    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                  SMALL BUSINESS LIABILITY REFORM (H.R. 2813)

    =======================================================================

                                    HEARING

                                   before the

                SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

                                     of the

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                         WASHINGTON, DC, JULY 22, 2004

                                   __________

                               Serial No. 108-76

                                   __________

             Printed for the use of the Committee on Small Business

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     house

                                     ______

                        U.S. GOVERNMENT PRINTING OFFICE
    97-092                      WASHINGTON : 2005
    _____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800
    Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                          COMMITTEE ON SMALL BUSINESS

                     DONALD A. MANZULLO, Illinois, Chairman

    ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
    Chairman                             JUANITA MILLENDER-McDONALD,
    SUE KELLY, New York                    California
    STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
    PATRICK J. TOOMEY, Pennsylvania      ENI FALEOMAVAEGA, American Samoa
    JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
    SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
    EDWARD SCHROCK, Virginia             GRACE NAPOLITANO, California
    TODD AKIN, Missouri                  ANIBAL ACEVEDO-VILA, Puerto Rico
    SHELLEY MOORE CAPITO, West Virginia  ED CASE, Hawaii
    BILL SHUSTER, Pennsylvania           MADELEINE BORDALLO, Guam
    MARILYN MUSGRAVE, Colorado           DENISE MAJETTE, Georgia
    TRENT FRANKS, Arizona                JIM MARSHALL, Georgia
    JIM GERLACH, Pennsylvania            MICHAEL MICHAUD, Maine
    JEB BRADLEY, New Hampshire           LINDA SANCHEZ, California
    BOB BEAUPREZ, Colorado               BRAD MILLER, North Carolina
    CHRIS CHOCOLA, Indiana               G.K. BUTTERFIELD, North Carolina
    STEVE KING, Iowa                     [VACANCY]
    THADDEUS McCOTTER, Michigan

                      J. Matthew Szymanski, Chief of Staff

              Phil Eskeland, Policy Director/Deputy Chief of Staff

                      Michael Day, Minority Staff Director

                SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

    EDWARD L. SCHROCK, Virginia          G.K. BUTTERFIELD, North Carolina
    Chairman                             Ranking Member
    ROSCOE G. BARTLETT, Maryland         DONNA M. CHRISTENSEN, Virgin
    SUE W. KELLY, New York               Islands
    TRENT FRANKS, Arizona                ENI F. H. FALEOMAVAEGA, American
    JEB BRADLEY, New Hampshire           Samoa
    STEVE KING, Iowa                     ANIBAL ACEVEDO-VILA, Puerto Rico
    THADDEUS G. McCOTTER, Michigan       ED CASE, Hawaii
                                         DENISE L. MAJETTE, Georgia

                  Rosario Palmieri, Senior Professional Staff

                                      (ii)

                                C O N T E N T S

                                  ----------

                                   Witnesses

                                                                       Page
    Chabot, Hon. Steve, U.S. House of Representatives (OH-1).........     4
    Rickard, Ms. Lisa A., President, Institute for Legal Reform, U.S.
      Chamber of Commerce............................................     6
    Cavey, Mr. Chris, Nationwide Insurance...........................     8
    Wagner, Ms. Jo, CTO, Inc.........................................    10
    Doroshow, Ms. Joanne, Executive Director, Center for Justice &
      Democracy......................................................    12
    Schwartz, Mr. Victor, General Counsel, American Tort Reform
      Association....................................................    14

                                    Appendix

    Prepared statements:
        Chabot, Hon. Steve, U.S. House of Representatives (OH-1).....    25
        Rickard, Ms. Lisa A., President, Institute for Legal Reform,
          U.S. Chamber of Commerce...................................    28
        Cavey, Mr. Chris, Nationwide Insurance.......................    35
        Wagner, Ms. Jo, CTO, Inc.....................................    39
        Doroshow, Ms. Joanne, Executive Director, Center for Justice
          & Democracy................................................    44
        Schwartz, Mr. Victor, General Counsel, American Tort Reform
          Association................................................    59

                                     (iii)

                        SMALL BUSINESS LIABILITY REFORM

                                  ----------

                            THURSDAY, JULY 22, 2004

                      House of Representatives,
       Subcommittee on Regulatory Reform and Oversight,
                                    Committee on Small Business
                                                       Washington, D.C.
        The Subcommittee met, pursuant to call, at 2:05 p.m. in
    Room 311, Cannon House Office Building, Hon. Edward L. Schrock
    [chairman of the Subcommittee] presiding.
        Present: Representatives Schrock, Kelly, Velazquez and
    Christensen.

        Chairman Schrock. Let us go ahead and begin our hearing. We
    are glad to have Congressman Chabot here.
        Our hearing today addresses the cost of tort liability to
    the small business community. Tort liability has become a cost
    of doing business in the United States that makes us less
    competitive. One study puts the cost at 4.5 percent of
    manufacturing output. That is four times as much as those in
    Canada, the United Kingdom and Japan.
        It has been as much as eight times as high as those in
    Mexico, Taiwan, South Korea or China. Other nations have far
    better and less costly tort systems. A study sponsored by the
    U.S. Chamber shows the cost of tort liability for small
    businesses in America is $88 billion a year. Small business
    bear a disproportionate share of the total tort liability
    burden. Although taking in only 25 percent of business revenue,
    they face 68 percent of the tort costs. The average liability
    cost for small businesses is $15 per $1,000 of revenue, while
    large corporations average $5.39 per $1,000 of revenue.
        Reducing the cost of tort liability is clearly an issue of
    great importance to small businesses. The president has made
    ending lawsuit abuse a cornerstone of his plan for economic
    recovery. In a speech in Mississippi he said, and I quote,
    ``Junk and frivolous lawsuits can ruin an honest business.
    Listen,'' he said, ``small businesses are the backbone of our
    society. Most new jobs are created by small businesses. And
    when you have junk and frivolous lawsuits that could completely
    wipe out a small business hanging over the heads of small
    business people it doesn't help. It hurts economic vitality and
    economic growth.''
        The president clearly sees the threat of frivolous lawsuits
    and our current tort system to the strength of the American
    economy. It is incumbent upon Congress to vigorously reform the
    system.
        We are fortunate today to have Ohio Congressman Steve
    Chabot with us. I can say without question there are few
    members of this chamber, this Congress, who could rival his
    commitment to restoring common sense to our legal system and
    protecting small business. We are anxious to hear from him
    today and lucky that he could be here with us.
        It is important to remember that small businesses generate
    nearly 80 percent of the new jobs each year in this country and
    account for 50 percent of its total payroll--total private
    payroll, and recently they have been critical to our economy.
    From 2000 to 2001 small businesses created 100 percent of the
    net new jobs. Every effort should be made to protect and
    encourage small business development.
        I would like to thank the congressman for being here as
    well as those who will follow him. I feel we have two
    exceptional panels of witnesses before us and I look forward to
    all their testimony.
        Before we go to Congressman Chabot I would like to yield to
    Ms. Velazquez for any comments she might have.

        Ms. Velazquez. Thank you, Mr. Chairman.
        Today we will examine the liability costs of small
    businesses. Congressman Chabot, I appreciate your taking the
    time to be here to discuss the Small Business Liability Reform
    Act which you introduced last year. Given that you have taken a
    lead on this issue I look forward to hearing your observations
    on this matter.
        We have all heared the arguments on the need for tort
    reform, the costs to taxpayers and the costs of rising
    premiums. We need to work in a bipartisan manner to get the
    heart of this program and formulate solutions that meet the
    needs of our nation's small businesses and consumers. Any
    wholesale changes to our legal system must be based on
    independent empirical data, not just the emotion of the issue.
    In my time on the Committee, I have heard many compelling
    stories but have seen little compelling data. In fact, my
    review of the Bureau of Justice statistics and National Center
    for State Courts concerns an across-the-board 10-year decline
    in tort filings and awards.
        When addressing policy changes, Members of Congress have
    the responsibility to ensure that decisions are based on
    unbiased information and evidence. I hope today's hearing will
    provide an opportunity to separate the hard facts from
    perceptions. In order to move forwards, we must first pinpoint
    the systematic problems that are hurting our nation's small
    businesses. Armed with this knowledge we can then cross-target
    solutions and ensure that we do not create unintended, long-
    term consequences that will harm small businesses.
        I am concerned that if we do not have a better handle on
    what our small businesses need, we will end up with policies
    that offer them no help. In the zeal to help our nation's
    entrepreneurs, we have seen several bills move through this
    body that were represented as small business relief. In reality
    the lion's share of benefits went to large corporations, and
    small businesses received just a fraction.
        The consequences for small businesses and consumers are far
    too serious to repeat this pattern with liability reform.
    NFIB's own surveys and independent polls all show tort reform
    is not a high priority for small businesses. So let us slow
    down and figure out what is really going on. Once the liability
    needs of our nation's small businesses are adequately assessed,
    balanced policy reforms can be pursued.
        In the meantime we should focus on health insurance, tax
    reform, work force issues and regulatory relief. These are the
    issues that consistently rank as the top concerns for U.S.
    small companies and are where we can have the most impact in
    supporting the growth of our nation's small business owners.
        With that I thank the Chairman and I look forward to the
    testimony of our witnesses.

