January 23, 2003
Understanding Asbestos Litigation: The Genesis, Scope, and Impact
MR. WOOTTON: My name is Jim Wootton and I am the President of the Institute for Legal Reform here at the U.S. Chamber and on behalf of the Chamber we want to welcome everybody for coming today and engaging in this very important conversation about the sources and perhaps some of the solutions to the asbestos problem that is facing American industry today.
The subject of asbestos is a very complicated one for people who are in the legal reform business because on the one hand, unlike almost any other substance perhaps except lead paint, it is a substance that is no longer used in any way that would make it a continuing problem. But it is a continuing problem because of either exposure during the time that it was used or what has now become more troubling, it has become part of sort of litigation industry that is prolonging the life of the asbestos compensation puzzle, beyond what most people expected. Most people expected that the demographics of asbestos would mean that there would be an end, because people who were exposed, they would age, they would be out of the work force, whoever had a latent problem would be discovered and they would be compensated. And now with new litigation techniques and new recruiting techniques, this problem seems to be expanding at a time when a lot of people predicted it would not be.
It has become such a crisis for some companies that their stock price has been very adversely affected. The future of some companies has been placed in doubt because of what they can expect to be demanded of them in a compensation system that is operating in the tort system today.
And so there is a very concerted effort on the part of policy makers and now I think appreciated by both sides of the aisle and all political persuasions that needs to be some reformation of how we compensate people who have a disease that is associated with asbestos.
Lots of people are in the midst of trying to find that solution, it is illusive, there have been plenty of press reports about how difficult a search for that solution is, but I think it is fair to say that this conversation here today should contribute to that debate.
One of the things that I think a lot of people are experiencing is that they donít even really understand the issues involved in the problems that have to be solved and this kind of conversation is going to support that search.
We are particularly grateful for people from the hill joining us today. You all are hearing from lots of different people about what you might be asked to do in the coming months in this area and it will, I hope, benefit you to be better informed about the issue and about what needs to be dealt with to solve the problem.
I am always grateful for Judy Pendell who makes putting these programs together seem effortless. I know it is a little bit like watching the duck go across the top of the pond, it looks very serene on the surface, but there is an awful lot of activity under the water. Judy is responsible for that activity and I think her credibility with the academic community and the policy making community is what makes her involvement in our program here at the chamber so productive.
She is currently a senior fellow at the Manhattan Institute, dealing mostly with legal reform and she is a help to us here at the chamber in shaping our research program.
Judy is going to be the moderator of the panel and she is going to do the introductions and without further adieu, Judy. Thank you all.
MS. PENDELL: Thank you. I will just say before we begin, that I have been working on legal reform since 1982, and this is an interesting issue because it has had a life in many stages of that 20 year time span, where it has been high on peopleís screens, it has been addressed by the congress and then it has sort of taken a back burner because of expectations that it was nearing resolution. But now it definitely has a new life and I am hoping that for those of you that are new to this issue, some of you are here who I know who have been working on this issue for a long time. This will be a useful perspective on what is happening in the courts today and out of the courts, relative to asbestos.
A couple of words about format. Each one of our speakers representing the research organizations will present their findings and then we will take questions only relative to that study. The bigger question, like how did this happen, we would like to have you hold to the end of the presenters.
I would like to also say that Dr. Steven Carroll, who was to be part of this program from Rand was taken ill and he will not be participating today, but Deborah Hensler will be doing all the Rand presentation.
After the three studies have been presented to you, our two experts from the bench and from the law schools will give some opening comments, they will join us here on the stage and then we will open it for broad discussion.
I would like you to identify yourself, there will be roving hand mikes here, I would like you to identify yourself and feel free to ask any specific panelist or generally so people can dive in if they have something to say in response to your question. We would prefer you to keep it to questions, a little commentary is fine, but we would like for the benefit of all the people who are attending to hear the good questions and hear what our panelists have to say in response.
This program is being webcast on the Chamber web page. There is an event page on that. So, there are some people who are in front of their computers who are watching this. If they have questions, there is an email address, AsbestosConference@USChamber.com, thatís AsbestosConference@USCHAMBER.com. You can email your questions, they will be presented to me and I will raise the questions with the panelists.
Having told you all of that, our first speaker will be Dr. Deborah Hensler from Rand. She I currently the Judge John W. Ford Professor of Dispute Resolution and Director of the Stanford Center on Conflict & Negotiation at Stanford Law School.
She is continuing as a consultant with Rand, having been with Rand for twenty-eight years. For six of those years she was Director for the Institute for Civil Justice and she was founder of Randís Survey Research Group.
She has been conducting research on public policy issues in the civil justice area since 1979 and is without dispute one of the most noted experts in the field of civil justice today.
Her empirical research on dispute resolution in ordinary and complex litigation and tort liability has won her national recognition. She is the recipient of a very long list of honors and awards. Last year she received the Robert P. Kay Law Professor award from the American Bar Association. Thatís just one example.
She is a fellow of the American Academy of Political & Social Science. She is on the Editorial Board of the Law & Society Review and is a consulting editor of Psychology Ė Public Policy & Law. She has a Bachelorís degree from Hunter College and PhD in political science from MIT. Dr. Deborah Hensler.
DR. HENSLER: Thank you, very much for that gracious introduction, Judy. One of the very positive things of working on civil justice issues over the last quarter of a century now has been the opportunity to get to know and work with Judy Pendell.
I was struck coming into this session by the poster and the title for the conference, Understanding Asbestos Litigation, and I thought to myself, what would I tell somebody in a few words that they needed to know to understand the litigation. So, here is my list, it is big, it is growing, it costs a lot of money and under any scenario it will cost more in the future and most importantly there are significant questions about whether the dollars that are being spent are serving the purposes with the tort system it is supposed to serve.
What I am going to do this morning, hopefully quite quickly is summarize for you the findings of a Rand study on the state of asbestos litigation that has now been ongoing for about two years.
Rand first studied asbestos litigation in the early 1980ís and for many years the Rand figures from our early studies, particularly figures on the cost of asbestos litigation, figured prominently in public policy debates about asbestos litigation and to some extent in case law and judicial opinions on asbestos litigation. But it was not until a few years ago, as concern about asbestos litigation mounted, that Rand was able to raise sufficient funds to take a new look at the asbestos litigation issue.
And even for some of us, like myself, who had been tracking the litigation in the interim, some of our findings have been quite surprising.
A quick profile of asbestos litigation, comparing the figures that we collected in 1982, just after Johns Manville had petitioned for Chapter 11 reorganization and the status of the litigation today, although these figures on the right hand column are already somewhat dated, they are good through the year 2000 when we collected these data. 600,000 claimants and growing, close to 8,500 defendants and growing, total cost to date that we estimate in nominal dollars of $54 billion. Total bankruptcies attributed to asbestos as of our last count, 67. And estimates of future costs by experts who have tried to these estimates, ranging from $145 to $210 billion.
