[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
4
EXCESSIVE LITIGATION'S IMPACT ON AMERICA'S GLOBAL COMPETITIVENESS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON THE CONSTITUTION
AND CIVIL JUSTICE
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 5, 2013
__________
Serial No. 113-7
__________
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
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT,
LAMAR SMITH, Texas Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
SPENCER BACHUS, Alabama ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
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 JUDY CHU, California
TED POE, Texas TED DEUTCH, Florida
JASON CHAFFETZ, Utah LUIS V. GUTIERREZ, Illinois
TOM MARINO, Pennsylvania KAREN BASS, California
TREY GOWDY, South Carolina CEDRIC RICHMOND, Louisiana
MARK AMODEI, Nevada SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
KEITH ROTHFUS, Pennsylvania
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on the Constitution and Civil Justice
TRENT FRANKS, Arizona, Chairman
JIM JORDAN, Ohio, Vice-Chairman
STEVE CHABOT, Ohio JERROLD NADLER, New York
J. RANDY FORBES, Virginia JOHN CONYERS, Jr., Michigan
STEVE KING, Iowa ROBERT C. ``BOBBY'' SCOTT,
LOUIE GOHMERT, Texas Virginia
RON DeSANTIS, Florida STEVE COHEN, Tennessee
KEITH ROTHFUS, Pennsylvania TED DEUTCH, Florida
Paul B. Taylor, Chief Counsel
David Lachmann, Minority Staff Director
C O N T E N T S
----------
MARCH 5, 2013
Page
OPENING STATEMENTS
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Chairman, Subcommittee on the
Constitution and Civil Justice................................. 1
The Honorable Jerrold Nadler, a Representative in Congress from
the State of New York, and Ranking Member, Subcommittee on the
Constitution and Civil Justice................................. 2
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 7
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on the Constitution and
Civil Justice.................................................. 9
WITNESSES
Paul J. Hinton, NERA Economic Consulting
Oral Testimony................................................. 11
Prepared Statement............................................. 13
Rocky Flick, Miami, OK
Oral Testimony................................................. 16
Prepared Statement............................................. 18
Neil Vidmar, Ph.D., Russell M. Robinson II Professor of Law, Duke
University School of Law, and Professor of Psychology, Duke
University
Oral Testimony................................................. 23
Prepared Statement............................................. 26
Henry N. Butler, GMU Foundation Professor of Law, and Executive
Director, Law & Economics Center, George Mason University
School of Law
Oral Testimony................................................. 34
Prepared Statement............................................. 37
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Jerrold Nadler, a
Representative in Congress from the State of New York, and
Ranking Member, Subcommittee on the Constitution and Civil
Justice........................................................ 5
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress from the State of Virginia, and
Chairman, Committee on the Judiciary........................... 59
Material submitted by the Honorable Trent Franks, a
Representative in Congress from the State of Arizona, and
Chairman, Subcommittee on the Constitution and Civil Justice... 61
Supplemental Material submitted by Neil Vidmar, Ph.D., Russell M.
Robinson II Professor of Law, Duke University School of Law,
and Professor of Psychology, Duke University................... 64
EXCESSIVE LITIGATION'S IMPACT ON AMERICA'S GLOBAL COMPETITIVENESS
----------
TUESDAY, MARCH 5, 2013
House of Representatives
Subcommittee on the Constitution
and Civil Justice
Committee on the Judiciary
Washington, DC.
The Subcommittee met, pursuant to call, at 2:50 p.m., in
room 2141, Rayburn House Office Building, the Honorable Trent
Franks (Chairman of the Subcommittee) presiding.
Present: Representatives Franks, Goodlatte, Jordan, Chabot,
King, DeSantis, Rothfus, Nadler, Conyers, Scott, Cohen, and
Deutch.
Staff Present: (Majority) Zach Somers, Counsel; Sarah
Vance, Clerk; (Minority) David Lachmann, Subcommittee Staff
Director; and Veronica Eligan, Professional Staff Member.
Mr. Franks. The Subcommittee on the Constitution and Civil
Justice will come to order. Without objection, the Chair is
authorized to declare a recess of the Committee at any time.
And I will say good afternoon to all of you. Thank you for
being here. I apologize for the delay. There were votes on the
floor, and we appreciate you being here.
Welcome to the first hearing of the Subcommittee on the
Constitution and Civil Justice for the 113th Congress. The
topic for today's hearing is Excessive Litigation's Impact on
America's Global Competitiveness.
During this Congress, this Subcommittee will examine
various proposals to reform our Nation's civil justice system.
One of the animating factors behind all of these proposals will
be how excessive litigation creates huge costs that
unnecessarily burden and diminish the American economy, job
creation and our global competitiveness.
The unemployment rate today remains around 9 percent. And
economic growth actually contracted in the last quarter. I
believe that this hearing will reveal that part of the reason
for America's high unemployment and sluggish economy is the
excessive cost our litigation system imposes on U.S. job
creators.
Americans face the highest lawsuit costs of any developed
country. Our tort lawsuit costs are at least double those of
Germany, Japan, and Switzerland, and triple those of France and
the United Kingdom. According to a recent study by economists
at the Pacific Research Institute, America's tort system
imposes a total cost on the U.S. economy of about $865 billion
per year, which is equal for the total annual output of all six
New England States or the yearly sales of the entire U.S.
restaurant industry. This amounts to an annual tort tax of
$9,827 on a family of four, and is equivalent to an 8 percent
tax on consumption or a 13 percent tax on wages.
Excessive tort costs hurt U.S. global competitiveness in at
least three ways. First, excessive lawsuit costs leave less
money for American companies to invest. Money that America
spends on its litigation system is money that cannot be spent
on research, innovation, expansion and job creation.
Second, our lawsuit system puts U.S. companies at a
disadvantage when they are doing business abroad. American
companies are increasingly being sued in U.S. courts for wrongs
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 U.S. economy. A 2008 study by the Department of Commerce
concluded that the U.S. Litigation environment harmed our
competitiveness by discouraging foreign investment. This study
found that for international businesses, ``The United States is
increasingly seen as a Nation where lawsuits are too
commonplace.'' This discourages foreign-owned companies from
expanding business and in creating jobs in the United States.
Despite the high costs of our tort system, it does not
always appear that the system is promoting consumer safety or
delivering fair and appropriate outcomes. In terms of safety,
there is little evidence that additional tort lawsuits make
Americans safer.
According to World Health Organization statistics,
Americans die from unintentional injuries at a higher rate than
our peers in other developed countries. And in terms of fair
outcomes, the U.S. Tort system returns less than $0.50 of every
tort cost dollar to injured claimants, those it was designed to
help. In other words, the United States is shouldering the
burden of excessive litigation costs without receiving any
perceivable benefit from those costs.
Now, I look forward to the witnesses' testimony. I believe
that this hearing will help shine more light on how our tort
system burdens the U.S. economy, reduces job creation, inhibits
capital investment, and stifles innovation. I hope that with
this knowledge, we can moved forward in this Congress with
civil justice reforms that enable American companies to better
compete in the global marketplace and raise our productivity
and the standard of living for all Americans.
And with that, I want to thank again everyone in the new
year for coming to the Committee and I would yield to the
Ranking Member of the Subcommittee, Mr. Nadler, from New York.
Mr. Nadler. Thank you, Mr. Chairman. Mr. Chairman, before
we begin, I want to congratulate you on another Congress as
Chairman of this Subcommittee.
We have jurisdiction over some of the most important
matters Congress is ever called upon to consider. It is a
tremendous responsibility, and I know all our Members take the
responsibility very seriously. I also want to welcome our
Members from both sides of the aisle. I am sure we will have
some very spirited debates, as we always do. That is
appropriate. Many of the issues we tackle raise our most
fundamental values. I am confident we will approach these
debates with goodwill and mutual respect.
Today's hearing revisits a perennial issue before our
Subcommittee; namely, the question of the impact of the tort
system on our economy. It is a fair question, and one we have
debated for years. At its core, the purpose of the tort system
is to apportion responsibility and to allocate costs based on
how each of us observes or fails to observe our legal duties to
one another. When someone is harmed because of another's
negligence or wrongdoing, it is fair that the person whose
negligence inflicted that harm compensate the injured party.
This is not a cost to society, but, rather, a transfer to the
injured party. It also ensures that there was an economic
incentive for all of us to be careful, to take steps needed to
ensure that our products are safe, that our property is safe,
that the food we sell is safe, even if those steps involve some
costs. It is also a way to ensure that when someone is wrongly
harmed and faces medical bills or lost work that the
responsible party will pay those bills. In other countries,
there is less need to resort to the courts because the
healthcare system, the social safety net, and government
regulation address many of those concerns. I am not sure how
many of the proponents of restricting the rights of plaintiffs
would prefer that approach, but it is certainly an alternative.
There have been some often cited studies that purport to
demonstrate that the tort system as it is currently structured
imposes a significant cost on society and on our
competitiveness. Studies, most especially the series of reports
by Towers Watson and the Pacific Research Institute's ``Jackpot
Justice,'' have met with a great deal of criticism, some of
which we will hear today. As Judge Richard Posner has observed,
``The aim of liability is to induce potential injurers to spend
more on safely, and so the fact that they do spend more cannot
be judged a failure to improve social welfare.'' And, indeed,
the authors of the Towers Watson report admit, ``We examine
only one side of the tort system, the costs. No attempt has
been made to measure or quantify the benefits of the tort
system or to conclude that the costs of the U.S. tort system
outweigh the benefits or vice versa.'' And, as Judge Posner
correctly points out, there is a, ``difference between a cost,
which in economic terms is a reduction of the amount of
valuable resources, and a transfer of wealth from one person to
another that doesn't reduce the total amount of resources but
merely redistributes them.''
We have also heard some real horror stories about the
impact on lawsuits on businesses. But we don't always get all
the facts or even accurate facts. So I hope that we will
continue to look at those examples carefully to make sure that
we draw the correct conclusions.