        Chairman Schrock. Thank you, Ms. Velazquez. Would Dr.
    Christensen like to have an opening statement?

        Ms. Christensen. Thank you, Chairman Schrock. I am really
    glad that the Subcommittee is holding this hearing to look at
    the merits of H.R. 2813, the Small Business Liability Reform
    Act. Reportedly, small businesses bear significant share of the
    costs of U.S. tort liability, $88 billion annually. But what I
    would like to also find out is what percentage is that when one
    considers all businesses and how much of that is due to
    personal injury suits. Also, what kinds of businesses are
    included in that report?
        For example, if health-related businesses are included and
    we consider them small businesses I think that would
    significantly skew the results of the study. But whatever the
    costs and the make-up of the businesses, if small businesses do
    bear a disproportionate burden of liability costs or if
    liability costs are significantly burdening them, regardless of
    the proportion of the costs or relationship to the larger
    corporations, it is something that this Committee needs to look
    at, examine thoroughly and fashion a remedy for. But caps have
    not proven to be an effective approach.
        I really want to commend Representative Chabot for his
    effort to provide tort reform for small businesses. But the
    bill does raise several concerns, including what is the
    definition of small business, its caps on punitive damages,
    limits on non-economic awards, and preemption in some cases of
    state law.
        Other portions of the legislation really provide no
    protection for the injured. In fact, the injured party under
    this bill appears to be less protected.
        It in fact reminds me a lot of what we went through on
    malpractice reform. And I would wonder since there is no clear
    definition of which small business needs are covered, if this
    is not another approach to achieving malpractice tort reform
    without really calling it that. But as a physician I do share--
    I would not want to say that malpractice reform is not needed.
    I think I share the same concern in that case that I share,
    that I have for small business where relief is needed. But I
    really do not think that caps are the answer. What we really
    need to do in both cases is to really take a comprehensive
    approach that includes the assessments of what the causes are
    for the increasing premiums and the increasing costs that are
    incurred by small businesses in this case and really do a bill
    that addresses each one of those issues, look at the cause and
    craft some remedies that really get to the bottom of it.
        But I am interested to hear the testimony today and to hear
    from our colleagues and see if this bill can in some fashion
    address some of the issues that small businesses are facing.

        Chairman Schrock. Thank you, Doctor.
        Congressman Chabot is the chairman of the Subcommittee on
    the Constitution, also a member of the Small Business
    Committee. And as soon as he does his testimony he has to
    return to the Floor. He is speaking on legislation and he has
    to get back.
        So with that, the floor is yours, Steve.

        STATEMENT OF THE HONORABLE STEVE CHABOT, U.S. HOUSE OF
                         REPRESENTATIVES (OH-1)

        Mr. Chabot. Thank you very much, Mr. Chairman. It is
    certainly a pleasure to be here this afternoon. And as you
    mentioned, I am not going to be able to stick around after my
    testimony because I am going to have to get to the floor. We
    are involved in fairly non-controversial issues, gay marriage.
    So obviously it is a very involved issue and they are debating
    it as I speak. So I am going to try to keep my testimony fairly
    concise. And I appreciate the members here and I appreciate the
    remarks that I did hear. And thank you for giving me the
    opportunity to appear before the Subcommittee this afternoon on
    behalf of H.R. 2813, the Small Business Liability Reform Act.
        This legislation was first introduced back in the 106th
    Congress--this, by the way, is the 108th Congress that we are
    in now--by our former colleague, Congressman Jim Rogan of
    California and was passed in the House on February 16 of the
    year 2000 by a 221 to 193 margin. It was not considered in the
    last Congress, the 107th. I reintroduced the bill in this
    Congress, the 108th, along with my democratic colleague Ken
    Lucas from across the Ohio River. Ken, of course, is Kentucky
    and I am Ohio. So we introduced this together. So it is a
    bipartisan piece of legislation.
        The frequency and high cost of litigation is a matter of
    growing concern to small businesses across the country. Today's
    civil justice system presents a significant disincentive to
    business start-ups and to continued operations of existing
    businesses already in existence. The litigation costs and
    excessive judgments affecting small businesses have escalated
    out of control, destroying lives and businesses and affecting
    communities both in and out-of-state.
        Small business employ after all nearly 60 percent of the
    American workforce. Further, more than 60 percent of small
    business owners make less than $50,000. A lot of the public
    thinks that you are the owner of a business, you are a wealthy
    individual. That is clearly not the case. It is in some
    circumstances but in more than half it is not.
        Small business owners know that if they are sued they will
    have to choose between a long and costly trial or an oftentimes
    expensive settlement. Either choice significantly impacts the
    operations of a business and the livelihood of its employees.
    And I think that is something that oftentimes gets lost in
    these, especially by some of my, I think some of my folks that
    may disagree philosophically with tort reform and some other
    things that when a business goes down the drain because of a
    lawsuit it is the employees, the little guys and the little
    gals that are oftentimes hurt the most when that business goes
    under. Most business decisions today are made with this new
    reality in mind. These decisions ultimately affect the hiring
    of new employees, improving existing products or introducing
    new ones. And they also involve long-term planning.
        H.R. 2813, this bill, helps remedy this situation. It is
    not the solution to it but it is I think a first step.
        The Small Business Liability Reform Act is after all, as I
    mentioned, a bipartisan bill that would make the necessary
    reforms that have been at the forefront of the small business
    community's agenda for a number of years now.
        Under Title I, the bill would limit punitive damages to
    $250,000, a quarter of a million dollars, or three times the
    amount awarded to a claimant for economic and non-economic
    losses, in other words what lawyers refer to as compensatory
    damages. It would also eliminate joint and several liability
    for non-economic losses, instead making defendants responsible
    for an amount consistent with the harm contributed. And it
    would also preserve a state's right to legislate intrastate, in
    other words within the state, disputes by allowing a state to
    elect out of the statute if all the parties to the lawsuit are
    citizens of that particular state.
        These changes protect small businesses from being
    unnecessarily punished unless it is established that the
    conduct that has occurred warrants such a penalty. And it
    protects small businesses and individual defendants from being
    liable for non-economic damages that they did not cause. In
    addition, this bill would make certain reforms for product
    sellers and distributors other than manufacturers. The chain of
    distribution of a product provides plaintiffs with wide choice
    of defendants, including sellers and distributors, who may
    never have physical control over a product from which to join
    in a product liability lawsuit.
        Under Title II, product sellers and distributors would be
    held liable for injuries caused by defective products only if,
    number one, the seller was negligent; two, the seller breached
    an express warranty or; three, the manufacturer was judgment
    proof. These reforms would reduce the exposure that sellers and
    distributors face in the product's so called ``chain of
    distribution.''
        Mr. Chairman, reform is needed to protect small businesses,
    promote the flow of goods across state boundaries, and inject
    fairness into a legal system that is escalating out of control.
    While pursuing these reforms, we must be cognizant of and
    protect the rights of those plaintiffs with legitimate claims.
    And I believe that this bill accomplishes both.
        Mr. Chairman, I want to thank you again for holding today's
    hearing. And I thank my colleagues on the Subcommittee for
    giving me the opportunity to speak on this important issue. And
    I want to once again thank my colleague Ken Lucas for his
    leadership in co-sponsoring this bill along with me. And thank
    you for your time.[Congressman Chabot's statement may be found
    in the appendix.]
        Chairman Schrock. Thank you, Congressman. Thank you very
    much for being here.
        Ms. Kelly has to go to a meeting here shortly. I must vote.
    I am going to put this Subcommittee in recess until 2:45 until
    I get back. I assure you I will run down there and I will run
    right back. I will not dilly-dally, I will be back as quick as
    I can. The second panel could be sitting and getting set up in
    the meantime.
        So we will recess for a few minutes.
        [Recess.]