And an important thing to note as you look at this chart, that is to date no one has ever got the estimates of the scope of asbestos litigation right, everyone, including us, has underestimated the scope.
The data that we used in the briefing that I am about to present to you come from a myriad of sources. Some of it is date that we have collected in previous research including research on other mass torts, we have used publicly available data as well as data that we acquired under confidentiality agreements and we have conducted interviews with many of the leading participants in the litigation on the plaintiffís side as well as on the defense side.
What I want to talk about this morning is what the numbers are behind these profiles, get down a little into the details, speak briefly about why we are in the situation we are today and then end by highlighting some of the consequences that have grabbed the attention of people here in Washington and around the country.
Well, there are a lot of different ways we could talk about the numbers with regard to litigation. We need to think about a lot of different aspects of the litigation, although among the people sitting in this room, you probably focus on one aspect, more than on other aspects, depending on whose interests you represent. So, I want to give you a picture that speaks both about the people who filed claims, who have injuries and about the companies that they filed those claims about. I want to talk about the money that is being spent by the defendants and who that money is going to.
6,000 claimants plus sounds like a huge number of people flowing through the civil justice system, but these numbers in asbestos in asbestos litigation are actually amplified many times over because the typical claimant files against several dozen defendants and courts and those defendants and the plaintiffsí attorney who represented the plaintiffs, are dealing, therefore, with a massive litigation that really in some respects represents something more than the 600,000.
What has grabbed attention in recent years is that the number of claims filed annually has risen sharply which was not consistent with previous estimates and also that the average severity of the diseases claimed by those people who are filing claims has declined sharply.
This chart shows you graphically the pattern of annual claims filings against five major defendants. They are defendants with very different postures in this litigation. You can see that the size of the caseload varies dramatically for the very largest of the defendants and a defendant down at the bottom of the charge that is only seeing several 1,000 claims filed annually, but the important thing to note is without regard to the posture of these defendants in the litigation, the general trend has been upward and there was a particularly sharp surge towards the end of the 1990ís and on into the year 2000-2001.
An important aspect about the debate about litigation is that it is non malignant claims, and I am going to speak more in a few moments about the nature of claims in this litigation, but it is the non cancer claims that account for the growth in claims in asbestos litigation and among these non cancerous claims are by virtually everyoneís agreement, a large proportion of claims of people who have signs of asbestos injury, they have legally cognizable injuries in most jurisdiction but in ordinary personís parlance, they are not currently functionally impaired, meaning they are not work disabled and their ability to carry out the functions of daily life is not restricted.
In addition, asbestos litigation which was originally seen as a litigation that came out, of course, the asbestos industry and asbestos products has now moved beyond that industry to a set. In fact, a growing number and growing variety of sectors of the economy. And much of the increase in recent years was indeed outside the traditional purview of asbestos defendants.
The number of defendants has increased sharply. We have been keeping track of firms putting together various lists and we are now up, as you can see, to more than 8,000. Perhaps more important than the sheer number of firms is the fact that we have now identified firms in virtually every sector of the economy that is involved in the litigation.
Now, I want to emphasize that some of the firms in the list of 8,400 have only had a few claims filed against them, whereas some of them have had tens of thousands of claims filed against them and some sectors of the economy have been much less affected than other sectors of the economy. But there has been this steady spread across the economy.
Various people have tried to estimate the cost of asbestos litigation over the last now more than 30 years. We have used these variety of estimates and other data that we had available to us to do our estimates and as you can see we come up with an estimate of about $54 billion. That is money coming directly from insurers, directly from defendants in the form of self insurance or if they have maxed out their insurance company, and we note on this chart that there is an involvement of insurers outside the United States as well.
And for some companies, the amount of money that has been spent on asbestos litigation is now more than a billion.
Where is this money going? Transaction costs have consumed more than half of this money. A famous number in the early Rand study in the 1980ís was that less than 40 cents on the dollar was actually going to asbestos plaintiffs. As we moved into the 1990ís, both defendantsí and plaintiffsí attorneys with the help of judges were able to develop much more efficient of dealing with asbestos litigation. We will see in a moment what some of the consequences of that efficiency have been. But one consequence that everyone thought they would see as that transaction costs would drop dramatically and we at Rand also expected to find that when we went back to take this new look at asbestos litigation.
Indeed what we have seen is that plaintiffs are taking home somewhat more of the dollars spent than they were in the 1980ís, but not a heck of a lot more. Defendantsí expenses have gone down as they have reutilized their handling of asbestos litigation and as at least in the 90ís they coordinated their defense instead of spending lots of money fighting among themselves, which was what they were doing in the 80ís.
But plaintiffís attorneys contingent fee arrangements, to the best of our knowledge, have not dropped and so that portion of the money is going to the attorneys leaving plaintiffs, as you can see, with less than half the money.
Now, with the rise of bankruptcies we have seen the development of what are called claimant bankruptcy trusts, as monies or transferred as a part of reorganization plans to plaintiffs and plaintiffs who appear in the future are, therefore, then ordered to claim against a trust. The trusts have done a remarkable job, particularly the Manville Trust of building very efficient procedures and so plaintiffs do collect the lionís share of the money that is flowing through the trust, but the cost of that for plaintiffs have been that they are collecting pennies on the dollar in terms of the liquidated value, as it is called, of the claim, that is the value of the claim by comparison with what they would get if it were being liquidated in the tort system before the bankruptcy.
And most of the dollars that are being paid out are being paid out to claimants who are not claiming cancer. Now, let me point out on this chart, because I didnít before, mesothelioma is a truly dreadful cancer. It is a signature disease for asbestos. There is some debate about whether there are ever any causes for it, but generally if you are exposed to asbestos and you have mesothelioma, thatís because of your asbestos exposure.
Other cancers may also be caused by asbestos. Many of those cancers, like lung cancer, do have other causes and so there many be some dispute about whether it was asbestos related. Those cancers together with mesothelioma, as you can see, represent about 10% of the claims that have been resolved to date.
The large group of non malignant claims includes claims of people with asbestosis. Asbestosis is a respiratory disease. It can be severe and its most severe state it can be fatal. In the early years of asbestos litigation, where many of the claims were from shipyard workers who had had very close and long exposure to asbestos, asbestos claimants were seriously ill people who badly needed compensation.
As regulation of asbestos finally kicked in under OSHA, we began to see a decline in exposures in the workplace and the levels of exposure the later workers had to asbestos generally have not produced the kind of severe asbestosis that we saw in previous periods and that is why there is this widely accepted, although we have not be able to come up with statistical data to break down this loose sector, but it is generally accepted that in recent years most of those claimants do not have severe asbestosis.
As you can see the allocation of compensation reflects to some degree the severity of the diseases and so properly the mesothelioma and other cancer claimants do receive more of the compensation dollars then the less seriously injured people. Notwithstanding that, the magnitude of the non malignant claims is so great that the lionís share of the money that has been spent to date has gone to those people.
