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


 
  CAN WE SUE OUR WAY TO PROSPERITY?: LITIGATION'S EFFECT ON AMERICA'S 
                         GLOBAL COMPETITIVENESS

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON THE CONSTITUTION

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2011

                               __________

                           Serial No. 112-31

                               __________

         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 R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania             [Vacant]
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]

      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

                              ----------                              

                              MAY 24, 2011

                                                                   Page

                           OPENING STATEMENTS

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Committee on the Judiciary.......     1
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Chairman, Subcommittee on the 
  Constitution...................................................     3

                               WITNESSES

Paul Hinton, Vice President, NERA Economic Consulting
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
Charles Silver, McDonald Chair in Civil Procedure, University of 
  Texas School of Law
  Oral Testimony.................................................    18
  Prepared Statement.............................................    20
John H. Beisner, Skadden, Arps, L.L.P.
  Oral Testimony.................................................    28
  Prepared Statement.............................................    30


                   CAN WE SUE OUR WAY TO PROSPERITY?:
                    LITIGATION'S EFFECT ON AMERICA'S
                         GLOBAL COMPETITIVENESS

                              ----------                              


                         TUESDAY, MAY 24, 2011

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

    The Subcommittee met, pursuant to call, at 2:08 p.m., in 
room 2141, Rayburn Office Building, the Honorable Trent Franks 
(Chairman of the Subcommittee) presiding.
    Members present: Representatives Franks, Smith, Chabot, and 
Scott.
    Staff present: (Majority) Holt Lackey, Counsel; Sarah 
Vance, Clerk; Grant Anderson, Legal Research Intern; (Minority) 
David Lachmann, Subcommittee Chief of Staff; and Veronica 
Eligan, Professional Staff Member.
    Mr. Franks. This hearing will come to order. We want to 
welcome everyone to the Subcommittee on the Constitution, 
particularly the witnesses that are with us today.
    We want to welcome you all here today. As you heard, the 
votes have just been called, and we especially appreciate our 
witnesses. So what we are going to do for the moment here is we 
are going to defer to the full Committee Chairman, Mr. Smith, 
for an opening statement.
    Mr. Smith. I thank the Chairman, and I also want to thank 
the Chairman and the Ranking Member for the special 
dispensation that allows me to sneak in an opening statement 
before I go vote. I am not necessarily going to be able to come 
back after votes, but I did want to make my statement. So, let 
me proceed, and once again, thank you.
    Today the Judiciary Committee continues to pursue its job 
creation agenda. The unemployment rate remains close to 9 
percent as it has throughout this Administration. Congress 
should do everything it can to reduce the cost of creating jobs 
in America and to put Americans back to work.
    For the Judiciary Committee, this means making sure that 
America's lawsuit system is efficient and fair. Both the 
Lawsuit Abuse Reduction Act, which reigns in frivolous 
lawsuits, and the Health Act, which limits non-economic damages 
in health care, are at the top of this Committee's agenda.
    Today we continue this reform agenda by investigating ways 
that America's bloated lawsuit system harms our global 
competitiveness. I hope that today's hearing highlights some 
specific areas of the law that could be improved by reasonable 
common sense reforms.
    The Department of Commerce recently and correctly concluded 
that America's inflated lawsuit costs are ``an important U.S. 
competitiveness concern.'' The U.S. spends twice as much on 
lawsuits as similar countries, which hurts American 
competitiveness in at least three ways.
