. And one of the main reasons is that, often, these settlements are confidential, and they stay confidential, and it is therefore hard to measure this.
I get call after call after call with story after story after story. I believe that it is very much a problem today. It is unbelievable to me that frivolous lawsuits are not going on. And I do commend you all for looking at this legislation.
Mr. HOWARD. Very briefly?
Mr. SMITH. Yes. Briefly.
Mr. HOWARD. In order to have ethical conduct, you must enforce it. And in my experience as a practicing lawyer over the last 30 years, lawyers have gotten away with more and more, and they are pushing the envelope more and more. And judges almost never have the willpower to enforce rule 11 sanctions. I think it's very important to have a statement from Congress in the form of this bill to reinforce the backbone of judges to enforce ethical behavior.
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Mr. SMITH. Thank you, Mr. Forbes.
The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Ms. Harned, you indicate—has your foundation conducted any studies on this issue?
Ms. HARNED. In my testimony, I reference a number of small business surveys in which small-business owners are posed questions.
Mr. DELAHUNT. I heard you say that, and that is polling data in terms of whether they are concerned. I think that is a measurement of sentiment as opposed to hard empirical data. Let me restate it. You indicate that it is not so much the lawsuit, but, rather, it is the settlement issue that seems to create this fear, if you will, this fear that they are living with on an everyday basis that they are anguishing over. Have you conducted any studies in an empirical way that determines the number of settlements made that are considered frivolous?
Ms. HARNED. Again, all I can tell you about is the small business owners that I talk to and what they are saying. It is not just——
Mr. DELAHUNT. I appreciate that.
Ms. HARNED. It is——
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Mr. DELAHUNT. Okay. I don't have a lot of time, Ms. Harned. Please. I understand that the answer is no. And I understand that you speak to a lot of small business owners. But I'm asking for some hard data. Because I guess I would posit this question to Mr. Eisenberg and to Mr. Schwartz. You know, the only stakeholder that is not here is the insurance industry. And from what I understand in terms of previous hearings, they're never at the table to speak to this particular issue.
But if there is, if there is, in fact, if the data would support that there are frivolous settlements creating this culture of fear, I would think that we would need them at the table.
Is there any obligation on the part of the insurance carriers, the insurance industry where there is a frivolous—I direct this to professor Eisenberg—is there an obligation to not just simply settle those claims but to litigate those claims?
I mean, I find it, you know, a rather dismissive way of saying, well, you know, the small business owner, I'm sure most small business owners are insured. Everybody has coverage today. And yet, if the insurance carriers are settling these claims and they are frivolous, they are unsubstantial, what is the role and the responsibility of the insurance carrier, Mr. Eisenberg, if there is any?
Mr. EISENBERG. I'm not an expert on insurance law, so I wouldn't opine to it. I think you touch upon an important point, and probably the slice of society that has the best information on the litigation system is the insurance industry. And it would be extremely useful to systematically get data from that industry about many of the issues that the Committee on both sides is concerned about. Because when I try to get behind insurance company publication of data, I just find it nothing I'm willing to stand behind before an august body such as this.
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Maybe you folks have the prestige, power, whatever, to get behind what is going on in litigation in insurance, but I don't.
Mr. SCHWARTZ. Mr. Delahunt, may I answer?
Mr. DELAHUNT. Sure.
Mr. SCHWARTZ. Here is the problem, which I'm sure, as an expert, which you are, you will understand. A claim is brought, and an insurer thinks it has no basis. If they don't settle it, in some parts of our country, and this does have backup——
Mr. DELAHUNT. I understand. Madison County. But——
Mr. SCHWARTZ. Just let me just complete my sentence, they then will get a potential claim against them for bad faith or failure to settle. So they are put a little bit——
Mr. DELAHUNT. I understand that, but what you are suggesting to me, Mr. Schwartz, and those clearly are exceptional cases. I think you will grant that to me. I think it was your phrase, absolutely—that this will impact only ''absolutely baseless claims,'' this particular litigation.
I share the same concern that Mr. Forbes articulated as far as constituents and how they feel about the system. I think it is important, even if there is data that indicates that the reality is somewhat different.
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But what I find frustrating is, here we are, we are having hearings, yet we don't have the information from the insurers about probably the concern that most small businesses have about the settlement issues.
I think, once you file a complaint, a bill of complaint, it goes through, then you have some data. But if we can't get the information—and you know, I would call on the Chairman of this Committee and the Chairman of the full Committee to work with the respective Ranking Members to attempt to get from the insurance industry some hard data on the settlement issue so that we can then have a thoughtful discussion without talking simply in an anecdotal way and guess and speculate.
