[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

                              ----------                              

                             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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
       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,
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \4\ Floridians for Quality Affordable Healthcare, Physician 
Professional Liability Survey, December, 2002, Conducted by RCH 
Healthcare Advisors, LLP.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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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