    First, excessive lawsuit costs leave less for American 
companies to invest. Money that America spends on its 
litigation system is money that is not going to research, 
expansion, and job creation.
    Second, our lawsuit system puts American companies at a 
disadvantage when they are doing business abroad. American 
companies are increasingly being sued in domestic courts for 
wrongs that they allegedly committed abroad. Many of these 
suits have been marred by disturbing evidence of fraud, 
misrepresentation, and corruption by American and foreign trial 
lawyers.
    Third, our lawsuit system discourages foreign investment in 
the American economy. A 2008 study by the Department of 
Commerce concluded that the U.S. litigation environment harmed 
our competitiveness by discouraging foreign investment. That 
study found that for international businesses, the ``United 
States is increasingly seen as a nation where lawsuits are too 
commonplace.''
    Global surveys of business leaders have shown that the high 
costs of our lawsuit system discourage foreign-owned companies 
from expanding businesses and creating jobs. Many of these 
problems share a common cause. Too many trial lawyers view the 
law as a business to make money for themselves rather than as a 
profession to achieve justice for their clients. This upside 
down view of the purpose of the law explains many of the most 
questionable practices we see today.
    Trial lawyers aggressively recruit clients to build massive 
and profitable class actions. They settle class action lawsuits 
on terms that pay them millions in attorneys' fees while giving 
relatively little to the clients whom the lawsuit was supposed 
to protect. They encourage hedge funds to invest in their 
lawsuits as if they were any other startup business.
    None of this is consistent with the advice of the most 
revered lawyer in American history, Abraham Lincoln. Lincoln 
advised his fellow lawyers, ``Discourage litigation. Persuade 
your neighbors to compromise whenever you can. Point out to 
them how the nominal winner is often a real loser in fees, 
expenses, and waste of time. As a peacemaker, the lawyer has a 
superior opportunity of being a good man. There will still be 
business enough.''
    I hope that today's hearing illuminates ways that this 
Committee can help turn America's legal system toward President 
Lincoln's worthy standard.
    Thank you, Mr. Chairman, and I yield back.
    Mr. Franks. And I thank the Chairman. We are going to go 
ahead and recess now for the votes. And so, this meeting stands 
recessed until after the votes.
    [Recess.]
    Mr. Franks. The meeting will come to order.
    We are reconvening the hearing here. I apologize that we 
have been waiting here for others, but it turns out that we had 
already opened it with a quorum, so we are in good shape. And 
you know how those things go.
    But I want to welcome you this afternoon again to the 
Subcommittee titled, ``Can We Sue Our Way to Prosperity?: 
Litigation's Effect on America's Global Competitiveness.''
    America faces the highest lawsuit costs of any developed 
country. America's tort lawsuit costs are at least double those 
of Germany, Japan, and Switzerland, and triple those of France 
and the United Kingdom.
    I believe as today's testimony will show, these lawsuit 
costs serve as a tax on anyone who would create jobs in 
America. And of all of the taxes that can be imposed, this 
lawsuit tax is perhaps the most regressive, job crushing, and 
harmful to America's global competitiveness.
    The lawsuit tax is regressive because it falls much harder 
on small businesses than on big businesses. According to a 
pending study conducted by one of our witnesses today, small 
businesses earn just more than one-fifth of business owner 
revenues in America, but bear more than four-fifths of the 
business lawsuit costs. Small businesses are less likely to 
have the level of insurance that larger businesses carry. Small 
businesses are not as experienced in the legal system and do 
not have all of the same access to elite lawyers.
    And precisely because they are small, small businesses are 
vulnerable to being wiped out entirely by just one lawsuit. 
This is why, though, it is relatively rare for large businesses 
to be driven completely out of business by a lawsuit. Probably 
every member of this House has met a small businessman or woman 
from their district whose livelihood has been threatened by a 
