- LAWSUIT ABUSE REDUCTION ACT

[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

LAWSUIT ABUSE REDUCTION ACT

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

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CONSTITUTION

OF THE

COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

H.R. 966

__________

MARCH 11, 2011

__________

Serial No. 112-18

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Printed for the use of the Committee on the Judiciary

Available via the World Wide Web: http://judiciary.house.gov

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COMMITTEE ON THE JUDICIARY

LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TOM REED, New York LINDA T. SANCHEZ, California
TIM GRIFFIN, Arkansas DEBBIE WASSERMAN SCHULTZ, Florida
TOM MARINO, Pennsylvania
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona

Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------

Subcommittee on the Constitution

TRENT FRANKS, Arizona, Chairman

MIKE PENCE, Indiana, Vice-Chairman

STEVE CHABOT, Ohio JERROLD NADLER, New York
J. RANDY FORBES, Virginia MIKE QUIGLEY, Illinois
STEVE KING, Iowa JOHN CONYERS, Jr., Michigan
JIM JORDAN, Ohio ROBERT C. ``BOBBY'' SCOTT,
Virginia

Paul B. Taylor, Chief Counsel

David Lachmann, Minority Staff Director

C O N T E N T S

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MARCH 11, 2011

Page
H.R. 966, the ``Lawsuit Abuse Reduction Act''.................... 3

OPENING STATEMENTS

The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Chairman, Subcommittee on the
Constitution................................................... 1
The Honorable Jerrold Nadler, a Representative in Congress from
the State of New York, and Ranking Member, Subcommittee on the
Constitution................................................... 5
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Committee on the Judiciary....... 6

WITNESSES

Elizabeth Milito, NFIB Small Business Legal Center
Oral Testimony................................................. 9
Prepared Statement............................................. 11
Lonny Hoffman, Professor, University of Houston Law Center
Oral Testimony................................................. 23
Prepared Statement............................................. 25
Victor E. Schwartz, Shook, Hardy & Bacon L.L.P.
Oral Testimony................................................. 45
Prepared Statement............................................. 47

APPENDIX
Material Submitted for the Hearing Record

Prepared Statement of Peter Lushing, Professor of Law, Benjamin
N. Cardozo School of Law....................................... 69

LAWSUIT ABUSE REDUCTION ACT

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FRIDAY, MARCH 11, 2011

House of Representatives,
Subcommittee on the Constitution,
Committee on the Judiciary,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:06 a.m., in
room 2141, Rayburn Office Building, the Honorable Trent Franks
(Chairman of the Subcommittee) presiding.
Present: Representative Franks, Smith, Forbes, King,
Nadler, and Scott.
Staff present: (Majority) Paul Taylor, Subcommittee Chief
Counsel; Zach Somers, Counsel; Sarah Vance, Clerk; (Minority)
David Lachmann, Subcommittee Staff Director; Jason Everett,
Counsel; and Veronica Eligan, Professional Staff Member.
Mr. Franks. The Subcommittee will come to order.
Thank you all for being here.
We have called this hearing because some of the changes,
the 1993 amendments made to rule 11 of the Federal Rules of
Civil Procedure, need to be revisited.
Rule 11 provides for one of the most basic requirements for
litigation in Federal court, that papers filed with the Federal
district court must be based on both the facts and the law.
That is to say, anytime a litigant signs a filing in Federal
court that they are certifying to the best of the person's
knowledge, information, and belief formed after reasonable
inquiry that the filing is accurate, based on the law or
reasonable interpretation of the law, and is brought for a
legitimate purpose. This is such a simple requirement but one
that both sides to a lawsuit must abide by if we are to
properly have a functioning Federal court system.
However, under the current Federal procedural rules, a
failure to comply with rule 11 does not necessarily result in
imposition of sanctions. The fact that litigants can violate
rule 11 without penalty significantly reduces the deterrent
effect of rule 11 itself, which harms the integrity of the
Federal courts and leads to both plaintiffs and defendants
being forced to respond to frivolous claims and arguments.
The Lawsuit Abuse Reduction Act corrects this flaw by
requiring that Federal district court judges impose sanctions
when rule 11 is violated. Mandatory sanctions will more
strongly discourage litigants from making frivolous claims in
Federal court, and it will also relieve litigants from the
financial burden of having to respond to frivolous claims as
the legislation requires those who violate rule 11 to reimburse
the opposing party reasonable expenses incurred as a direct
result of the violation.
Additionally, the legislation eliminates rule 11's 21-day
safe harbor which gives litigants a free pass to make frivolous
claims so long as they withdraw those claims if the opposing
party objects.
As Justice Scalia correctly pointed out while dissenting
from the 1993 rule's change, he said, ``Those who file
frivolous suits and pleadings should have no safe harbor.
Parties will be able to file thoughtless, reckless, and
harassing pleadings secure in the knowledge that they have
nothing to lose. If objection is raised, they can retreat
without penalty.''
Now, while this legislation makes changes to rule 11, it is
important to recognize that nothing in this legislation changes
the standard by which the courts determine whether a pleading
or a filing violates rule 11. Courts will apply the same legal
standard they have applied since 1993 to determine if a filing
runs afoul of rule 11. Thus, all the legislation really does is
to make the technical and conforming changes to rule 11
necessary to make sanctions mandatory rather than
discretionary. In Justice Scalia's words, it is simply about
making rule 11 a significant and necessary deterrent to
frivolous litigation rather than a toothless rule.
According to the first rule of the Federal Rules of Civil
Procedure, the goal of the rules is to ensure that every action
and proceeding in Federal court be determined in a, ``just,
speedy, and inexpensive manner.'' I believe that this goal will
be well served through a mandatory sanctions provision for
violating the simple requirements of rule 11 that every filing
be based on both the law and the facts.
I look forward to hearing from our witnesses.
And I now recognize the Ranking Member of the Subcommittee,
the gentleman from New York, Mr. Nadler, for 5 minutes for his
opening statement.
[The bill, H.R. 966, follows:]

