[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
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 JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
CHRIS CANNON, Utah SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona ANTHONY D. WEINER, New York
MIKE PENCE, Indiana ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
C O N T E N T S
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JUNE 22, 2004
OPENING STATEMENT
Page
The Honorable Lamar Smith, a Representative in Congress From the
State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 1
The Honorable John Conyers, Jr., a Representative in Congress
From the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 3
WITNESSES
Mr. Philip K. Howard, Chair, Common Good
Oral Testimony................................................. 5
Prepared Statement............................................. 6
Ms. Karen R. Harned, Executive Director, National Federation of
Independent Business Legal Foundation
Oral Testimony................................................. 8
Prepared Statement............................................. 9
Professor Theodore Eisenberg, Henry Allen Mark Professor of Law,
Cornell Law School
Oral Testimony................................................. 15
Prepared Statement............................................. 17
Mr. Victor E. Schwartz, General Counsel, American Tort Reform
Association
Oral Testimony................................................. 43
Prepared Statement............................................. 44
APPENDIX
Material Submitted for the Hearing Record
Statement from the U.S. Chamber of Commerce...................... 76
Statement from the American Medical Association.................. 85
American Tort Reform Association, Bringing Justice to Judicial
Hellholes 2003, submitted by witness Victor Schwartz........... 87
Prepared Statement of the Honorable Elton Gallegly, a
Representative in Congress From the State of California........ 131
Letter from Public Citizen organization to Judiciary Committee
Chairman F. James Sensenbrenner, Jr............................ 132
Letter from the American Bar Association to Chairman
Sensenbrenner.................................................. 134
Letter from witness Victor Schwartz to Chairman Sensenbrenner in
response to Public Citizen letter.............................. 136
Letter with attachments from witness Karen R. Harned to Chairman
Sensenbrenner.................................................. 141
Journal of Harvard Law and Public Policy article submitted by
witness Victor Schwartz........................................ 176
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.
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.
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.
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.''
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.
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.
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.
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.
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.
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:]
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.
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?
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.
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.''
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.
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.
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.''
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.
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
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.\1\ The only problem ranked higher is rising health-care
costs.
---------------------------------------------------------------------------
\1\ ``Small Business Problems and Priorities,'' Bruce D. Phillips,
NFIB Research Foundation. (June 2004).
---------------------------------------------------------------------------
This number two ranking represents a significant increase from the
thirteenth position it held in the 2000 ``Small Business Problems and
Priorities'' survey.\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.\3\ With a dramatic rise
in the cost of lawsuits, \4\ it is not surprising that many small-
business owners `fear' getting sued, even if a suit is not filed.'' \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.\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.\7\
---------------------------------------------------------------------------
\2\ ``Small Business Problems and Priorities,'' William J. Dennis,
Jr., NFIB Education Foundation (May 2000).
\3\ ``Small Business Problems and Priorities,'' (June 2004), at 7.
\4\ ``U.S. Tort Costs: 2003 Update, Trends and Findings on the
Costs of the U.S. Tort System,'' Tillinghast-Towers Perrin, 2003.
\5\ Id. at 7-8.
\6\ NFIB National Small Business Poll, ``Liability,'' William J.
Dennis, Jr., NFIB Research Foundation Series Editor, Vol. 2, Issue 2
(2002).
\7\ Id. at 1.
---------------------------------------------------------------------------
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.
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.\8\ Many small-business owners understand this
dynamic, and as a result, will settle claims without notifying their
insurance carriers.
---------------------------------------------------------------------------
\8\ NFIB National Small Business Poll, ``Business Insurance,''
William J. Dennis, Jr., NFIB Research Foundation Series Editor, Vol. 2,
Issue 7 (2002).
---------------------------------------------------------------------------
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.
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.
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.
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.
______
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.\9\
---------------------------------------------------------------------------
\9\ Letter dated March 11, 2004 from Joseph R. Compoli, Jr.,
Attorney at Law, to Custom Tool & Gage, Inc.
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.''
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.''
\10\
---------------------------------------------------------------------------
\10\ The NFIB Small Business Growth Agenda for the 108th Congress,
at 15.
---------------------------------------------------------------------------
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.
``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.
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.
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.\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.'' \12\
---------------------------------------------------------------------------
\11\ Testimony of Ms. Hilda Bankston before the United States
Senate Committee on the Judiciary, ``Class Action Litigation,'' (July
31, 2002).
\12\ Id.
---------------------------------------------------------------------------
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.
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.\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:]
---------------------------------------------------------------------------
\13\ Fed. R. Civ. P. 11(a).
(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.'' \14\
---------------------------------------------------------------------------
\14\ Id. at 11(b).
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.\15\
---------------------------------------------------------------------------
\15\ Id. at 11(c)(1)(A).
---------------------------------------------------------------------------
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
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.
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.
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.
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
Mr. Smith. Thank you, Mr. Eisenberg.