lawsuit.
    This lawsuit tax is particularly harmful to job creation 
because it is the kind of tax that businesses cannot anticipate 
and the only kind of tax that can cost more than the entire 
revenue and assets of the business itself.
    Now, while any tax can slow job creation at the margins, 
the lawsuit tax can stop job creating businesses in their 
tracks. The lawsuit system harms competition because it leads 
to America spending about twice as much on tort litigation as 
our major global competitors. The American tort system costs 
about 2 percent of gross domestic product as compared to about 
1 percent or less of GDP in most other developed countries.
    Having the highest lawsuit tax rate in the developed world 
makes it harder for American businesses to grow their 
businesses, to create jobs, and to compete in the international 
economy.
    The trial lawyers, their political allies, and other 
defenders of the lawsuit status quo, often argue that these 
high costs are necessary to deter dangerous negligence and 
compensate the injured.
    Everyone agrees that we should minimize the amount of 
injury caused by negligence, and that Americans who are harmed 
by the negligence of others should be compensated. But there is 
little evidence that America's additional tort lawsuit costs 
make Americans any safer. According to World Health 
Organization statistics, Americans die from unintentional 
injuries at a higher rate than our peers in other developed 
countries. Among countries that the CIA designates as 
developed, only Finland and South Africa have higher rates of 
accidental death. And other modern developed countries justly 
compensate the injured while spending less than half of the 
amount on litigation that we spend here in America.
    America's bloated lawsuit costs undermine American 
competitiveness because they only handicap those businesses 
that are trying to build wealth and create jobs in America. 
American businesses trying to grow to compete on a global scale 
face lawsuits and costs and risks that their international 
competitors do not. Americans doing business abroad must worry 
about being sued back home, and foreign businesses are much 
less likely to invest in America and create jobs that are here 
because they are concerned about America's high lawsuit costs.
    In a competitive global economy, America cannot afford a 
lawsuit environment that is so much more burdensome than our 
competitors. To borrow a phrase, America cannot ``win the 
future'' while carrying the extra weight of the developed 
world's highest litigation costs.
    And with that, I want to welcome the witnesses again. And 
we will introduce them, and we will begin.
    Indeed we have a distinguished panel of witnesses today. 
Our first witness, Mr. Paul Hinton, is the vice president of 
NERA Economic Consulting and has conducted empirical economic 
research on the costs of American litigation. He holds a B.A. 
from Oxford University and a master's degree in public policy 
from the Kennedy School at Harvard.
    Our second witness, Mr. Charles Silver, is a McDonald chair 
in civil procedure at the University of Texas School of Law. 
Mr. Silver's research and writing focuses on health care, law, 
and policy, civil procedure, complex litigation, and the 
professional responsibility of attorneys. He is currently an 
associate reporter on American Law Institute's project on 
aggregate litigation and a member of the ABA TIPS task force on 
the contingent fee.
    Our third witness, Mr. John Beisner, is a partner and co-
head of the mass torts and insurance litigation group at 
Skadden Arps, L.L.P. He has researched and frequently spoken 
and testified about alleged shortcomings in America's Federal 
litigation system that exposes American businesses to undue 
liability.
    Each of the witnesses' written statements will be entered 
into the record in its entirety. I ask that each witness 
summarize his testimony in 5 minutes or less. To help you stay 
within that time frame, 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. When the light turns red, it 
signals that the witness's 5 minutes have expired.
    Before I recognize the witnesses, it is the tradition of 
Subcommittee that they be sworn in. So, if you will please 
stand to be sworn.
    [Witnesses sworn.]
    Mr. Franks. Thank you. Please be seated.
    I now recognize our first witness, Mr. Paul Hinton, for 5 
minutes.