        Chairman Schrock. I will call the hearing back to order.
    Thank you again for your indulgence.
        We are happy to have the second panel with us today. Let me
    first introduce our first witness who is Lisa Rickard who is
    the President of the U.S. Chamber Institute for Legal Reform.
    Ms. Rickard is a graduate of the Lafayette College in Easton,
    Pennsylvania, and received her law degree from American
    University.
        Before we begin I would just ask you all if you could help
    us with the five minute rule. On the front of the table is a
    box that lets you know when your time is up. It will turn
    yellow and then red, then the trap door opens and away you go.
        So, Ms. Rickard, the floor is yours. Thank you for being
    here.

    STATEMENT OF LISA A. RICKARD, INSTITUTE FOR LEGAL REFORM, U.S.
                          CHAMBER OF COMMERCE

        Ms. Rickard. Lisa Rickard, President of the U.S. Chamber
    Institute for Legal Reform. The U.S. Chamber is the world's
    largest business federation, representing more than three
    million businesses and professional organizations of every
    size, in every business sector, and in every region of the
    country. The U.S. Chamber founded the Institute for Legal
    Reform in 1998 with the mission of making America's legal
    system simpler, fairer and faster for everyone. On behalf of
    the Chamber and ILR, I appreciate the opportunity to testify
    before the Subcommittee today on the effect of lawsuit abuse on
    small business. I would also request that a copy of my
    testimony and the full ILR study, ``Tort Liability Costs for
    Small Business,'' be included for the record.

        Chairman Schrock. Without objection.

        Ms. Rickard. No sector of the economy is hit harder by
    lawsuit abuse than America's small business owners. In our most
    recent survey of our small business members, over 90 percent of
    those surveys ranked legal reform as a high or extremely high
    priority.
        Last month ILR released the results of a groundbreaking
    study that shows the devastating effect of litigation on
    America's small businesses. Last December, world-renowned
    actuarial firm Tillinghast Towers-Perrin released its annual
    report showing that in 2002 the tort system drained our economy
    to the tune of $233 billion, or $809 per person.
        We wanted to go a step further, to find out exactly how the
    tort system is threatening American small businesses, which
    create approximately 75 percent of the new jobs in our country.
    We contracted with NERA Economic Consulting to analyze the
    numbers. NERA is affiliated with Marsh, Inc., one of the
    largest commercial insurance brokers in the world. NERA was
    able to use data on actual purchases by Marsh customers. NERA
    also analyzed data from A.M. Best, an insurance information
    service, Market Stance, a market research firm in insurance,
    and U.S. Economic Census.
        What we found in our study is quite troubling. The total
    cost of the tort system to all U.S. businesses, both large and
    small, is an astounding $129 billion. NERA's study found that
    small businesses with $10 million or less in annual revenue,
    and one or more employees, bear 68 percent of that cost, paying
    $88 billion a year. That translates into about $150,000 per
    year, money that could be put into much more productive uses.
        Very small businesses, those that we define with less than
    $1 million in annual revenues, pay $33 billion of that $88
    billion per year. What is even more astonishing is that these
    very small businesses pay $15 billion of their liability costs
    out of pocket, not through insurance coverage.
        What does that all really mean?
        To us it means that America's small businesses are paying a
    high price for our legal crisis in the form of lost
    opportunities to expand their businesses.
        It means that significant small business capital is being
    diverted to the bank accounts of trial lawyers rather than
    being invested in tens of thousands of new American jobs.
        And it means that American consumers are forced to pay more
    for everything they purchase, including consumer goods and
    health care because businesses are forced to raise prices to
    stay afloat.
        I.L.R.'s study highlights why we need comprehensive legal
    reforms at the federal and state levels that will rein in the
    excessive influence of trial lawyers and restore fairness and
    balance to our legal system.
        We strongly urge Congress to enact bills that cut back on
    frivolous litigation, such as the Class Action Fairness Act and
    the Fairness in Asbestos Injury Resolution Act.
        We also support the recently introduced Lawsuit Abuse
    Reduction Act, medical malpractice reform legislation, the
    Commonsense Consumption Act, and the host of pending
    legislation providing liability protection for manufacturers of
    lawful goods and services.
        We also support the Small Business Liability Reform Act,
    which would place reasonable limits on punitive damages awarded
    to plaintiffs in liability cases against small businesses,
    abolish joint liability so that defendants are only liable for
    their proportionate share of damages, and protect innocent
    product sellers from liability when the manufacturer is
    directly responsible for the harm.
        Unfortunately, not one of these legal reform bills I just
    mentioned have been enacted, even as we watch lawsuit abuse
    stifle economic development in America's states, cities and
    towns.
        In closing, I would like to make clear that ILR strongly
    believes that those who have been truly injured should receive
    just compensation through our legal system. That is what
    America's civil justice system was originally designed to do.
    It was not, however, intended to become a lottery that bestows
    jackpot awards on behalf of random plaintiffs at the expense of
    unsuspecting, hard-working small businessmen and women.
        It is time for all of us Americans to jettison our lawsuit-
    happy culture and take some personal responsibility for ending
    the litigation lottery in this country.
        On behalf of the U.S. Chamber Institute for Legal Reform
    and the U.S. Chamber, thank you for the opportunity to appear
    before you today.[Ms. Rickard's statement may be found in the
    appendix.]
        Chairman Schrock. Thank you, Ms. Rickard. We appreciate it.
        Next we will hear from Chris who is an insurance agent with
    Nationwide Insurance Company and the owner of Cavey Insurance
    Agency in Hampstead, Maryland. Welcome, Mr. Cavey, and the
    floor is yours.

             STATEMENT OF CHRIS CAVEY, NATIONWIDE INSURANCE

        Mr. Cavey. Thank you, Mr. Chairman and members of the
    Small--

        Chairman Schrock. Could you please turn on your mike?

        Mr. Cavey. Thank you, Mr. Chairman--

        Chairman Schrock. Thank you.