__________

Mr. Nadler. Thank you, Mr. Chairman.
It is deja vu all over again. After a brief hiatus, we are
back to legislation supposedly aimed at preventing frivolous
litigation, but which would in fact revive a rule that gave
birth to an entire litigation industry operating in tandem with
normal civil litigation. The revised rule 11 proposed here
would take us back to the failed 1983 rule which the courts
rightly rejected after a decade of catastrophic experience.
Moreover, this legislation goes even beyond the text of the
1983 rule broadening the flawed mandatory sanctions even
further.
Rule 11 of the Federal Rules of Civil Procedure serves a
vital role in maintaining the integrity of our legal system. As
the Rules Committee noted in 1993, ``since the purpose of rule
11 sanctions is to deter rather than to compensate, the rule
provides that if a monetary sanction is imposed, it should
ordinarily be paid to the court as a penalty. However, under
unusual circumstances, deterrence may be ineffective unless the
sanction not only requires the person violating the rule to
make a monetary payment, but also directs that some or all of
this payment be made to those injured by the violation.
Accordingly, the rule authorizes the court, if requested in a
motion and if so warranted, to award attorney's fees to another
party.''
While the sponsor has expressed a desire to limit
unnecessary litigation, the experience with the old rule 11 was
the exact opposite. Rule 11 litigation became a routine part of
civil litigation, infecting more than one-third of all cases.
Rather than serving as a disincentive, the old rule 11, which
would be restored by this legislation, actually made the system
considerably more litigious. In the decade following the 1983
amendments, there were almost 7,000 reported rule 11 cases
becoming part of approximately one-third of all Federal civil
lawsuits. Civil cases frequently, in better than a third of all
cases, became two cases: one on the merits and the other
dueling rule 11 allegations. The drain on the courts' and the
parties' resources caused the Judicial Conference to revisit
the rule and adopt the changes this bill would now have us
undo.
When this Committee considered an earlier version of this
legislation in 2005, the Judicial Conference wrote to then
Chairman Sensenbrenner that the bill would undo, ``the 1993
rule 11 amendments even though no serious problems has been
brought to the Judicial Conference Rules Committee's
attention,'' and the bill, ``in some ways seems to go beyond
the provisions that created serious problems with the 1983
rule. It may even cause greater mischief. Rule 11 in its
present form has proven effective and should not be revised.''
When we were considering what became the 2005 amendments to
the Bankruptcy Code, the original legislation--the original
draft of the legislation, I should say--contained a provision
that would have required the imposition of mandatory penalties
under bankruptcy rule 9011, the corollary to rule 11. That
language was specifically rejected in 2005 and does not appear
in the public law. The court is given the appropriate
discretion to craft sanctions as appropriate, even though the
rest of the legislation stripped the bankruptcy courts of
discretion in numerous other areas. Congress thought better of
that inflexible, unworkable rule. We were right then and we
should consider this proposal in the same light.
Small businesses, just like all businesses, are concerned
about baseless lawsuits. I do not know anyone who wouldn't be.
But just to keep the situation in perspective, I would also
note that in a June 2008 survey of its members by the National
Federation of Independent Business, ``The Voice of Small
Business,'' their membership ranked, quote, costs and frequency
of lawsuits and threatened suits 65th of their 75 top concerns;
36.7 percent responded that this was not a problem while only
7.3 percent called it, quote, critical. Whatever NFIB in
Washington may say, I think it is pretty clear that its
membership, actual small business people, have a healthy
perspective on the issue.
Mr. Chairman, the courts have ample authority under the
current rule 11 to sanction conduct that undermines the
integrity of our legal system, but this legislation is the
wrong solution in search a problem. By taking us back to a time
when rule 11 actually promoted routine, costly, and unnecessary
litigation, this bill is a cure far worse than the disease. We
know what this rule does because we lived with it and the
courts rightly rejected it nearly 20 years ago. We should
benefit from that experience and reject this legislation.
I thank you and I yield back the balance of my time.
Mr. Franks. Well, thank you, Mr. Nadler.
I now recognize the Chairman of the full Judiciary
Committee, the distinguished gentleman from Texas, Mr. Smith,
for 5 minutes for his opening statement.
Mr. Smith. Thank you, Mr. Chairman, and Mr. Chairman, I
appreciate your having this hearing, I think, on one of the
most important subjects of the year and also on a subject that
I think can do a world of good for a lot of individuals and
business owners in the United States.
Mr. Chairman, on Wednesday I reintroduced H.R. 966, The
Lawsuit Abuse Reduction Act. On the same day Senator Chuck
Grassley, the Ranking Member of the Senate Judiciary Committee,
introduced the same bill in the Senate.
The Lawsuit Abuse Reduction Act, otherwise known as LARA,
is just over a page long, but it would help restore much needed
rationality to all civil cases brought in Federal court by
requiring mandatory sanctions against those who file frivolous
lawsuits.
In recent years, frivolous lawsuits have been filed in
Federal court against the Weather Channel for failing to
accurately predict storms, against businesses for the actions
of wild birds who flew onto their premises, and against
television shows who claimed that some people were too scary.
More and more playgrounds are shutting down because of
liability concerns, and then fast food companies are sued in
Federal court because inactive children gain weight.
Newsweek reported that frivolous lawsuits have become so
prevalent in America that children are learning to abuse the
legal system as well. One teacher who taught for 20 years
before retiring said, ``a kid will be acting out in class and
you touch his shoulder and he will immediately come back with,