How did we get here? This is a very long story, there is lots of reasons, I am going to try and whip through this very quickly, this is the class on sort of asbestos 101. I am going to go through the reasons on this chart.
First of all, asbestos is in many respects a great product, okay, it is versatile, it protects against fire, it was widely used, it was widely used all over the world, it is particularly used in heavy industry. It is estimated that 27 million U.S. workers were exposed to asbestos in industries where there was great exposure between 1940 and 1979.
An unknown number of workers were exposed in other industries in occupations, we do not have good data in the United States, much to my dismay, for exposures outside the so-called high risk industries. And one of the reasons the litigation estimates are so uncertain, is because we are working off these data on exposures from 1940 to 1979. Although we know that there have been exposures since then, from asbestos in place, and in other industries and occupations. And for those of you who are here from the business community, I want to note to you that while Jim Wootton probably talked about the decline in asbestos use and exposure in the United States, that asbestos is still be widely used in other parts of the world. And so those of you, I am teaching my students now in civil procedure, that litigation is global, not just something that arises and occurs in U.S. courts. We ought to be thinking about what is going on in the rest of the world with regard to asbestos exposure as well.
Epidemiologists have estimated close to a quarter of a million of premature deaths through 2009, as a result of this exposure. As I have already indicated, there are a variety of diseases that associated with this exposure. I do want to note that the epidemiologistsí predictions show us having cases identified, cases of asbestos related disease at least through the year 2030 in the United States. So, when Jim talked about expectations about the litigation declining or perhaps even disappearing, the expectations were really that the litigation would stabilize and that defendants who face the litigation would be able to project what their risk would be.
Those who were faced with this litigation and people in the medical system knew that there would be cases appearing for many decades because asbestos related diseases typically are so-called latency diseases. You are exposed now, you may not actually show an injury until forty years from now. And thatís been one of the problems in terms of projecting the diseases.
So, we know there are going to be diseases coming forward. We have some notion as to what the distribution of the diseases will be, what has surprised people is the distribution of the claims.
So, let me move on to telling the story of the litigation, because thatís the key story here. In the beginning, asbestos litigation, in the beginning, the beginning was in the 60ís and 70ís, in the beginning the litigation was very difficult to win from a plaintiffís perspective. Plaintiffís face serious obstacles in terms of statutes of limitation. How can you come forward with a disease that you had actually incurred 30 to 40 years ago. The answer in many jurisdictions was that you couldnít.
And there we key issues about the litigation, what did the defendant know, what was the state of the art at the time that the person was exposed and defendants, of course, used every aspect of the substantive and procedural law to advocate vigorously their case. And plaintiffs lost lots of cases.
But then plaintiffs began to win cases, there were some key substantive law decisions, many states changed their statutes of limitation, so the statute didnít start to run until you discovered the injury and plaintiffsí attorneys who brought those first successful cases, learned something very important that has colored all of tort litigation since. And that is the way for plaintiffs, who, generally speaking, have less resources than large corporations to succeed in litigation against corporations, is for attorneys to identify many, many claimants who have the same type of claim, arguably identical, similar, etc., and to bring those claim en masse, and when you bring those claims en masse, you change the risk profile between plaintiffsí attorneys and defendants.
Plaintiffsí attorneys who learned that lesson early became the successful leaders of this litigation. And once they learned that lesson, of course, they needed to find more plaintiffs and the way they found more plaintiffs was by helping unions and others support mass medical screenings to see who actually showed signs of exposure. Once those people came forward with signs of exposure, arguably in injury, arguably the statute of limitations started to run and they had to bring those cases.
Since it was a small number of firms that learned these lessons fast, a small number of firms came to represent a very large proportion of plaintiffs in most parts of the country.
Much of the litigation was concentrated initially in jurisdictions where there had been a heavy exposure, jurisdictions, for example, was shipyards, judges tried to get their arms around that litigation and they used the tools of case management to do that. Defendants, looking at their litigation costs in the late 70ís and early 80ís tried to come up with programs that would restrict their litigation exposure risk and offered settlements that reduced their own litigation costs.
And as the first bankruptcy trusts came on line, as I have already said, the bankruptcy trusts tried to control transaction costs, because that was in the interests of the trustees and the beneficiaries of the trust and so we had a set of efficiency efforts and they were successful and they did reduce transaction costs somewhat and they made it a lot cheaper to bring more litigation and in our American free enterprise system, plaintiffsí attorneys got that message and began to bring more litigation.
The number of law firms with large caseloads of asbestos, think of these, these are product liability claims, allegedly very complicated claims to bring. This chart shows you the number of firms with 100 or more new filings. That number of firms began to grow as other people, other firms began to see that this was a litigation in which you could represent people who arguably needed compensation and you could make a considerable amount of money doing so.
Well, by the 1990ís, courts and parties and plaintiffsí attorneys have learned that the way you deal with this kind of litigation is to do so-called global settlements. And, so, not surprisingly, the courts and the defendants and at least some of the leading plaintiffsí attorneys tried to achieve those settlements under the rubric of multi district litigation in the federal courts and ultimately under rule 23. And those attempts to do global settlements failed and failed most spectacularly when the U.S. Supreme Court overturned two settlements that had been seen as models for perhaps bringing about a resolution of this litigation.
And during this period, as federal courts began to act to collect these cases, okay, and when it became clearer that the federal courts were not going to succeed in resolving the cases, filings moved out of the federal courts, where about half of the cases had been during the 1980ís, into the state courts.
And so today, although we are sitting here in Washington talking about this litigation, this is primarily state court litigation.
State courts adopted different procedures, different interpretations of substantive law, different interpretations of venue rules that had affects on asbestos litigation and, not surprisingly, in our federal system where plaintiffsí attorneys get the first shot of where to ring their case, the cases move to states that were perceived as being the most jurisdiction and to venues within those states that were seen as being most favorable to plaintiffs.
Obviously, defendants get their shot at deciding jurisdiction, they can try and remove cases and they have and they did, but in general this litigation has become increasingly state court litigation through the combination of substantive and procedural rules and judicial practices.
As state courts found themselves facing lots and lots of cases, they use the same tools that the federal courts had used earlier, they used judicial case management, which includes the ability to consolidate cases for pre-trial and sometimes for trial and to handle them as if they were all one humungous thing. And these efforts by judges were often pointed at trying to get control of their own caseload and ignored the effects that they were having on litigation dynamics, which was namely to grow the litigation and the effects more controversially on outcomes which defendants, at least, argue is that the risks to the defendant of facing these huge collection of cases is so great, that they settled the cases for more than the cases would be worth individually and, of course, that simply invites more litigation.
As the attraction of consolidation grew, okay, we had more and more consolidated trials. Now, people sometimes ask, how any trials have there been in this litigation, you are telling us about hundreds of thousands of claims, did any of them ever go to trial. We have actually been trying to track what has been happening at trial as part of the Rand study. You have about 1,600 plaintiffs whose cases actually reach trial in this period 1993 through 2001, this is when we have a good database for doing that, because about two-thirds of those claims were tried in groups. Those 1,600 plaintiffs actually represent 527 trial verdicts, verdicts that cover multiple plaintiffs.