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.
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.
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.
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.
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.
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.\1\ Eighty percent found that the prior
rule had an overall positive effect and should not be changed.\2\
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.\3\ 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.'' \4\ The
Advisory Committee has made many sound decisions, but it did not do so
when it revised Rule 11 in 1993.
---------------------------------------------------------------------------
\1\ 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.
\2\ See id.
\3\ See id.
\4\ Amendments to Federal Rules of Civil Procedure and Forms, 146
F.R.D. 401, 523 (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.'' \5\ 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.'' \6\ 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.'' \7\ The bottom line is that the
Supreme Court corrective against unsound rule changes did not work in
this instance.
---------------------------------------------------------------------------
\5\ Id. at 401 (1993) (transmittal letter).
\6\ Id. at 505 (Statement of White, J.).
\7\ Id. at 507-08 (Scalia, joined by Thomas, J.J., dissenting).
---------------------------------------------------------------------------
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.'' \8\ 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.\9\
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\8\ See 28 U.S.C. Sec. 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).
\9\ See H.R. 2979 and S. 1382, 103rd Cong., 1st Sess. (1993).
---------------------------------------------------------------------------
Shortly after the revised Rule 11 took effect, Congress attempted
to repeal the Federal Rules Advisory Committee's action to weaken Rule
11.\10\ By that time, some practitioners had already referred to the
new Rule 11 as a ``toothless tiger.'' \11\ The repeal passed the
House.\12\ Those opposing the bill, however, felt that there had not
yet been adequate time to determine the effectiveness of the amended
rule in practice.\13\
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\10\ Attorney Accountability Act of 1995, H.R. 988, Sec. 4, 104th
Cong, 1st Sess. (1995).
\11\ 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'').
\12\ 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.
\13\ See H. REP. NO. 104-62, at 33 (dissenting views).
---------------------------------------------------------------------------
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.'' \14\ They also include claims that are not ``warranted by
existing law'' \15\ or those with an absence of factual or evidentiary
basis.\16\ 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.'' \17\ 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.
---------------------------------------------------------------------------
\14\ Fed. R. Civ. Proc. 11(b)(1).
\15\ Id. 11(b)(2).
\16\ Id. 11(b)(4).
\17\ 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, Sec. 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
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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.\18\
---------------------------------------------------------------------------
\18\ Id. at 508.
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.\19\ 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.
---------------------------------------------------------------------------
\19\ For example, when Minnesota revised its own Rule 11 to conform
to the 1993 amendment of the federal rule, the state advisory committee
commented:
GWhile 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.
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.
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.'' \20\ 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,
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\20\ American Tort Reform Association, ``Bringing Justice to
Judicial Hellholes 2003'' at ix, available at .
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.\21\
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\21\ Richard Nealey, The Product Liability Mess: How Business Can
Be Rescued From the Politics of State Courts, 462 (1998).
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.\22\
---------------------------------------------------------------------------
\22\ 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.
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.
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.
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.
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.
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.
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?
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]
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.
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?
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.
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?
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.
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.
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?
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.
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?
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.
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.
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----
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.''
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?
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.
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.
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.
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.
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.
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----
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?
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.
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.
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.
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.
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.
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.
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----
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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?
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.
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.
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
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Material Submitted for the Hearing Record
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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.
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.\1\ 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.\2\
However, the cost to defend those cases averages $91,803.\3\
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\1\ U.S. Department of Health and Human Services, July 24, 2002.
\2\ PHYSICIAN INSURERS ASS'N OF AM., PIAA CLAIM TREND ANALYSIS:
2002 ed. (2003), exhibit 6a.
\3\ Lori A. Bartholomew of PIAA, Remarks to the Am. Coll. Of
Radiology (May 13, 2003).
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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.\4\
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\4\ Floridians for Quality Affordable Healthcare, Physician
Professional Liability Survey, December, 2002, Conducted by RCH
Healthcare Advisors, LLP.
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Findings have shown that approximately 80% of medical liability
claims show no signs of a negligent injury.\5\ One of the authors of
the ``Harvard Study,'' Troyen A. Brennan, along with two colleagues,
conducted a follow-up study in 1996.\6\ 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.\7\
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\5\ Id.
\6\ 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).
\7\ Id.
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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.\8\ 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.\9\
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\8\ 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).
\9\ Id.
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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.\10\
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\10\ 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).
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%.\11\
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\11\ American Hospital Association and the American Society of
Hospital Risk Management study, statement by AHA before the Federal
Trade Commission, September 9-10, 2002.
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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
Increase the number of Americans with health
insurance by up to 3.9 million people.'' \12\
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\12\ LIABILITY FOR MEDICAL MALPRACTICE: ISSUES AND EVIDENCE, A
Joint Economic Committee Study for the Joint Economic Committee, United
States Congress, May 2003.
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
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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.
Thank you, Mr. Chairman. I yield back my time.
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