don't touch me or I'll sue.''
These cases, and many like them, have wrongly cost innocent
people and business owners their reputations and even hundreds
of thousands of dollars. The annual direct cost of American
tort litigation alone now exceeds over $250 billion a year.
When Business Week wrote an extensive article on what the
most effective legal reforms would be, it stated what is needed
are penalties that sting. As Business Week recommended, ``give
judges stronger tools to punish renegade lawyers. Before 1993,
it was mandatory for judges to impose sanctions such as public
censures, fines, or orders to pay for the other side's legal
expenses on lawyers who filed frivolous lawsuits. Then the
Civil Rules Advisory Committee, an obscure branch of the
courts, made penalties optional. This needs to be reversed by
Congress.''
Just a few years ago, the Nation's oldest ladder
manufacturer, a family-owned business near Albany, New York,
filed for bankruptcy protection and sold off most of its assets
due to litigation costs, even though the company had never
actually lost a court judgment.
As Bernie Marcus, co-founder and former chairman of the
Home Depot has described, ``an unpredictable legal system cast
a shadow over every plan and investment. It is devastating for
startups. The costs of even one ill-timed abusive lawsuit can
bankrupt a growing company and cost hundreds of thousands of
jobs.''
In his 2011 State of the Union Address, President Obama
said, ``I am willing to look at other ideas to rein in
frivolous lawsuits.'' I hope the President will act on those
words, and I hope he is watching today.
LARA would require monetary sanctions against lawyers who
file frivolous lawsuits. It would reverse the 1993 amendments
to rule 11 that made rule 11 sanctions discretionary rather
than mandatory. It would also reverse the 1993 amendments that
allow parties and their attorneys to avoid sanctions by making
frivolous claims and demands but by withdrawing them within 21
days after a motion for sanctions has been filed. So LARA would
get rid of the free pass lawyers have now to file frivolous
lawsuits in Federal court.
LARA also would restore mandatory sanctions for frivolous
lawsuits without changing the current standard by which
frivolous lawsuits are judged.
Further, LARA expressly provides that nothing in the
changes it makes to rule 11 shall be construed to bar or impede
the assertion or development of new claims, defenses, or
remedies under Federal, State, or local laws, including civil
rights laws. Consequently, the development of civil rights law
would not be affected in any way by LARA.
LARA applies evenhandedly to cases brought by individuals
as well as businesses, both big and small, including business
claims filed to harass competitors and illicitly gain market
share. The bill also applies to both plaintiffs and defendants.
Anyone who opposes frivolous lawsuits should support a one-
page bill that provides for mandatory sanctions when a judge
finds a case to be frivolous.
Mr. Chairman, although I look forward to hearing from the
witnesses today, I regret I am not going to be able to stay
because of a Steering Committee meeting called by the Speaker
that I need to attend in a matter of minutes. But once again, I
appreciate your having this hearing and I appreciate the
witnesses who are here.
I yield back.
Mr. Franks. Well, thank you, Mr. Smith.
I would now recognize the Ranking Member of the full
Committee, the gentleman from Michigan, Mr. Conyers, for 5
minutes for his opening statement. It looks like Mr. Conyers is
not here. He was here a moment ago.
Then without objection, other Members' opening statements
will be made a part of the record.
We have a very distinguished panel of witnesses today. Each
of the witnesses' written statements will be entered into the
record in its entirety. And I ask that each witness summarize
his or her testimony in 5 minutes or less. To help you stay
within that time, there is a timing light on your table. When
the light switches from green to yellow, you will have 1 minute
to conclude your testimony, and when the light turns red, it
signals that 5 minutes has expired.
Our first witness is Elizabeth Milito. Ms. Milito serves as
senior executive counsel with the National Federation of
Independent Business, Small Business Legal Center, a position
she has held since March of 2004. Ms. Milito came to NFIB from
the Department of Veterans Affairs where she defended VA
hospitals in Maryland, the District of Columbia, and West
Virginia in employment and labor lawsuits and was responsible
for training and counseling managers on fair employment and HR
practices. She has an extensive background in tort, medical
malpractice, employment and labor law. And we are glad to have
you here, Ms. Milito.
Our second witness is Lonny Hoffman. Mr. Hoffman is the
George Butler Research Professor of Law at the University of
Houston Law Center. Professor Hoffman is a specialist on
procedural law in Federal and State courts and has authored
numerous Law Review articles. He has testified before Congress
and at the state level, served on numerous professional
committees and organizations, and he is a member of the Supreme
Court of Texas Rules Advisory Committee and editor-in-chief of
The Advocate, a quarterly journal published by the Litigation
Section of the State Bar of Texas. And welcome, Professor.
Our third and final witness is Victor Schwartz. Mr.
Schwartz is a partner at the law firm of Shook, Hardy & Bacon,
where he is the chairman of the public policy group and
maintains an active appellate practice. Before entering the
full-time practice of law, Mr. Schwartz was a professor and
dean at the University of Cincinnati College of Law. For more
than 2 decades, Mr. Schwartz has been co-author of the most
widely used torts casebook in the United States, ``Prosser,
Wade and Schwartz's Torts.'' Additionally, he is the author of
the leading text, ``Comparative Negligence,'' and has written
over 150 Law Review articles. Welcome, Professor.
So without objection, all Members will have 5 legislative
days within which to submit materials for the record.
And before I recognize the witnesses, it has been the
tradition of the Constitution Committee that they be sworn in.
So if you will all stand and raise your right hand.
[Witnesses sworn.]
Mr. Franks. Thank you all very much.
I now recognize our first witness, Elizabeth Milito.