We have Mr. Howard talking about, you know, I think his language was, most judges, you know, are abdicating their responsibility. Well, that is a statement that anybody can make, but it has no basis in fact. Let's get the information here and see if we can address the issues Plaintiff Forbes and myself and others.
Mr. SMITH. Thank you, Mr. Delahunt.
The gentleman from Texas, Mr. Carter, is recognized for questions.
Mr. CARTER. Thank you, Mr. Chairman.
I've got to tell you, when you look at what—I happen to support this piece of legislation, but I have questions about it. In reality, you two gentleman, Mr. Schwartz and Mr. Eisenberg, you both are associated with law schools. Law schools still teach lawyers that they have a responsibility to their client to give them a good analysis of their case and how the law applies to their case and whether or not it is a good claim that they bring forward.
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So if they don't give that client a good piece of advice and we go forward and get this sanction—and let's say Randy is giving advice to Exxon, so he gives Exxon bad advice, we are going to say there is a sanction imposed against one or the other. Well, we all know, everybody goes for the deep pockets, so Exxon might have to pay the bill, when Randy was at fault because Randy happens to not be insured this year. So there is a lot here to be concerned about.
Something I thought about a lot in 20 years on the bench—and I have seen a lot of bogus lawsuits filed in 20 years on the bench—is, how about punching the lawyer's ticket? If we have got a lawyer and we go to Houston—I don't even practice in Houston, but I sat down there on three or four occasions, and there are thousands of personal injury lawsuits that are filed in Houston and settled in Houston, maybe hundreds of thousands. And maybe many of them are bogus lawsuits. And they are all filed by the same maybe 35 or 40 lawyers in that area.
Why can't we just punch the ticket, reach a point where, if there are a lot of bogus lawsuits filed by a lawyer, that a judge can say, you have lost your practice of law in Texas?
Mr. SCHWARTZ. In general, the regulation of the bar is by States, and actually, Senator Edwards has proposed a three-strikes-you're-out rule on frivolous lawsuits.
Mr. CARTER. I would turn the same thing around on frivolous defense.
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Mr. SCHWARTZ. That is right. That is a matter that is worthwhile to discuss for the State bar of Texas. That goes to whether or not a man or woman can continue to practice law and is licensed by the State.
Mr. CARTER. Another question was asked here about business litigation. As a matter of fact, filing frivolous lawsuits in business litigation is a tool of competition in today's industry. Would you agree with that or not?
Mr. SCHWARTZ. I am glad you raised that because there were very good questions raised earlier about frivolous lawsuits among businesses. This change in rule 11 would apply to businesses. And if a frivolous lawsuit is brought merely for competition purposes, it would give the defendant, which is often a smaller business, an ability to invoke rule 11.
Mr. CARTER. And another question was asked—and anybody can answer this, I don't care who. The question was asked: Why did the original rule 11 change? And nobody gave—we talked about it, but we didn't say why. Did the courts say it was taking too much court time, which is my guess, or what reason did the court give in changing rule 11?
Mr. SCHWARTZ. It was really a committee of judges, not the court, and they changed it because there was a perception that the rule 11, with its sanctions, was causing—and you used the exact word—collateral litigation, litigation over whether the claims were frivolous and then the principal litigation of whether or not somebody was going to be liable.
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And over time, I want to put a date, in 1980, rule 11 was changed to make it look like the rule would look if this legislation were to pass Congress. And the rule 11 originally was very weak. It only applied when a lawyer intentionally was violating the legal system, and all of, you know, it is hard to prove intent.
So, in 1980, rule 11 was made tougher. The early experience with rule 11 that was, it did develop collateral litigation, and also there was the experience where some legitimate civil rights cases were impeded by rule 11. When the committee operated in 1993 and made its decision, they were thinking about things that occurred in the early 1980's. But those matters have been corrected.
Mr. CARTER. I have one more question. I will direct this to Mr. Eisenberg. Mr. Eisenberg, I was looking at your statistics on lawsuits per capita, showing Germany, Sweden, Israel and Austria being ahead of the United States.
Mr. EISENBERG. Yes, those are not mine. They are in my testimony.
Mr. CARTER. Well, they are in your——
Mr. EISENBERG. They are in my testimony, right.
Mr. CARTER. Isn't it true that they don't have anything near or anything resembling a tort system like we do in those companies? I think in Germany, for instance, they just have a schedule of damages, and the only thing you really try is if it is so offensive that it should be above the schedule.
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Mr. EISENBERG. I think there are major differences which make cross-country comparisons difficult. I think one is our tort system is certainly different from most other countries, and two, so is our system of social insurance and protection. And it may be we necessarily have more tort activity because we have a smaller social safety net than those other countries. That is, the person who has a brain-damaged child as a result of perhaps an innocent medical mistake and needs to maintain a child for the rest of its life may have no choice but to sue because we do not have a safety net like other countries might have for them.