        Mr. Cavey. --and members of the Small Business Committee.
    My name is Chris Cavey. I am an insurance agent for Nationwide
    Insurance Company and the owner of Cavey Insurance Agency in
    Hampstead, Maryland. I am here on behalf of the National
    Federation of Independent Business whose 600,000 members
    strongly support restoring common sense in our civil justice
    system.
        The frequency and the high cost of our litigation in the
    country's current civil justice system is a matter of growing
    concern to small businesses like mine. Liability reform would
    inject a measure of fairness into a legal system that preys on
    business, often without regard to legal merit. Liability reform
    also would help reduce the number of frivolous lawsuits and
    exorbitant costs of defending a frivolous lawsuit that can
    drive a business into financial ruin.
        The NFIB supports H.R. 2813, the Small Business Liability
    Reform Act, because it would significantly improve the legal
    climate in which small businesses operate. The bill covers the
    smallest of the nation's small businesses, like me, with fewer
    than 25 employees, who operate in fear that they will be put
    out of business.
        I would like to share with you a couple of examples where
    my clients, who are business owners of small businesses, were
    nearly destroyed by lawsuits. In both cases Nationwide
    Insurance Company informed the business owner that the amount
    of the lawsuit was greater than the liability limit of their
    current policy. And that is, a very scary letter for a business
    owner to get.
        In both cases the business owner was covered by a policy in
    excess of $1 million and in both cases the business owner would
    have been pushed out of business had the full amount of damages
    in excess of the insurance policy been awarded.
        The first example involves the case of a local family that
    operates a grain farm. The current owners are third generation
    in farming and have won numerous agricultural awards for
    production and conservation. In 1997, they were sued for $5
    million for incorrectly planting their corn. In September of
    that year a lady approached an intersection with a stop sign.
    She proceeded to ``roll through'' the stop sign, claiming her
    vision was impaired by corn planted to close to the edge of the
    roadway and was struck by oncoming traffic.
        She sued the owner of the property, the local county and
    state jurisdictions, and my client, the farmer, who rented the
    ground and planted the corn. This suit was investigated
    thoroughly by all parties, however, the corn was harvested
    prior to the filing of the lawsuit so there were only
    eyewitness accounts of the manner the corn was planted.
        My policyholder received that scary letter from Nationwide
    stating that they were only insured up to $3 million. This
    letter was devastating to the client. We spoke by phone and in
    person and they were afraid that they would have to liquidate
    the family farm if the trial went against them. The Circuit
    Court found for all the defendants and the charges were
    dismissed. Within weeks, the plaintiff's attorney filed in the
    Appellate Court and the farmer had to worry again about losing
    the family farm in court. During the preparation work for the
    Appellate Court, Nationwide Insurance Company decided to settle
    out of court for $600,000. This decision was based on the prior
    opinions of that court and the fact that the full settlement
    would have forced complete liquidation of the farm.
        Another client of mine owns and operates a local farm
    roadside market. He grows a limited amount of his own produce
    but buys thousands of dollars of locally produced grown
    produce, bedding and nursery crops. He has been in business for
    about 25 years at this location. One day in early spring at the
    farm stand, a woman fell in the parking lot. The owner
    witnessed the accident, gave her first aid, which included two
    band aids to her knee and promoted some good will and gave her
    some freebies to apologize.
        A year later Nationwide Insurance Company notified him that
    the woman and her husband we suing for $1.7 million each. The
    woman involved was claiming soft tissue damage in her back and
    neck from the fall. She even appeared in court for discovery in
    a neck brace.
        However, the insurance company did the proper investigation
    prior to trial, found that the woman making the claim was part
    of a winning foursome at a local golf course and was still
    maintaining her three handicap. She had not missed any of her
    club tournaments the summer of her alleged injury, nor the
    following summer while waiting for trial. She was looking for
    the ``big payoff'' on the back of a kind small business owner,
    and thankfully she was caught.
        The scary part of this ordeal was when the business owner
    received the notice that he was being sued for $3.4 million. He
    also received a letter from Nationwide which was scary that
    indicated he needed to hire outside counsel. This man has run
    his small farm market for 25 years, but a frivolous lawsuit
    would have put him out of business.
        Legitimate claims should be heard. If someone's behavior is
    negligent then they should be held responsible. But frivolous
    lawsuits like the ones I have just described serve only to
    enrich plaintiff's lawyers at the expense of small business who
    oftentimes lack the resource to fight back in court. Without
    action by Congress, these meritless claims will cause small
    businesses to close their doors forever and their employees
    will lose their jobs. The Small Business Liability Reform Act
    would help ensure that small business can survive in this
    increasingly litigious environment. I hope H.R. 2813 will be
    enacted without delay.
        Thank you very much for this opportunity, Mr. Chairman.[Mr.
    Cavey's statement may be found in the appendix.]

        Chairman Schrock. Thank you very much, Mr. Cavey.
        Our next witness this afternoon is the President of CTO,
    Incorporated, a commercial contractor in Harlingen, Texas. Her
    firm has just celebrated its 31st year of business, completing
    over 200 various projects over the past decade. Ms. Jo Rae
    Wagner is also a leading member of the Plumbing-Heating-Cooling
    Contractors National Association. And we are delighted to have
    you here from Texas. The floor is yours.

                   STATEMENT OF JO WAGNER, CTO, INC.

        Ms. Wagner. Thank you, Chairman Schrock, Ranking Member
    Gonzalez, and members of the Subcommittee and other
    distinguished guests. It is a thrill for me to be here in
    Washington and I applaud the Committee's scheduling of a
    hearing to discuss tort reform, a matter of primary importance
    to my industry, the plumbing-heating-cooling contractor
    industry, and my company.
        My name, as you said, is Jo Rae Wagner, President of CTO,
    Incorporated, a commercial plumbing, heating and cooling
    contractor in Harlingen, Texas. I am a woman in a male-
    dominated industry, so most of my correspondence has a Mr.
    instead of a Ms. and an ``E'' on the end of Jo. My firm is
    celebrating its 31st year in business, which proves that women
    can and will continue to be a force in the construction
    industry. Not to toot my own horn, but I have worked hard to
    show that women can also be very good plumbers.
        During 29 of those 31 years my company has pursued the
    American dream of being a family-owned small business. I have
    focused on growing my business through investment in the real
    strength of my company, its employees, and in developing a
    skilled workforce to ensure increased profitability by
    professionally and efficiently completing over 250 projects
    over the past decade. We take pride in our work; in fact, our
    association motto is that ``plumbers protect the health of the
    nation.''
        However, over the past two years, I find that I am spending
    more time preparing for mediations and court appearances than
    on exploring new business opportunities to keep my company
    profitable. I wish to return to a time when our industry
    focused on what we do best, build America, without the stress
    of wondering if we are going to get sued on any given project.
        Mr. Chairman, we are in desperate need of tort reform for
    the construction industry. The current system is jeopardizing
    the security not only of my company, but it is my opinion that
    the legal sector is sucking resources out of the construction
    of schools, hospitals and other valuable assets that enrich our
    nation. We need to put an end to the frivolous litigation that
    pervades the construction sector; such litigation is
    jeopardizing the future of America's small businesses.
        Lawsuits threaten profitability and my company's ability to
    compete in this sector. Many of my fellow contractors are
    responding to the potential for legal action by reducing their
    workforce; simply, many firms cannot afford triple-digit
    increases in their general liability premiums, that is, if they
    are lucky enough to find coverage. Often these increases come
    to companies that have not had a claim; it is simply the nature
    of the industry. Until we see some return to normalcy, our firm
    has chosen to remove itself from performing work in high risk
    trades, including air conditioning, as we cannot continue to
    operate under a veil of potential litigation.
        Our industry is highly supportive of H.R. 2813, legislation
    sponsored by Representatives Steve Chabot from Ohio and Ken
    Lucas from Kentucky. It is a great first start in reversing a
    trend that is tearing away at the very foundation of an
    industry that is known as the finest in the world. Key for our
    industry are the provisions in Section 104 which would limit
    non-economic liabilities to those liable or negligent for the
    action's occurrence. An anecdote should help explain why it is
    so essential for those that are negligent to be assigned their
    proportionate share of the damages.
        Several years ago, my company performed work on a large
    school project. Due to some mold and construction defect
    claims, the school board sought legal action against all 26
    contractors involved in the project. The school board sought
    $30 million for a project that cost $14 million to build. Let
    me repeat: the cost to build the building was $14 million, yet
    the cost to sue was $30 million. Through the process of taking
    depositions, several contractors were told they were not
    negligent for the mold or construction defect claims. I was
    prepared to rejoice when I learned that my company was one of
    them.
        Meanwhile, as the matter appeared headed toward litigation,
    a construction remediator was hired to remedy the mold and
    defect claims. The court system appointed a mediator to assign
    liability amongst the 26 contractors involved, but instead, the
    mediator focused on identifying enough insurance to cover the
    costs for those remediating the mold problem, which had nearly
    approached $20 million. All 26 of the ``involved''--and I use
    that term generously--were assessed and contributed to cover
    the costs of the remediator. Even though various depositions
    cleared us of any negligence and liability, we were still found
    ``guilty'' and were forced, through insurance, to assist in
    covering the costs. I cannot begin to describe the anger and
    frustration I felt on hearing this news. Of course, it made no
    difference that we performed quality work on this school
    project and never had any call-backs to replace any of the
    plumbing fixtures, appliances or piping.
        Mr. Chairman, this story is not the exception, it is the
    daily experience for those participants in the plumbing,
    heating and cooling industry.
        My company has been named in another lawsuit that involves
    32 construction companies. And like before, we have no apparent
    liability. Counsel informs me we should be able to get out of
    this one for $1.5 million. I already know that my insurance
    next year will be considerably higher. Those are costs that
    simply cannot be passed on to the consumer.
        The court system in south Texas will be considering over $2
    billion in construction-related lawsuits. In an effort to cover
    the costs of possible litigation, the bidding for new schools
    have exceeded estimates by 40 percent. Why should the taxpayer
    be expected to fund such an increase?
        I thank you again, Mr. Chairman, for the opportunity to
    appear before this Committee. In a few short minutes I have
    tried to address my concerns and capture why our industry so
    desperately needs tort reform legislation. My colleagues and I
    plead with you to start putting an end to this travesty of
    justice that serves to destroy the fabric of what makes our
    country great. It has been a most gratifying experience for me
    to be here representing my company, CTO, Inc., and my trade
    association, the Plumbing-Heating-Cooling Contractors National
    Association. Thank you.[Ms. Wagner's statement may be found in
    the appendix.]