           TESTIMONY OF PAUL HINTON, VICE PRESIDENT, 
                    NERA ECONOMIC CONSULTING

    Mr. Hinton. Thank you, Chairman Franks and distinguished 
Committee Members, for inviting me to provide testimony today 
on the effects of litigation on competitiveness.
    Mr. Franks. Pull your mic a little bit closer to you, sir. 
Is it on?
    Mr. Hinton. How is that? Yes.
    Mr. Franks. Okay.
    Mr. Hinton. Okay, thank you.
    Yes, my name is Paul Hinton. Thank you for your 
introduction. I am a vice president at NERA Economic 
Consulting, which is a global firm dedicated to applying 
principles of economics, finance, and quantitative analysis to 
complex business problems, legal, and public policy challenges.
    I have co-authored and authored a number of empirical 
studies that estimate the direct costs of the legal system, and 
developed measures of the impact of the legal system on 
economic activity. It is the result of these studies that 
provide the basis of my testimony here this afternoon.
    I will also reference a widely-cited study on the tort 
costs by Towers Watson.
    U.S. litigation affects competitiveness by imposing 
additional costs on businesses operating in the United States. 
Towers Watson, the actuarial firm that reports U.S. tort costs 
of $250 billion a year, estimates that the U.S. ranks number 
one in tort costs as a percent of GDP, as you previously 
mentioned. Furthermore, by this metric, U.S. tort costs are 
more than double those of most other countries.
    A NERA study of tort costs found that higher tort costs 
from operating in the United States are a particular burden on 
small businesses. This potentially exaggerates the adverse 
effects on U.S. business activity because small businesses are 
responsible for creating 65 percent of the net new jobs in the 
country.
    We used the approach similar to Towers Watson. Starting 
with the premiums paid for liability insurance, we took the 
analysis a step further by using more detailed data on the 
insurance costs for individual businesses from the insurance 
broker, Marsh. We found that in 2008, small businesses with 
less than $10 million in revenues represented 22 percent of 
U.S. business revenues, but incurred 83 percent of the tort 
costs. These direct costs of the U.S. tort system can be 
described as having an effect on business similar to a tax and, 
like a tax, can affect the level of business activity.
    We are currently conducting a study commissioned by the 
U.S. Chamber Institute for Legal Reform in which we quantify 
the potential effect on jobs of differences in tort costs 
across the United States. The preliminary findings of this 
study indicate that the legal climate within a State 
substantially affect tort costs. The results from studies of 
changes in business activity due to taxes are then used to 
estimate potential employment effects attributable to 
differences in tort costs.
    Now, these direct costs of doing business are just the tip 
of the iceberg. Litigation also imposes indirect costs. The 
uncertainty created by litigation affects businesses' borrowing 
costs and, hence, their ability to invest, grow, and create 
jobs. Many foreign companies are wary of becoming embroiled in 
U.S. litigation, which may deter foreign direct investment.
    Dealing with litigation can occupy management time, result 
in unproductive risk avoidance, and otherwise distort business 
decision making. These indirect costs imposed by the tort 
system reduce productivity.
    So, in another NERA study, we looked at productivity. We 
used the liability costs associated with U.S. asbestos 
litigation to show how tort costs slow U.S. labor productivity 
growth relative to other countries.
    We measured differences in productivity growth per employee 
in asbestos industries between the U.S. and 10 industrialized 
countries. We used comparisons of non-asbestos industries to 
control for other differences that were unrelated to the 
litigation, such as local market conditions and regulation.
    But what we found is in the industries heavily affected by 
asbestos litigation, our study measured half a percentage point 
slower productivity growth in the United States. Now, over 14 
years of the study period, that meant productivity losses in 
the U.S. of over $300 billion, or $50 billion in 2000 alone.
    In conclusion, litigation imposes direct costs that are 
higher in the U.S. than in other countries, and these costs 
fall more heavily on small businesses. The direct and indirect 
costs of litigation together put the U.S. at a competitive 
disadvantage, slowing productivity growth.
    Thank you again, Chairman Franks and distinguished 
Committee Members, for this opportunity to testify today and 
for holding this hearing to bring attention to this important 
economic issue.
    [The prepared statement of Mr. Hinton follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Franks. Thank you, Mr. Hinton.
    And, Mr. Silver, you are now recognized for 5 minutes, sir. 
Your microphone, sir.
    Mr. Silver. Push that. Sorry, thank you.
    Mr. Franks. You know, you think we have been doing this for 
about 100 years, and whenever we invented microphones. That 
happens all the time, and there are ought to be a smarter way 
just to turn those microphones on from up here, shouldn't 
there?

