Our Broken Legal System and its Impact on Competitiveness

I recently sat down with a reporter from the Ukrainian Service of the Voice of America to talk about the impact that lawsuit abuse is having on America’s small businesses. It seems she had…

I recently sat down with a reporter from the Ukrainian Service of the Voice of America to talk about the impact that lawsuit abuse is having on America’s small businesses.  It seems she had stumbled across our Web site,IAmLawsuitAbuse.org, which brings home the sad reality that lawsuit abuse hurts working families and neighborhood businesses.  As someone who is still trying to understand the unique legal culture of the U.S., the foreign-born reporter was shocked that even the most ridiculous of lawsuits has the potential to destroy a business or force it to lay off employees. 

The media seems to enjoy the spectacle of an absurd lawsuit.  The latest favorite is the woman who is suing Victoria Secret for an injury that was supposedly sustained when the pair of underwear she was putting on broke and hit her in the eye.  The plaintiff was interviewed on the “Today” show and everyone had a good laugh.  However, the impact these ridiculous lawsuits are having on our economy is no laughing matter.

The U.S. has the most expensive litigation system in the world, costing us all more than a quarter of a trillion dollars a year – which averages out to $3,200 per family of four.

Part of this cost can be attributed to America’s inefficient class action system.  While intended to give large groups of consumers a means for righting a wrong, the multi-billion dollar class action industry is effectively padding the pockets of the trial lawyers at the expense of the rest of society.  Businesses and their employees suffer from abusive suits when they are pressured to into huge settlements in order to avoid the chance of a catastrophic judgment.  Consumers and investors who are plaintiffs in these cases also gain little on an individual basis, while lawyers go home with huge fees.  For example, in a settlement of a class action lawsuit filed against a video rental company over late fees, plaintiffs’ lawyers were awarded $9.25 million in fees and expenses while the class members received a couple of coupons for free movie rentals. 

So what is the impact of an abusive legal system that steals away 1.9 percent of U.S. GPD every year?

Here is are some examples:  Reports issued last year on the competitiveness of U.S. capital markets found that the ability to bring broad securities class actions in the U.S. was a factor in a foreign company’s decision to list or trade in the United States.  In fact, a 2007 Financial Services Forum study found nine out of every ten foreign companies who de-listed from a U.S. exchange in the last four years said the litigation environment played a role in that decision.  Foreign companies are not the only ones de-listing from the U.S. or choosing to go elsewhere – U.S. companies are doing the same.  The percentage of U.S. companies going public oversees without also listing at home jumped from less than one percent a decade ago to over nine percent today. 

While most people think the filing of lawsuits are “victimless” acts because they target huge, faceless corporations, the fact remains that small U.S. businesses are getting hit with a bill for $98 billion every year to pay for tort costs.  If small businesses are the backbone of our economy, then abusive lawsuits are throwing America’s spine out of whack.

The U.S. Chamber Institute for Legal Reform released a Harris Interactive surveylast year revealing that three-quarters of small business owners are worried about becoming the target of a frivolous or unfair lawsuit, and that 34 percent of them had a suit filed against them in the past 10 years.  Of those who are most concerned, six in ten say the fear of lawsuits makes them feel more constrained in making business decisions generally, which has led to them make their products and services more expensive or to lay off employees.

In the same survey, we asked small businesses owners how they would grow their businesses if they felt like they were protected from lawsuit abuse.  Their answers included improving their facilities or buying new equipment, increasing wages and benefits for their current employees and hiring new employees.  

They also said that, if protected from frivolous lawsuits, they would be willing to invest more into developing new products or services.  Instead, companies are diverting resources from productive purposes into legal and settlement costs.  Using a large company as an example, the drug maker Wyeth spent $25 billion on legal costs and reserves between 1999 and 2004, but only invested $19 billion in researching and developing new life-saving or life-improving pharmaceuticals.  And more recently, the automaker Volkswagen decided that the threat of liability was too great to offer a new “lane assist” feature in the U.S. that would save lives by guiding a car back into the lane if it senses drifting.

So not only are lawsuits taking money out of our economy, they are also preventing new products and services from ever seeing the light of day. 

As recent reports on the capital markets demonstrate, the U.S. is no longer the only game in town.  We live in a global economy, and it is time to ensure the lawsuits we laugh about do not cause the competitiveness of our economy to slip beyond repair.  America is a world leader because of our ability to adapt and innovate.  Now is the time to fix our broken lawsuit system before more of our economy falls victim to lawsuit abuse.