Today, for example, we have as one of our witnesses, a CEO
of Blitz, USA, a manufacturer of gas cans. Mr. Flick is being
presented as a victim of excessive litigation and will tell the
Subcommittee that his company was driven out of business by
greedy trial lawyers representing people who poured gas on open
flames, and that the people who were crippled, disfigured, and
killed, including small children, were not really victims, but
were actually predators destroying a blameless company. What
Mr. Flick's testimony does not mention is that many of these
victims did nothing more than fill a chain saw; or, in the case
of 3-year-old Jenna Bullen, knocked over a can. She suffered
second-degree burns on 95 percent of her body. She lost her
fingers, her toes, and almost all of her skin. The can exploded
when leaking fumes ignited on an open flame in a hot water
tank. The fact that a simple device costing only pennies called
a flame arrester could have prevented these tragedies. When gas
outside a gas can ignites, the gas can will explode if the
flame ignites the gas inside. Flame arresters have been used
for years to prevent such explosions. According to a report by
Consumers Union, ``Should fumes outside the can ignite as you
pour or fill, a flashback is possible that could ignite the
contents of the can itself. Such accidents can be prevented by
a flame arrester, which we think should be legally required in
all openings of containers like these. As it is, only the
makers of the Jerry Jug and the Eagle Safety have bothered to
provide an arrester. The Eagle Safety is a strainer-like wire
mesh device in a single fill pour opening does give full-time
protection.'' Mr. Flick understood this. He wrote a memo in
which he said that within the next 2 years, his company should
``develop and introduce a device to eliminate flashback from a
flame source. Water heater incidents should be the test case
for this. Once this is developed, we should advocate the device
be standardized under ASTM's regs or law.'' That certainly
places these accidents and Mr. Flick's victim claim in a
different light. Perhaps that is why the company was ordered to
pay $250,000 in sanctions for failing to produce this memo when
sued by the heirs of Jonathan Green. The court found that ``The
settlement would not have been not less than $250,000 higher if
the plaintiff would have had the document. Particularly the
court finds that the `wish list,' Mr. Flick's memo, which was
not disclosed to the plaintiff, would have drastically
increased the settlement value. The wish list would have hurt
if not potentially eliminated the defense that they did not aid
a flame arrester because it would not have been useful.''
I ask unanimous consent for a copy of Mr. Flick's wish list
memo be placed in the record.
This is the victim the Chamber of Commerce has held up as
proof that our legal system is broken. I would suggest they
find someone else.
Another of today's witnesses has this to say: ``Alternative
legal rules should be evaluated in terms of how they guide
behavior. A straightforward normative implication of this
analysis is that we should create legal rules that provide
businesses incentive to invest in injury avoidance so long as
the marginal costs of achieving additional safety is less than
the expected marginal benefit of increased safety.'' I am sure
that little Jenna Bullen will be interested in that theory.
I look forward to today's testimony, and I yield back the
balance of my time.
Mr. Franks. I thank the gentleman. And his mentioned
document will be placed into the record.
[The material referred to follows:]
__________
Mr. Franks. And I would now yield to the distinguished
Chairman of the full Committee, Mr. Goodlatte, from Virginia.
Mr. Goodlatte. Thank you, Mr. Chairman. And I very much
appreciate you holding this hearing on a very important
subject. Before I give my opening statement, I would like to
recognize and welcome a good friend and fellow Virginian,
Professor Henry Butler, who has something in common with a
former Member of this Committee. His father and my former
employer without whose help and guidance, I would not be
serving in the Congress today. So he is a good representative
of great work done by the Butler family in an earlier
generation. And, Henry, you are always welcome here. And thank
you also for the good work you do at the Center for Civil
Justice Reform at George Mason Law School, another great
contribution to our whole effort to address this issue.
With Americans facing high unemployment and stagnant
economic growth, it is the role of every Congressional
Committee to do its part to get America moving again. For the
Judiciary Committee, this means, in part, doing what we can to
remove the crushing burden that excessive litigation costs
impose on our global competitiveness, economic growth, and our
ability to create and retain jobs.
Judge Learned Hand observed that litigation is to be
dreaded beyond almost anything short of sickness or death.
Unfortunately, the United States has become the world's most
litigious country. This litigiousness has created what amounts
to a tort tax which imposes an added cost on every product
Americans purchase and every service we consume.
We need a civil justice system that deters wrongdoers and
fully compensates victims. But a prosperous free enterprise
economy also depends on a tort system that is efficient and
free of meritless litigation and excessive damage awards. As
economists have pointed out, an efficient tort system produces
greater trust among market participants through the fair and
systematic resolution of disputes, thereby encouraging more
production and exchange, creating a higher standard of living
for individuals within a society. In other words, we can ensure
that all injured parties have their day in court while at the
same time enhancing our global economic competitiveness and
creating and maintaining jobs for American workers.
Regrettably, our civil justice system is not functioning
toward this end. It is not fairly compensating victims who have
to wait too long to get a case to trial and receive an average
of only $0.46 of every dollar spent in litigation, even when
they win. And it is hurting the economy.
America's runaway litigation system harms the economy in at
least four ways. First, the specter of undeserved, ruinous
litigation makes it more difficult for small businesses to grow
and become competitive on a global scale.
Second, even those American businesses that are large
enough to compete globally are saddled with litigation
liabilities that their foreign rivals do not face.
Third, America's lawsuit climate discourages foreign direct
investment in the U.S. economy.
And, finally, American companies' domestic liability for
their actions abroad places them at a competitive disadvantage
relative to foreign competitors seeking to do business in the
same foreign markets.
The real losers in all of this are ordinary Americans.
American consumers are hurt in the form of higher prices, U.S.
workers in the form of lower wages, and American retirees in
the form of low returns on retirement accounts and pension
funds. Those hurt by excessive litigation costs include people
like the former employees of Blitz, USA, the company Rocky
Flint, the second witness on our panel today, used to run. At
its peak, Blitz, USA produced three out of every 4 portable gas
cans nationwide and employed 350 people in the small town of
Miami, Oklahoma. But over the last decade, a wave of costly
litigation driven by the misuse of its products by others, a
misuse over which the company had no effective control, took
its toll. The lawsuits finally drove the company out of
business. Blitz, USA is gone. But the lesson of the devastating
impact lawsuits can have on real lives and real communities
lives on. I am sure that Rocky will share much more with us
today about the real-life impact excessive litigation costs had
on Blitz and its employees.
There has got to be a better way to solve issues with
regard to technology and changes in products than to drive a
good company employing 350 people out of business with lawsuits
in which a large portion of the amount of money paid was not
paid for economic loss and was not paid to the people who
suffered, whether or not their claim was valid under the law.
I look forward to our witnesses' testimony. I believe that
it will be invaluable as we move forward in this Congress with
reforms to improve our civil justice system.
And, Mr. Chairman, I yield back. Thank you.
Mr. Franks. And I thank the gentleman.
And I would now yield to the Ranking Member of the
Committee, Mr. Conyers from Michigan.
Mr. Conyers. Thank you, Mr. Chairman. I welcome all the
witnesses, particularly the one who hasn't been in this hearing
room for a number of decades. We remember his father fondly,
who was himself a Member of the Judiciary Committee.
Mr. Hinton. Thanks.
Mr. Conyers. Members of the Committee, this is a hearing
that may produce seriously flawed studies, that may make it
difficult if not impossible to form as a basis for serious
policy making. We have a number of issues before us. But I
think that we need to examine whether we want to change the
system and how much we want to change it. One frequently
criticized component of our trial system is punitive damages.
And I would like to share with you that they are very few, they
are rare, and reserved for only the most harmful kinds of
cases. And they are not awarded to compensate injured
plaintiffs, but the purpose is to punish and deter future
wrongdoing. The whole idea is to inhibit wrongdoing by knowing
that these kinds of legal results are available. They are used
in cases where there is either intentional misconduct or
grossly negligent activity. And so I want to try to turn off
some of the wrath that may come down on punitive damages.
Now, what we have found is that only about 5 percent of the
plaintiffs were awarded punitive damages. And the median
punitive damage award in these cases was $64,000. Punitive
damages in excess of $1 million were awarded to only 13 percent
of these cases. And so I want to improve the system in many,
many ways. And I think that it is carefully occurring.
Another issue that could be raised is the so-called
explosion of litigation. And I enjoy all of your comments on
that subject. But frivolous lawsuits, too, are also brought
under this title of explosive litigation. But the frequency of
tort cases in the courts to most of our surprise has steadily
decreased in recent years. We found that the number of tort
cases have declined by 79 percent. And tort filings continue to
decline and represent only a small fraction of litigation in
the United States. The National Center for State Courts shows
tort cases account for 4.4 percent of all cases filed in State
courts.
And so I invite you to approach these discussions that we
will hear today in a fair and balanced manner. And remember the
great savings that occur by the examples set by punitive
damages and the fact that cases, tort cases are really on the
decline and not otherwise.
I thank the Chairman for his courtesy and return any unused
time.
Mr. Franks. And I thank the gentleman.
Without objection, other Members' opening statements will
be made part of the record.
So let me now introduce our witnesses. Welcome to all of
you.
Mr. Paul Hinton is the Vice President of NERA Economic
Consulting. Mr. Hinton has over 15 years' experience in
securities and finance litigation, commercial and contract
disputes, bankruptcy and product liability cases. He has
testified in litigation, arbitration, and before legislative
committees such as this one. Prior to joining NERA, Mr. Hinton
worked on Project Finance at Morgan Grenfell, and at the
European Commission. He is a graduate of Oxford University, and
has a graduate degree from the Kennedy School of Government at
Harvard University. Mr. Hinton, welcome, sir.
Mr. Rocky Flick is the former President and CEO of Blitz,
USA. At its peak, Blitz, USA was the producer of three out of
every four portable gas cans nationwide and employed 350 people
in the small town of Miami, Oklahoma. But over the last decade,
a wave of costly litigation driven by the misuse of its
products by others, a misuse over which the company had no
effective control, took its toll. Unfortunately, lawsuits drove
the company out of business in August of last year.
Professor Neil Vidmar is the Russell M. Robinson, II
professor of law and professor of psychology at Duke Law
School. Professor Vidmar's scholarly research involves the
empirical study of law across a broad spectrum of topics in
civil and criminal law. A social psychologist by training, he
is a leading expert on jury behavior and outcomes and has
extensively studied medical malpractice litigation, punitive
damages, dispute resolution, and the social psychology of
retribution and revenge. Welcome, sir.