TESTIMONY OF CHARLES SILVER, McDONALD CHAIR IN CIVIL PROCEDURE, 
               UNIVERSITY OF TEXAS SCHOOL OF LAW

    Mr. Silver. All right. Thank you very much, Chairman 
Franks. It is an honor to be here today.
    The title of this hearing is, ``Can We Sue Our Way to 
Prosperity?'' Actually, the answer is yes. Civil justice 
systems contribute to the prosperity of the United States. In 
fact, the strongest proponents of civil justice systems that 
protect legal rights and enforce legal obligations are not 
lawyers, but institutional economists, including economists who 
have won the Nobel Prize.
    I will first demonstrate the connection between lawsuits 
and prosperity by talking about medical malpractice litigation, 
in particular about lawsuits against anesthesiologists. I will 
then discuss very briefly the larger literature on the 
connection between law and economic growth.
    To start with, medical errors make America poorer. The case 
of anesthesiology is very interesting. Until the mid-1980's, 
anesthesiology was very dangerous, killed or severely injured 
thousands of patients every year. Malpractice lawsuits against 
anesthesiologists were common, and malpractice premiums for 
anesthesiologists were two to three times the average costs 
facing other physicians.
    In this situation, anesthesiologists could have run to 
State legislatures or Congress and demanded tort reform. That 
is what health care providers usually do. But instead, the 
leaders of the American Society of Anesthesiologists initiated 
a patient safety campaign. They studied closed medical 
malpractice claims to learn the root causes of medical errors. 
Then they took what they knew and applied it. They redesigned 
their equipment. They established mandatory treatment 
guidelines, and they took other steps to reduce both the 
frequency of mistakes and the harmfulness of mistakes. The 
results were spectacular. In approximately a decade, mortality 
rates fell to one in every 200,000 anesthesia administrations, 
a 10- to 20-fold improvement over the immediately prior period.
    Of course, as anesthesia became safer, the frequency and 
harmfulness of injuries declined, and lawsuits pretty much 
dried up. Malpractice costs fell. Premiums fell. In real 
dollars, anesthesiologists pay less for liability coverage 
today than they did in 1985.
    A 2005 Wall Street Journal article summarized the 
developments. I will quote from it. ``Today anesthesia related 
adverse events and emergencies are rare, and anesthesiologist 
malpractice insurance premiums are low. Anesthesiologists pay 
less for malpractice insurance today in constant dollars than 
they did 20 years ago.'' That is mainly because some 
anesthesiologists chose a path many doctors and other 
specialists did not. Rather than pushing for laws that would 
protect them against patient lawsuits, these anesthesiologists 
focused on improving patient safety. Their theory, less harm to 
patients, would mean fewer lawsuits.
    Why did they act when they did? For a very straightforward 
reason--because they were beset by lawsuits and their insurance 
premiums were rising. To quote one of the leaders of the 
anesthesia patient safety movement, the campaign was set in 
motion because, ``A malpractice crisis was markedly reducing 
the incomes of anesthesiologists.''
    As a result of the movement, anesthesia is now the only 
segment of health care delivery that meets industrial standards 
of quality. Every other segment of the health care delivery 
system is beset with quality problems. There is a 2011 April 
peer reviewed issue of the journal Health Affairs, which 
published a series of articles finding things such as 33.2 
percent of patients treated in hospitals experienced adverse 
events. Adverse events kill about 187,000 people in hospitals 
every year and cause 6.1 million injuries. The total cost of 
these errors run somewhere between $393 billion and $958 
billion estimated in terms of what people pay to avoid problems 
like that.
    We also know that health care providers can do better. In 
my report I cite instances recently where health care providers 
have reduced the number of mistakes, greatly increased the 
quality of their care. These improvements help make America 
prosperous. Patients who live contribute to America's 
prosperity more than patients who die. Patients who are healthy 
contribute more to America's prosperity than patients who are 
injured. And patients who are healthy do not need additional 
health care. So, we save money on health care costs when 
patient safety improves.
    My question is, why should any group of health care 
providers be allowed to follow any path other than the one that 
anesthesiologists took, which is to devote themselves to 
patient safety and improve their systems? And as far as I know, 
no one has answered that question.
    The last thing is, as I said, there is a very large 
literature on the connection between law and economic 
prosperity. That literature shows three things. Number one, 
that protection of human rights, including civil rights, 
greatly increases a society's prosperity. Number two, countries 
with functioning legal systems tend to be much wealthier than 
countries without them. And, number three, countries with 
common law systems, like the United States, tend to fare 
better, to grow faster, than countries with civil law systems. 
These are findings that economists have generated, not law 
professors. I encourage the Committee to study this literature.
    Thank you very much.
    [The prepared statement of Mr. Silver follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Franks. And thank you, Mr. Silver. You make a lot of 
compelling points.
    Mr. Beisner, you are recognized for 5 minutes. Sir, am I 
saying your name correctly?
    Mr. Beisner. You said it correctly.
    Mr. Franks. Okay, that is great?

