[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.]