Now, this whole question of consolidated trials has attracted a lot of attention in the last few years. I think it is important to note that when I say two-thirds of claims were tried in groups, when we look very carefully at the data, what we see is that mostly these are small numbers of plaintiffs. These are four plaintiffs, six plaintiffs, who cases arise out of the same work site and these are not class action trials. There are no absent plaintiffs involved. The jury is being asked to decide the fate of the plaintiffs before them. However, when a jury is looking at a set of plaintiffs whose injuries are different from each other, those Ė the injuries of one plaintiff may shape the juryís sense of what is gin got happen to another plaintiff. And so we may get verdicts that are different that the verdicts we would have gotten if those plaintiffs were tried individually. Some plaintiffs may be at a disadvantage as a result, and defendants may be at a disadvantage. And, in fact, we could have both things going on in the same trial.
Now, it is the very large trials that have attracted attention. So, far we have really just found sixteen of these during the period, just, I say in quotes, because sixteen is a small number, but altogether it looks like these were procedures that were intended to bind close to 60,000 plaintiffs. Those trials had different outcomes, including some cases that were consolidated and then dismissed and in the report that we are currently working on we will have more to say about those.
In addition, the average verdict, the mean verdict, which includes the effect of the extreme verdicts, rose quite dramatically in the period 1998 to 2001. The increase in the value of asbestosis cases has attracted particular attention in the business community, because these are the cases where there is more debate about the nature of the injury or indeed, whether there is any kind of functional impairment, but it is important to note that the value of mesothelioma cases tripled on average in this period and that although those were a small fraction of the cases, that has contributed to the increase of the costs of this litigation in this period and is one of the things that has grabbed defendants attention.
Well, what are the consequences of all this. I think we are going to speak the rest of the morning about the consequences, so I am just going to highlight some briefly, as I have already said, bankruptcies are becoming more frequent. There is also additional economic impact on defending companies that is sometimes lost in the debate on bankruptcy and perhaps most importantly from a social policy point of view, the compensation for future claimants who, as I have said, are going to appear for several decades more, is at risk.
This just shows the trend in the bankruptcy numbers, the total number doesnít really convey to you now much growth there has been. Twenty nine of these bankruptcies have been from January 1, 2000.
One of the pieces of the Rand study that my colleague, Steve Carroll, who couldnít be with us this morning, has been working on is trying to understand what the economic consequences of this litigation is. And it is important when we think of the economic consequences to recognize that defendants who were not in bankruptcy have consequences because of the dollars that they are paying out to asbestos claimants and to their own defense counsel. And economists have different ways of modeling the effect of these kinds of costs on the level of investment and on jobs, and you can see these estimates here on this chart. They are quite substantial numbers.
However, these estimates are an attempt to understand what the effects are on specific defendant companies and economists tell us that if one company doesnít create jobs, another company may move in and create those jobs, or another company may invest in a product.
And so what we are seeing in the economy may be some shifts in the successes and failures of different companies, and the bottom line is that it is really hard to get a handle on the indirect economic affects of this litigation, but there is reason to believe, certainly, that thatís significant.
Now, why do I say future claimant compensation is at risk? At some point one has to ask the question with this kind of litigation is, is there going to be enough money left to pay these litigants. And to the extent that defendants response to large scale litigation is to go into Chapter 11, we need to look at what has been the experience in the Chapter 11 bankruptcies.
And I think that many people would say that that story has been a success story in the sense of the flexibility with which parties and courts with the help of Congress in this case have used the bankruptcy system to try and deal with asbestos litigation. And we do have working trusts and many of these bankruptcies that represent relatively new petitions are now working towards reorganization plans.
But the history of the trust is sobering and I am showing you here the example of Johns Mansville because it as the leading asbestos producer and bankruptcy trusts and the story very quickly told is that at the beginning of the history of the trust, the trust thought, based on its estimates, it could pay out full value of claims just the way they were being paid in the litigation system with a reduction in transaction costs because it was an administrative scheme and by 2001, the trust was paying 5 cents on the dollar.
I have worked for a long time as many people in the room have on issues having to do with tort litigation, the tort reform wars, etc., and often in those debates, particularly in Washington, but often in state capitals as well, there is as lot of disagreement about the numbers.
One of the things that I find interesting about asbestos litigation and the current policy debate is I believe that there is wide spread agreement about the current state of the litigation as I have described it. Most, if not all of the numbers that I have showed you on these charts are not in dispute.
The only thing on this chart that is somewhat in dispute is the issue about whether future claimant prospects are as certain as I put it here. That is whether they are at risk because some plaintiff attorneys have told me, there are lots of other defendant companies or potential defendant companies out there and, therefore, sixty odd bankruptcy while sobering is not the end of the story. However, other plaintiffsí attorneys are seriously concerned about whether there will be any money left on the table when future claimants come forward, having discovered their diseases.
What the disagreement is about in my mind is whether the system that I have described is a system, whatever its warts may be, that generally should be a system that is endorsed and supported or whether it is a system that calls for reform. And if it is a system that calls for reform, there is wide spread disagreement currently about what reform would best remedy the problems and how we get to those reforms. And with that, I will end.
MS. PENDELL: Why donít you stay there. We will take questions now. Are there questions from the audience? I will start with one. Deborah, your next to the last slide said in talking about whether or not there will be enough money there for future claimants and you commented that the plaintiffs bar in many cases feel that are lots of other defendants out there. Legitimate defendants?
DR. HENSLER: Well, I think the issue is how far can you reach under substantive court doctrine to defendants. There are cases, as you know, in which an attempt is being made to sue some insurers directly on the theory that the insurers knew that the defendants were exposing their workers to asbestos, are those legitimate claims or not? The court is going to decide that. Clearly if they were judged legitimate that would have very substantial import.
What about defendants who are in the chain of distribution? What about the whole notion of premises liability, this growing component of the caseload in which workers are suing the property owners in a premise on the grounds that there was exposure to litigation? These are real battles and as plaintiffsí attorneys look to new defendants, they have new theories and those theories will be tested in the courts.
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Öin the interests of their workers or maybe they will decide that their risks are too large and maybe they should seek the protection of Bankruptcy Court.
So, I think that there are questions that ultimately in our system will be decided by law. You have a product and this is one of the things that distinguishes asbestos litigation from other mass torts is that this is not a product that was manufactured or incorporated into products manufactured by a very small number of companies. It is really a ubiquitous product and that sets up a very special sort of litigation dynamic that I donít think we have seen to date in any other litigation in the United States.
MS. PENDELL: Question?
MR. FESTER: John Fester with the American Forest & Paper Association. Are there any estimates to the quantity of asbestos that is still out there in buildings and structures, etc.?
DR. HENSLER: You mean in the United States?
MR. FESTER: In the United States.