      TESTIMONY OF JOHN H. BEISNER, SKADDEN, ARPS, L.L.P.

    Mr. Beisner. Good afternoon, Chairman Franks, and thank you 
for inviting me to testify today about the effects of 
litigation on the global competiveness of U.S. businesses.
    Today's hearing asks an important question: Can we sue our 
way to prosperity? And I guess I respectfully disagree with Mr. 
Silver. I think the answer to that question is a resounding no. 
Our nation's love affair with litigation has substantially 
damaged our economy by hampering productivity and stifling 
innovation.
    Why is our legal system so prone to abuse? The key problem 
is that we have made lawsuits an attractive investment with few 
disincentives for bringing meritless cases. As a result, the 
parties themselves are becoming less and less relevant in 
litigation. The litigation process is being taken over by 
sophisticated investors.
    Today, I would like to address several examples of 
litigation abuse. In addition, I would like to discuss third 
party litigation funding and explain why, if not arrested, it 
will exacerbate those problems.
    Let me begin by addressing fraud in mass torts. 
Unfortunately, fraud is something that can occur at every step 
of the mass tort process. One source of that fraud is the 
increasing use of medico-legal screenings organized by lawyers. 
My sense has always been that lawsuits happen when someone 
thinks he has been injured, goes to the doctor, finds out what 
is wrong, and seeks treatment. If in the course of that he 
thinks his injury may have been caused by another person, the 
individual might retain a lawyer to consider pursuing a 
lawsuit.
    Medical screenings work exactly the opposite way. They 
serve to discover supposed injuries in people who never thought 
they were sick in the first place until they found out about 
the chance to be in a lawsuit. Simply put, they manufacture 
diagnoses to fuel litigation.
    The welding fume litigation discussed in my prepared 
statement illustrates how such recruitment practices lead to 
the filing of fraudulent claims. The lawyers in that litigation 
collected about 10,000 plaintiffs through medico-legal 
screenings and claimed that all of them suffered from a rare 
neurological disease called manganism based largely on 5 minute 
diagnoses each.
    As the litigation progressed, it became apparent these 
diagnoses were not worth very much. Most plaintiffs did not 
seek medical care for this alleged ailment, and several were 
forced to dismiss their claims after it was revealed they had 
lied in discovery or faked their symptoms. In one instance, a 
man who claimed to be bound to a wheelchair was caught on 
videotape carrying groceries and raking leaves. Eventually, the 
judge required the plaintiffs in that case to produce medical 
opinions substantiating their claims, and at that point, 
thousands of people dismissed their lawsuits.
    In discussing medical screening practices, one must also 
mention the massive fraud uncovered in 2005 by the Texas 
Federal court handling the silicosis-asbestos litigation. But 
the fraud and abuse so prevalent in early litigation practices 
has now spread to the current operations of so-called asbestos 
bankruptcy trusts that are effectively run by trial lawyers and 
appear to operate with no meaningful oversight or transparency. 
As such, these trusts facilitate fraudulent claiming practices 
and double-dipping, both of which threaten to siphon money away 
from more legitimate claimants.
    Another problem is the increase in lawsuits by citizens of 
other countries that have virtually nothing to do with the 
United States. In some of these cases, the record suggests that 
lawyers have gone so far as to fabricate evidence in foreign 
countries in the hope of cashing in on the generous U.S. legal 
system.
    A third area of concern is the so-called piggyback lawsuit 
phenomenon. In these lawsuits, private lawyers scour the news 
for government investigations, and then bring lawsuits echoing 
the government's allegations. If the target company has done 
something wrong, that wrong will likely be remedied by a hefty 
fine. Typically, no further legal action is necessary or 
appropriate.
    The main beneficiaries of piggyback lawsuits are the 
lawyers who free ride on the government investigation and get 
big fees. The consumers or shareholders they claim to represent 
typically receive very little.
    To me, the picture is clear. Our legal system is 
increasingly rife with abuse and losing its original sense of 
purpose. Clearly, we need to return our legal system to its 
roots, to create more accountability and to reduce the 
influences of non-parties. Remarkably, however, we seem to be 
doing just the opposite, embracing new practices that encourage 
litigation and further marginalize the actual parties.
    The most troubling example is the growth of third party 
litigation financing in which an investor funds a lawsuit in 
exchange for a piece of the recovery. Traditionally, the 
doctrines of champerty and maintenance condemn these 
arrangements. Today, however, they are being touted as a way to 
increase access to justice.
    I commend the Subcommittee for holding today's hearing and 
urge you to critically examine the fraud and abuse in our 
system, and begin a serious dialogue about what reforms are 
needed to restore a sense of responsibility and restraint in 
our American litigation system.
    Thank you very much.
    [The prepared statement of Mr. Beisner follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
                               __________