TESTIMONY OF ELIZABETH MILITO,
NFIB SMALL BUSINESS LEGAL CENTER

Ms. Milito. Thank you, Mr. Chairman and distinguished
Subcommittee Members. My name is Elizabeth Milito and I serve
as senior executive counsel with the National Federation of
Independent Business Small Business Legal Center.
NFIB's mission is to promote and protect the right of its
members to own, operate, and grow their businesses and
represents about 350,000 member businesses nationwide. The
typical NFIB member employs 10 people and reports gross sales
of about $500,000 a year.
We applaud the Subcommittee for holding this hearing on the
problem of lawsuit abuse.
For the small business with 10 employees or less, the
problem is with the $5,000 and $10,000 settlements, not the
million dollar verdicts. When you consider that many small
businesses only net between $40,000 and $60,000 a year, $5,000
paid to settle a case immediately eliminates 10 percent of that
business' annual profit.
In my experience, the greatest abuses occur in lower dollar
suits which often target small businesses. In many instances,
an attorney will just take a client at his word, performing
little, if any, research regarding the validity of a
plaintiff's claim. As a result, small business owners must take
time and resources out of their business to do the plaintiff's
attorney's homework. They must prove their innocence in cases
where a few hours of research at most would lead the attorney
to conclude that the lawsuit was unjustified.
Small businesses are a target a frivolous suits because
lawyers understand they can be more likely than a larger
corporation to settle a case rather than litigate it. Small
businesses do not have in-house counsels to inform them of
their rights, to write letters responding to allegations made
against them, or to provide legal advice. They do not have the
resources needed to hire an attorney to fight small claim
lawsuits. And often they do not have the power to decide
whether or not to settle a case. The insurer makes that
decision for them.
In addition to the financial costs of settling a case are
the incalculable psychological costs. Small business owners
threatened with lawsuits often would prefer to fight in order
to prove their innocence. Settling a meritless case causes the
business to look guilty.
Frivolous lawsuits take many forms, but I would categorize
them into four types. Pay me now or I will see you in court.
Let's not the law get in our way. Somebody has to pay it. It
might as well be you. And yellow page lawsuits.
Pay me nor or I will see you in court often involves a
demand letter. Demand letters are particularly attractive when
the plaintiff can sue a small business for violating a State or
Federal statute. The letter alleges the small business violated
a particular statute, and at some point the letter says that
the small business has an opportunity to make the whole thing
go away by paying a settlement fee up front, the sooner, the
better. If these demands are not met, the letter threatens a
lawsuit.
Let's not let the law get in our way. While most attorneys
adhere to the ethical standards to which they have been sworn
to uphold, there are instances where attorneys fall short and
fail to research the validity of the plaintiff's claim and may
even fail to review the statute they allege the defendant
violated.
Somebody has to pay and it might as well be you. This is
where the plaintiff may have been harmed but is suing the wrong
person. This is what happened to NFIB member Hugh Froedge.
Froedge's business was named in a personal injury lawsuit after
the plaintiff was injured at work. Although there was no
evidence that Froedge's belt conveyor caused the plaintiff's
injuries, the lawsuit took 11 years to resolve. In the end,
Froedge's insurance company decided to settle the matter, even
though Froedge believed he was not culpable and would have
preferred to fight.
In yellow page lawsuits, hundreds of defendants are named
and it is their responsibility to prove they are not culpable.
Plaintiffs name defendants by using vendor lists or even lists
from Yellow Pages of businesses operating in a particular area
or during a particular time. For example, an NFIB member has
been targeted in asbestos litigation. The family-owned
commercial construction business was founded over 40 years ago
and has been targeted in recent years in asbestos litigation as
manufacturers have gone bankrupt, leaving a void of solvent
defendants. As a result, attorneys are now trolling for
construction firms that existed in the 1960's and are still in
existence today regardless of whether the plaintiff had any
connection to the firm. Still, to get to dismissed from these
cases, the NFIB member regularly spends thousands of dollars in
attorney's fees and discovery costs.
Legislation is sorely needed to reform our Nation's civil
justice system. H.R. 966, recently introduced by Representative
Lamar Smith, would be particularly helpful in curbing, if not
stopping, many of the types of suits I have described. It would
put teeth back into rule 11.
Thank you for inviting me to testify today.
[The prepared statement of Ms. Milito follows:]

Prepared Statement of Elizabeth Milito

__________
Mr. Franks. Mr. Hoffman?

TESTIMONY OF LONNY HOFFMAN, PROFESSOR,
UNIVERSITY OF HOUSTON LAW CENTER

Mr. Hoffman. Chairman Franks, Ranking Member Nadler,
Members of the Committee, everyone is concerned with costs and
delays in Federal court, but the proposed legislation will not
solve the problems that are said to exist. To the contrary, it
can confidently be said, contrary to the sponsor's intentions,
that this bill will actually increase cost and delays and
foster greater litigation abuse.
The source of this confidence is the vast body of empirical
evidence that has been collected relating to the 1983 version
of rule 11, the model on which this bill is based. That
empirical evidence is so persuasive that it has produced a
remarkable degree of agreement across the political spectrum
that the 1983 amendment of rule 11 was one of the most ill-
advised procedural experiments ever tried.
Because of the existence of this research, which
incidentally I cite in my prepared statement at length for the
Committee's review, there is much that we can learn from our
past. Yet, in proposing this regressive reform of rule 11, the
bill fails to heed what the history has to offer.
One sobering lesson from that history is that the 1983 rule
was frequently misused as a compensatory fee-shifting device
and that this was one key trigger for the frivolous satellite
litigation over sanctions that followed. This point is
particularly relevant today since the bill that the Committee
has before it emphasizes compensation as an expressly
authorized objective of the rule. It is likely, therefore, that
the proposed legislation will actually make things even worse
than they were in 1983. After all, we witnessed a scourge of
meritless rule 11 motions even though deterrence, not
compensation, was the rulemakers' intended goal back then, and
there was no express reference to compensation in the text of
that rule.
The bottom line on this point is this. It is difficult to
see that anyone who is concerned over costs, delays, and abuse
could support legislation that, as our history teaches, is
almost certain to lead to substantially greater costs, delays,
and abuse in the Federal courts.
A second and last lesson from history I want to highlight
today is perhaps more sobering of all. The empirical evidence
persuasively shows the profound discriminatory effects of the
1983 rule. Civil rights claimants, in particular, were impacted
most severely. There are numerous reasons why this is so, but
we know that one is that, as noted, the '83 rule was often
misused as a cost-shifting tactic. These claimants, who are
frequently resource-poor, faced the greatest threat from the
monetary sanctions that could be and were imposed under that
rule.
Thankfully many, though not all, of the discriminatory
effects against civil rights claimants and others were
ameliorated by the 1993 amendments to rule 11 and especially
its inclusion of a safe harbor provision. This result likely
explains, at least in part, the overwhelming support that the
current rule enjoys, as a number of surveys of Federal judges
and lawyers has consistently shown. And again, I cite all of
these surveys in my prepared remarks for the Committee's
consideration.
In conclusion, it is instructive to recollect that judicial
rulemakers remain actively involved in monitoring the state of
civil litigation in the Federal courts and can be relied upon
to do their work. For those who are concerned about costs and
delays, the sounder course is to set this legislation aside and
look for more productive ways to improve the administration of
justice.
Thank you.
[The prepared statement of Mr. Hoffman follows:]

__________

Mr. Franks. Thank you, Professor.
Mr. Schwartz?