Mr. SMITH. The gentleman is recognized for an additional minute without objection.
Mr. CARTER. I just want to point out, in Germany, in order to recover, you have to file a lawsuit. And then you go—it becomes like an administrative hearing after that point in time. So it is just a matter of course you file your lawsuit. They don't have contingent fees. They tell the lawyer what he will get paid for that lawsuit. They tell, if they prove their case, what it will pay. It will be X amount of marks for this kind of damage. And the only thing really to try, fee-wise, is 10 percent recovery if it is more serious than was conceived when they published the schedule. So it's not that they are more litigious; they've got to do it to get there.
Mr. EISENBERG. It may be. There's lots of ways to decide that.
Mr. CARTER. Statistics are fun.
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Thank you.
Mr. SMITH. Thank you, Mr. Carter.
The gentleman from Florida, Mr. Wexler, is recognized.
Mr. WEXLER. Ms. Harned talked about what small business people are saying in terms of their complaints. What I hear from small businesses, whether they are small businesses or whether they're physician groups or so forth, what they're complaining to me is what they say are the crippling rate increases in their insurance premiums. To me, that is the whole issue.
I am from Florida, like Mr. Keller. We have watched the Florida legislature adopt tort reform measure after tort reform measure, whether it's medical malpractice or business litigation or what have you. And the insurance premiums for business and doctors have not come down.
Mr. Schwartz, if I understand your writings and beliefs over the years, you have been, I think, very clear in saying that restricting litigation will not lower insurance rates. Is that true? That's your view?
Mr. SCHWARTZ. I said that about one bill that was in the United States Senate, and unfortunately, that quote has been repeated by some groups where it was not about that specific bill. I am sure you and all Members of the Committee have had that happen to them. There was a bill in the Senate that had no teeth in it. So that is all.
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Mr. WEXLER. That's fine.
Mr. Delahunt talked about the fact that insurance companies aren't represented here. But, Mr. Schwartz, you, again, I presume on a different occasion, your position was, and I am quoting, tell me if this is just an isolated event too, ''Insurance was cheaper in the 1990's because insurance companies knew that they could take a doctor's premium and invest it, and $50,000 would be worth $200,000, 5 years later when the claim came in. An insurance company today can't do that.''
Mr. SCHWARTZ. And that is an accurate quote. And the end of the quote was, ''Because they can't do it, they must look at the reality of the claim system and measure the actual losses against premiums.''
Mr. WEXLER. So the problem here as much or maybe even more so according to your quote isn't the explosion or the alleged explosion in litigation; it is the fact that, in the 1990's, insurance companies were making a better return on their investments than they are now, and because of the market conditions that insurance companies invest their money in being much less favorable, therefore, insurance rates go up.
Mr. SCHWARTZ. I follow you to the therefore. There is an additional insight here. The insurance rates have gone up, and we're not here about medical malpractice, but insurance rates have gone up because they have to now look at how much premium they have, so that smog that was there isn't around anymore.
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Mr. WEXLER. Right. If the economic environment changed again, and we were back in the situation we were in the 1990's, then insurance premiums—there wouldn't be any cause for tort reform, would there, because income to the insurance companies would be up again?
Mr. SCHWARTZ. That is not entirely true. First, only a small amount—they are not allowed to invest in common stock.
Mr. WEXLER. Let's talk about the supposed litigation explosion, and I appreciate the comments earlier. Ms. Harned said she just has a sense. And we talked about individuals, and the experience of individuals is very important, no doubt, but what we're talking about is systematic change here. And of course, most tort reform, really, the application is in State courts. Most tort cases are brought in State courts, not in Federal courts. Isn't it true, and these are the Department of Justice statistics, and this is where I get very confused, automobile tort filings, which make up a majority of tort claims, have fallen by 14 percent from 1992 to the present? That's the Department of Justice's statistics. Would you agree those are accurate?
Mr. SCHWARTZ. I don't have any question with that.
Mr. WEXLER. All right. Medical malpractice filings per 100,000 population have fallen by 1 percent, according to the Department of Justice over the same period. Some people say those are misleading because you are just talking about the actual amount of cases filed and not the recoveries. So I figure we're filing a smaller number of cases, but the recoveries must have just ballooned. Same statistics, the Department of Justice, the trend in award size was down. The median inflation-adjusted award in all tort cases dropped 56.3 percent between 1992 and 2001. So where is the explosion?
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Mr. SCHWARTZ. As Ms. Harned said earlier, those data do not capture cases that are settled; 95 percent of the cases are settled.