    Mr. Franks. Thank you, Mr. Beisner.
    I will now recognize myself for 5 minutes for questions. 
And I will begin the questions with you, Mr. Hinton.
    Mr. Hinton, you mentioned that there are studies that 
quantify the effect on business of taxes in general. How 
sensitive is the level of business activity to changes in the 
cost of doing business like litigation?
    Mr. Hinton. There are a lot of economists who have studied 
the question of the effect of taxes on business activity. And 
just as with taxes, tort costs raise the cost of doing 
business. So, looking at some of those studies can be 
instructive.
    A survey of studies of the effect on employment of taxes 
found that the median effect across the studies that had been 
surveyed measured any elasticity of minus .6. But turning that 
into English, that means that if you raise taxes by 10 percent, 
say, from 30 percent to 33 percent, it could result in a 6 
percent reduction in employment. So, that is the sort of order 
of magnitude that you might expect to see if you adjust tort 
costs.
    Mr. Franks. Thank you, sir.
    Mr. Silver, I guess my next question would be to you, sir. 
Do not other countries with common law systems, such as the 
United Kingdom, create enforceable legal rights at less cost 
than the U.S.?
    Mr. Silver. I am sorry. I could not hear.
    Mr. Franks. Okay. Do not other countries with common law 
systems, such as the United Kingdom, create enforceable legal 
rights at less cost than the United States?
    Mr. Silver. I do not know what the answer to that question 
is, Mr. Chairman, because it really depends on how costs are 
counted. The costs of injuries are what they are, but the legal 
system only captures a fraction of those costs. So, in England, 
for example, the legal system will capture a very small amount 
in the damage award, but an additional amount will be 
transferred to the public health system, what they call, I 
guess, the National Health Service, which will care for the 
victim by providing medical services. So, in order to find out 
how much the total costs are, one has to look way beyond the 
legal system in other countries, and here as well because here 
the legal system also only captures a fraction of accident-
related costs.
    Mr. Franks. Mr. Beisner, let me go ahead and give you a 
shot at the same question. Do other countries with common law 
systems, like the United Kingdom or others, do you think they 
create an enforceable legal rights system at any difference in 
cost to the consumers and to the society as a whole?
    Mr. Beisner. I do not have a lot data to offer the 
Committee on that point, but from everything that I have seen, 
I think that the answer is yes. And I think it is reflected in 
the fact that when you talk with persons responsible for the 
administration of businesses, they certainly make a huge 
distinction in the environment that they find in European 
countries versus the United States in terms of the amount of 
resources that they need to divert to litigation. I think as a 
practitioner, one need only encounter a European business 
person for the first time who is engaged in having litigation 
in the United States to say, I have never experienced anything 
like this before in terms of the amount of resources and money 
I have to expend to deal with this matter.
    Mr. Franks. Well, I want to thank all of you for attending 
the Committee here this morning. I appreciate your testimony. 
It sounds like the question--sure.
    Mr. Scott. Thank you. I did not have an opening statement. 
I would to ask----
    Mr. Franks. No, we asked about questions because--you do 
not have an opening statement anyway. I mean----
    Mr. Scott. Well----
    Mr. Franks. But you are welcome--please. Please proceed?