TESTIMONY OF VICTOR E. SCHWARTZ,
SHOOK, HARDY & BACON L.L.P.

Mr. Schwartz. Good morning and thank you for the
invitation, Chairman Franks; Mr. Nadler, my home State Member;
Mr. Scott; and Members of the Committee.
I guess lawyers can prove almost anything, but I am just
going to get to the base of what actually goes on in real life.
I had a small client. Up in New Jersey, they have strong
laws against frivolous claims. And she was barraged with
lawsuits on dram shop acts. We found one where the fellow had
stopped at numerous bars. His police report did not indicate
that he stopped at her place of business. We filed a frivolous
claim. She was compensated for the costs she endured. No more
claims were filed against her that were phony at all. It was
over. And they had strong sanctions against frivolous claims.
Frivolous claims are defined in the bill. These are not
some weird hypotheticals. It is real serious stuff. You have to
misstate facts, misstate law. There is no ambiguities at all.
And under the current system, unfortunately, people who are
engaging in this practice are not caught.
The 21-day safe harbor rule is unbelievable, but I will
share with you just briefly how it works. Instead of filing a
frivolous claim petition in court, you give it to the
plaintiff's lawyer. You have to spend $8,000-$10,000 to write
the motion. Then he can decide whether or not he wants to just
dismiss the claim, and then 30 days later, he can file it
again. The court does not even see it. So that system allows
anyone, if they are unscrupulous, to game the system.
If the court actually hears a frivolous claim motion, under
the current rules, it is basically a wrist slap, money going to
the court, not the small business that Ms. Milito represents
who now will see his or her insurance go up over a completely
and totally baseless claim.
Our testimony shows that 95 percent of the judges believe
that rule 11 had a positive effect on practice when the change
was made. Three-quarters of them felt that the benefits of rule
11 outweighed their problems. When rule 11 was changed, all the
checks and balances that we have on rules simply folded. The
Supreme Court is the ultimate party to approve the rules, but
as Chief Rehnquist said at the time, we really did not look at
the merits of it. Earlier Chairman Smith quoted what Justice
Scalia said, and that was that between somebody who is abused
and an abuser, we are going to go with the people who are
abused by this system and this rule change is wrong. And he was
very prophetic because that is exactly what has occurred.
There is also a domino effect of rule 11. When the Federal
rules change, State rules change. And as my testimony shows, in
States--and it is printed there--States felt they had to change
it because they want to have the same rules in the Federal
courts, Mr. Forbes, as they do in the State courts to avoid
forum shopping. So States, all of a sudden, were imprisoned
with a rule that they did not like because the sanctions were
not there. They had no problems that the professor spoke of in
their State courts.
966 ends the 21-day game system and it puts penalties where
they should go, on the lawyer who brings them, and the money
that is lost to the small businesses who have suffered the
problem of the system. It is their costs. And some of the
businesses are not insured. One frivolous claim can put a small
business right under after they pay for it, and they are
weaponless to fight it.
There have been past, as Mr. Nadler says, considerations of
prior LARA's, but we tried, and the people who drafted this
learn from questions that were raised. The bill says, with
respect to anything in civil rights, nothing in this act shall
be construed to bar or impede the assertion of the development
of new claims, defenses, remedies under State or Federal law,
including civil rights laws. You could not be clearer than
that.
There were federalism claims raised by some prior bills,
and that has been addressed too.
I am just going to conclude with four things that have been
asserted against the bill.
That LARA will prolong satellite litigation. After rule 11
in 1983 was enacted, there was a lot of litigation, but once it
settled out, there was not a lot. And think of the alternative.
A person has no weapon to stop a frivolous claim. In terms of
basic risk-benefits in our society, which do you go with? Some
litigation or no weaponry to stop a baseless claim that the
President has talked about?
The sanctions will not impede justice. The rule works both
ways.
And finally--and I have heard it so many times from my
trial lawyer friends, plaintiffs lawyer friends, well, bring me
more data to show me that it is really a problem. It is asking
for a bucket of steam. As Ms. Milito says, most of these things
occur with a demand letter. The frivolous claim never gets to
court. Under the 21-day rule, basically the plaintiff's lawyer
gets his money. It is disposed of and the frivolous claim never
sees the light of day. We don't have any legal way to strike a
demand letter. You can't do that. So this idea that it is not a
problem because there are no great numbers of suits is just
phony.
You have done a good job with this bill. It is really
needed now. In this economy, the last thing we need is more
businesses and others, individuals, hurt by frivolous claims.
[The prepared statement of Mr. Schwartz follows:]

