The Tort Tax
June 11, 2003
By Jim Copland
The Bush tax cuts are undoubtedly significant to the economy, but our congressional lawmakers would be derelict in their duties were they not to reduce another of the largest, most insidious taxes around -- the tax imposed by plaintiffs' lawyers on our nation's citizenry through the tort law system. Members of Congress will have the chance to do just that this week when The Class Action Fairness Act, which addresses the question of frivolous lawsuits, is introduced in the House.
Most Americans are by now aware that such vexatious lawsuits abound, from overweight people suing McDonald's over their obesity to hookers and drug dealers suing Hollywood producers for filming in their "neighborhoods" and infringing on their "economic livelihoods." But few are aware of just how taxing our system of tort law really is. Studies by Tillinghast-Towers Perrin and the President's Council of Economic Advisors estimate that America's tort system costs over $200 billion annually, or over 2% of gross domestic product -- more than in any other developed nation.
And even as the economy has stagnated and the stock market has plunged, the tort tax has continued to skyrocket: In 2001, the last year for which data are available, U.S. tort costs grew by 14.3%. If tort costs continue to increase at their 2001 pace, the 10-year cost of the tort tax will be over $4.8 trillion -- roughly triple the size of the 2001 and 2003 Bush tax cuts combined.
What's driving the dramatic run-up in tort costs? A key factor is an explosion of "class-action" claims in which lawyers sue major corporations on behalf of thousands or even millions of plaintiffs, who often don't even know they are being represented. Between 1997 and 2000, American corporations reported a 300% increase in federal class actions and a 1,000% spike in state class actions filed against them. Facing these massive suits, and watching their share prices sink with bad publicity, corporations settle rather than risk billions of dollars in punitive damages.
As a general rule, the lawyers pursuing these claims get huge fees -- a study by Class Action Reports shows that plaintiffs' lawyers in the average class-action case earn over $1,000 per hour -- but the claimants represented by these lawyers get virtually nothing. For example, in one Texas case, lawyers sued two auto insurers for overbilling because the insurers rounded up premium bills to the next dollar (a practice that was sanctioned by the state insurance department). The insurers settled the suit for $100 million, the lawyer who filed the suit pocketed $8 million, policy holders got a paltry $5.50 each, and everyone's auto insurance bills went up.
One reason why class-action abuses have been so difficult to stop is that large classes of plaintiffs with members in multiple districts across the country enable suing attorneys to "shop" for the most favorable court. Quite predictably, the best forum winds up being a state "magnet court" well known for its hospitable treatment of class-action lawsuits. For instance, Madison County, Ill. -- recently made famous by handing out a $10.1 billion verdict against Philip Morris for allegedly insinuating that its "light" cigarettes were "safer" -- has seen a tremendous upsurge in class-action filings in recent years, as the Center for Legal Policy has documented in three recent studies. From 1998 to 2000, class-action filings in Madison County increased over 1,800%. Over 80% of these suits were brought on behalf of proposed nationwide classes.
Plaintiffs' lawyers admit the existence of magnet courts. Dickie Scruggs, one of the nation's foremost plaintiffs' lawyers, who pocketed hundreds of millions in the tobacco settlements, described it best at a conference last June: "[W]hat I call the 'magic jurisdiction' . . . [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected . . . . They've got large populations of voters who are in on the deal . . . . And so, it's a political force in their jurisdiction, and it's almost impossible to get a fair trial if you're a defendant in some of these places . . . . Any lawyer fresh out of law school can walk in there and win the case, so it doesn't matter what the evidence or the law is."
The magnet court phenomenon not only costs our economy billions by generating increased settlement values for often tenuous claims; "magic jurisdictions" present a serious threat to the democratic and federalist principles underlying our constitutional design. County court judges -- elected by and accountable to only the several thousand residents of their home communities -- are making decisions that have a huge impact on the American economy as a whole, which clearly infringes on the power our Constitution's framers gave Congress to regulate interstate commerce.
Fortunately, Congress has the power to act, reclaim its constitutional powers, and stop the madness. The Class Action Fairness Act would remove to federal court any large national class-action cases (those over $5 million in the Senate version and those over $2 million in the House version). Decisions to certify a national class of plaintiffs could be immediately appealed -- to the Supreme Court if necessary -- to prevent rogue judges from abusing their positions. While not eliminating the "tort tax" or its harmful effects on the economy, the Class Action Fairness Act would thus stop some of the worst abuses in our increasingly wacky system of justice.
Mr. Copland is director of the Manhattan Institute's Center for Legal Policy.
©2003 The Wall Street Journal