Professor Henry Butler has been noted already, a rather
famous name around here, is the George Mason University
Foundation Professor of Law, and Executive Director of the Law
and Economic Center as George Mason University School of Law.
Professor Butler has devoted much of his career to improving
this country's civil justice system through judicial education
programs. Professor Butler has held prior appointments at
Northwestern University School of Law, the Brookings
Institution, Chapman University, the University of Kansas, the
University of Chicago, and Texas A&M University.
Each of the witnesses' written statements will be entered
into the record in its entirety, so I would ask each witness
summarize his testimony in 5 minutes or less.
To help you stay within that time, there is a timing light
in front of you. The light will switch from green to yellow,
indicating that you have 1 minute to conclude your testimony.
When the light turns red, it indicates that the witness' 5
minutes have expired.
And before I recognize the witnesses, it is the tradition
of the Subcommittee that they be sworn. So if you please stand.
[Witnesses sworn.]
Mr. Franks. Thank you, please be seated.
And I would now recognize our first witness, Mr. Hinton.
Sir, please turn on your microphone before speaking. Yes, sir,
you got it.
TESTIMONY OF PAUL J. HINTON,
NERA ECONOMIC CONSULTING
Mr. Hinton. Thank you very much. I believe the microphone
is on.
Thank you, Mr. Chairman and distinguished Committee
Members, for inviting me here today to testify on the effects
of litigation on the U.S. Competitiveness.
As was already said, my name is Paul Hinton. I am a Vice
President at NERA Economic Consulting. NERA is a global firm
dedicated to applying the principles of economics and finance
and quantitative analysis to complex business, legal, and
public policy challenges. I have coauthored a number of
empirical studies that estimate the direct costs of litigation
to businesses, including a forthcoming study commissioned by
the U.S. Chamber Institute for Legal Reform that compares
litigation costs across countries. It is the results of this
forthcoming study comparing the costs of litigation in the
United States with European countries and Canada that provides
the basis for my testimony today.
U.S. Litigation, whether arising in tort claims or
otherwise, affects the ability of American companies to compete
globally by imposing additional costs. But higher direct costs
of doing business are just the tip of the iceberg. Litigation
also imposes indirect costs. Uncertainty created by litigation
may affect companies' 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, and multinational companies may
choose to limit the extent of their operations in the United
States.
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.
The actuarial firm of Towers Watson estimates that the U.S.
tort costs exceed $250 billion a year, representing 1.7 percent
of GDP. Our forthcoming study expands on this body of knowledge
with separate data and estimates the U.S. litigation costs are
about two and a half times the average level of the four
largest Eurozone economies. That is Germany, France, Italy, and
Spain. Furthermore, when compared to the least costly European
countries, such as Belgium, The Netherlands, and Portugal in
our study, U.S. litigation costs are estimated to be about four
times as high as those countries.
Our study uses prices of general liability insurance bought
by businesses in the United States, Canada, and Europe provided
by the insurance broker Marsh, Inc. as a basis for estimating
relative litigation costs. General liability insurance prices
provide a useful basis for analysis because they reflect the
costs of litigation risk even though only a fraction of
aggregate litigation costs may be insured. We also examine the
differences in costs of automobile third-party liability
insurance and corporate director and officers liability
insurance, commonly known as D&O, to provide additional
insights on different litigation costs. Automobile insurance
represents about half of all liability insurance in the U.S.
and an even greater proportion in Europe. It follows that
automobile liabilities costs constitute a significant cost of
all insured liability costs. And while differences in auto
liability insurance across countries means that price
comparisons are not very meaningful, comparisons of claim costs
in different countries reveal that on average U.S. costs in
2008 were almost four times the level in the largest Eurozone
economies.
Furthermore, D&O insurance is specifically designed to
cover the costs of litigation. And so it is particularly
relevant here. Litigation involving directors and officers is
only a small component of the overall liability costs in each
country. However, the large U.S. share of the global D&O market
is an illustration of how differences in legal systems can
affect liability costs. According to Alliance, which is a major
global insurance company, U.S. aggregate D&O premiums for 2009
amounted to between 5 billion and 6.7 billion, whereas the
European aggregate was only 2 billion for an economy about the
same size. However, it is important to note that European D&O
costs of multinational companies in large part result from
exposure to litigation in the U.S. And not to their domestic
exposure. As a result, on average, domestic European D&O
litigation exposure would be much less than a third of the U.S.
level.
Now, simple comparisons of insurance costs may not provide
a reliable basis for comparing litigation costs across
countries because there are many factors that affect liability
insurance rates that are unrelated to the operation of the
legal system in each country. The contribution of our latest
study is to separate out the cost differences due to economic
factors, demographics, healthcare costs, and separate out then
the effects of the legal system.
Just wrapping up--I see my time is up--I would say in
conclusion that the U.S. costs are a lot higher. And,
unfortunately, this means that under the assumption that
countries have the same benefits to businesses of legal
protection, higher litigation costs put U.S. businesses at a
disadvantage competitively.
Thank you, Mr. Chairman, and distinguished Committee
Members for the opportunity to testify. And I will take any
questions.
Mr. Franks. Thank you, Mr. Hinton.
[The prepared statement of Mr. Hinton follows:]
__________
Mr. Franks. We would now recognize our second witness, Mr.
Flick. Please turn on your microphone, sir.
TESTIMONY OF ROCKY FLICK, MIAMI, OK
Mr. Flick. Chairman Franks and Members of the Subcommittee,
my name is Rocky Flick. I am the CEO of Blitz, USA. I
appreciate the invitation to testify today.
Today's hearing explores the costs of the U.S. legal system
and its effects on global competitiveness. I am here to testify
that these costs are real. In my experience with my company,
these costs are borne by employers, consumers, and employees in
the form of lost jobs, wages, market share, and higher prices
for goods and services.
Blitz, USA was a small company based in Miami, Oklahoma,
the northeast corner of Oklahoma. When we filed for bankruptcy,
we had about 120 good manufacturing jobs with better than
average manufacturing wages and strong benefits. Healthcare was
one of the benefits that we had at better than market levels
for our employees.
We had been in business about 50 years. And we were able to
lead in a business, even as a small business, selling to some
very large companies. Our customers were Wal-Mart and Home
Depot and Ace Hardware, and the places that you all shop for
durable goods. We manufactured approximately 15 to 20 million
red plastic and metal gas cans every year. And our challenges
weren't with Chinese competition or foreign competition. We did
a very good job at competing, both domestically and
internationally. But we could not survive the onslaught of the
trial system.
We as an industry and the gas container industry today
continues targeted by the plaintiffs' lawyers. They have an
organization where they organize around litigation, toward gas
can lawsuits. And it is the biggest threat in the industry
today.
The people who lost their jobs when we filed bankruptcy
lost those benefits. I had several people that had serious
issues, like cancer, that then we were just unable to provide
their insurance, and they went through significant issues after
Blitz closed its doors.
The way these lawsuits happen is the plaintiffs say that
Blitz and other gas can companies should put a low-cost, simple
device into a can to keep it from exploding. The large majority
of the cases are when someone is pouring gas onto a fire. The
second fact pattern is when some children get ahold of a gas
can and get near to a hot water heater or a flame of some kind.
There is no device that you can put on a gas can that will make
it safe to pour gas on a fire. And this basic premise is what
these lawsuits are about.
Over the years Blitz had insurance. The insurance company
settled because our litigation is very expensive. And then that
attracted more cases and they settled and attracted more cases
and they settled, and finally insurance got too expensive for
us to buy. We went out of business. There are other people in
the business today filling our void. And I believe that they
will have the same fate as we do, unless the legal system
changes.
The CPSC studied this as far back as 1980 and determined
that no device would help in this matter, that it shouldn't be
regulated, that it was because of the way that people were
misusing the can. I am not aware of any case of ours or others,
other manufacturers, where there wasn't misuse involved in the
product.
And I see it is time for me to wrap up. But we declared
bankruptcy. The lawsuits go on today. The trial bar is suing--
continues to sue Blitz. I am still the CEO, trying to wrap up
the bankruptcy proceedings. Our assets have all been sold. But
the plaintiffs' bar continues to sue the retailers and they sue
the individual executives and they sue the owners and past
owners of the company.
This system in my view is not efficient and it is not just.
And it needs change.
Mr. Franks. Thank you, Mr. Flick.
Mr. Flick. I appreciate the opportunity to testify and look
forward to your questions.
[The prepared statement of Mr. Flick follows:]
__________
Mr. Franks. I would now recognize our third witness,
Professor Vidmar.
TESTIMONY OF NEIL VIDMAR, Ph.D., RUSSELL M. ROBINSON II
PROFESSOR OF LAW, DUKE UNIVERSITY SCHOOL OF LAW, AND PROFESSOR
OF PSYCHOLOGY, DUKE UNIVERSITY
Mr. Vidmar. I want to be very clear, although I am have
been a faculty member at Duke Law School for the last 26 years,
I am not a lawyer by training, although I picked up a lot of
law in the years there. And I did spend a year at Yale Law
School when I became interested in the law. My approach to the
kinds of questions that are before this Committee today and as
part of this whole debate about the tort system, is actually to
collect empirical data, sometimes collected by others, and also
to critique the kinds of issues that are made before this
Committee. One of my areas of specialization over the past 26
years has been medical malpractice and for a slightly shorter
period of time I have been studying punitive damages and
related areas. But we are still going back 20 years or so with
regard to the basic kinds of questions.
Based on this quarter century of empirical work, there are
many myths about the tort system, the American tort system,
that are widely believed by members of our society due to
simple misunderstandings or are myths created and perpetuated
often by business groups and individuals that are self-serving
and just flat out wrong.
One of the things I still talk about in my class is the
McDonald's coffee spill case of the poor woman that ``just
spilled a little bit of coffee on herself and got a couple
million dollars in an award.'' I have the pictures here today.
