[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

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                      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.]

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