The New Lawsuit Nightmares
Fifteen years ago, the Chamber’s Institute for Legal Reform (ILR) was formed in response to a toxic lawsuit climate that was crippling American businesses.
There have been many positive changes since then. Class action abuse is lower and many states have enacted important legal reforms.
At the same time, there are some troubling new trends on the horizon. “I often compare the legal reform fight to playing whack-a-mole – a game I used to play on the New Jersey boardwalk. Just as you ‘whack down’ one type of lawsuit abuse, another one pops up elsewhere,” says ILR President Lisa Rickard.
The previous decade saw a record flood of asbestos-related lawsuits. While some were legitimate, many were not. Massive abuse, and sometimes fraud was uncovered. As a result, many states imposed stricter medical criteria standards on those bringing cases. The number of abusive and questionable cases subsequently dropped.
However, plaintiff’s lawyers have adapted. First, they found new, more peripheral companies to sue. Many of the new companies didn’t directly manufacture or use asbestos. But they may have distributed asbestos-containing products or built products that someone else later added asbestos to. And that was enough for them to be crippled by lawsuits.
Third-party litigation financiers are essentially “lawsuit speculators” – investors who bet on the outcomes of cases.
Second, the plaintiffs’ lawyers have exploited the more than $35 billion in asbestos trusts established by companies to pay out asbestos claims and put an end to the onslaught of litigation. A plaintiff can do this by presenting inconsistent facts to multiple trusts to seek compensation while also suing solvent companies in the court system. And the companies being sued have no way of knowing about the trust claims.
These abuses were outlined in a front-page Wall Street Journal story. Among other things, the story mentioned the more than 2,000 claims filed with one trust from individuals who claimed to work in construction, metalworking or chemicals – all before their twelfth birthday.
The situation is crying out for reform, and Congress is acting by moving the Furthering Asbestos Claim Transparency Act, or FACT Act (H.R. 982). It’s a commonsense measure that would require the trusts to file quarterly reports on their claims with the bankruptcy courts. In addition, Ohio and Oklahoma recently enacted legislation requiring transparency about trust claims. Several additional states are considering similar measures.
Developments in litigation funding are also creating new problems.
Traditionally, there are two parties in litigation, a plaintiff and a defendant. But over the last decade, a third party has inserted itself into the equation.
Third-party litigation financiers are essentially “lawsuit speculators” – investors who bet on the outcomes of cases. Included among this group are hedge funds that were created solely to invest in lawsuits – they finance the litigation costs and get a percentage of the settlement or award.
Another group of funders practice “lawsuit lending.” This is when a plaintiff borrows from a lender to finance living expenses while litigation is ongoing. With interest rates as high as 200%, the plaintiff often ends up with little to no compensation.
The examples are numerous. In one case, the New York Law Journal reported about a plaintiff who borrowed $27,000 from a lawsuit lender for a slip-and-fall lawsuit. His case was settled five years later, but the lender demanded $100,000 – two-thirds of the total settlement and more than three times the amount of the original loan. To add insult to injury, the plaintiff’s lawyers pocketed an additional one-third of the settlement – leaving the plaintiff with just $111 out of a $150,000 settlement, or less than 1%.
Regardless of the form, third-party funding poses a major threat to the integrity of the legal system by shifting the focus from justice for the litigants to profits for the investor. More importantly, it undermines the core goal of the civil justice system – providing fair and impartial justice for litigants.
Last October, ILR called for regulatory oversight of third-party litigation funding. In addition, several states are acting to curb lawsuit lending. Earlier this year, Oklahoma became the first state to enact legislation regulating the practice by subjecting lawsuit lenders to the state’s Uniform Consumer Credit Code
More Reforms Needed
Despite the progress we’ve made over the 15 years, examples like asbestos litigation and third-party litigation financing show that many problems remain with the U.S. legal system.
According to NERA Economic Consulting, the United States still has the highest liability costs in the developed world - double those in the UK, three times higher than those in France and five times higher than those in Japan (when measured as a percentage of GDP)
This legal cost burden matters to business. In a 2010 survey, more than two-thirds of small business owners said they would have to hold back on hiring employees, reduce employee benefits and raise costs for consumers if targeted by a lawsuit. Seventy percent of in-house business lawyers surveyed by Harris Interactive said that a state’s legal climate mattered when making important business decisions, such as where to locate and expand.
This is why ILR is continuing its campaign to improve America’s legal system. “It’s crucial that we stay on the offensive and respond to new trends, while building on the success of the past fifteen years,” says Rickard.