Mr. WEXLER. But weren't 95 percent of the cases settled before, too? We're just talking about relativity here, 1992 to 2001.
Mr. SCHWARTZ. I'll try to get the information for you, Mr. Wexler, if I can. I think, at least in my experience, more cases are settled now; and the ones that go to court, when they're ready to go to court, they are the ones where the defendant really believes they have a good shot at winning.
Mr. SMITH. The gentleman's time has expired.
The gentleman from Utah is recognized for his questions.
Mr. CANNON. I thank the Chairman, first of all, for holding this hearing. As the gentleman knows, I am deeply concerned about this issue. I want to apologize to the Chairman of the panel for not having been here. Today, is my primary election in Utah, and I have been fielding telephone calls.
This is, in fact, an extraordinarily important issue. Before I did Congress, I actually did venture capital and ended up associating with and funding a large number of lawsuits for a couple of reasons. In the first place, we have had a transformation in America away from large business employing most of the people in America and toward small business creating the real jobs of the future. And this has evolved somewhat. I think I was part of that process.
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In fact, I was certainly funding many of these small companies at the beginning of this that resulted in pay by larger companies who felt like they needed to dominate everything. I think there's been a shift in theory in large business that, in fact, encouraging entrepreneurs with the company to leave the company and then come back to the company is good for the large company. But there clearly is an ongoing tension between small business and starting up and taking market share from large companies. And litigation has been a major tool in that process.
We kept track at one point in time. Let me just say that, for a long time, we tried to do dispositive rulings like summary judgment motions and had remarkable success with those in these frivolous cases. They were expensive. And then we always applied for attorneys fees up rule 11 or the State corollary and never, ever got any compensation. The collateral litigation issue became one that we looked at: Is it worth now suing because the judge wouldn't give us the compensation we were due? That has been a terrific problem, I believe, and continues to be.
Then, of course, when a business fails, everybody goes after the deep pockets, so you still get this frivolous litigation just because you funded or have been associated with the company.
The effect of that has, I believe, been to chill small businesses. In other words, people who are thinking about going into business for themselves say, is it worth the cost? The second effect has actually been to raise, significantly raise, the cost of capital. So we're dealing with what I think is a fundamental problem in America. We're looking at these brilliant people who can organize a company and hire people and create technologies or otherwise improve our system, and we're saying to them, here is a hurdle. If you trip over this hurdle, you're down and out for the count.
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So, Mr. Eisenberg, actually, if you could respond to that. We are not talking here about doctors and malpractice litigation. We are talking about the people who are looking at the system and saying, I have got a great idea. I can employ people. I can improve the way the world functions. And yet if I get sued, I lose everything. If you could respond to that?
Mr. EISENBERG. I think, from just sort of a rigorous, hard core, analytical perspective, it is very difficult to link specific instances of legal——
Mr. CANNON. May I just object and refine the question because I agree with you. It is very hard to get data. But the data is the function of the question you ask.
What I am suggesting here, I don't think anybody has asked this question. So if you'll just deal with the concept, which is, is there a chilling going on that is negative, that hurts our society, that causes business not to grow as fast as it otherwise could?
Mr. EISENBERG. Here is the one datum I have in mind. We cut back on rule 11 in the early nineties. It was followed by the greatest peace time expansion in history.
Mr. CANNON. Mr. Howard, you appear to have a response to that.
Mr. HOWARD. There's a failure to appreciate—and in part, it comes from the fact that it is very hard to get data on this—the second-level effects of any change in the structure of a society. There's no question, because I am a lawyer and I represent small companies and big companies on a regular basis, that the legal system has created a series of barriers that significantly favor larger companies, because you have to be able to deal with a whole—not only regulatory barriers but now the cost, indeed, the inevitability of litigation.
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Mr. CANNON. I will cut you off, Mr. Howard, because my time is about to expire.
Let me just point out, I was doing business in the nineties and I suffered great pain in this regard. I think many other people suffered great gain. I think it is, despite the serious handicap that our legal system provides, that we actually did do great things in the nineties.
Now, we have a transformation. We build on a much higher platform. It is one of those defectors of entrepreneurialism that I think we need to focus on.
I thank the Chairman. I am a cosponsor of this bill, and I think that it will probably do good just to have the discussion. Hopefully, we actually implement it by passing legislation. I yield back the balance of my time.
Mr. SMITH. Thank you, Mr. Cannon.
The gentlewoman from Texas, Ms. Jackson Lee is recognized for questions.
Ms. JACKSON LEE OF TEXAS. I thank the distinguished Chairman for yielding. I thank the Committee for holding what is an important reflection. I think we meet this way on an annual basis in a continuing siege on the access of litigants to the courthouse.