__________

Mr. Franks. I want to thank the witnesses for their
testimony. I will now begin the questioning by recognizing
myself for 5 minutes.
Ms. Milito I will begin with you, if I could. As you know,
lawsuits affect the costs and availability oftentimes of
liability insurance for small businesses, and this is true,
obviously, for meritless lawsuits because in many instances it
will be cheaper for a small business to settle a meritless case
than to defend against it in court.
In NFIB's experience, have the effects lawsuits have on the
costs and availability of liability insurance forced small
businesses to close their doors or not be able to expand or not
be able to hire additional employees?
Ms. Milito. Thank you. That is a good question, and the
answer is yes and our experience has shown that. In a poll NFIB
conducted, nearly one-quarter of small employers reported they
had either been sued or credibly threatened with a lawsuit. As
Mr. Schwartz pointed out, the precise dimensions of the
frivolous lawsuit problem are hard to pin down, but if you ask
any NFIB member whether frivolous lawsuits are a problem, they
will tell you, yes, they are because even if their business has
not been sued or threatened with a lawsuit or demand letter,
they know a business that has.
And I think it is particularly problematic that this poll
conducted by NFIB showed that over 20 percent of small business
owners reported that they spend more time on liability problems
and potential liability problems than such vital business
activities as obtaining or repaying business loans, evaluating
the competition, or looking for ways to cut costs.
I was on the phone yesterday with a member. She has not
taken a paycheck out of her business for herself in over 6
months because she is concerned about meeting the payroll for
her two employees. She is concerned about paying the rent. A
$5,000 settlement would put her under because that is her rent.
That is her weekly payroll. So these small dollar lawsuits and
demands do affect our members.
Mr. Franks. Thank you.
Mr. Schwartz, I am just one of your many admirers, and I
wanted to ask you a--sir?
Mr. Schwartz. I always have trouble with that.
Mr. Franks. No, no.
Mr. Schwartz. But thank you, sir.
Mr. Franks. With the prior versions of LARA, opponents have
often expressed deep concern about the act's potential to
impede just causes such as landmark developments in civil
rights cases because at that point in history, perhaps the
legal claims might have been deemed frivolous. Would LARA, if
it was in effect in the 1950's, have stifled the civil rights
movement and led to the dismissal of cases such as Brown v.
Board of Education or cases like that?
Mr. Schwartz. Under the bill you put together, sir,
absolutely not. The bill is crystal clear that nothing in the
act is going to be there to impede the assertion or development
of new law, including civil rights laws. So that is not an
argument against this bill. The development of new law is right
there and not blocked in any way.
Mr. Franks. Well, as you know, Mr. Schwartz, nothing in
LARA changes the legal standard that Federal district courts
apply to determine whether a litigant has violated rule 11. It
is really simply about making sanctions mandatory and clearly
stating what will be included in the monetary penalty.
In the past some have, as you know, characterized these
changes as draconian and argued that they will lead to delay,
increased costs, and satellite litigation. And you touched on
that partially, but would you expand and respond to those
arguments?
Mr. Schwartz. Absolutely. The criteria of rule 11 are tough
as to what a frivolous claim is. We are talking about claims
that have no basis in fact, and a Federal judge is going to
have to make a determination about that. And I worked for a
Federal judge for 2 years, a trial judge, and he was not going
to find a claim has no basis in fact unless it had no basis in
fact.
As far as satellite litigation is concerned, some will
arise, but think of all the claims that will not be filed if
there is a strong deterrent against filing them. Right now,
there is none. It is paper-mache, and that deterrent will save
legal costs because the cases just will not be filed against
businesses and individuals when there is no basis in fact.
Mr. Franks. Thank you very much. My time is about up. So I
am going to refer to the Ranking Member here for questions.
Mr. Nadler. I thank you, Mr. Chairman.
Professor Hoffman, during the decade that the 1983 version
of rule 11 was in effect, the version that this bill would in
effect bring back, at least a quarter of all cases on the
Federal civil docket were burdened by rule 11 proceedings that
did not result in sanctions. Based on our experience with the
1983 version of the rule and, for that matter, our experience
with the 1993 revision of the rule, will this bill lead to less
litigation or more litigation and why?
Mr. Hoffman. Thank you for your question.
As I indicated in my prepared remarks, I am concerned that
this bill will lead, as the evidence shows compellingly, to a
great deal more cost and delay, fostering additional abuses.
And if I could expand on that to speak even further to your
point, one of the things that is astonishing is when you survey
the Federal judges who are in charge of applying the rules, who
were in charge back in '83, who are in charge today after the
'93 amendment went into effect in applying the rules, the same
Federal judges that Mr. Schwartz was speaking about a moment
ago--and when they are polled--these are the people who are on
the front lines who are dealing with these cases--the numbers
are astonishingly against this bill.
So just to give a few of these, all of which are--and
more--in my prepared statement, when asked in 2005 by a survey
from the esteemed Federal Judicial Center, more than 80 percent
of 278 Federal district judges agreed with this statement: rule
11 is needed and it is just right as it stands now. An even
higher percentage, 87 percent, preferred the existing rule to
the 1983 version, the version on which this bill is based.
Equally strong support, 85 percent, existed for the safe
harbor provision that is now in the rule, while more than 90
percent oppose changing the rule to make the imposition of
sanctions mandatory for every rule 11 violation.
Mr. Nadler. Okay, thank you.
Now, when the advisory committee amended rule 11 in 1993,
they gave the courts discretion to impose sanctions and noted
that the purpose of sanctions is to deter bad conduct, not to
reward the other party. Why did they give the court this
discretion, which this bill would take away? And why did they
make sanctions about deterrence rather than about compensation?
Mr. Hoffman. So, look, let me start with the business of
mandatory. First, it is vital that district courts have
discretion to apply not just rule 11 but all of the critical
rules, all of which are in the toolbox, and this notion, again,
that was suggested that there are no other alternatives for
controlling and managing litigation costs and managing the
litigation system is just utterly contrary to the actual
experience of litigants and judges every single day. Whether it