I didn't put them into my materials, but if any Members of this
Committee are interested in looking at the scars on that woman,
they are pretty dreadful because McDonald's was selling its
coffee at 190 degrees Fahrenheit when, in fact, the
manufacturer had recommended 160 degrees. And the bottom line
was that McDonald's continued to sell the coffee even though
they had had over 700 complaints simply because it the coffee
sold better, even though more people were burned. And if you
see Stella Liebeck's scars, and I would be happy to pass those
up, if you have a strong stomach.
The coffee spill case is one of the kind of myths that has
been perpetuated. And it is overseas as well, I should say,
because I have given talks in Australia and New Zealand. And I
talk about the criminal justice system. And the first thing
they bring up is, ``Yeah, but what about the McDonald's coffee
case?'' It is just wrong information.
And the other thing is that, in fact, I published an
article on medical malpractice in a leading medical journal.
The doctors were shocked to learn that when they go to jury
trial, that doctors prevail in three out of four cases. That is
another one of these things, that we are always out to get you.
Since this Committee's concern is with the issue of
litigation against businesses, and especially punitive damages,
including exploding gas cans, allow me to offer a few comments
that I and my other colleagues, Professor Tom Baker, now at the
University of Pennsylvania Law School and Professor Herbert
Kritzer at the University of Minnesota Law School made; these
are appended to my comments. And I urge the Committee Members
to look at our paper on ``Jackpot Justice'' and the way that we
systematically dissected it.
There are reasons why our litigation level is a little bit
higher than European countries, for example. One, these other
countries have stronger regulatory mechanisms that eliminate
the need for tort claims. Perhaps exploding gas cans. Second,
the social welfare systems in these other countries reduces the
medical costs to injured parties. I lived in Canada for almost
20 years, although I was born in the United States. And one of
the things that Canadians don't worry about are medical bills
because they are taken care of. And tort bills are heavily
driven by medical costs that are much higher in the U.S. than
in other countries.
In the brief period I have left, allow me to make just
several points before my time is up.
In 2005, there was a study by the National Center for State
Courts. It found that 8 percent of initial claims asked for
punitive damages. However only 31 cases were actually reported
across the United States and the major cities in the United
States. What happened to those initial claims? Well, what
people often do not understand is how the tort system has
mechanisms to eliminate frivolous claims. One is that the judge
just looks at it and says, this is frivolous and I am not going
to give it to the jury. That is it. Sometimes the judge says,
well, we will let it go through. And before the jury is sent
back to deliberate, the judge says, I won't give--I don't want
you to consider the issue of punitive damages.
The other issue that I think is important is that we do
have some large punitive damages cases. But what is striking is
they are often business versus business. One is TXO v. Alliance
Research Corporation, where the Supreme Court itself said this
case involved was egregious behavior. In one of the articles,
the second articles that I have appended on punitive damages,
we have a case which, again, the largest punitive one that we
uncovered was a case involving a business against another
business.
So some of these things get blown out of proportion and are
actually myths. And I keep going back, because I love beating
this one to death, I love to beat the McDonald's coffee spill
case. This is the fourth time I have referred to it. I really
urge Members of this Committee to look up the McDonald's case
on the Internet because this myth has just created incredible
impression, the iconic example of our jury system gone awry. I
have spent a lot of time studying juries. When I was doing
medical malpractice I interviewed jurors, I followed them
through. I was also involved in a unique research project in
Arizona where we actually--the Arizona Supreme Court initiated
this project--where we actually recorded in the jury room 50
civil juries deliberating as well as the test. The thing--and
some of these articles are written up. I talk about it in one
chapter of my book with Valerie Hans--one of things that came
through is every time these claims are made about runaway
juries, they are an insult to the American citizens that serve
on juries. I feel very strongly about that. Because what we
found was juries are so conscientious and actually like
accountants go through the evidence and say, well, you know,
the plaintiff claimed X bills. They go through and they act
like accountants: ``Wait a minute, this doesn't add up.''
And so I think those are my final comments. I have actually
got quite a bit of time left. But I think the point that I
would like to make is one in addition to what I have also said
is I want to go back to this, that you underestimate the common
good sense of the American people when you insult the jury
system.
Thank you.
Mr. Franks. I thank the gentlemen.
[The prepared statement of Mr. Vidmar follows:]*
---------------------------------------------------------------------------
*See Appendix for the supplemental material submitted with this
statement.
---------------------------------------------------------------------------
__________
Mr. Franks. And I now recognize our fourth and final
witness, Professor Butler. Sir, I hope you will also turn your
microphone on.
TESTIMONY OF HENRY N. BUTLER, GMU FOUNDATION PROFESSOR OF LAW,
AND EXECUTIVE DIRECTOR, LAW & ECONOMICS CENTER, GEORGE MASON
UNIVERSITY SCHOOL OF LAW
Mr. Butler. Happy to be here today. Thank you.
Chairman Franks, Ranking Member Nadler, and Members of the
Subcommittee, thank you for the opportunity to be here today.
The impact of our civil justice system on international
competitiveness is a vitally important one. The premise of this
hearing that we, in fact, have excessive litigation is one that
I am willing to accept, although I cannot quantify the extent
to which litigation is, in fact, extensive. One area of the law
that has seen extraordinary amounts of litigation in recent
years, and an area of particular interest to me, and which will
severe as the focal point of my testimony, is State consumer
protection law. I hope to make two points in my brief
testimony. First, optimal. That is an economic rule. Optimal
legal rules recognize the trade-off between the cost of
accidents and the costs of accident prevention. Second,
excessive litigation can tip this balance, leading firms to
make socially wasteful expenditures, which ultimately harms
both their global competitiveness and consumers.
Tort law is perhaps the most analyzed area of law and
economics. This framework of analysis can trace its lineage to
one developed by Judge Learned Hand in the seminal U.S. v.
Carroll Towing opinion over 60 years ago. Judge Hand opined
that the determination of tort liability should be based on
whether the alleged tortfeasor had failed to take additional
precautions that would have cost less than their expected
benefits in terms of reduced likelihood and severity injuries.
A similar approach is found in the work of Judge, then law
professor, Guido Calabresi. Calabresi famously wrote in his
seminal book, ``The Cost of Accidents,'' that the goal of tort
law should be to minimize the combination of the costs of
avoiding accidents and the costs of accidents. That is in
evaluating a legal regime we should think about the tradeoffs
of costs and benefits. We can have too much safety, we can have
too much consumer protection, we can have too much disclosure,
and so forth. Because the marginal costs of accident reduction
increases as the probability of accidents decreases, the law
tolerates some injuries. That is, the optimal number of issues
is not zero. And I know that sounds cold and harsh, but that is
the way we think about it in law and economics, and I think the
way the courts actually act. The benefits of holding American
businesses liable for injuries and damages for consumers,
customers, users of products and services are well known and
have been summarized some by Ranking Member Nadler's comments.
So it serves as a guide for the behavior that we expect of our
businesses.
A civil litigation system characterized by excessive
litigation can lead to lower levels of production, employment,
innovation, and business openings. Unfortunately, some areas of
American law have strayed from the balancing approaches
articulated by Judges Hand and Calabresi. Their common sense
notions have become uncommon in some areas of American law. So
State consumer protection acts, which I realize are not in your
jurisdiction, are an unsettling example of an area where
product litigation has strayed far from a common sense
balancing approach. In my view, the amount of such litigation,
which imposes a tremendous toll on all American businesses that
directly interact with consumers, is clearly excessive. States
pass these laws, often referred to as little FTC acts, because
they were modeled after Section 5 of the FTC Act. They passed
these laws for appeared to be sound economic reasons. In our
modern mass-produced economy it is often uneconomical for
individual consumers to bring lawsuits against manufacturers
when they are dissatisfied with a product. To solve this
problem, little FTC acts allow for private actions, awarding of
attorneys' fees to a winning consumer, statutory damages
oftentimes as high as $1,000 per occurrence, and relaxation of
traditional common law requirements of reasonable reliance and
actual injury. At about the same time that the States were
adopting little FTC acts, the class action lawsuit was coming
into favor as another solution to the uneconomical lawsuit
problem. So somewhere along the way, the two solutions merged
into the consumer class actions. And they now benefit from the
procedural--the class actions now benefit from the procedural
and substantive advantages that were found in the little FTC
acts. This combination of solutions has brought about a perfect
storm of litigation resulting in a dramatic increase of
litigation during the first decade of the century, as
documented by a study that I oversaw when I was at Northwestern
University. Consumers ultimately pay the costs that excessive
litigation imposes on business through higher prices. Of
course, because the law of demands that higher prices will
result in fewer goods being sold, some consumers will decide to
go without products altogether, and firms will then need fewer
workers. To the extent that businesses cannot recover all of
these from consumers, moreover, they result in reduced profits
which translate into lower returns for shareholders and other
investors.
I wanted to quickly summarize how this impacts--this type
of litigation can impact on the global competitiveness of
firms. Corporations have responded to these lawsuits; of
course, they have to respond to these lawsuits. And every
lawsuit that is filed against a business diverts resources from
otherwise productive pursuits. The greater the expected cost of
litigation, the more a company will invest in avoiding
litigation. If there are problems with a product, the firm will
invest resources to improve to avoid litigation. And even when
there is nothing wrong with the product and no consumers have
relied or been injured, however, the mere threat of class
actions and potential liability under broadly interpreted State
consumer protection acts can also lead companies to pour more
resources into safety. The potential for enormous financial
liability as well as the potential for unfavorable publicity
can force even the most stable and rational businesses to
settle cases that they believe they could win at trial. But
because this increased investment is tied to the cost of
handling unfounded legal claims rather than consumer injury, it
is socially wasteful. In this matter, excessive litigation
disrupts the balance between the marginal benefits and costs to
precaution that tort law attempts to--that tort law and other
areas of law attempt to strike as a balance.
So the upshot of my brief remarks is that excessive
litigation under something as benign sounding as State consumer
protection acts can have serious adverse consequences for
America's competitiveness.
Thank you for allowing me the opportunity to express my
views.
[The prepared statement of Mr. Butler follows:]
__________
Mr. Franks. Gentlemen, I thank you for your testimony. And
we will now proceed under the 5-minute rule with questions. I
will begin by recognizing myself for 5 minutes.
I will address my first question to you, Professor Butler.