Let me, Professor Eisenberg, let me engage you. I could spend my time with the other distinguished witnesses, engaging in one of my skills, cross examination, as a lawyer, but I think the key is to try to find the truth. And one-upmanship on adversaries at this point may not be the best approach to take to let me try to cull from you or pull from you pithy responses to what I think is the overall failing, the fatal flaw of where we were today.
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Let me just put on the record that I think this whole question of tort reform and the siege and overburden of the system, let me caution and say, I recognize that courts like mine, Southern District of Texas, there certainly are delays in getting to the courthouse, partly because in the Southern District, we have an enormous list of drug cases. So there are many reasons why civil plaintiffs, if you will, have a long line to wait behind.
And I also recognize that we have to bring some relief to our small businesses, and we work with our small businesses, and I think some of the points may be at the level of exaggeration.
But in any event, we have documentation that shows that, before a civil action that appeared before a jury in 2001, the median jury award was $37,000, and that represented a 43.1 percent decline over the last decade. Limiting that amount as to only tort cases, a median jury award stood at $28,000 as a result of a 56.3 percent decrease over the decade.
The false image that there are $1 million cases dropping every 5 minutes, quite contrary to the constituents that I represent, the 18th Congressional District, traditionally poor, traditionally working-class, middle-class, and take their heart in their hand when they go into a courthouse because most times they are poured out.
Our judges are elected. They are dominated by Republicans in the State of Texas, and I don't think there's a good day for plaintiffs most times in the State system. So in essence, there is a balance.
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My question to you would be, the application of rule 11 and the new legislation that we are proposing, is the crux of the matter the idea of frivolous lawsuits only or is the idea of increasing insurance rates that cannot be legitimized also a problem? And how would you respond to the legislation that proposes to make rule 11 mandatory?
Mr. EISENBERG. I'm concerned about it, again, I haven't had much time to study it, but I'm concerned about its raising the cost, potentially in every case, every case in which a defendant has enough money to fund a serious defense. Under section 3, upon motion, the trial court, every State court must decide whether the action affects interstate commerce.
Well, that could be one of the most complex factual inquiries we have. The Supreme Court has struggled with it and shifted gears on it over the years. That cost will go up substantially.
Ms. JACKSON LEE OF TEXAS. So there lies a cost surge that is supposed to bring about a cost decrease, but there may be a potential increase.
Mr. EISENBERG. The evidence is that, understandably, defendants litigate as well as they can once they decide to go to court and not settle. But, for example, they will litigate——
Ms. JACKSON LEE OF TEXAS. In the course of your answer, just because my time is short, can you answer that question regarding insurance rates versus frivolous lawsuits?
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Mr. EISENBERG. Well, I think it's been a theme of the hearings, we don't know the relationship between insurance rates and frivolous lawsuits. We have no idea that frivolous lawsuits are increasing. That's clear. And we have no evidence that insurance rates go down when you sanction attorneys. So I hope that is an answer.
Ms. JACKSON LEE OF TEXAS. You can finish your other point.
Mr. EISENBERG. The one point you raised about costs and delays in getting justice in the Southern District, one of the reasons Federal courts are a bit behind is because we have a, I think, documented trend in abuse by defendant removals. The defendant can stay any case simply by removing it to Federal court. It is an automatic stay.
We have, in my testimony, one case where a defendant removed a case wrongfully, not once, not twice, not three times, but four times, increasing the cost to both sides, a dead weight loss to the system, litigating over where we should sit around the table. And that type of abuse, I think, if you are going to address lawsuit abuse would be an important addition to the bill.
Ms. JACKSON LEE OF TEXAS. Undermining a vulnerable plaintiff because the plaintiff may invariably have less money than some defendants.
Mr. EISENBERG. Then the plaintiff's lawyer will ask for a bigger fee because the case was so complicated, and they will get hammered because they got a big fee when they were moved four times.
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Ms. JACKSON LEE OF TEXAS. And in essence, shuts the door to many litigants in the system?
Mr. EISENBERG. Yes, that's the game.
Ms. JACKSON LEE OF TEXAS. I thank the gentleman.
I yield back.
Mr. SMITH. Before we adjourn, I just want to make an observation. Maybe it's personal; maybe it's legal. I don't know. But it seems to me that, ultimately, people are more important than statistics. And I read a monograph in college—and I am not saying it is applicable here—but the title was, How to Lie with Statistics. We can always use statistics to prove almost everything.