    Mr. Scott. Thank you. I just wanted to ask Mr. Beisner, 
because he had recommended Rule 11 sanctions. Would you propose 
Rule 11 sanctions for defense counsel who drag out litigation 
with frivolous defenses, denials of liability when liability is 
clear, and that kind of thing?
    Mr. Beisner. Well, I think Rule 11 right now works both 
directions on that. I think the greater problem we have, 
though, is with lawsuits that should not be filed in the first 
place, and there is no consequence for that when they are 
filed.
    Mr. Scott. Well, there is a sanction that the lawyer who 
brings a meritless case does not get paid. But when I was 
practicing, when you would file a suit, you would get a 
response that would have a total denial of liability, even when 
liability was clear. Should a Rule 11 sanction be applied to 
that kind of response?
    Mr. Beisner. Rule 11 applies, but I think often, you know, 
whether liability is clear is in the eye of the beholder. I 
think most plaintiffs' counsel I have talked to say when they 
file the case, the liability is clear, and it often does not 
turn out that way. And I think up front, denial before the 
facts are fully developed is often fully appropriate.
    But again, to answer your question specifically, Rule 11 
works both ways. If you do not have a sound basis----
    Mr. Scott. Mr. Silver, have you ever heard of a defense who 
files a denial of liability, when liability is clear, ever 
sanctioned under Rule 11, because it is a boiler plate defense. 
They just deny everything. And have you ever heard anybody 
sanctioned under Rule 11?
    Mr. Silver. No, I have not, and it is very common to file 
an answer that includes a very large number of defenses, most 
of which will drop out of the lawsuit at some point as the case 
proceeds.
    Mr. Scott. In terms of economic activity, is there any 
value to the tort system we have in the United States, which, 
because we have our tort system, people internationally know 
that products made in the United States are safe, and a feeling 
that they might not get from other countries that do not have 
as vigorous liability responsibility?
    Mr. Silver. Well, I cannot say whether products that are 
made in America sell better abroad than products that are made 
elsewhere. Perhaps Mr. Hinton has some insight into that. 
However, it certainly is the case that what we are talking 
about is cost internalization.
    The discussion of tort costs is very interesting because it 
does not ever attempt to quantify the fraction of those costs 
that are wrongfully imposed costs. In other words, when we 
measure insurance costs, what we could be measuring are in fact 
costs that people wrongfully impose on other people. What that 
says is if you were to eliminate those costs, eliminate the 
tort tax, then what you would foster would be false growth. It 
would look like people were doing better economically, but in 
fact, they would be saddling a lot of other people with very 
large billions or trillions of dollars worth of costs for which 
they were not accountable. And so, you would get a lot of false 
economic growth.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Franks. Thank you, Mr. Scott.
    And thank all of you again. Everyone made some pretty 
salient points. I appreciate that.
    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.
    Without objection, all Members will also have 5 legislative 
days with which to submit any additional materials for 
inclusion in the record.
    With that, again, I thank the witnesses, and I thank the 
Members and the observers.
    And the hearing is now adjourned.
    [Whereupon, at 3:29 p.m., the Subcommittee was adjourned.]

                                 
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