I think it is commonly assumed that when U.S. companies are
sued and excessive litigation costs are imposed that it is a
nameless, faceless corporation that pays these costs. In your
experience, who ultimately bears the costs of excessive
litigation?
Mr. Butler. Well, to the extent we have excessive
litigation, I think it is fair to characterize it as a tax. And
as Milton Friedman famously would say, only people pay taxes.
If somebody has to bear that cost and that cost is either borne
by consumers in the form of higher prices, employees in terms
of lost jobs, shareholders in terms of lower rates of return.
So there is no--there is no free lunch in this system; the
costs are borne by someone.
Mr. Franks. Yes, sir.
Mr. Flick, I might follow up with you sort of in the same
vein. Who paid the ultimate price for the lawsuits against
Blitz, USA? I won't try to lead you in the question. Who paid
the ultimate costs there?
Mr. Flick. I think all three of those, the consumer--the
prices of gas cans went up over the years from about $5 for a
5-gallon gas can to more recently $20. People are paying more
for the product, and the costs of litigation are in that. The
costs of some environmental regulation are in that too.
But the consumer certainly paid more, our people who lost
their jobs paid with their jobs and their loss of benefits, and
the shareholders ultimately had a company that was worth
nothing.
Mr. Franks. Thank you, sir.
Mr. Hinton, let me ask you a question here.
I was fascinated with the Professor Vidmar's comment that
they recorded, I think, some of the juries deliberating in
cases. I didn't know whether the juries knew that they were
being recorded or not. If they did, I suppose that would change
the dynamics of the deliberation pretty profoundly; if they
didn't, it opens up a whole new set of questions.
But Professor Vidmar's testimony, he states that the claims
about negative effects of the American tort system have not
stood up to scrutiny. I would like to just give you the
opportunity to reiterate what your studies have shown about the
effects of the American tort system and to respond to any
points regarding Professor Vidmar's testimony.
Mr. Hinton. Yes. Thank you. I think one of the points I
would like to respond to Professor Vidmar that he raised was
that if you look at Europe, they have much more extensive
healthcare benefits and welfare benefits and so on. And so how
can you be sure that higher tort costs in the United States are
not just a result of that.
And in the study that we have done, we actually relied on
some research by Kermar and Schmidt, who tried to control the
amount of government program spending in their comparative
analysis and found that if you were to change the benefit
system in Europe to the same level of benefits that they have--
we have in the U.S., it would only change the tort costs there
by about 26 percent, which is a tiny fraction of the difference
that we measure.
So I think that in terms of the effects of the tort system,
those cost differences, they are so large it is difficult to
ignore them. The question of whether or not they affect
competitiveness does depend a little bit on this issue of
transfer rate; how much benefit is there coming from the tort
system. The reason in our study that we think we address that
is because we think that those types of benefits provided by
the legal systems in these countries are of similar magnitude.
And they are certainly not sufficiently different to explain
why the U.S. tort system costs over two and a half times the
European one.
Mr. Franks. Well, thank you, sir.
Mr. Flick, I might return to you, sir. I don't know if
Blitz, USA would have qualified as a small business. I think
you said at one point you had 120 employees, and that is
certainly not a large corporation. But would it have been
easier for Blitz to survive the lawsuits against it if it were
a large corporation or a division of a large corporation?
Mr. Flick. Yes, I believe so. I guess it would depend on
how large and how much the large corporation wanted to put into
fight----
Mr. Franks. So you think there may be a disproportionate
impact on small businesses?
Mr. Flick. Well, a small business just can't get the cases
to trial with the high costs. If it costs 2 or $3 million to
win a case and your insurer--the insurance company is going to
settle that case. And a large business can take a longer view
due to their resources and fight the cases and shine more light
on the truth.
Mr. Franks. Well, thank you very much. And I am going to
turn to Mr. Nadler and yield him for 5 minutes for questions.
Mr. Nadler. I thank the Chairman.
Professor Vidmar, I would like you to elaborate. I mean, we
had a little debate here about the U.S. having higher
litigation costs than Europe. Can you expand in your testimony
about why these differences might exist and why Mr. Hinton is
wrong in what he was saying?
Mr. Vidmar. My view is that when some of these estimates--I
have not seen those statistics. What I do know is that the
issue that was brought up with the Jackpot Justice article,
which were very similar to these, I mean, he has different data
than we have now, but when my colleagues, Tom Baker and Herbert
Kritzer and I went through the report, we just found so many
flaws in the assumptions, that we decided it was not worth the
paper it was written on.
Mr. Nadler. So they were like all these studies that we
were told here that when we amended the Bankruptcy Code, every
credit card holder will get $400 savings in lower interest
rates. They have that amount of validity.
Mr. Vidmar. Yeah. It is----
Mr. Nadler. Um----
Mr. Vidmar. Oh, I am sorry.
Mr. Nadler. Go ahead.
Mr. Vidmar. No. I was just going to say, it is difficult
sometimes in making these exact comparisons across the
different countries.
Mr. Nadler. Okay. Could you comment briefly on the
assertion that some jurisdictions are legal hellholes driving
out doctors, that OB/GYN's are leaving jurisdictions----
Mr. Vidmar. Well, you know----
Mr. Nadler [continuing]. Because of the tort system.
Mr. Vidmar. Yes. That is something that I addressed a
number of years ago about legal tort claims places. I have
actually written about them--one of the places we know about is
the Bronx jury. Everybody moves their cases to the Bronx
because the Bronx juries are favorable to plaintiffs. In fact,
I wrote an article with a colleague where we actually went in
and looked at the data and compared the Bronx to Manhattan and
to the other boroughs. We found no difference. That is the kind
of work that I do.
Mr. Nadler. So Manhattan and the Bronx are both legal
hellholes?
Mr. Vidmar. I am sorry?
Mr. Nadler. So Manhattan and the Bronx are both legal
hellholes?
Mr. Vidmar. Yes. Well, I mean, it is one of those things.
But that has been the pleasure for me in doing these things
just as an intellectually interesting task is everybody
believes about the Bronx jury.
Mr. Nadler. So in other words, you found no evidence that
the fact----
Mr. Vidmar. We found no evidence whatsoever to support that
position, with one tiny exception.
Mr. Nadler. To support the position that doctors are
leaving.
Mr. Vidmar. With one tiny exception, which is not doing it
justice. Yeah.
Mr. Nadler. Okay. Mr. Hinton, in your testimony you cited a
2011 report by Towers Watson, you referred to it, that U.S.
Tort costs exceed $250 billion per year. In the report, they
state, ``we examined only one side of the U.S. Tort system, the
costs. No attempt has been made to measure or quantify the
benefits of the tort system or conclude that the cost of the
U.S. tort system outweighed the benefits or vice versa.''
Have you calculated the benefits of the tort system? And if
so, what is the net cost of the system after subtracting the
benefits? Since we don't know the net costs, then everything
else that you are talking about is irrelevant.
Mr. Hinton. That is one of the reasons we developed this
forthcoming study looking at across countries. So basically the
idea of that study design is to say, let us choose some other
countries where we think the regulatory environment and the
compensatory benefits that are----
Mr. Nadler. And that will show you the net benefits of the
tort system?
Mr. Hinton [continuing]. Are about the same, right, so we
hold those constant, and that enables us then to infer from
differences in the costs--if those differences in costs and the
benefits are about the same, then we must be----
Mr. Nadler. So that is a forthcoming study?
Mr. Hinton. That is the forthcoming study.
Mr. Nadler. So as of now, this touted $250 billion cost is
a number that means nothing, because it is just one side of the
equation. We don't know the other side of the equation. Until
you come out with a forthcoming study, it is an irrelevant
statistic. Correct?
Mr. Hinton. I mean, I think it is an exactly what it says
it was. It is an estimate by Towers Watson, not by me----
Mr. Nadler. Okay.
Mr. Hinton [continuing]. Of how big they think the tort
system is in terms of its costs.
Mr. Nadler. In terms of its costs, but it says nothing
about its net benefits or net costs.
Mr. Hinton. They didn't address that, I don't think.
Mr. Nadler. Okay. Exactly. Thank you.
Professor Vidmar, could you comment on Mr. Hinton's
statement about the forthcoming study that by comparing--can
you in fact compare these systems across different countries?
Mr. Vidmar. Well, there are so many differences between
different countries that you always get into the difficulty of
confounded variables, I am using a technical term that we use
in this field, but, I mean, it is just not the same. And, in
fact, I think, if I understood the comment, is that some of
these issues are just not controlled for in the study.
Mr. Nadler. Okay. Thank you. Let me get back to Mr. Hinton
before my time runs out. In your study with the $250 billion,
the Towers Watson study, does the $250 billion include
transfers from one party to another?
Mr. Hinton. It includes all the costs that would----
Mr. Nadler. So in other words----
Mr. Hinton. It would include some transfers.
Mr. Nadler. So you did not subtract the transfers from the
costs?
Mr. Hinton. Not in that study. That is my understanding,
that----
Mr. Nadler. So do you think transfers are net costs?
Mr. Hinton. No. I think that the transfers are part of the
benefit of the system. Right? They provide for the
compensation, I think.
Mr. Nadler. Okay. So in other words, even the cost figure
is not a real cost figure, because it includes----
Mr. Hinton. Well----
Mr. Nadler [continuing]. Includes transfers. Transfers are
not a cost.
Mr. Hinton. Well, a cost----
Mr. Nadler. As Judge Posner pointed out.
Mr. Hinton. If I am paying you compensation, then the
compensation is still a cost to me.
Mr. Nadler. To you, but not to the system.
Mr. Hinton. Well----
Mr. Nadler. Because I have the money. Maybe I deserve to
have the money and you shouldn't, because you punched me in the
arm or whatever.
Mr. Hinton. I think you are right that you have to be
careful how you refer to the system when you are referring to
costs.
Mr. Nadler. Okay. My last--I think my time has expired.
Thank you. I yield back.
Mr. Franks. I thank the gentleman. And I would now
recognize the gentleman from Pennsylvania, Mr. Rothfus, for 5
minutes.
Mr. Rothfus. Thank you, Mr. Chairman. Mr. Hinton, in your
testimony, you talk about features of a country's legal
environment and how it might impact on a country's overall
litigation costs. Do you have an opinion on characteristics of
our legal environment that you think have the biggest negative
impact?