be rule 8 on pleadings or rule 11 on sanctions or rule 12 on
motions to dismiss or rule 56, we know that district judges are
appropriately the ones at the front lines to handle these
things, and that is exactly why the discretion needs to be
there.
On compensation, as I have already said in my remarks, we
know that the focus on compensation that wasn't, again, the
intent of the '83 rulemakers and wasn't even in the bill was
something that utterly deluged and was one of the key problems
for the avalanche of satellite litigation over sanctions that
followed. So we know that the monetary focus is what is drawing
there. And that is why I say in my prepared remarks the concern
should be even greater where this bill specifically mentions
compensation as a goal to be achieved. It is offering it on a
silver platter.
Mr. Nadler. Thank you.
And what are the advantages of the 21-day safe harbor
provision of rule 11? Has that helped to reduce satellite
litigation?
Mr. Hoffman. An enormous amount. The studies show that it
helps across the board, though it helps especially with civil
rights claims.
And actually if I could just speak to that also for a
moment. This notion that the bill has in the end of it that it
is going to protect against assertions of novel claims and that
somehow, therefore, we can just utterly dismiss all of the
strong empirical evidence on discrimination from the '83 bill
is utterly misguided. We know that there were all kinds of
reasons why those civil rights claimants----
Mr. Nadler. And could you comment on Mr. Schwartz's
comments on the safe harbor provision that people just do this,
in effect, out of court and this will prevent that?
Mr. Hoffman. And so that is another interesting point. If
in fact, as both of the other witnesses indicated, that one of
the serious problems here is that these problems happen at the
demand letter stage right before there is litigation, then rule
11 has no application whatsoever to that. Right? Those
problems, if they exist, will continue to exist independent of
this rule. The value of the safe harbor----
Mr. Nadler. And getting rid of the safe harbor provision
will not affect that?
Mr. Hoffman. No, because it is before there is a lawsuit.
In other words, that is just to say rule 11 is inapplicable
because it is prior to a lawsuit, which is an interesting
point.
Mr. Nadler. Let me ask Mr. Schwartz to comment on that.
Mr. Schwartz. Well, you have to connect the dots, Mr.
Nadler. The fact that the demand letters are capitulated to is
because there are not really strong rules against frivolous
claims.
Mr. Nadler. No, no, no. But Professor Hoffman's point is
that the question of the safe harbor provision is irrelevant to
a demand letter sent before the litigation commences because
rule 11 in any form can't reach that conduct because it isn't
part of the lawsuit.
Mr. Schwartz. Well, in the life that I have led, the two
are connected because if a person knows that he has a weapon to
sanction the lawyer who has brought the frivolous claim, they
are not going to capitulate to the demand letter and make a
settlement, and lawyers calculate in their own mind in the real
world how much it is going to cost to defend----
Mr. Nadler. Let me just ask Professor----
Mr. Schwartz [continuing]. And then they considerably lower
what is in their complaint and that is how they game the
system.
Mr. Nadler. And Professor Hoffman, would you comment on
that? And then my time has expired.
Mr. Hoffman. So just to wrap up on that, two points there.
So, one, the point there is that rule 11 has no application at
all. It cannot be used as a sword, and although it may serve as
this potential deterrent effect that Mr. Schwartz is talking
about, that turns out to only be true to the extent that you
have any risk at all of being sanctioned. And of course, if
everything settles out of court, there is no risk whatsoever
there.
The other quick point to make is I wanted to commend
Chairman Franks for your memo of Thursday, March 10, and one of
the points that you make there is important--again, I commend
you for it--pointing out that nothing LARA changes the current
standards by which frivolous lawsuits are judged. And so when
Mr. Schwartz talks about this deluge and the paper-mache that
exists in the current rule, none of that is addressed. And so
one must assume, therefore, that the rule is fine, which is the
underlying presumption that is obviously there.
Mr. Nadler. Thank you very much.
I yield back.
Mr. Franks. Thank you, Mr. Nadler.
And I now recognize for 5 minutes Mr. Forbes.
Mr. Forbes. Mr. Chairman, thank you for this hearing today.
Mr. Franks. Mr. Forbes, I don't think your microphone----
Mr. Forbes. I am sorry. Can you hear now?
I just wanted to thank our witnesses. We have a very
talented panel and I appreciate your written comments.
Mr. Chairman, I would like to just kind of make some
comments about what I have heard both from the dais here and
from the panel.
First of all, this is not about civil rights claims. I
mean, you know, basically when you cut to the chase on this, we
know what this is about. If you like the plaintiffs lawyers,
you don't like this legislation. If you support small- and
medium-sized businesses who hire most of our constituents, you
like this legislation.
One of the things I heard the Ranking Member mentionis that
this was a solution in search of a problem, but then I heard
Mr. Hoffman say that this was not the right solution, that
there is a problem, it is just not the right solution. I
remember when we brought gang legislation before this very
Committee, the first comment that was made was that that was a
solution in search of a problem. Where is the problem? Nobody
raises the fact today that we don't have a problem with gangs
and that we need to do something about it.
The other thing, Mr. Chairman, that I would just say is
oftentimes--Ms. Milito, the one thing I disagree with you on is
I don't think it is just the $5,000 settlements that we are
talking about. We talk about those a lot, but the real world is
this. Mr. Schwartz is exactly right. We don't hear from the
people that this really impacts the most. We don't get them
walking in here because they are working. They are home and it
is very difficult for them to come up here and sit where you
are sitting and make those claims. Let me give you a real-world
case that brings this home, and it wasn't a $5,000 claim.
Several years ago, I had a constituent of mine that came to
me and they were wrapped up in one of these frivolous suits. It
was a tort situation that they had absolutely no liability in
at all, and they were brought in as an additional party
defendant to that case. They came in and they had the demand
letter. They contacted the attorney and said we don't have any
liability. We weren't even involved in the contract that you
are talking about in the tort liability that took place. The
plaintiff's attorney said, no, no, we are continuing to move
forward. We are bringing all of these individuals in as party-
defendants.
So they did what most small business people would do that
you represent, and they said, well, we are going to turn it
over to our insurance company because we have been paying all