It is important to use Mr. Watts' phrase a while ago: Not only to get the facts but to get the facts behind the facts. For example, I've been told that tort filings declined by 9 percent, and most all of that decline came in routine car crash lawsuits and that there was an 8 percent drop in filings in fiscal year 2003, primarily as a result of decreases in personal-injury, product-liability cases involving asbestos suits, because they had all been filed. In other words, that puts into context a lot of the figures that we might or might not have heard.
I think the main point—and, Mr. Schwartz, you brought it out—is that, basically, this is all irrelevant. We're not talking about the meritorious cases that need to be filed. We're talking about the frivolous lawsuits that have been filed by real people and against real people who have been hurt and damaged in the process. I think we need to get back to the point of the hearing which was the abusive nature of so many frivolous lawsuits.
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With that, let me thank the witnesses for their testimony today. It has been very informative and we stand adjourned.
Ms. WATERS. Mr. Chairman, I ask unanimous consent to submit the opening statement for the record.
[The information referred to was never received by the Committee at the time of press]
Mr. SMITH. We previously recognized all Members to do that, but in any account, we will be glad to do so.
Thank you.
[Whereupon, at 12:01 p.m., the Committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
PREPARED STATEMENT OF AMERICAN MEDICAL ASSOCIATION
The American Medical Association (AMA) appreciates the opportunity to express its views on approaches to limiting lawsuit abuse and applauds the Chairman and the Committee for holding a hearing on this important issue. Medical liability reform is the AMA's number one legislative priority and limiting lawsuit abuse through the reduction of meritless claims would be an important step toward reducing the soaring medical liability premiums that many physicians are forced to pay.
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Every time a lawsuit is filed, the physician and the physician's insurance company are forced to expend considerable resources to defend the suit regardless of whether or not the case actually has merit. Even though experts have found that nearly 70% of all lawsuits are dismissed before trial, the average cost to defend a claim that ultimately gets dropped or dismissed is approximately $24,669 per lawsuit.(see footnote 38) For those cases that actually go to trial, including the 7% of claims that go to a jury verdict, physician defendants prevailed 82.4% of the time.(see footnote 39) However, the cost to defend those cases averages $91,803.(see footnote 40)
The costs add up significantly when nearly every physician in the U.S. can expect to be sued at some point in his or her career. A recent study of South Florida physicians found that physicians across all specialties were sued an average of 1.10 times during their career while physicians in high-risk specialties, such as neurosurgeons, were sued an average of 4.5 times during their careers.(see footnote 41)
Findings have shown that approximately 80% of medical liability claims show no signs of a negligent injury.(see footnote 42) One of the authors of the ''Harvard Study,'' Troyen A. Brennan, along with two colleagues, conducted a follow-up study in 1996.(see footnote 43) They found that the only significant predictor of payment to medical liability plaintiffs in the form of a jury verdict or a settlement was disability, and not the presence of an adverse event due to negligence.(see footnote 44)
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A Harris interactive study conducted in 2002 illustrates just how detrimental the litigious nature of our society is to physicians and other health care professionals. This study reveals the extent to which the fear of litigation affects the practice of medicine and the delivery of health care. Specifically, the study found that three-fourths (76%) of physicians believe that concern about medical liability litigation has negatively affected their ability to provide quality care in recent years.(see footnote 45) Additionally, the study found that a majority of physicians (59%) believe that the fear of liability discourages open discussion and thinking about ways to reduce health care error.(see footnote 46)
Physicians and their insurance companies are not the only ones paying the price for having to defend meritless lawsuits. The federal government has reported that:
The cost of the excesses of the litigation system are reflected in the rapid increases in the cost of liability insurance coverage. Premiums are spiking across all specialties in 2002. When viewed alongside previous double-digit increases in 2000 and 2001, the new information further demonstrates that the litigation system is threatening health care quality for all Americans as well as raising the costs of health care for all Americans.(see footnote 47)
Patients are further impacted when their access to critical services are reduced due to physicians paring back services or relocating their practices in order to avoid the high premiums required to insure themselves against medical liability claims. Additionally, in 2002, the American Hospital Association reported that more than one-fourth of the nation's hospitals reported either a curtailment or complete discontinuation of at least one service as a result of liability premium expenses growing by over 100%.(see footnote 48)
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The crisis facing our nation's medical liability system has not waned—in fact, it is getting worse. Escalating jury awards and the high cost of defending against lawsuits, even meritless ones, have caused medical liability insurance premiums to reach unprecedented levels. Just recently, the AMA added another state, Massachusetts, to its list of states in crisis due to the effects of rising medical liability costs—putting the number at 20.