        Chairman Schrock. Thank you, Ms. Wagner. The next time I
    need plumbing or HVAC done I am calling you.

        Ms. Wagner. Thank you very much.

        Chairman Schrock. Thank you very much.
        Next we will hear from Joanne Doroshow who is the Executive
    Director for the Center for Justice and Democracy. And I hope I
    did not mess your name up too bad.

        Ms. Doroshow. No. You said it perfectly.

        Chairman Schrock. Great, thank you. The floor is yours.
    Thank you.

     STATEMENT OF JOANNE DOROSHOW, CENTER FOR JUSTICE AND DEMOCRACY

        Ms. Doroshow. Thank you, Mr. Chairman. I have a fairly
    extensive written statement which I would like to submit for
    the record and just make a few points to highlight that
    statement.

        Chairman Schrock. Without objection.

        Ms. Doroshow. A few years ago I attended a large conference
    in Albany, New York, my state capital, and it was a small
    business conference. And the governor and all the major
    political leaders of the state spoke to the small business
    community in New York, including the chairman of the Small
    Business Committee in New York who was the primary sponsor of a
    very broad tort reform bill. And I went there in order to hear
    the various political leaders talk about this very important
    issue supposedly to small business, that is tort reform.
        And as I sat there, what struck me as I sat there minutes
    and minutes going by is that not a single mention of this issue
    was made by any of these political leaders. And as a result of
    that we did our--decided to do our own survey of various small
    business trade associations and organizations of their members
    to see whether or not lawsuits and liability issues were really
    such an incredible concern as we were hearing from the
    lobbyists in Albany.
        And what we found is that in study after study, survey
    after survey it wasn't even mentioned as an issue. Liability
    and lawsuits if they are mentioned at all are very, very far
    down on the list, whereas other issues like workforce and
    health care costs and traffic and so forth, other kinds of
    labor issues were much more important.
        And then we saw the NFIB's most recent poll of small
    businesses and saw that, well, lo and behold, lawsuits and
    liability ranked number 64 out of 75 of a list of issues of
    concern. Higher than lawsuits were issues like traffic and
    parking, anti-competitiveness practices like price fixing, in
    other words, which the insurance industry engages in, business
    growth and labor and so forth. And so we really have not seen
    much change in terms of the importance of liability and
    lawsuits as an issue for small businesses.
        Of course, what we have seen is an increase in concern
    about insurance premiums. Well, there is no wonder for that, we
    have been in a hard insurance market since 2001, characterized
    by skyrocketing rates and reduced coverage for many businesses
    and for doctors and for many, many policyholders. The causes of
    that problem have nothing to do with the legal system, they
    have to do with the investment cycle of the insurance industry.
    And we are coming out of that hard market now.
        In my testimony I indicate new statistics that show that
    rates are actually starting to come down for all businesses,
    including small businesses, as we come out of the hard
    insurance market.
        But I do want to at least address the issue of tort reform
    liability as it comes up in this particular piece of
    legislation because it is a fairly massive intrusion into state
    law and into the power and authority of juries and judges in
    this country. And if you are going to do something like that
    you really need to base it on some data. So what do the data
    really say about the liability system?
        Well, they say that lawsuits in this country are actually
    dropping. They have, tort filings have dropped for the last ten
    years. Jury verdicts are down. Claims are down. But the
    insurance industry is making a lot of money. In fact, their
    profits were up almost 1,000 percent last year from 2002.
        So there is tremendous amount to be concerned about about
    what the insurance industry is doing. However, none of that is
    being driven by the lawsuits or the legal system.
        If you take a look at the Tillinghast study that the
    Chamber of Commerce bases its report on, again the data in that
    is about liability insurance premiums. There is nothing
    whatsoever in that study that deals with the legal system or
    the tort system or juries. It is not even remotely connected to
    the legal system. You have expenses in there that concern
    overhead and salaries by insurance executives, all kinds of
    unverifiable statistics. You even have in there no fault costs
    dealing with commercial auto accidents when there is no lawsuit
    involved at all. So that is in terms of a study to rely on in
    order to pursue this massive overhaul of the legal system it is
    just wrong.
        The specifics of this legislation are also extremely
    damaging to innocent consumers but will also do nothing to even
    solve this problem of frivolous lawsuits. You have a cap on
    punitive damages in this piece of legislation which would only
    affect the most egregious kinds of cases where clearly the case
    is not frivolous.
        I will wrap up here because I know I am out of time, but I
    would just caution that there is nothing in this legislation
    that is going to assist small businesses with their insurance
    problems, with the issue of frivolous lawsuits. Half the bill
    does not even deal with the issue of small businesses but deals
    with product sellers.
        So thank you, Mr. Chairman.[Ms. Doroshow's statement may be
    found in the appendix.]

        Chairman Schrock. Our last and most patient witness today
    is Victor Schwartz. Mr. Schwartz has served as both a professor
    of law and the Dean of the University of Cincinnati's College
    of Law as well as served the U.S. Department of Commerce under
    both Presidents Ford and Carter.
        In addition, he is also the co-author of one of the most
    widely used tort casebooks called Prosser, Wade & Schwartz's
    Torts.
        With that you are recognized. Welcome.

     STATEMENT OF VICTOR SCHWARTZ, AMERICAN TORT REFORM ASSOCIATION

        Mr. Schwartz. Thank you, Mr. Chairman and Ms. Velazquez. I
    appreciate your being here today and discussing a topic that is
    very, very important. I also served as general counsel to the
    American Tort Reform Association. And at least with our
    members, they feel liability is a very major problem, and our
    members include small businesses, school boards, doctors'
    groups, across the board really almost all of society.
        The bill that Mr. Chabot discussed is very important. In
    fact, part of it dealing with wholesalers and product sellers I
    would be pleased to take questions on because we helped develop
    that idea in the Commerce Department many years ago.
    Wholesalers and product sellers should not be dragged into
    every lawsuit, they should be there if they have done something
    wrong.
        But I am going to discuss today what I see from my 50 trips
    last year is the number one problems that small businesses
    face. Everywhere you go if you ask them, the number one thing
    they talk about is frivolous lawsuits.
        And what do they mean by that?
        Well, there is a rule that defines them. Frivolous lawsuits
    are cases that have no basis in fact or they are not based on
    existing law or any reasonable extension of the law. The law
    moves forward. And there was weaponry to help businesses
    against frivolous claims, and that weaponry was in Rule 11 of
    the Federal Rules of Civil Procedure. And that said if the
    judge finds a claim is frivolous, the plaintiff who brought
    that case has to pay the costs of the other side. Plain and
    simple.
        But in 1993 that rule was severely weakened. And as a
    result people--and I think of my smallest client who runs a
    little restaurant in Atlantic City--they do not have weaponry
    to fight. She had a case where a police report showed that the
    person was never in her restaurant. He named a whole bunch of
    other places. And because the rule is so weak and because it is
    so ineffective she could not recover her legal costs.
        Now, plaintiffs' lawyers in general do a very good job. But
    there are a few who survive on these suits, and they sue school
    boards, they sue small business, they sue more the defendless
    type of people. And they know if they make an offer to settle
    that is under the defense costs the insurer is really on the
    hook. If they do not settle the case and they go to court a
    case could come in above claim limits, or they will have to pay
    more to litigate then to settle. And it is a death of a
    thousand cuts.
        Mr. Smith of the Judiciary Committee has introduced a bill
    4571, and I hope all of you will consider co-sponsoring his
    bill because it restores the power to Rule 11, which is a
    federal rule, but states tend to follow the federal rules. So
    if a federal rule is changed state rules will change. And it is
    a good bill, it is solid. In fact, one of the most experienced
    trial lawyers in North Carolina, a very experienced man, said
    that this is the exact type of reform that is needed. We need
    mandatory sanctions against frivolous claims. That trial lawyer
    is currently running for vice president of the United States,
    sir.
        So this is not a partisan kind of thing, it is a bipartisan
    kind of thing. And I think it should be supported by every
    member of this Committee. It is small business's really number
    one problem.
        I will mention something else that Mr. Smith's bill does.
    We have a new type of tourist in America, and I call them the
    litigation tourist. The litigation tourist travels around the
    country to what the American Tort Reform Association calls and
    is defined as ``judicial hellholes.'' These are places where
    you just do not want to be sued. And I ask our ``Judicial
    Hellholes'' report be made part of the record, sir.