Mr. Hinton. Well, in our study, we specifically looked at
two features of the legal environment: whether or not you had a
civil or common law tradition, and the number of lawyers per
capita in that country. There are obviously other features that
are important characteristics of the legal system. We didn't
study those directly, but that may be a topic for further work.
But one of the differences that is notable between the U.S.
and Europe is the existence of class actions as a remedy and
mass litigation procedures. And in the analysis we did of D&O
insurance, it is certainly true that securities class actions
represent a significant part of the costs of D&O insurance in
the U.S. And so may make a contribution or explain in part why
the U.S. makes up such a large fraction of the total global D&O
costs.
Mr. Rothfus. What about other countries and their treatment
of punitive damages? For example, are European countries, do
they have a punitive damages option available to litigants?
Mr. Hinton. I am sorry. I didn't----
Mr. Rothfus. Punitive damages. May litigants seek punitive
damages in European courts?
Mr. Hinton. I am sorry. I can't answer that question. I am
not really an expert on that issue.
Mr. Rothfus. What about, I mean, have you studied, you
know, mechanisms that other countries may use to assess the
viability of a claim before they would go to a court? Are there
any stages to litigation in European countries before you get
to a court that might weed out claims that don't have merit?
Mr. Hinton. Again, I would have to do further study on
those legal characteristics.
Mr. Rothfus. Professor Vidmar, just a couple of questions.
You made a statement in your written testimony about, this is
on page 5, the important lesson--this is with respect to
physicians. The important lesson is that the per capita number
of physicians has steadily increased over 4 decades.
Is that still a current assessment or is this study
somewhat old, because I looked at some of the charts that
accompanied your testimony, both on page 3, the patient care
physicians per capita, and again on page 4, we had some
specialties per capita, neurosurgeons and OB/GYN's? In looking
at these charts, it looks as though, frankly, the number has
flatlined over the last decade.
Mr. Vidmar. They are going up. You can only take--is that
on? Yeah. You can only take them up so far. But we actually
have some data that have gone up through 2010. You reach a
certain point that you just don't--you don't need more
physicians or whatever it is, I mean, if you insisted that it
go up.
What has been very important in our research is to show
they have--contrary to the claims. Illinois was one example.
Doctors are leaving Illinois. Okay. That was the claim. We
looked, and they weren't leaving Illinois. A related claims was
that doctors in the rural areas were leaving. We looked and
broke the data down by rural counties. They weren't leaving. I
have done the same thing for Missouri, I have done the same
thing for Florida, and consistently we find that these claims
are just not legitimate. Or they are not supported by data is
probably a better way to state it.
Mr. Rothfus. A little bit about punitive damages. Again, my
understanding of punitive damages is that they are meant to
punish a wrongdoer. When you punish a wrongdoer, when society
punishes a wrongdoer in the criminal context, we have a beyond-
a-reasonable-doubt standard of proof. It seems to me that if
you are going to punish a wrongdoer, would you not consider
that kind of standard of proof in a civil context?
Mr. Vidmar. Well, in a civil context it is--in the ordinary
case, it is more reasonable than not, but when you get to
punitive damages, the standard is higher.
Mr. Rothfus. A clear and convincing----
Mr. Vidmar. A preponderance of evidence becomes much more
accepted. It is not proof beyond a reasonable doubt, because
people are not put in jail or not sentenced to die as a result
of the verdict, but in fact in the punitive damages there is a
higher threshold of doubt that the jury has to overcome.
Mr. Rothfus. But you are punishing people, are you not?
Mr. Vidmar. Yes, yes, for misbehavior. And the work that I
have done, when you read these cases on a case-by-case basis,
what you find is some of the defendants in these cases--I can't
give examples right offhand, I can actually send some in, but
reading the case studies, their behavior is absolutely
egregious.
Mr. Rothfus. When you punish wrongdoers, shouldn't the
benefit go to society? When you extract a punishment from a
wrongdoer, shouldn't it be applied more generally to the
society?
Mr. Vidmar. I didn't understand the question.
Mr. Rothfus. Well, when you allow for punitive damages in a
civil litigation context----
Mr. Vidmar. Yes.
Mr. Rothfus [continuing]. You are a private litigant
litigating that----
Mr. Vidmar. Yeah.
Mr. Rothfus [continuing]. And when you are punishing a
wrongdoer, it is not for the harm, it is for the bad act.
Mr. Vidmar. It is for the bad act, yes.
Mr. Rothfus. And doesn't society have an interest in taking
the award for that bad act and making----
Mr. Vidmar. Well----
Mr. Rothfus [continuing]. Sure that victims are adequately
compensated?
Mr. Vidmar. In some instances, I would actually think that
that might be the case, but that is the way our law has
developed. And there is no more I can say about that, except
that when you see these cases, it is a punishment. The
behavior, you know, sometimes it has been sexual abuse,
sometimes it is been just somebody who has been so totally
reckless in what they have done, that any Member of this
Committee, if I showed you some of those cases, you would say,
yeah, that is a bad person. And this is one way, it is not a
criminal sanction, but it is one way of punishing. It is a
fine.
But one of the things I want to reemphasize, I went over it
very quickly, the jury just doesn't get these right away. Most
of these claims that are made, some lawyers, and again, I am
not going to defend the lawyers, almost automatically when they
file a lawsuit they ask for punitive damages, but they know it
is not going anywhere. And, in fact, the judge looks at it and
says----
Mr. Rothfus. Well, if they know it is not going anywhere,
should there be Rule 11 sanctions?
Mr. Vidmar. Well, they do it sometimes. It is just a matter
of part of the negotiation tactics. The other side knows that
they are not going to get----
Mr. Rothfus. But if there is no merit for it----
Mr. Vidmar. I am sorry?
Mr. Rothfus. If there is no merit for it and----
Mr. Vidmar. Well, but----
Mr. Rothfus [continuing]. Somebody is putting it in a
pleading, you know, shouldn't there be some kind of----
Mr. Vidmar. Well----
Mr. Rothfus [continuing]. Sanction for that?
Mr. Vidmar.--I would almost agree with you, some of the
time when they do this, it is just the lawyers getting out of
control. I am not always going to defend lawyers. Remember, I
am not a lawyer, so I don't have to defend them all the time.
I think that sometimes some plaintiff lawyers do it a
matter of pleadings, and they just figure, well, this will
scare the other side, but what I can tell you is the other side
says, this--they get into pretrial discussions and the other
side says, this ain't going to go anywhere. If the plaintiff
lawyer gets really recalcitrant, it gets to the judge, and the
judge says, we are going to throw this out. And our data show
that of the claims that are made, most of the time the legal
system filters these cases out before they ever get to a jury.
And I should add----
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Vidmar [continuing]. Another thing, that I do a little
bit of consulting. Most of the time when I have done, because
my law school position allows me do that, I am usually a
defense expert rather than a plaintiff expert on these kinds of
matters. So I see both sides of the cases.
Mr. Rothfus. Thank you, Mr. Chairman. Yield back.
Mr. Franks. I thank the gentleman. And I would now
recognize the Ranking Member of the full Committee, Mr.
Conyers, for 5 minutes.
Mr. Conyers. Thank you, Chairman Franks. This has been
pretty interesting, but Mr. Flick, your situation is
prominently known. Were you sanctioned by the court, finding
that Blitz hid information in the form of a handwritten memo by
you that would have hurt, if not potentially eliminated Blitz's
defense that the flame arresters weren't useful in preventing
these explosions?
Mr. Flick. Yes. Thank you for letting me talk about that.
Mr. Franks. Sir, can you pull your microphone? Pull it
toward you.
Mr. Flick. Yes. Thank you. Blitz--I don't know how much
detail I can get into that, because----
Mr. Conyers. Is the answer yes?
Mr. Flick [continuing]. Because the case is under appeal,
but I don't think we were sanctioned for hiding anything. We
produced some documents late, and we were sanctioned for that.
It is under appeal, and----
Mr. Conyers. What about destruction of documents and not
turning certain other documents over?
Mr. Flick. I don't think it has ever been shown that we
destroyed any documents.
Mr. Conyers. So is your answer yes or no?
Mr. Flick. Would you----
Mr. Conyers. To my question.
Mr. Flick. The question--repeat the question, please.
Mr. Conyers. Well, I was just trying find out if it is true
that you had a handwritten memo, which I have a copy of, and
that your defense would have been eliminated in preventing
devastating explosions if that information had come forward.
Mr. Flick. I don't think the defense would have been
eliminated. There was a document that was found that was
produced late, and we were sanctioned for that, and that is
under appeal.
Mr. Conyers. Okay. Well, what about the part where the
court finds that the settlement would have been not less than
$250,000 higher if the plaintiff would have had the documents
discussed in this memorandum opinion, and particularly those
which were not disclosed to the plaintiff would have
drastically increased the settlement value? The court seemed to
have had some problems, and--but since you are still in court
with it, I won't pursue this any further. I didn't know that
this was still under appeal.
Professor Vidmar, you have been the subject of much comment
even though you are one of the witnesses. You have heard
references to the so-called tort tax. Have you ever examined
that for any accuracy or do you have a view about it?
Mr. Vidmar. I try to stick to my areas of expertise. That
is not one. In economics--I mean, I understand economics as a
general rule, but I tend to avoid areas that go beyond my
expertise, and that, I feel, is one that I shouldn't jump into.
Mr. Conyers. We have heard a lot about class action
lawsuits, but it has been my experience that class action
lawsuits are very complex, they are not easy to come by and
very few of them get through. As a matter of fact, former
President Clinton gave it a try at one time and wasn't very
successful at it.
Mr. Vidmar. Our legal system has its flaws, but it also has
its good points. And many of the times you have an adversary
system where plaintiffs go after--you know, the lawyers go
after people, but our system does a pretty darn good job of
weeding out most of these frivolous kinds of lawsuits, but of
course that is not what we hear about. We hear about the ones
that go through. But judges and others, they start applying the
law and say these are just not appropriate lawsuits, so they
don't get there.
Mr. Conyers. Thank you, Mr. Chairman.
Mr. Franks. And I thank the gentleman.
And I would now recognize the gentleman from Florida, Mr.