DR. HENSLER: I think they are actually some estimates, but I canít give them to you today. And the whole issue about what to do about asbestos in place, of course, has been something that has been argued fairly vigorously. There is asbestos in all residences. There was in my old house in Los Angeles, there was asbestos around the heating ducts and I assume that was true in al of the other houses that were from that era. So, there is a fair amount of it.
I canít tell you in terms of actual bulk of the product. And, of course, knowing how much out there doesnít give you the answer to the question of how much of exposure is there and then the question, how much injurious exposure is there, because exposure up there, you know, if there were asbestos in a very high ceiling, very well protected, I am not an epidemiologist, by that is clearly quite a different matter from talking about asbestos fibers dripping off an open duct in a factory somewhere.
MR. BRICKMAN: Lester Brickman, Cardozo Law School. Did Rand collect any data that would enable an estimate from a medical point or medical science point of view of the actual numbers of asbestosis current in the United States as compared to the hundreds of thousands of current claims?
DR. HENSLER: My understanding is that no one knows the answer to that question. I have been asking that question. In the report that we are working on currently, the follow on to the report that we issued a couple of months ago, there is going to be a chapter written by an epidemiologist, an epidemiologist who has not been involved in the litigation on either side, who at our request has reviewed the state of the epidemiological literature. And in preparing the September briefing, I asked her that question. I said, well, all right, you know, we know, we think we know what the projection is for mesothelioma case, but thatís not what is in dispute. What is the projection for asbestosis cases? And we donít seem to have one in the United States. It is not a reportable disease the way mesothelioma is, so we can get the mesothelioma stats from the Center for Disease Control.
And there are other cancer stats but, of course, the problem with the other cancers is that virtually all the other cancers have other causes, and so we donít necessarily have those data.
And then for this huge number of cases that are non malignancies, we seem to be at a loss. It seems to me and this is not a Rand judgment but a personal judgment, that given the impact, both on peopleís lives and on peopleís pocketbooks of this litigation, that it is kind of shocking that there hasnít been any attempt by the public health agencies in the United States to get a better handle on this.
MR. BRICKMAN: A quick follow up. Is it possible the number approach is zero?
DR. HENSLER: Anything is possible. So, thatís a trick question. I think the number, the fraction of non malignant cases that are serious asbestosis cases coming forward today by all reports that I have received from people is very small, including plaintiffs attorneys who represent cases of people who allege asbestosis or pleuroplax, etc. But I have not seen any statistical data and so I donít know what it is.
While the mike is coming I will say, we tried to get that data from various people who are cooperating with us, with the student and one of the problems is that even those who are willing to share data, the data on the non malignancies have been categorized very differently by different parties and by those same parties, very differently over time. So that it is not clear to me that there actually are those data out there, okay. And my comment about the public health agency is a call for some research on the medical problem.
MR. BEITER: Terry Beiter with the Congressional Budget Office. I gather from the information you presented on the mega trials, that none of those sixteen mega trials reached a verdict. Have they all been dismissed? Are some of them still the courts?
DR. HENSLER: Some of them have reached verdicts. Typically when you have large consolidations, okay, what happens is there is a settlement, sometimes on the courthouse steps. And there is no kind of coherent story that I could tell you about those cases in a table and thatís why I havenít done that here. And so what we are doing in the report is actually writing a narrative description of a page or so of each of those litigations. Each one of them is to some degree sue generous and I think you need to view those as abhorrent cases. I think it is important not to think that these mega consolidations characterize the system.
At the same time, you need to understand that outcomes of those cases or the prospect that one of those cases would actually go to trial with multiple defendants and thousands of plaintiffs, does have an impact not just on the litigation strategies of the defendants and the plaintiffsí attorneys who are in that courtroom, but on plaintiffsí attorneys and defendants who are contemplating whether this is going to happen to the litigation against them.
So, wrong to think that thatís the name of the litigation, as some people have asserted it is, but also wrong to think that litigation in a court in Canowa County, West Virginia is only affecting the outcomes of those cases and those parties.
MS. PENDELL: Okay, we will move on to our next speaker. You will have another shot at Deborah when we finish all of our presentations.
Our next speaker, Jonathan Orszag is the managing director of Sebago Associates, Inc. He previously served as assistant to the U.S. Secretary of Commerce and Director of the Office of Policy & Strategic Planning. Prior to joining the Commerce Department, he served as an Economic Policy Advisor on President Clintonís National Economic Council.
For his work on individual development accounts, the Corporation for Enterprise Development awarded him its 1999 Leaders Award for forging innovative public policies to expand economic opportunity in America. That is one of a number of honors he has received.
He helped James Carville write his book, We are Right, They are Wrong, a handbook for spirited progressives. He held a number of very important advisory positions including assisting Senator Joseph Lieberman with his 2000 debate with republican vice presidential candidate Richard Chaney.
He has a BA from Princeton and a Masters from Oxford. Dr. Jonathan Orszag.
DR. ORSZAG: Thank you, it is great to be here today. I just want to walk through the findings of a study that I authored jointly with Joe Stigler that won the 2001 Nobel Prize in Economics and my brother, Peter Orszag, who is a senior fellow at Brookings as well as a partner of mine with our firm Sebago Associates.
A number of the facts that are presented at the beginning of my presentation have already been gone through, so I will go through those quite quickly.
As Deborah noted, asbestos claims have skyrocketed in the past decade. These claims are pushing many firms into bankruptcy or at least to the brink of filing for bankruptcy.
What I want to do is highlight that the costs, that the payments that are made claimants, some who are sick and most who appear not to be sick, are not free. And the purpose of our paper is to illuminate those costs that are imposed on workers. Those costs show up in terms of wages, in terms of future employment prospects and in terms of ability to save for retirement.
I am going to jump over the background facts, since you have already heard about them. In terms of the number of firms that have entered into bankruptcy, we compiled a list of all the firms that we could find that have ever been cited as entering into bankruptcy due to asbestos liabilities. We then impose three filters on those firms. We ask, could we find contemporaneous information from either press releases, from the bankruptcy filing, from news reports that suggested that asbestos liabilities played a significant role in the bankruptcy.
We also excluded all non U.S. corporations, partially for simplicity and partially for data issues. And we also excluded subsidiaries of companies to avoid double counting. So, there were some companies where a number of subsidiaries went bankrupt, we didnít double count those, we actually just counted that as one bankruptcy event. Using these filters we estimated that 61 companies went bankrupt.
I should note that there is a slight discrepancy, but I think it is due to timing from the summer report. Rand actually had sixty bankruptcies so I think we are in line. And given the fact that they didnít have access to our list of bankrupt companies and we didnít have access to theirs, it is satisfying from a fact checking point of view that we are coming up with very similar results.
But I think the most important thing, and more important than the actual numbers is the trend. If you look at the trend, it is actually pretty stark here about how rapidly there has been an increase in the number of asbestos related bankruptcies. And if you look at one-quarter of all the firms that have filed for bankruptcies, have done so in the first Ė did so in the first ten months of 2002, and nearly 60% had done so in the past five years. So, there is a pretty sharp increase in the rate of the number of firms entering into bankruptcy.