        Chairman Schrock. Without objection, it will be.

        Mr. Schwartz. Now, common sense says you should be able to
    sue where you live, you should be able to live where you have
    been hurt, you should be able to sue where you work or in the
    defendant's principal place of business. And that is what Mr.
    Smith's law says. It is a problem of interstate commerce that
    people are suing where there is none of these things. That is
    the litigation tourist. They go to a place like Madison County.
    They have never been there before. They did not work there
    before. They were not hurt there. There is only one reason they
    go there, because it is known that the judges will find for
    plaintiffs.
        Plaintiffs' lawyers acknowledge this. There are famous
    plaintiffs' lawyers who say, Victor, I agree with you except
    for one thing, I do not call them ``judicial hellholes,'' I
    call them ``magic jurisdictions.'' So we agree really on the
    nature of the place, we just have a difference as to the title.
        So I suggest that this Committee as it approaches a variety
    of remedies that come forward, those are two that are very
    practical embodied in Mr. Smith's bill, dealing with frivolous
    claims, putting sanctions on those who agree with them--who
    bring them, excuse me--and also clamp down on litigation
    tourism. We do not need that in this country.
        Thank you very much.[Mr. Schwartz's statement may be found
    in the appendix.]

        Chairman Schrock. Thank you very much.
        Let me start the questioning. We are going to have votes
    here in a few minutes, so when that happens we will ask a few
    questions, we will get over there and vote and we will get back
    as quick as we can.
        Mr. Schwartz, I was interested in your comments about the
    rule, the change of Rule 11. Do you have any sort of list of
    states that have altered their own state rules to conform to
    the national model? And I am curious, is my home state of
    Virginia one of them?

        Mr. Schwartz. No. But many have and we will submit that
    information to this Committee.

        Chairman Schrock. No, Virginia is not?

        Mr. Schwartz. Virginia has not. But there is a trip wire in
    many, many states. What happens is the way the rule is set up,
    if the federal rule changes it is automatic. There are not
    hearings, there is no legislative action, it just happened. And
    there are quite a few states that have done that. And we will
    submit that information to you, sir.

        Chairman Schrock. Great, thank you.
        Do you think that the Bar will undertake to rewrite or
    correct the problem with Rule 11?

        Mr. Schwartz. No. They have shown no inclination to do
    that. And it has been 11 years. We have had over a decade of a
    weakening of a rule that was the one weapon that a small
    business owner had to stop a frivolous claim. There has been
    absolutely no movement on the part of the Bar.
        I think, you know, the rule applies to frivolous defenses
    too. And so sometimes defense attorneys might not want those
    sanctions brought against them. It cuts both ways. So the Bar
    has not policed its own house on this issue.

        Chairman Schrock. How do these frivolous lawsuits affect
    the dockets and the case loads of our courts, courts generally?

        Mr. Schwartz. Well, they are going to add to it because
    there is not a vacuum cleaner to get rid of them. Most of them
    I have to say are settled, they virtually never go to trial
    because it is too expensive for the plaintiff's lawyer and the
    defense lawyer to go to trial. That is why some of the data
    about the reduction in the number of lawsuits has some meaning,
    but it also has to be put in the context that more and more
    cases today are settled.

        Chairman Schrock. Can you give me or share with us any
    instance where civil justice reform has made a difference in
    jobs or the economy?

        Mr. Schwartz. Sure. In the interest of time I will just
    mention one. This body passed in 1994 the General Aviation
    Recovery Act. It was an 18-year statute of repose for general
    aviation. And I was right at these tables and told the bill
    would do no good and it would produce aircraft that would be
    falling out of the sky. One witness said ``tissue paper''
    airlines or ``balsam wood'' airplanes.
        That bill, and I will submit to this Committee an article
    that documents this, has restored an industry. Cessna, Piper
    are back. Twenty-five thousand jobs--and these are not
    hamburger flipper jobs--and the planes are safer than ever.
        And I was with Mr. Glickman the other night, a former
    member of this body, Secretary of Agriculture, and he had the
    lead on this bill. And he took a lot of flack from some of his
    colleagues about it. But the president of the United States
    signed the bill and it has been very effective.
        I can give you other examples. We will submit them to you
    after the hearing.

        Chairman Schrock. Great. Thank you.
        Ms. Rickard, in your testimony you mentioned that small
    businesses pay a disproportionate share of the overall costs of
    tort claims. What impact do you think that is having on job
    creation in this country?

        Ms. Rickard. The U.S. Chamber has a small business council.
    The chairwoman of that council, Mora Donahue, runs Fabric
    Contractors in New Orleans, Louisiana. We convened here when we
    released this study, the members of that small business
    council. There were over 60 people from small businesses here
    and the stories from different regions of the country, one
    after the other, with regard to lawsuits being filed against
    these companies and the number of whether it is regular
    personal injury suits being dragged in and joint and several
    liability cases, they have gone on and on about the impact for
    them and the increase in insurance rates as well, which
    resulted in them having to scale back in jobs.
        There is a woman who runs a home health care agency in
    Richmond, Virginia who was also up here and talked about the
    impact of her costs and frivolous litigation which has required
    her to scale back on her jobs. So we see this nationwide in
    both rural and urban areas.

        Chairman Schrock. So the very small businesses seem to be
    really hit the hardest because they find it difficult to pass
    on those costs. Can you explain why it is that they do not have
    access to insurance companies for these claims as many of the
    larger businesses have?

        Ms. Rickard. I am sorry, why they?

        Chairman Schrock. Why they, explain why smaller companies
    do not have access to the insurance coverage for some of these
    things that large businesses seem to have.

        Ms. Rickard. They do have access to insurance in a number
    of circumstances. Some of them choose not to take insurance
    because of the cost.
        However, in our study, because we did rely on insurance
    coverage, we found that we looked at employers, small
    businesses that have one employee. And there is not a lot of
    data with regard to single proprietorships, and they do not
    generally take insurance. And it is the cost generally.

        Chairman Schrock. Thank you.
        Ms. Velazquez.

        Ms. Velazquez. Thank you, Mr. Chairman.
        Ms. Doroshow, there have been discussions that the specter
    of litigations has hindered small business growth. What
    evidence have you seen that indicates that small businesses'
    economic growth have been hindered by litigation fears?

        Ms. Doroshow. Well, we have never seen any evidence of
    that. And, in fact, as I have mentioned in my testimony, in
    survey after survey of small businesses that are done
    internally by trade associations, the NFIB, the Chamber and
    other state associations as to the issues that are most
    important to them in terms of business growth, in terms of
    where they will locate a business, liability, litigation,
    lawsuits have absolutely nothing to do with it. These issues
    rank very, very low of issues to concern of small businesses.

        Ms. Velazquez. Thank you.
        Mr. Chairman, I would like to ask unanimous consent to
    enter into the record a survey conducted by the National Small
    Business United in conjunction with Arthur Andersen basically
    that mentions when asked to name the three most significant
    challenges to the future of growth and survival of their
    businesses the top three factors were finding and retaining
    qualified employees, state and federal regulations and economic
    uncertainty. Neither lawsuits nor liability law made the list.

        Chairman Schrock. Without objection.

