Foreign businesses afraid of American “jackpot justice” are likely being deterred from investing within U.S. borders, and from hiring American workers to high-wage jobs, according to a new report by the U.S. Department of Commerce.
Commerce Secretary Carlos Gutierrez releasing the findings last week at the annual summit of the U.S. Chamber Institute for Legal Reform (ILR) in the nation’s capital.
“Frivolous litigation prevents our businesses from hiring and growing, discourages foreign investment and, by tying up the courts, it delays access to justice to individuals who are truly injured,” Gutierrez told summit participants. Particularly important, he said, was the chilling effect our lawsuit climate has on foreign investment.
This isn’t small potatoes. Gutierrez noted that foreign direct investment accounts for 5.3 million American jobs (and millions more indirectly), largely in manufacturing, and the new report says that wages for those jobs are on average 25 percent higher than for other American private-sector jobs.
But such investment would surely be greater if the U.S. system were less tilted in favor of plaintiffs’ attorneys. The Commerce report cited studies showing that in constant (2006) dollars, U.S. tort costs metastasized from $13 billion in 1950 to $247 billion in 2006, and tripled as a percentage of Gross Domestic Product (GDP).
As a percentage of GDP, those costs are twice that of Germany, nearly three times that of Japan, and more than three times the lawsuit costs in Great Britain and France.
Various studies cited by the Commerce report show that would-be foreign investors often cite these lawsuit costs as a barrier. One study particularly showed investor preferences for the British system.
Commerce cited British high court judge Lord Leonard Hoffman, who noted that unlike the U.S. system, British common law works better because it features “no punitive damages, [definite] limits on pain and suffering, no contingency fees, user pays, no juries in most civil cases, and a trail bar with almost no political influence.”
The Commerce report specifically focuses on four disadvantages of the American system. Punitive damages are the first. These are extra penalties some juries impose above and beyond both the actual costs of victim compensation and any “pain and suffering” awards.
Unmoored from the actual degree of harm, these penalties often represent what Commerce calls “emotional” jury reactions that “many outside the U.S. view… to be particularly troubling.”
Second on Commerce’s list of problems is the proliferation of class-action lawsuits, where plaintiff lawyers can walk away with millions, while the individual members of the “winning” class sometimes receive only tiny cash awards.
Meanwhile, the expenses of defending the suits are so great that Commerce says they “can create their own incentives for settlement unrelated to the merits of the case.”
Commerce also criticized “forum shopping,” whereby plaintiffs’ attorneys cherry-pick a particular court in which to file their suits based more on the court’s record of friendliness to plaintiffs than on the suit’s actual geographical connection to that jurisdiction.
Fourth, Commerce criticized an overall “litigation culture” that scares off investors, including a spate of convictions of high-profile class-action trial lawyers for perjury, bribery, fraud, and obstruction of justice.
None of this is mere academic theorizing. As the United States tries to ward off an economic crisis, lawsuit abuses are undermining American competitiveness. As Treasury Secretary Hank Paulson said in a speech in November 2006, “Simply put, the broken tort system is an Achilles heel for our economy.”
This being election day, it probably should not go without notice that John McCain has long been an advocate of tort reform, while Barack Obama and Joe Biden are anything but.
On reform votes identified by the National Association of Manufacturers, Joe Biden has voted against reform, and in favor of plaintiffs’ lawyers, every single time since 1999. And both Biden and Obama have been near the top of various lists of recipients of campaign donations from trial lawyers.
On July 13, the Obama campaign hosted a fundraiser during the national convention of the top national trial lawyer lobby. Five top lawyer-association officials wrote the fund-raising letter “to help accomplish” the election of a president who will reverse recent gains in “top-down tort reform.”
The Commerce report was studiously apolitical. But by obvious extrapolation, what it means is that Obama and Biden’s stances in favor of jackpot justice could harm American competitiveness, and thus job creation, quite substantially.
Quin Hillyer is associate editorial page editor of The Washington Examiner.