It is also important that the firms, that the year before they entered into bankruptcy, employed about 200,000 workers and really the firms that have entered into bankruptcy in recent years, have tended to be larger firms, the 24 firms for which we have data, this is important, of this 60 plus firms that we estimate entered into bankruptcy, we could only obtain data for forty of those using a variety of public sources, including SEC filings, companyís websites and then there is a variety of Compustat and other data sources on employment, but it is important to note that we had data for just 40 of these.
And for the 24 companies for which we had data in the past four years, they employed more than 136,000 workers. So, there is a significant weight towards not only increasing bankruptcies in recent years but these tended to be larger companies as well.
It is also important to note that these are very diverse companies. They are spread out over a wide number of industries, as Debra noted. They are in a number of states that are headquartered in 19 different states, Pennsylvania being the one with the most companies. And then importantly they have facilities in 47 different states across the country. The only ones that we were unable to find, ones with facilities or without facilities were Hawaii, North Dakota and Rhode Island.
It is also important to note the bankrupt firms tend to be highly unionized. Johns Manville reported in its SEC filings that 42% of its workers were unionized in 1981, the year before it declared bankruptcy. Other firms report similarly high numbers. This is an interest factoid in terms of the characteristics of the bankrupt firms.
But the core of our study was about what the impacts were. And one of the impacts is on employment and what we did was for each company we compared their trend in employment to five years before they entered bankruptcy to the change in industry employment during that time period. And for the companies for which we had time series data we found that there were roughly 52,000 lost jobs in that five year period relative to the industry control group.
If you then scale that for the companies for which we donít have time series data, we get a high end estimate of 60,000. I should highlight that his I just solely for companies that have entered into bankruptcy.
So, we estimate that the employment losses due to asbestos liabilities are roughly in the range of 52,000 to 60,000.
One important thing which Debra highlighted is that full employment in the economy is dictated by macro economic factors, it is not dictated by asbestos liabilities, but nonetheless there are significant transaction costs, transition costs for the workers involved in these layoffs. In particular, one of those types of transition costs is that workers have to go through unemployment spells during those periods of unemployment, they are losing wages and to the extent that those wages reflect their marginal product, it is a loss to the economy.
If you are assuming that the average displaced workers making $40,000 and they are displaced for about a month, the loss of economic activity is roughly in the range of $175 million to $200 million.
There is another cost though. Displaced workers tend to get jobs at lower wages than their previous jobs and they tend to be on a path of future wages that are lower than they otherwise would have been. And if you look at that in terms of net present value terms, we estimate that the loss there is between $1.2 and 2.8 billion. So, the entire costs of these layoffs translates into a $25,000 to $50,000 per laid off worker in that present value terms due to the layoff that is incurred because of the asbestos liabilities.
Another key impact is in terms of stock performance, and this is something Jim mentioned. I mean, this is, I think something that is intuitively obvious to a number of people here that if you look at the market index, thatís the red line that is at the top. The next line is an industry control group, so as you can see, that performed worse than the market as a whole, but much better than the bankrupt companies did. The bankrupt companies performed, obviously, very poorly over this period.
And this has an important effect, as a number of people realized with the Enron debacle that workers are often invested in company stock, the 401k plans are invested in company stock, so as the stock price of the company declines, due to the asbestos liabilities, that workersí 401Ks also decline.
If you just look at the 401K plans and the per plan participant assets are invested in the company stock, we found that for the companies for which we had data, from five years before bankruptcy to the bankruptcy period, there is a loss of about $8,300 in the 401K. Thatís about a 25% decline in the average 401K balance for such workers.
It is important to highlight here that this doesnít include workers who may have a 401K at a different company that had invested in the company that entered into bankruptcy, who would have also lost retirement assets due to the bankruptcy occurrence.
This loss of assets has real affects on those workers. It is a reduction in ultimate retirement assets of roughly $24,000. This is for a worker who is making $45,000. In terms of how they could offset that, to make sure that they are not in that position of a reduction in retirement assets, they could increase their savings by $720 per year. But, remember, this is somebody making $45,000, so a $720 increase in savings is actually a pretty significant cut in consumption. For any amount of money, you can only do two things, you can save it or you can consume it. So, if you have to increase your savings, thatís a reduction in your annual consumption.
You could also take a reduction in your retirement income as well. You could say, okay, thatís fine, I will just have lower income in retirement. This would translate into a $1,250 loss of income in retirement for somebody who is 45 years old, which is a pretty significant amount for a retiree.
Thereís other costs from bankruptcies. These are costs that have Ė actually the bankruptcy event itself Ė a number of academic studies have estimated that those costs are roughly between 3 and 6% of the market capitalization. Again, these academic studies are not based on asbestos bankruptcies, they are based on more general large firm bankruptcies. And I think there is a plausible case to be made that asbestos bankruptcies are far more complicated than a typical large firm bankruptcy and so, thus, these may be conservative estimates.
But if you run the numbers then, using this three to six percent of market capitalization, you end up in the range of -- an estimate of direct cost to bankruptcy in the range of $325 to $650 million.
Our study focused largely on the cost to workers at bankrupt firms, but there is also costs to firms that are non bankrupt firms that have significant liabilities. This is something Deborah noted in terms of that there are more and more firms that are being sued and these are more and more what you can call tangential firms, firms that were not hardcore asbestos manufacturers, and so our analysis does not capture the full affects of asbestos liabilities on defendants to date and it doesnít reflect the future costs of ongoing litigation. And so that would add to whatever numbers.
Deborah presented some evidence that $10 billion in payouts translates into a loss of upper end estimate of 138,000 jobs. That includes both bankrupt and non bankrupt companies. We are looking at just bankrupt companies and coming up with something in the range of 52 to 60,000 jobs. So, again, I am comforted that we are coming up with using completely different methodologies. We used the bottom up methodology, they use a top down methodology and we come up with very similar results.
Before I conclude, I just want to note from an economic perspective the implications that there are more and more tangential firms that are part of the asbestos litigation. From an economic perspective you want to create the incentives, the appropriate incentive affects. And economists generally believe that the costs of monitoring may be excessive and so it is important that the product liability system have the appropriate incentives for firms to monitor their inputs and to monitor to make sure that they do the right thing to provide a safe product.
And as you get more and more to these type tangential firms, the costs of monitoring become very high and that calls into question the current system that we have and pushes people in the direction of reform. And I think thatís very important as people think about reform options, is how do you create a system that creates the right incentive effects. Economists love to talk about incentive effects, but thatís a very important thing. So, when thinking about reform, the incentives for companies to have the right incentives, to create a safe product, to monitor their product appropriately is very essential.
So, to conclude, just with our three facts here, we estimate that the bankruptcies have led to a loss of an estimated 52,000 to 62,000 jobs, we estimate that each displaced worker will lose on an average an estimated $25,000 to $50,000 in wages over his or her career because of the period of unemployment and because of having lower wages for the rest of their working life and the average worker in an asbestos related firm will have lost roughly $8,300 in 401K assets, which represent on an average a roughly 25% decline in that balance.