DeSantis, for 5 minutes.
Mr. DeSantis. Thank you, Mr. Chairman. Thanks to the
witnesses for your time and testimony. Mr. Hinton, you
mentioned that you compared lawyers per capita. I didn't
actually hear what the result was. I am assuming America has
way more lawyers per capita than European countries.
Mr. Hinton. Yes. That is right, but it is not just that the
U.S. has more, is that we were able to measure how many, the
number of lawyers in each country, and so see how much
variation in the liability insurance prices followed the same
pattern that existed across all the countries.
Mr. DeSantis. No. I understand that. And in terms of the--
did you look at Great Britain, because you said there was civil
versus common law countries? We are obviously common law. Great
Britain is common law. Did you look at them or are they just
continental European countries?
Mr. Hinton. No. The U.K. was included in our study.
Mr. DeSantis. Okay. In the U.K., is it true, I don't know
if you looked at this, that they have basically a British rule
where if you sue somebody and you lose, then you got to pay the
winning party's attorney's fees?
Mr. Hinton. Yes. That is my understanding, is that that is
how the loser pays system operates.
Mr. DeSantis. Is that something that the continental
European countries also utilize?
Mr. Hinton. It works differently in different countries.
Mr. DeSantis. Okay. Mr. Flint, I guess in your experience--
I mean, you guys eventually got brought under because of
excessive litigation, but had you been dealing with litigation
before you went under? I mean, was this just a common
occurrence that you would have to deal with lawsuits?
Mr. Flick. Well, the lawsuits under this theory started
about 10 years ago for our company, and they started slow and
got excessively more in the last few years.
Mr. DeSantis. So were you winning those early lawsuits? Or
how was that----
Mr. Flick. I was only able to get two cases to trial. We
won one and lost one, the rest of them settled or are pending,
or they are stayed in bankruptcy court currently.
Mr. DeSantis. And so from your experience, were these cases
driven by victims or by lawyers?
Mr. Flick. In my experience, they were driven by the money
that plaintiff's lawyers make. There are victims, and they are
horrific injuries in each of these cases, but I think the
driver was the money that the plaintiff's lawyers were making.
Mr. DeSantis. And you guys--from your testimony, it sounded
like they couldn't even tell sometimes whether it was actually
your cans, but is it that they are going after you because they
knew that you could pay a judgment?
Mr. Flick. That would be speculation, but, you know, in
lots of cases it was only testimony that said it was our can,
because there wasn't any physical evidence. And we did buy
adequate amounts of insurance, and I think that is a driving
force for the plaintiff's attorneys as well. They are a
business, and they go where they can get money.
Mr. DeSantis. And did you settle any cases?
Mr. Flick. Our insurance companies did, usually under
protest of the company. We wanted to be able to tell our story
more than we did.
Mr. DeSantis. So knowing that you--so you may have a
situation where you know it is going to cost more to pay the
attorneys to actually litigate the case, but you wanted to do
that rather than just kind of paying somebody a smaller fee
just to kind of go away and drop the case?
Mr. Flick. Yes, sir, that is correct.
Mr. DeSantis. Okay. Thank you, Mr. Chairman. I yield back
the balance of my time.
Mr. Franks. And I thank the gentleman.
And I will now recognize the gentlemen from Virginia, Mr.
Scott.
Mr. Scott. Thank you, Mr. Chairman.
Professor Vidmar, are there cases where companies changed
their policies only because punitive damages changed the
calculation that it would be cheaper to just go ahead and pay a
lot of claims rather than fix a problem?
Mr. Vidmar. I can't speak to that directly. I think there
is some evidence for this. I do know the insurance companies, I
think consistent with what you have said, often say, ``Look,
settle this thing. We'll take care of it,'' rather than go
forward, even though sometimes the defendant in these cases is
protesting. So it is kind of a----
Mr. Scott. Well, I mean, when the calculation in the
boardroom is, rather than fix the problem, why don't we just
incur the recurring lawsuits, because paying the lawsuits would
be cheaper than fixing the problem, wasn't that what happened
in one of the automobile cases where people were getting burned
to death?
Mr. Vidmar. I believe that is correct, that in the past,
that this was a cost of doing business, we'll lose a few, but
we'll win more often, because they have to make a calculation,
a balance. To some degree----
Mr. Scott. And only because punitive damages changed that
calculation did they bother to stop killing people.
Mr. Vidmar. As opposed to compensatory damages, that is one
of the functions of punitive damages, is to simply override
this, ``Well, it is cheap to pay somebody off.'' The punitive
damages said, you are going to pay a penalty for doing this.
Mr. Scott. Are you familiar with the numbers that said
there are about a hundred thousand deaths due to preventable
medical errors?
Mr. Vidmar. Yes.
Mr. Scott. And 15,000 medical malpractice cases?
Mr. Vidmar. I think that is probably right.
Mr. Scott. And so if there was a fair system, there would
be not 15,000 cases, but a hundred thousand cases. Is that
right?
Mr. Vidmar. It is not clear in those instances from what I
have seen about this. I am hesitant to make a direct kind of
projection from that.
Mr. Scott. But, I mean, when people say there are too many
lawsuits, those numbers themselves suggest that that cannot be
true.
Mr. Vidmar. Well, that is probably true.
Mr. Scott. Now, Mr. Hinton, you said that the average costs
per incidence is high. I think Professor Vidmar pointed out
that a lot of--just about every country outside of the United
States, healthcare is not a cost. Is that one of the reasons
our damages are higher?
Mr. Hinton. Yes. That is an important thing to control for
when you are comparing countries, both how much is paid for as
a government benefit, as a social--part of social programs, but
also there is differences in the private sector health
insurance market. And we controlled for those things in our
study.
Mr. Scott. Well, do you also control for the fact that in
the United States a lot of these lawsuits are so expensive to
bring, that the smaller lawsuits aren't brought? And that would
increase the average, wouldn't it?
Mr. Hinton. I am not sure how that would affect our study.
Mr. Scott. What is the--we are talking about
competitiveness. What part of the product price is litigation
costs?
Mr. Hinton. What fraction of the product's price? That is
an interesting question. It obviously depends very much on the
product. And I know we heard today from Mr. Flick about their
experience in the prices----
Mr. Scott. Well, if you have a company that is getting sued
a lot, it may be because they are not very careful in the way
they do business, but, I mean, the product price, you have got
one for litigation, and if it is not that big, and then the
percentage of that that is negligence cases, because a lot of
this is businesses suing businesses, isn't it?
Mr. Hinton. Well, I do know of another example where some
economists studied differences in drug prices between Canada
and the United States--actually, I think it was vaccine
prices--and it was around the time of--I think it was in the
'80's.
Mr. Scott. Where we provided immunity to offset that----
Mr. Hinton. That is right. There was--that was the
legislative solution. But at the time it was studied, they
found that it was a big cost--a price differential, and that
was attributed to cost of----
Mr. Scott. I am running out of time. I would like Professor
Vidmar to just tell us, typically what does a lawyer make for
bringing a frivolous lawsuit?
Mr. Vidmar. For a frivolous lawsuit, nothing.
Mr. Scott. Thank you.
Mr. Vidmar. The other thing that I discovered in the
research is sometimes people are hurt very badly, whether it is
medical malpractice or whether it is some other injury, but the
evidence is so weak or it is so difficult, you are going to
have to require so many experts to do this that they--and I do
know of cases where the lawyers just say, I can't take the
case, and so the person never gets compensation even though by
some other standard, we would say they deserve it.
Mr. Scott. So you are saying in a good case, they can't
bring it because it is too expensive; in a frivolous case, if
they bring it they don't get paid?
Mr. Vidmar. That is roughly it, yes.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Franks. I thank the gentleman.
And I will now recognize the gentleman from Florida, Mr.
Deutch, for 5 minutes.
Mr. Deutch. Thank you, Mr. Chairman. Mr. Flick, in response
to a question earlier about who paid the ultimate cost, you
talked about the number of your employees who lost their jobs
and the cost of the gas can going from $5 to $20 per gas can.
And then in your written testimony you said that Blitz
shuttered its door because the trial bar got greedy.
And I appreciate the majority's decision to hold a hearing
about the excessive litigation's impact on America's global
competitiveness. I don't know. I am still not sure what
constitutes excessive litigation.
And in the case of Blitz, I wonder if the trial bar, if it
is greedy trial lawyers who brought the case of the 4-year-old
who was burned to death in his garage after he knocked over a
Blitz can and it exploded, or the 10-year-old from California
who was burned 85 percent of his body when the gas can
exploded, or the man who was walking down the street carrying a
Blitz gas can when the static electricity from his body ignited
the gas can and he was burned over 80 percent of his body.
And I wonder if it was greedy trial lawyers who are
responsible for bringing the case of the man whose lawnmower
ran out of gas, and when he went to refuel, and while pouring,
his can exploded and threw him through the barn door and then
he burst into a ball of flame.
I wonder if it was greedy trial lawyers who were
responsible for bringing the case of the 4-year-old in upstate
New York who was burned over 80 percent of his body, or the 11-
year-old who was roasting marshmallows around the campfire when
the fire died and he went to pour some gas on, and the can
burst into flames.
And then finally, I wonder if it is greedy trial lawyers
who are responsible for bringing the case of a young boy from
Florida, where I am from, Jacob Joyner, who was 10 when he
suffered second and third degree burns over half of his body,
and after 6 weeks in intensive burn treatment facilities, he
passed away.
I understand there is this ongoing effort to demonize
lawyers. In every one of these instances, the only way that
these tragic circumstances were going to be addressed--the
nature of our tort system is such that the only way that any of
these individuals or their families could pursue justice is
through the courts.
And so it is my understanding, and this is just what I
would like to chat a bit about, that as early as 1973, Consumer
Reports had said that if fumes outside a gas ignite, a
flashback is possible that could ignite the contents of the can
itself. And they said then that such accidents can be prevented
by a flame arrester, which they had suggested should be legally
required in all gas cans.
And so given--it is also my understanding, by the way, and
I would just like your thoughts on this, frankly, that the cost
of those flame arresters is about $0.04, significantly less
than the jump from $5 to $20 per gas can.