        Ms. Velazquez. Ms. Doroshow, what will H.R. 2813 do with
    regard to stopping the filing of all frivolous litigation?

        Ms. Doroshow. This bill has absolutely nothing to do with
    the issue of frivolous litigation. The major provisions are
    capping punitive damages which are only awarded in a very, very
    tiny number of cases, in the most egregious kinds of cases,
    limiting joint and several liability for non-economic damages
    which are the kinds of damages that affect particularly women
    who do not work outside the home, the poor, children and senior
    citizens. And then the other whole half of the bill affects the
    issue of product sellers. We are talking about major retailers
    like Wal-Mart and Toys-R-Us that this bill would change state
    laws around the country, eliminate the ability of states to
    have strict liability for product sellers, to make sure that
    products that reach the consumer are safe.
        And this part of the bill would do a tremendous amount to
    encourage putting unsafe products on the market. That is what
    it would do.

        Ms. Velazquez. Thank you.
        Mr. Cavey, NFIB's 2002 National Small Business poll on
    liability makes the case that there has been no explosion in
    lawsuits filed against small businesses. And I quote from their
    own survey and summary, ``11 percent of small business owners
    were defendants in a liability suit during the past five years.
    The incidence is virtually identical to that reported by a
    similar sample of owners in 1995. There effectively has been no
    change in the frequency of liability suits filed against small
    businesses at least in the last decade.''
        Would you care to comment on that?
        And I would like unanimous consent to enter into the record
    this NFIB National Small Business poll.

        Chairman Schrock. Without objection.

        Mr. Cavey. The statistics that you have I cannot personally
    verify from sitting where I am. I can, however, verify what has
    passed through my agency and in front of my business
    association at home. And the fact of the matter is perhaps the
    percentages have not increased dramatically one way or the
    other. Maybe they have, maybe they have not. I cannot answer
    that. But I do know that the fear of liability suit is
    constantly there on the small business owner.
        I also know that the cost of the liability insurance and
    the cost to protect the policy holder who is the small business
    owner is continually going up.

        Ms. Velazquez. Thank you.
        Mr. Cavey, are you here in what capacity, representing
    NFIB?

        Mr. Cavey. I am here as a member of NFIB, yes, ma'am.

        Ms. Velazquez. Okay. This is their survey.
        Ms. Wagner, you mentioned in your testimony that you were
    sued by a school board?

        Ms. Wagner. Yes. Actually it is the whole district. The
    school district informs the school board which initiates the
    lawsuits.

        Ms. Velazquez. Okay. In the case that read about in The
    Valley Star involving faulty prison construction it says that
    you were sued by a county. Since H.R. 2813 applies to cases
    where individuals sue businesses it will not impact the type of
    cases that you have experienced; is that correct?

        Ms. Wagner. In a sense, yes. All we are looking for is some
    legislation that would draw a line in the sand somewhere to
    stop the rampant and needless lawsuits that attack for no
    reason at all for large groups of contractors.

        Ms. Velazquez. But what I am trying to say is this type of
    legislation does not apply?

        Ms. Wagner. Well, it will in one sense, in the sense of
    mold damages and construction defects occasionally you have
    eight to nine hundred individuals suing the contractor on an
    individual basis for health reasons. And that would apply.

        Ms. Velazquez. Thank you.
        Okay, Mr. Chairman.

        Chairman Schrock. Ms. Rickard, let me ask you how important
    is tort reform to small business? I want to ask everybody that.

        Ms. Rickard. In our survey, and I did mention this in my
    testimony, we do survey our members, small business members.
    And in that survey over 90 percent of those surveyed--and I
    believe there were over 1,000 respondents to that survey
    representative of small, representative of small business
    across the nation reported that 90 percent that legal reform
    was rated important or very important among those members.
        Again, our small business council, representative of a
    large cross-section of small business in this nation, meets two
    or three times a year. They consistently talk with me. I spoke
    with them last December at their board meeting. And when I got
    to the issue and went on about legal reform they were just
    rabid about the problem and essentially gave me a cheering
    ovation at the end of my presentation talking about the need
    for us to really pursue this issue for them.

        Chairman Schrock. Mr. Cavey and Ms. Wager, please.

        Mr. Cavey. Can I answer that question?

        Chairman Schrock. Absolutely you can.

        Mr. Cavey. Well, I will tell you how the best way to answer
    that question is. And it crosses partisan lines every single
    way you can get it, the fact is that it is needed in small
    business. I challenge the members of this Committee, regardless
    of their political affiliation, to go home, get out your ``A
    list'' of donors to your campaign contributions who are small
    business owners, just call them up and ask. Do not take my word
    for it, pick the people that are putting you here to represent
    them and giving you money to do it.

        Chairman Schrock. Would you believe it if I told you I
    have?

        Mr. Cavey. God bless you.

        Chairman Schrock. You are welcome.
        Ms. Wagner?

        Ms. Wagner. Last week when PHCC put a notice out that I
    would be testifying today, when I went home for the weekend I
    never realized what I was going to run into Monday morning. My
    e-mail was totally jammed with people, contractors from
    California, Nevada, Arizona, name it, from everywhere in this
    nation that actually plugged up my e-mail just to tell me to
    please get the word across today that this was a dire situation
    in our industry and we desperately need some help.

        Chairman Schrock. Good. Ms. Doroshow, Mr. Schwartz?

        Ms. Doroshow. Survey after survey for years has shown that
    it is not as high a priority as many, many, many other issues
    that affect small business. In fact, NFIB's most recent poll it
    ranked 64th out of 75 issues. So I am just going by what I see
    in terms of the surveys and the data and the facts. And when
    you compare it to other issues that are affecting small
    businesses today it ranks very, very low if it is mentioned at
    all.
        Now, the issue of insurance is another thing. It is number
    two for small businesses in the NFIB survey. But as we consumer
    groups have been saying for years over and over again, the
    causes and solutions to these insurance problems lie with the
    insurance industry. We are in a hard insurance market right
    now. It is ending. The insurance industry has made enormous
    amounts of money off the back of policy holders which has not
    been driven by any increased losses. The solutions to that
    problem lie with the insurance industry. And what Congress
    ought to be doing, the first thing they should be doing is
    remove the antitrust exemption that the insurance industry
    currently enjoys in this country. It allows them to price fix,
    it allows them to burden small businesses and other policy
    holders with enormous kinds of rate hikes without any
    accountability.

        Chairman Schrock. Mr. Schwartz, I think I know what your
    answer is to that, so let me ask you another question. Ms.
    Doroshow has suggested that product sellers should face
    liability for products they do not manufacture. What do you
    think about that?

        Mr. Schwartz. Well, I think product sellers should be
    responsible when they have done something wrong. And I agree
    with the concept that Ms. Doroshow has in her testimony, and
    that is there should be pressure on a product seller to deal
    with responsible manufacturers.
        And if you read Mr. Chabot's bill what it says is that if a
    manufacturer is not in business or unavailable to be sued, then
    the product seller has to bear full and complete liability.
    Now, you are a businessman and if you were in business and you
    knew that if you did not deal with a responsible manufacturer
    you would have full and complete liability, you would have a
    motive to do it.
        So I think you get to the goal that you want which is to
    have product sellers act in a responsible way with that
    provision.
        Right now let us go for very brief with the litigation
    tourist. What happens with the litigation tourist is, and this
    is where it hurts small business, they go into another state
    and the plaintiff's lawyer when he goes into that state wants
    to get into the state court. That is the hellhole. He does not
    want to be in a federal court. So they will name some local
    seller, a retailer, a small pharmacy, a little stationery store
    so that that person is from the same state and they will not
    have the case in federal courts, it will have to be in the
    state court. And that is not good.
        If the law was that the local seller only was liable for
    fault and wrong it would be much harder to drag that innocent
    seller into a case. Again, the consumer is still left with a
    responsible defendant.
        I was not involved in many of these things, I read them and
    I learn them--learn about them. But we did help develop the
    product seller provision under President Carter a long time
    ago. And it is law in about 16 states. But people deal in
    interstate commerce and it would be better to have it as a
    national law.

        Chairman Schrock. Ms. Velazquez?

        Ms. Velazquez. Mr. Schwartz, I know that you are here
    representing the American Tort Reform Association.