the premiums on our insurance company and let them defend it.
Well, unfortunately for them, the insurance company was the
reciprocal, which had filed bankruptcy and therefore wasn't
there to defend them.
They then approached me and I said you need to go to a law
firm and have an analysis done and see what they say. They
brought me the letter back that I read, and here is the
analysis. The law firm said you are absolutely right. You have
zero liability in this case. We will win this case if you go to
court, but it will cost you $500,000 to defend this case. The
claim is $300,000 that is being made to you. What do you do if
you are a small businessman?
And there is no disincentive for them to bring those cases
and to push it and to try to get hose businessmen to come up,
and if they don't settle for $300,000, it is $50,000 or it is
$100,000, but it is oftentimes even more than that $5,000.
So, Mr. Chairman, I think Mr. Schwartz is right. I think
this is a huge incentive to stop those frivolous cases and to
strike a balance that we need if we are really serious about
putting America back to work and hiring and jobs instead of
staying in the courtroom.
And I yield back.
Mr. Franks. Thank you, Mr. Forbes. I am glad you came by
today.
Now I will recognize Mr. Scott from Virginia for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
Ms. Milito, you indicated--could you remind me what portion
of your members had suits filed against them?
Ms. Milito. In a poll NFIB conducted--and again, this was
not just of NFIB members, but of all small business owners--
nearly a quarter of small employers reported they had either
been sued or credibly threatened with a----
Mr. Scott. And how many of your small businesses filed
suits against somebody else?
Ms. Milito. I do not have that information.
Mr. Scott. Is it fair to say that most, at one time or
another, have filed suit, collection or some other kind of
lawsuit? And is the fact that a suit has been filed evidence
that it is necessarily frivolous?
Ms. Milito. You are saying suits that a small business
owner might file? Is that what you are asking?
Mr. Scott. Or might be filed against them. The fact that it
is filed against them does not mean it is necessarily
frivolous.
Ms. Milito. No, you are correct. You are correct.
But what I can tell you----
Mr. Scott. And that small businesses file suits against
other small businesses.
Ms. Milito. Our members don't like to go court. Period.
They don't like to have suits filed against them, and they
don't like to file lawsuits. They don't want to get involved in
litigation. Period.
Mr. Scott. We have heard comments about $5,000 cases. How
many of these are subject to rule 11 because they would be in
Federal court?
Ms. Milito. Well, as Mr. Schwartz--first of all, certainly
our members are sued in Federal court. The asbestos litigation
story that I referred to--most of those claims are occurring in
Federal court. So in those yellow page lawsuits, a lot of those
are in Federal court. And I do believe LARA would reach those
claims.
And as Mr. Schwartz pointed out in his written statement
too, many of the States' rules of civil procedure do mimic or
change when the Federal rules change. So I think it would have
a deterrent effect and aid small businesses.
Mr. Scott. The $5,000 cases would not be affected by rule
11 in Federal court.
Ms. Milito. Well, these aren't $5,000 claims. These are
$5,000 settlements. The claims can be much more.
Mr. Scott. Thank you.
Mr. Hoffman, comments have been made about civil rights
litigation. The bill has this savings clause in it that says
that nothing in this act shall be construed to bar or impede
civil rights cases. The present standard in rule 11 would not
be affected. Is that right?
Mr. Hoffman. That is correct.
Mr. Scott. And if civil rights cases are adversely
affected, this wouldn't help that situation. Is that right?
Mr. Hoffman. That is right, and of course, remember it has
no application whatsoever when the issue that is allegedly
sanctionable isn't the bringing of a novel legal theory. For
instance, if the claim is you didn't do you right factual
investigation, that provision has no application whatsoever.
Mr. Scott. And is changing existing law--if you are asking
for a change in existing law, is that necessarily exempt from a
sanction or is it up to the judge?
Mr. Hoffman. Correct. The question of whether that is
sanctionable is not saved by that final provision that is in
there. That is right. It is not dispositive, if that is your
question.
Mr. Scott. But the judge gets to decide when it is
frivolous and when it is not frivolous.
Ms. Milito. The judge gets to decide whether or not rule 11
has been violated.
Mr. Scott. And so in 1954 when the law was fairly clear
that separate but equal was the law of the land, could a court
reasonably conclude that a lawsuit to change that would be
frivolous?
Mr. Hoffman. Certainly.
Mr. Scott. And in the 1960's when the law of the land was
that Blacks and Whites couldn't marry, that was well
established law. Is that right?
Mr. Hoffman. That is correct.
Mr. Scott. Would such a filing to try to change that law be
up to the judge to determine whether it was frivolous or not?
Mr. Hoffman. Correct.
Mr. Scott. In an automobile accident, just a routine
automobile accident, when a filing is made, my experience is
that what you get back is a general denial of liability. In a
case of a rear end automobile accident, when you get a general
denial, would the defendant be subject to sanctions for not
admitting liability?
Mr. Hoffman. So rule 11 technically applies to all
pleadings, all motions, and all other papers that are filed by
lawyers and their parties in Federal court.
Mr. Scott. And so if you get a general denial and you get
in this rule 11 litigation that the gentleman from New York has
talked about, would the next filing be I need attorney's fees
for your general denial?
Mr. Hoffman. The rule would technically apply to them as
well. Mr. Scott, it is one of the most astonishing things that
when critics talk about the deluge of inappropriate lawyering,
somehow it is always a one-way street and there is no
suggestion ever even considered that the defense lawyer, who is
billing by the hour, might have some incentive to increase
costs and delays unnecessarily.
Mr. Scott. And the attorney's fees, if this is applied
against the defendant, would be mandatory. Is that right?
Mr. Hoffman. The rule would apply equally for plaintiffs
and defendants.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Franks. Well, with that, I want to thank all of our
witnesses for their testimony today.
Without objection, all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses which we will forward and ask the witnesses to
respond as promptly as they can so that their answers may be
made part of the record.
And without objection, all Members will also have 5
legislative days to submit any additional materials for
inclusion into the record.
And with that, again I thank the witnesses and the Members,
and this hearing is adjourned.
[Whereupon, at 10:59 a.m., the Subcommittee was adjourned.]

A P P E N D I X

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