The AMA agrees with the findings of the Joint Economic Committee from its study in May 2003, where it stated that ''reform of the medical liability system could yield significant benefits that could:
Yield significant savings on health care spending;
Reduce unnecessary tests and treatments motivated out of fear of litigation;
Encourage systematic reform efforts to identify and reduce medical errors;
Halt the exodus of doctors from high-litigation states and specialties;
Improve access to health care, particularly benefiting women, low-income individuals and rural residents;
Produce $12.1 billion to $19.5 billion in annual savings for the federal government; and
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Increase the number of Americans with health insurance by up to 3.9 million people.''(see footnote 49)
The AMA again thanks the Chairman for holding this hearing and looks forward to the opportunity to work with the Committee to identify new ways to reduce lawsuit abuse and to achieve these important goals for the country.
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PREPARED STATEMENT OF THE HONORABLE ELTON GALLEGLY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Thank you for holding this important hearing, Mr. Chairman. Newsweek recently ran a story that painted a picture of a nation held hostage by fear of frivolous lawsuits: ministers afraid to counsel their flock, teachers afraid to discipline, doctors afraid of tending to the ill. They are not afraid they are wrong, mind you. Nor are they afraid they are not being careful enough. They are afraid that an opportunist could file a lawsuit against them that, though it has no merit, would subject them to thousands and thousands of dollars in legal fees to defend themselves. It is a problem that dominates modern culture.
Of course meritorious claims should see their day in court, but frivolous lawsuits and the threat of frivolous lawsuits should not hold Americans hostage and keep them from doing their jobs. The rest of us should not be burdened with the cost of frivolous lawsuits in higher taxes, higher prices, and higher insurance rates, either.
I am looking forward to the testimony of the witnesses and their ideas about ways to legislatively curb these abuses of the legal system.
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Thank you, Mr. Chairman. I yield back my time.
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(Footnote 1 return)
''Small Business Problems and Priorities,'' Bruce D. Phillips, NFIB Research Foundation. (June 2004).
(Footnote 2 return)
''Small Business Problems and Priorities,'' William J. Dennis, Jr., NFIB Education Foundation (May 2000).
(Footnote 3 return)
''Small Business Problems and Priorities,'' (June 2004), at 7.
(Footnote 4 return)
''U.S. Tort Costs: 2003 Update, Trends and Findings on the Costs of the U.S. Tort System,'' Tillinghast-Towers Perrin, 2003.
(Footnote 5 return)
Id. at 7–8.
(Footnote 6 return)
NFIB National Small Business Poll, ''Liability,'' William J. Dennis, Jr., NFIB Research Foundation Series Editor, Vol. 2, Issue 2 (2002).
(Footnote 7 return)
Id. at 1.
(Footnote 8 return)
NFIB National Small Business Poll, ''Business Insurance,'' William J. Dennis, Jr., NFIB Research Foundation Series Editor, Vol. 2, Issue 7 (2002).
(Footnote 9 return)
Letter dated March 11, 2004 from Joseph R. Compoli, Jr., Attorney at Law, to Custom Tool & Gage, Inc.
(Footnote 10 return)
The NFIB Small Business Growth Agenda for the 108th Congress, at 15.
(Footnote 11 return)
Testimony of Ms. Hilda Bankston before the United States Senate Committee on the Judiciary, ''Class Action Litigation,'' (July 31, 2002).
(Footnote 12 return)
Id.
(Footnote 13 return)
Fed. R. Civ. P. 11(a).
(Footnote 14 return)
Id. at 11(b).
(Footnote 15 return)
Id. at 11(c)(1)(A).
(Footnote 16 return)
Federal Judicial Center, Final Report on Rule 11 to the Advisory Committee on Civil Rules of the Judicial Conference of the United States, May 1991.
(Footnote 17 return)
See id.
(Footnote 18 return)
See id.
(Footnote 19 return)
Amendments to Federal Rules of Civil Procedure and Forms, 146 F.R.D. 401, 523 (1993).
(Footnote 20 return)
Id. at 401 (1993) (transmittal letter).
(Footnote 21 return)
Id. at 505 (Statement of White, J.).
(Footnote 22 return)
Id. at 507–08 (Scalia, joined by Thomas, J.J., dissenting).
(Footnote 23 return)
See 28 U.S.C. §2074(a) (providing that the Supreme Court transmits to Congress proposed rules by May 1, and that such rules take effect no earlier than December 1 of that year unless otherwise provided by law).
(Footnote 24 return)
See H.R. 2979 and S. 1382, 103rd Cong., 1st Sess. (1993).
(Footnote 25 return)
Attorney Accountability Act of 1995, H.R. 988, §4, 104th Cong, 1st Sess. (1995).
