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July 1, 2010

Taking Your State’s Lawsuit Temperature

Any doctor will tell you that a periodic physical is indispensable to a patient’s long-term wellbeing.  A medical check-up can catch minor ailments before they become major illnesses or encourage the continuation of healthy behavior, such as eating well and exercising regularly.   

Similarly, a regular check-up of a state’s lawsuit system is essential to the long-term fitness of its economy. 

It may not seem obvious, but a state with a fair and reasonable legal system has a leg up on its neighbors when it comes to encouraging businesses to locate their operations or grow jobs within its borders.  Conversely, those states with sickly lawsuit systems can shackle their economic opportunities. 

With the national unemployment rate hovering around 10 percent, states can no longer afford ailing lawsuit climates that can shutter small businesses and drive larger companies to places with better legal environments.  Elected officials need to focus on creating more jobs, not more lawsuits.

In order to help state leaders understand how their legal systems stack up against others, the U.S. Chamber Institute for Legal Reform recently released the Lawsuit Climate 2010: Ranking the States survey.  This study, the eighth of its kind, was conducted by the nonpartisan market research firm Harris Interactive and ranks all 50 states according to the perceived fairness and reasonableness of their state liability systems. 

The Lawsuit Climate report is based on the input from almost 1,500 in-house general counsel or senior litigators at some of America’s largest companies.  Why does the perception of in-house counsel matter?  Because these are the people who help make far-reaching business decisions, such as where to locate a new factory, whether to add additional employees, or whether to pull operations out of a state. 

Some – especially those who make a living by filing lawsuits – argue that a sick state legal environment has no impact on economic opportunity.  Yet, the study found that fully two-thirds, or 67 percent, of respondents believe that a state’s lawsuit climate is likely to impact important business decisions at their company. 

And while the Lawsuit Climate survey measures the perceptions of America’s largest companies, any state legal system that encourages abusive lawsuits negatively impacts all businesses, regardless of size.

Small businesses, which create 64 percent of all new jobs, are essential to turning our economy around, but lawsuits are threatening America’s entrepreneurs just when we need them the most.  In good times, small businesses operate on a razor-thin margin.  In this current economic environment, many are only one frivolous suit away from closing their doors forever.

Take the lawsuits filed against Monroe Rubber and Gasket in Monroe, Louisiana.  The family-owned small business is currently defending itself against more than 100 asbestos suits, which were filed despite the fact that the company has not handled anything related to asbestos in more than 20 years. Even then, the company was an intermediary seller of a small amount of materials containing encapsulated asbestos, a non-airborne material that remains legal to this day. “This could take us out of business,” lamented owner Mike Carter. “It’s just sad because I’ve got a group of people here that work with me. And it’s their livelihoods on the line.”  

Just like a sickly patient who has ignored his/her doctor’s dietary and fitness recommendations for years, some states have neglected their ailing lawsuit climates for far too long – and with severe consequences.

One obvious example is California, whose abysmal #46 Lawsuit Climate ranking is not surprising given the fact that state courts remain a haven for class action lawsuits.  Both Los Angeles and San Francisco were cited by survey respondents as among the top four most unfair and unreasonable litigation environments in the country.  In addition, state laws on the books have been known to encourage professional plaintiffs and their lawyers to bring lawsuits against businesses for technical violations of disabled access laws – such as a bathroom mirror being two inches too high – and receiving up to $4,000 plus attorneys’ fees per violation.

As California’s elected leaders consider actions to address one of the highest unemployment rates in the U.S. at 12.6 percent, they cannot ignore the poor impression that their pro-lawsuit environment is giving to current and potential job creators.    

On the other hand, some sensible elected officials are taking their lawsuit ailments head on.  During the 2010 legislative session, Florida’s leaders enacted two measures which they hope will incrementally improve its current #42 Lawsuit Climate ranking. 

One new Florida law sheds light onto the sometimes murky relationship between state attorneys general and the plaintiffs’ law firms they hire on a contingency fee basis to bring lawsuits on the state’s behalf.  Another significant measure reformed the state’s flawed slip-and-fall statute, which previously stacked the deck against business owners and their insurers – so much so that they felt compelled to settle every slip-and-fall claim, regardless of merit. 

Some states, like Texas – which has moved up 10 spots since the survey began to #36 this year – have enacted comprehensive tort reforms and have seen theirLawsuit Climate rankings gradually improve.  These states are on the road to recovery, but just like the long-term health of a patient, constant vigilance is required to prevent reforms from being undercut by those who wish to turn local businesses into cash machines. 

The message to state officials is clear: your check-up is complete, and if your lawsuit temperature is high, then it is time to consider whether your state’s economic wellbeing will benefit from more jobs or from more lawsuits.   Job growth in this tough environment will depend on many positive factors; hampering businesses with more lawsuits is not one of them.

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