Thank you, very much.
MS. PENDELL: Thank you, Jonathan. Questions?
MR. FESTER: John Fester with American Forest & Paper Association. You had a slide that showed a spike in bankruptcies over the last two to three years. To what extent is that increase due to the ancillary effect of the recession?
DR. ORSZAG: Well, certainly, I think, when we know Ė this is something that both Rand and our analysis looked at, we took into account that asbestos played a significant factor. Of course, other factors, the recession played a role. But remember, that chart went back to the 1970ís and we had a severe recession in 1981-1982 we had a recession and 1990-1991, and you donít see anything close to the sharp increase during those recessions. So, thatís one important factor.
But, obviously, when a Board of Directors makes a decision to enter into bankruptcy, they sit there and they look at their liabilities, they look at future firm performance and the recession plays a part, but the asbestos liability clearly played a significant role for these firms in the increase.
PROF. ROTHSTEIN: I take it that underlying all of this, you might get a grip on the cost to the economy of compensating these claimants. And I guess in doing that, you would also have to add to your very excellent list the cost in products and services, that arenít put out there because of the hesitancy of companies. But I think there is also something else left out when you are trying to tote up the cost in benefits. And by the way, I take it your assumption is the courts, and I agree with this, are not capable and not supposed to balance costs and benefits to society and that speaks toward having a global settlement from Congress.
But there is, I think, a benefit to society from compensating the claimants. I think it maybe doesnít compensate for all this, but there is a benefit that you have not counted, and that is, yes, jobs are lost on one side of the equation, but the claimants are getting money and they are spending it and three is a multiplier effect on the economy. I donít think that is a compensating effect, but it is an effect that should be measured and I wonder if you had looked at that.
DR. ORSZAG: We definitely thought about it and we had words to that effect in our paper. But it is also important to emphasize there, and it is a chart that Deborah showed about the transaction costs associated with those payments, which economists would call an economic loss. That a transfer from the company to the worker does not cause a real loss in economic output, because, you know, a company if it spent dollar and say paid a worker, that worker would go out and pay the dollar and buy clothes and food, etc. If it then pays it to a mesothelioma claimant, that mesothelioma claimant or their families would spend that money.
What happens in the asbestos liabilities though is that there are significant transaction costs. Remember, the plaintiffs are ultimately getting only roughly 40, 50% of the money and so that is a pure economic loss right there and thatís important to emphasize in the context of these costs.
But your more general point, that there are other costs and other benefits, that is absolutely true. We focus narrowly on the cost to workers and, you know, I will continue to emphasize this is solely on the cost to workers, there are benefits to claimants and there are costs that go far beyond this. And I believe the next presentation will get into the cost to communities and the costs in terms of health care, etc. and thatís important as well.
MS. PENDELL: One more question.
MR. BRICKMAN: Lester Brickman, Cardozo Law School. You indicated that you measured job losses up to the point of bankruptcy filing. My anecdotal experience is that job losses continue to occur after filing. Did you make any attempt to estimate job losses post filing?
DR. ORSZAG: The answer is, yes, we did. And I have some of that data which I can share with you, not right now, but I can ultimately share with you. But the key thing is that, remember, a lot of the big firms when bankrupt in the past few years and so much of the data that we had as only through the year 2000, so any Ė say half our firms, 60% of firms that went bankrupt in the last couple of years, we wouldnít have data post bankruptcy for those firms. But if you look at the experience of the firms that went bankrupt in the late 1970ís and 1980ís and early 1990ís, they continue to experience a downward trend in employment relative to their industry control group in the years after bankruptcy.
MS. PENDELL: Thank you, John. Our next speaker is Dr. Jesse David, he is a senior consultant at National Economic Research Associates. He has developed economic impact and cost benefit studies of proposed legislation for government agencies including DOT, OSHA, EPA and the Consumer Product Safety Commission. He provided research for a number of projects associated with public utilities in areas including strategies in a restructured market, a metered services market and electricity pricing for forecasting.
He has extensive modeling experience, which he has applied to issues such as electricity market restructuring, rate design for publicly provided services and market definition for industries such as municipal waste disposal, pipelines and water distribution.
He has a Bachelorís from Brandise and a PhD in economics from Stanford. Dr. David.
DR. DAVID: Thank you, Judy. I would like to thank the Chamber and the Manhattan Institute for inviting us here. We were asked to put on our thinking caps with regard to the information developed by Rand and Sebago and try to broaden the estimate of the impacts and the costs faced by the economy as a result of asbestos liabilities, in particular to address perhaps some of the questions that Prof. Rothstein just raised.
And the way I like to look at it is, in terms of primary effects, which we have just discussed, the obvious effects of asbestos liabilities on the shareholders of the firms and the workers of the firms who perhaps were laid off as a result of those liabilities, but then to look and to sort of the ripple effect throughout the economy, what we are calling secondary effects.
In particular, we are also going to identify some additional costs faced by the workers by firms that face asbestos liabilities and then we are going to look broader into the communities in which those facilities are located into the businesses that provide services to those companies, to business that provide services to the workers and to the local budgets of the state and local governments that may also be affected.
In particular I think it is important to recognize that in addition, as professor Rothstein was mentioning, in addition to the transfer of money between the shareholders or the firms, and the plaintiffs in these cases, there are net losses in economic output as a result of these lawsuits. And this is not just the transaction costs associated with hiring lawyer. Of course as much as we all enjoy being here today, this probably is a cost to the economy because we could be doing something else more productive perhaps, if asbestos lawsuits werenít so prevalent.
So, it is those other types of costs that we are going to consider that really are a net loss to the economy, that have absolutely nothing to do with compensating the plaintiffs, whether they deserve it or not, that is just not an issue that we are addressing.
So, the starting point of our analysis is the same 50 to 60,000 workers roughly that have been estimated to have been displaced by asbestos related lawsuits, as Jonathan was describing. We wanted to put a face on these workers, try to understand a little bit more about their situation and the situation of the communities in which they were employed.
Largely these firms are in what we are calling non durables manufacturers. The firms that actually went bankrupt or have gone bankrupt to date largely, of course, asbestos manufacturers, insulation manufacturers, plastic manufacturers, but also there have been a number of firms that have been named significant defendants in durables related sectors such as steel mills and shipyards. So there is a pretty broad sector of the economy that has been affected, but really it has been focused, of course, on asbestos, mineral wool and insulation companies.
In fact, many, we went in and actually looked at the facilities that had been affected by the 60 or so bankruptcies, we identified roughly 100 facilities that had experienced mass layoffs for complete shutdown and identified the communities in which those facilities were located. The average population of the community was just over 100,000 people, but, in fact, there were a few in rather large locations. And, in fact, for the most part, these facilities were located in very small communities, under 25,000 people for the median facility.