(Footnote 26 return)
See, e.g., Cynthia A. Leiferman, The 1993 Rule 11 Amendments: The Transformation of the Venomous Viper into the Toothless Tiger, 29 TORT & INS. L. J. (Spring 1994) (concluding that ''[o]n balance, the changes made appear likely to undermine seriously the deterrent effect of the rule'').
(Footnote 27 return)
Role No. 207, 104th Cong., 1st Sess. (Mar. 7, 1997) (passed by a recorded vote of 232–193). The Senate did not act on H.R. 988.
(Footnote 28 return)
See H. REP. NO. 104–62, at 33 (dissenting views).
(Footnote 29 return)
Fed. R. Civ. Proc. 11(b)(1).
(Footnote 30 return)
Id. 11(b)(2).
(Footnote 31 return)
Id. 11(b)(4).
(Footnote 32 return)
Id. 11(b)(2). Some have argued that the manner in which judges implemented the pre-1993 version of Rule 11 disproportionately impacted civil rights plaintiffs. Even if this was initially the case, by 1988, a survey conducted by the Federal Judicial Center as well as other scholarship demonstrated that courts were construing Rule 11 more favorably to most litigants and practitioners, especially civil rights plaintiffs. See Carl Tobias, Reconsidering Rule 11, 46 U. MIAMI L. REV. 855, 860–61, 864–65 (1992) (citing Thomas Willging, Deputy Research Director of the Federal Judicial Center, Statement at Advisory Committee Meeting, Washington, D.C. (May 23, 1991); Elizabeth Wiggins et al., Rule 11: Final Report to Advisory Committee on Civil Rules of the Judicial Conference of the United States, §1D, at 1 (Federal Judicial Ctr. 1991)). This led even some critics with ''the general impression that Rule 11's implementation was not as problematic as many civil rights plaintiffs and attorneys had contended.'' Tobias, supra, at 864–65
(Footnote 33 return)
Id. at 508.
(Footnote 34 return)
For example, when Minnesota revised its own Rule 11 to conform to the 1993 amendment of the federal rule, the state advisory committee commented:
(Footnote 35 return)
American Tort Reform Association, ''Bringing Justice to Judicial Hellholes 2003'' at ix, available at <http://www.atra.org/reports/hellholes/report.pdf>.
(Footnote 36 return)
Richard Nealey, The Product Liability Mess: How Business Can Be Rescued From the Politics of State Courts, 462 (1998).
(Footnote 37 return)
Asbestos for Lunch, Panel Discussion at the Prudential Securities Financial Research and Regulatory Conference, (May 9, 2002), in Industry Commentary (Prudential Securities, Inc., N.Y., New York) June 11, 2002, at 5.
(Footnote 38 return)
U.S. Department of Health and Human Services, July 24, 2002.
(Footnote 39 return)
PHYSICIAN INSURERS ASS'N OF AM., PIAA CLAIM TREND ANALYSIS: 2002 ed. (2003), exhibit 6a.
(Footnote 40 return)
Lori A. Bartholomew of PIAA, Remarks to the Am. Coll. Of Radiology (May 13, 2003).
(Footnote 41 return)
Floridians for Quality Affordable Healthcare, Physician Professional Liability Survey, December, 2002, Conducted by RCH Healthcare Advisors, LLP.
(Footnote 42 return)
Id.
(Footnote 43 return)
Troyen A. Brennan, Colin M. Sox & Helen R. Burstin, Relation between Negligent Adverse Events and the Outcomes of Medical-Malpractice Litigation, 335 N. Eng. J. Med. 1963 (1996).
(Footnote 44 return)
Id.
(Footnote 45 return)
harrisInteractive Inc., Common Good, Common Good Fear of Litigation Study: The Impact on Med. 65 (2002), available at http://ourcommongood.com/library/download/litrprt.pdf?item—id=10032 (last visited Feb. 12, 2004).
(Footnote 46 return)
Id.
(Footnote 47 return)
See OFFICE OF THE ASSISTANT SEC'Y FOR PLANNING AND EVALUATION, U.S. DEP'T OF HEALTH AND HUMAN SERVS., UPDATE ON THE MEDICAL LITIGATION CRISIS: NOT THE RESULT OF THE ''INSURANCE CYCLE'' (2002), available at http://heal-fl-health-carepdf.netcomsus.com/resources—update—report.doc (last visited Feb. 3, 2004).
(Footnote 48 return)
American Hospital Association and the American Society of Hospital Risk Management study, statement by AHA before the Federal Trade Commission, September 9–10, 2002.
(Footnote 49 return)
LIABILITY FOR MEDICAL MALPRACTICE: ISSUES AND EVIDENCE, A Joint Economic Committee Study for the Joint Economic Committee, United States Congress, May 2003.