        Mr. Schwartz. That is correct.

        Ms. Velazquez. And given that members of this association
    are predominantly large corporations I really find it
    interesting that you are here testifying on their behalf at a
    small business hearing. Could you please tell me how the
    American Tort Association Members such as Boeing, Johnson and
    Johnson, Exxon-Mobil, Chrysler will benefit from passage of
    H.R. 2813? I have the list here of the members of the American
    Tort Reform Association.

        Mr. Schwartz. Well, there are many, many small business
    members. I would invite you to attend one of our meetings. I
    will extend the invitation now that I hope you can accept so
    you will see our small business members. But I also want to
    address your question.

        Ms. Velazquez. Okay. But excuse me one second. I will
    strongly recommend you to tell them to add all those small
    businesses that are members of the American Tort Association
    because when you go down this list you do not have any small
    business represented in this list. So it is a matter of
    perception. I am sorry for that.

        Mr. Schwartz. Representative, first of all, you made a
    very, very good suggestion. And I will take it back. I always
    learn something from hearings and often it is from folks who
    are not that comfortable with tort reform. So I appreciate your
    statement.
        Let me just say in terms of the bill how some of the larger
    businesses might benefit from this small business bill--and
    remember, I was not testifying about that bill but a bill that
    dealt with frivolous claims. When product sellers are sued and
    if product sellers can be brought into cases even though they
    are totally innocent it allows some plaintiffs' lawyers, some,
    to manipulate the system. And then the larger businesses find
    that their cases are in state courts and some of these state
    courts do not have a very fair way of handling things. So the
    provision that deals with product sellers avoids needless
    lawsuits but it also helps a case be in a federal court when it
    should be in a federal court, and that helps some of the larger
    businesses.

        Ms. Velazquez. Ms. Doroshow, would you care to comment as
    to how large corporations will benefit from this bill?

        Ms. Doroshow. Well, I think half the bill does deal with
    large corporations. We are dealing with large product sellers
    here, major companies. It is not a small business bill at all
    when you look at that part of the bill. So I would say that
    those that are involved in selling consumer products would
    benefit tremendously from the liability restrictions that are
    in this legislation.

        Ms. Velazquez. Ms. Wagner, how many employees do you have
    in your company?

        Ms. Wagner. I have 65.

        Ms. Velazquez. Sixty-five. So this legislation also defines
    a small business as having 25 or fewer employees?

        Ms. Wagner. Yes. And I would truly hope that when this bill
    is discussed further that that would then be increased to 100
    since that would be a sensible amount for a small business.

        Chairman Schrock. We have a vote. Let me ask a couple of
    questions before I leave.
        Mr. Cavey, what is going to happen to your clients or other
    small businesses if we do not pass some sort of tort reform?

        Mr. Cavey. Well, tort reform is definitely needed. My
    estimation based on what I have seen through my agency is that
    two things will happen: number one--well, three really--there
    will be a lot more fear within the--dealing with the public;
    number two, I see that it will inhibit the amount of jobs that
    are out in the market because employers need to feel competent
    and they need to keep their expenses in line; and number three,
    I think the other thing it will do is it will cause consumer
    prices to go up because the small florist who has an increase
    in liability insurance is not going to take it out of the
    pocket, they are going to pass that right back on to the
    consumer in the neighborhood.

        Chairman Schrock. Does litigation drive insurance premiums
    obviously?

        Mr. Cavey. Oh definitely.

        Chairman Schrock. Okay.

        Mr. Cavey. Absolutely.

        Chairman Schrock. Ms. Wagner, I was impressed by your
    testimony about being forced to settle claims for which your
    company bore absolutely no responsibility. Do you think these
    kind of claims hurt your ability to get other contracts and
    particularly government contracts? I would think this is not
    the kind of publicity any company would want to get?

        Ms. Wagner. Well, this is true. And truly this has affected
    the way we feel about projects that we should take. First of
    all, we stopped bidding schools entirely because of the
    litigation in schools. But when you are looking at any given
    project having $100 million to $200 million worth of collective
    insurance you are looking at a lot of targets there for any
    litigation. So frivolous lawsuits on construction projects hurt
    everybody involved with them. And it certainly does not do
    reputations any good.

        Chairman Schrock. So you think the lawsuit culture in the
    construction industry discourages some people from going into
    business in your industry?

        Ms. Wagner. Absolutely. And it certainly right now is
    discouraging growth, which should be a part of the construction
    industry right now.

        Chairman Schrock. Absolutely.
        Well, we have a vote, folks. And I am not going to hold you
    here. I really do, I really do appreciate your testimony here.
    I appreciate the input you have. It has given me a lot to think
    about. And I am delighted to think that Mr. Schwartz learned
    something from us. That is so unusual here. So I really
    appreciate that.
        I appreciate your taking the time to come. And I assure you
    this is a subject that will not die. This is a subject we are
    going to hear about for a long time until something is done
    about it.
        So, again, I thank you all very much. And this hearing is
    adjourned.
        [Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]

        [GRAPHIC] [TIFF OMITTED] T7092.001

        [GRAPHIC] [TIFF OMITTED] T7092.002

        [GRAPHIC] [TIFF OMITTED] T7092.003

        [GRAPHIC] [TIFF OMITTED] T7092.018

        [GRAPHIC] [TIFF OMITTED] T7092.019

        [GRAPHIC] [TIFF OMITTED] T7092.020

        [GRAPHIC] [TIFF OMITTED] T7092.021

        [GRAPHIC] [TIFF OMITTED] T7092.022

        [GRAPHIC] [TIFF OMITTED] T7092.023

        [GRAPHIC] [TIFF OMITTED] T7092.024

        [GRAPHIC] [TIFF OMITTED] T7092.030

        [GRAPHIC] [TIFF OMITTED] T7092.031

        [GRAPHIC] [TIFF OMITTED] T7092.032

        [GRAPHIC] [TIFF OMITTED] T7092.033

        [GRAPHIC] [TIFF OMITTED] T7092.025

        [GRAPHIC] [TIFF OMITTED] T7092.026

        [GRAPHIC] [TIFF OMITTED] T7092.027

        [GRAPHIC] [TIFF OMITTED] T7092.028

        [GRAPHIC] [TIFF OMITTED] T7092.029

        [GRAPHIC] [TIFF OMITTED] T7092.034

        [GRAPHIC] [TIFF OMITTED] T7092.035

        [GRAPHIC] [TIFF OMITTED] T7092.036

        [GRAPHIC] [TIFF OMITTED] T7092.037

        [GRAPHIC] [TIFF OMITTED] T7092.038

        [GRAPHIC] [TIFF OMITTED] T7092.039

        [GRAPHIC] [TIFF OMITTED] T7092.040

        [GRAPHIC] [TIFF OMITTED] T7092.041

        [GRAPHIC] [TIFF OMITTED] T7092.042

        [GRAPHIC] [TIFF OMITTED] T7092.043

        [GRAPHIC] [TIFF OMITTED] T7092.044

        [GRAPHIC] [TIFF OMITTED] T7092.045

        [GRAPHIC] [TIFF OMITTED] T7092.046

        [GRAPHIC] [TIFF OMITTED] T7092.047

        [GRAPHIC] [TIFF OMITTED] T7092.048

        [GRAPHIC] [TIFF OMITTED] T7092.004

        [GRAPHIC] [TIFF OMITTED] T7092.005

        [GRAPHIC] [TIFF OMITTED] T7092.006

        [GRAPHIC] [TIFF OMITTED] T7092.007

        [GRAPHIC] [TIFF OMITTED] T7092.008

        [GRAPHIC] [TIFF OMITTED] T7092.009

        [GRAPHIC] [TIFF OMITTED] T7092.010

        [GRAPHIC] [TIFF OMITTED] T7092.011

        [GRAPHIC] [TIFF OMITTED] T7092.012

        [GRAPHIC] [TIFF OMITTED] T7092.013

        [GRAPHIC] [TIFF OMITTED] T7092.014

        [GRAPHIC] [TIFF OMITTED] T7092.015

        [GRAPHIC] [TIFF OMITTED] T7092.016

        [GRAPHIC] [TIFF OMITTED] T7092.017