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March 30, 2010

Tort Lawyers Set Their Sights on Britain

The American legal system—which has become infamous for absurd “hot coffee” lawsuits, exorbitant costs, and systemic abuse—is widely recognized as one American import that Europe can do without. But a movement is afoot in the U.K. to pass legislation in the next several weeks that would create U.S.-style collective-action lawsuits. If it passes, the Financial Services Bill would likely be a clarion call to the masters of U.S. litigation abuse.

In the U.S., a particular breed of claimants’ lawyers is notorious for back room political influence and a culture of greed and corruption. Some of the highest-profile, highest-paid trial attorneys have recently been found guilty of stealing money from their clients, bribing a judge, or racketeering. But abuses are not limited to these examples. As one trial lawyer put it, the crime that landed him in jail was simply “industry practice.” And what do those lawyers have in common? Collective actions.

Collective actions, or class actions, are an originally American legal mechanism that allows one or a few claimants to file a lawsuit on behalf of a large group of claimants, many of whom might not even know about the case. They are now a multibillion-dollar industry, and their history is rife with horror stories. These lawsuits fail to accomplish their goal of efficiently compensating consumers who have been wronged, and they play a large role in making the U.S. tort system the most expensive in the world, at a cost of $255 billion per year. But, according to research by Towers Perrin, the U.S. tort system returns less than 50 cents on the dollar to the consumers it is designed to help, and only 22 cents go to compensate actual economic losses.

Thus, governments that have considered creating collective actions without replicating the problems we face in the U.S. have been advised to meticulously integrate impermeable safeguards.

The U.K., however, is failing to heed history’s lessons. The Financial Services Bill, which many hope to pass before the upcoming general election, would create collective actions devoid of safeguards. Parliament has proposed leaving the details to be ironed out later.

While some may be pacified by the thought that the British might not abuse collective actions like Americans have, my bet is that British lawyers will not be the only ones filing suits. The U.S. trial bar has already set foot in Europe.

In the words of Brian Murray, a partner at an American law firm, “all the fields have been plowed in the United States. If you want to enter new markets, you have to go outside the United States.” In that vein, U.S. law firms are opening new offices in London, and some are even overtly advocating for collective actions across the EU.

U.S. claimants’ lawyers are looking to expand their business model across the Atlantic largely because class actions are so profitable for them. Lawyers extract enormous settlements, reaping millions of dollars in fees for themselves. But the problem is that the consumers they represent often get very little or nothing at all.

For example, claimants are now objecting to a settlement reached in an American case against retailer Costco, based on allegations that Costco improperly measured the automotive fuel it sold in some states. The claimants’ attorneys agreed to settle the case, allotting US$10 million for the attorneys’ fees and absolutely nothing for the claimants.

Furthermore, in the U.S., any citizen may be a claimant in one of these lawsuits without even knowing it. Without the consumers’ permission, lawyers can file on behalf of everyone who bought a certain product in a given period of time or held a certain stock as long as they have one claimant to name in the case. One environmental group placed an advertisement stating that “if you breathe air,” you are a claimant.

If consumers fail to “opt-out” of a suit—whether or not they know about it and whether or not they ever received any money at the end of it—they forfeit their right to make that particular claim in the future.

Not even American consumers approve of collective actions. According to a poll conducted by the U.S. Chamber Institute for Legal Reform while we were working to pass the Class Action Fairness Act to improve our system, 67% of Americans responded that lawyers benefit most from the collective action lawsuit system while 61% think that consumers or class members benefit least. Not only do consumers not benefit from the system, they end up having to pay the price for it. Seventy-four percent of respondents indicated that the class-action system drives up prices of consumer goods.

British politicians can be commended for working to expand consumers’ access to justice. And, in an election year, it may be tempting to rush legislation that seems to serve that purpose. But, based on 40 years of American experience, billions of dollars squandered, and widespread consumer dissatisfaction with the American system, adopting loosely written legislation to create collective actions, without safeguards that will prevent the most egregious abuses, is the wrong way to go.

At the very least, British policy makers should take the time to carefully integrate safeguards needed to prevent abuses and protect consumers. There will be another opportunity to consider this legislation, but, once the U.K. opens the litigation floodgates, U.S. trial lawyers will most definitely come rushing in.

This article originally appeared in the Wall Street Journal Europe.

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