And, again, I just want to know whether it is the--you said
the trial bar got greedy, and I want to know if it is the trial
bar's fault that the decision was made by the company to
manufacture something where there was plenty of evidence of
what could be done to prevent these things from happening, and
if 20 years ago when the company was first sued, or before
that, when Blitz was first told that there was a way to prevent
the explosions, if a flame arrester had been included in these
devices, that the horribly mutilated and in some cases dead
folks that I referred to wouldn't have been hurt.
And, frankly, if that decision had been made, and
ultimately there is a legitimate chance, isn't there, that the
employees who we were told earlier are the ones who really paid
the ultimate cost here rather than these victims, whether they
might not still have their jobs?
Mr. Flick. Well, that is a long question, and I would like
to break it down as you presented it. Oh. Is this on? Okay. I
think, to your first point, you know, do we just blame--do I
just blame the plaintiffs' bar? No, I don't. I think they are a
player in a system that is broken, and I believe if you----
Mr. Deutch. But I am not asking about the system. I am
asking about each of these individuals and their lawyers.
Mr. Flick. Well, I think you have got a fair amount of
misinformation in the statements that you have made. You have
listed purposefully, I think, a few cases where it is assumed
that there wasn't misuse, and I don't--and that doesn't----
Mr. Deutch. I am only--I only want--I am going to run out
of time. The only question I have is was there ever a moment
where you considered putting flame arresters into the cans?
Mr. Flick. Yes, yes, continually for years. And we studied
it and we studied it deeply, and we felt that it would cause
more harm than good, and we didn't feel that it would make the
cans safer. And I think it is a false assumption to say that
this $0.04 device, which isn't a $0.04 device, would----
Mr. Deutch. How much does it cost?
Mr. Flick. Well, I don't--it depends on how you do it, but
then you get other unintended consequences. And it is easy for
a plaintiff's lawyer to say, you could have done this and saved
this person, but it takes more----
Mr. Deutch. What is the unintended consequence by putting
something in that could have prevented the explosions that
wound up causing----
Mr. Flick. You could encourage people to accelerate fires
with the product, thinking it is safer than it is.
Mr. Deutch. All right. I yield back, Mr. Chairman.
Mr. Franks. And I would now yield to Mr. Cohen for 5
minutes.
Mr. Cohen. Thank you, Mr. Chair. This is a hearing that
reminds me of the hearings I have been having in the
Subcommittee on Regulations and Commercial Law. And it has been
dealing with regulations, and everything has centered on what
are the costs of regulations, and this is what are the costs of
our litigation system. And in neither one of these Committees
has the majority put forth the side of what are the costs to
human beings who are affected by bad air and bad water, by
torts. And that seems to be totally disregarded. And we see
these numbers. The tort system costs us $265 billion or
whatever. Well, that means there has been $265 billion of harm
somewhere. Very little of it is punitive damages. Most of it is
harm. And when somebody is injured by a drunk driver, that is
part of that figure.
Aren't the victims--Mr. Hinton, aren't the victims of drunk
drivers who might lose a limb or a life entitled to damages?
Mr. Hinton. They are in some cases, right. And I think the
issue on competitiveness----
Mr. Cohen. In some cases--let us say the cases were
liable--in every case that goes to--there is a judgment, there
is liability found----
Mr. Hinton. Right.
Mr. Cohen [continuing]. There has been a breach of duty.
Mr. Hinton. I agree with that. I think to answer your
question about why don't we talk about the cost to the--you
know, the cost to society, you know, the harm to individuals,
in the case of our study, at least, we were trying to address
the question of international competitiveness or comparisons
across countries, and so we deliberately compared countries
where we felt that the rates of accidents were similar and the
levels of protection and compensation paid were similar, and so
that we could essentially avoid having to compute that number
directly, but take account of the benefits of the legal system.
No one is saying that having a legal system, legal
protections is a bad thing per se. You know, it delivers
justice and compensation. What we are trying to do is work out
whether it can be done, you know, more cheaply, or less--you
know, more efficiently, so we compared these countries where we
feel that there are similar levels.
Mr. Cohen. What countries were they that you looked at?
Mr. Hinton. They were the core European, Eurozone
countries, the U.K., Canada and the United States.
Mr. Cohen. Okay. Well, if you take countries like India
that are competitive countries, and I was in India recently and
I heard from heads of companies that said, oh, our tax system
is unfair. We need to have a tax system that lets us compete
with Simmons and these other companies that we have to compete
against. And what I heard from Mr. Goodlatte is we need have a
tort system and a civil justice system that is like these other
countries.
Well, America is not like the other countries. America is
in fact the best country in the world. That is one thing you
realize from traveling. We are the best place in the world to
live and we got the best stuff here, and our civil justice
systems is the envy of the world. And in India and Pakistan, it
takes 20, 30 years to get a case to judgment. That is one of
the deficiencies of their government. That is why we have in
our Seventh Amendment the right to trial shall remain
inviolate. That has been 200 and something years of
jurisprudence, and people look at us with envy. And for us to
take the lowest common denominator of taxes and/or civil
justice so that we can compete is not what America is about,
and it never should be, because we take that, we scrap the
civil justice system. We say, all right, we will just have the
same system as India or we will have the same system as
somebody else. And, you know, I just don't see that in any
system. I think our country is doing pretty good and I just
don't see the damages.
And I am sure that the professor talked about some of this,
but I picked up today's New York Times. A liability challenge.
Generic drug makers defense faces a Supreme Court test. Karen
Bartlett was left seriously injured and legally blind having
taking a generic drug. I mean, are not the victims like Miss
Bartlett, the victims who took Celebrex, the victims who got
hip replacements from Johnson & Johnson after the company had
known that 40 percent of the devices were expected to fail,
aren't they entitled to getting justice? And how would that
justice be different if it was handled in a different
jurisdiction? How would it have happened in India?
Mr. Hinton. That is a really good question and it is the
sort of frame of reference to sort of think about the study
that we did, right. We are not saying that there aren't
Celebrex victims in other countries in Europe. Essentially the
premise of the sort of law experiment is that, yes, there are
people who took the drug are going to be equally at risk in the
U.S. As they were in these European countries, and they are
going to have their disabilities compensated and have their
healthcare costs compensated in different ways in different
countries, but to a similar extent. And it is because we are
able to make that assumption that it is then fair to compare
the cost side of the equation and say, at the end of the day,
the U.S. is a much more expensive place to do that and to
deliver that justice.
Mr. Cohen. My time has expired, but I thank the Chairman
for the opportunity to ask questions and to speak in terms that
the Founding Fathers would have appreciated.
Mr. Franks. Thank you, Mr. Cohen.
And this concludes today's hearing. Thanks to all of our
witnesses for attending.
Without objection, all Members will have 5 legislative days
to submit additional written questions for the witnesses or
additional materials for the record. And, again, I thank the
witnesses. I thank the Members and, of course, I even thank the
audience. This hearing is adjourned.
[Whereupon, at 4:35 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the Honorable Bob Goodlatte, a Representative in
Congress from the State of Virginia, and Chairman, Committee on the
Judiciary
With America's facing high unemployment and stagnant
economic growth, it is the role of every congressional
committee to do its part to get America moving again. For the
Judiciary Committee this means, in part, doing what we can to
remove the crushing burden that excessive litigation costs
impose on our global competitiveness, economic growth, and our
ability to create and retain jobs.
Judge Learned Hand observed that ``litigation is to be
dreaded beyond almost anything short of sickness or death.''
Unfortunately, the United States has become the world's most
litigious country.
This litigiousness has created what amounts to a ``tort
tax,'' which imposes an added cost on every product Americans
purchase and every service we consume.
We need a civil justice system that deters wrongdoers and
fully compensates victims. But a prosperous free enterprise
economy also depends on a tort system that is efficient and
free of meritless litigation and excessive damage awards. As
economists have pointed out, ``an efficient tort system
produces greater trust among market participants through the
fair and systematic resolution of disputes, thereby encouraging
more production and exchange, creating a higher standard of
living for individuals within a society.''
In other words, we can ensure that all injured parties have
their day in court while at the same time enhancing our global
economic competitiveness and creating and maintaining jobs for
American workers.
Regrettably, our civil justice system is not functioning
toward this end. It's not fairly compensating victims, who have
to wait too long to get a case to trial and receive an average
of only 46 cents of every dollar spent in litigation even when
they win. And it's hurting the economy.
America's runaway litigation system harms the economy in at
least four ways. First, the specter of undeserved, ruinous
litigation makes it more difficult for small businesses to grow
and become competitive on a global scale.
Second, even those American businesses that are large
enough to compete globally are saddled with litigation
liabilities that their foreign rivals do not face.
Third, America's lawsuit climate discourages foreign direct
investment in the U.S. economy.
And finally, American companies' domestic liability for
their actions abroad places them at a competitive disadvantage
relative to foreign competitors seeking to do business in the
same foreign markets.
The real losers in all of this are ordinary Americans.
American consumers are hurt in the form of higher prices, U.S.
workers in the form of lower wages, and American retirees in
the form of lower returns on retirement accounts and pension
funds.
Those hurt by excessive litigation costs include people
like the former employees of Blitz USA, the company Rocky
Flick, the second witness on our panel today, used to run. At
its peak, Blitz USA, produced three out of every four portable
gas cans nationwide and employed 350 people in the small town
of Miami, Oklahoma.
But over the last decade, a wave of costly litigation
driven by the misuse of its products by others--a misuse over
which the company had no effective control-- took its toll. And
lawsuits finally drove the company out of business.
Blitz USA is gone, but the lesson of the devastating impact
lawsuits can have on real lives and real communities lives on.
I'm sure that Rocky will share much more with us today
about the real life impact excessive litigation costs had on
Blitz and its employees.
I look forward to our witnesses' testimony; I believe that
it will be invaluable as we move forward this Congress with
reforms to improve our civil justice system.
Material submitted by the Honorable Trent Franks, a Representative in
Congress from the State of Arizona, and Chairman, Subcommittee on the
Constitution and Civil Justice
__________
Supplemental Material submitted by Neil Vidmar, Ph.D., Russell M.
Robinson II Professor of Law, Duke University School of Law, and
Professor of Psychology, Duke University
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