So, we are talking about small communities where the effect of a large mass layoff could have rather larger effects than one might expect across the economy as a whole or in large cities.
Next we took a look at the workers in the manufacturing industries and in the durable manufacturing industries in particular and tried to identify what the typical worker was who had been displaced. Generally speaking, we are talking about blue collar trades, relatively low skilled workers with perhaps less than the average prospect for reemployment. The average salary of these workers was under $30,000 a year in those particular industries, roughly over the last ten years.
So, we are talking, like I say, about workers who may have more difficulty than average within the economy of finding further employment, both because of where they are located, perhaps isolated from other large employment opportunities and also because of a low level of training and education.
So then we used some data from the Bureau of Labor Statistics, the Displaced Worker Survey, to try to identify what the actual reemployment prospects were for these workers. We found that after two to three years, roughly a quarter of them had not found employment. We are talking about 10% and we are still searching after two to three years and another fourteen, roughly 14% that actually stopped searching and officially according to the BLS dropped out of the labor force entirely.
So the facts that these layoffs occurred, didnít just necessarily cause temporary unemployment for a few weeks for everybody, there were some people who were facing significant long term unemployment.
Among the group that was reemployed after two to three years, the 75% or so, the average unemployment period was actually about 10 weeks. And, in fact, a large chunk of those workers were unemployed for longer than six months and when they werenít reemployed, as Jonathan mentioned, they tend to earn less at their new jobs, at least for several years. These numbers are actually slightly different than those reported by Sebago because of our particular focus on a couple of industries. In fact, it appears that the workers in those industries are probably, like I said, less likely to be reemployed and when they do get reemployed, it will be at a lower rate than perhaps the typical adjustment that a typical worker in the economy is going to face.
So, this is a group of workers that we are talking about. Letís now try to think of some additional costs that they are going to face, in addition to the loss in wages that Sebago reported and some of the other obvious costs that perhaps we could identify.
First off, because these are workers that are typically low skilled with relatively little training and a few years on the job, in many cases they are going to need retraining in order to find that employment. Roughly half, 42% of manufacturing workers who are displaced from their job, do participate in training programs, we found there have been a couple of recent studies published on this and the typical program costs roughly $2,000 to $3,000. So, we are talking about a net cost right there of about another $50 million to date based on the number of lost jobs in the 50 to 60,0000 range, as mentioned by Jonathan earlier.
Now, who is bearing these costs? These are probably going to be shared across the economy, the workers themselves in some cases pay for training, the companies sometimes offer training programs for reemployment and, of course, the taxpayer ends up picking up a large chunk of it.
Another impact that we examined was related to the effect on health care provision for workers who lose their jobs at these types of companies. We identified the cost of health care for a typical family served by their employer at about $160 a month. Once you move to an individual plan, if thatís what you are forced to take up after being unemployed, we are looking at an increase of over $300 a month in health costs. Now this, for example, would apply to anybody who was not able to obtain a COBRA plan after being unemployed. And, in fact, we found, I believe, only about 20% of displaced workers do participate in COBRA. And I would say also, a note, that this is compared to perhaps unemployment benefits, this is a large chunk of money, actually about over 50% of unemployment benefits could be spent on a health care plan if the family chose to participate in an individual plan.
In terms of the actual monetary cost to date for those 50 to 60,000 workers, we are not talking about necessarily a huge amount, given the participation rates in these health cares, maybe another $30 million on top of costs that we have already discussed. And, of course, now this is an actual net additional cost to the economy. But, perhaps, more importantly, we are talking about a lot of families, perhaps as many as 50% that donít take health care at all during their period of unemployment and we want to consider what the impact that might have on the economy, including increased reliance on emergency care, increased incidence of illness due to lack of preventative care and, of course, any costs that they do incur typically will, again, tend to be passed on to taxpayers around the country. So, thatís something to consider.
Obviously a mitigating factor here is unemployment insurance, which we would be remiss if we didnít discuss the average unemployment benefits, roughly about $200 a week for the workers that we are talking about here. As I mentioned, thatís, in itself, really only about twice what the cost of an individual health care plan is, so we are talking only very partial compensation, also only about half the offset of the lost earnings. So, clearly these workers are not made whole by unemployment insurance.
The net transfer from taxpayers for workers to date, we are looking at about $80 million and, of course, thatís all picked up by taxpayers again.
So, these were a couple of the types of costs and by no means, of course, is this list exhaustive, that may be faced by the workers themselves. But then we wanted to broaden the circle and examine how the sort of ripple effect moves through the economy.
And, in fact, three are certain types of models that economists have developed to identify the regional impacts of layoffs and losses of income. These types of impacts we generally group into two categories. Weíve got indirect impacts which are going to be the losses in income for businesses that supply the facilities in question, you know, construction trades, administration services, other types of supply and also a second type of effect called an induced effect or a multiplier effect which is as the income, as wages and income are lost to the workers, they are spending in the local economy decreases and that has a ripple effects throughout businesses within the region.
Three are a number of models that have been developed to identify these types of costs and impacts. We used two of them. We first used a model that I wonít really discuss much here to get a sampling of the 100 or so facilities that have been affected and attempt to identify sort of what an average affect was.
We then picked a location, which I will discuss in a moment as a typical location that was affected and applied a model known as REM, Regional Economic Model, which is a state of the art model that estimates these downstream impact from lost income and lost jobs.
Of course, the magnitude of that effect is really going to be very dependent on the community that is examined. Typically, smaller communities in some ways can be affected to a great extent because three may be some local services that are more dependent on the facility in question. In other cases, depending on the pattern of commuting and migration of the workers, they may be affected to lesser extent if most money is spent outside of that community, so it really is a idiosyncratic type of effect. But overall we found that for every ten jobs lost to the local economy due to a layoff, an asbestos related layoff, an additional eight local jobs were also lost in other types of services that provided support both for the facility in question and for those workers.
We then, as I mentioned, picked, and a particular example may hit home, I saw a couple of people here from Owens and from Corning, in 2000 Owens Corning laid off 275 workers in a plant in Ohio. We took Lincoln County Ohio and we found that that was fairly typical of the size and urbanization of the communities affected by asbestos layoffs and we used the REM model to understand what the overall effect was to Lincoln County.
Overall, as a result of these 275 layoffs, the REM model predicted an additional number of layoffs in lost jobs in other services. 77 lost jobs in local services, we are talking about medical services, financial services, local banks, local dentists, that sort of thing. Another sixty lost jobs in retail trade, we are talking about food and beverage establishments, local drug stores, that sort of thing and 48 jobs lost in local construction, electrical and carpentry trades that supply the facility and other types of services like that. Overall about 500 lost jobs in Lincoln County as a result of these layoffs. So, we are seeing this ripple effect. 275 workers at the firm in question, but they are not just the ones that are paying the price here. Weíve got another roughly eight jobs for every ten lost at the Owens Corning facility.
The REM model predicted that total output within the county would be reduced by approximately $60 million annually, and as a consequence of the reduction in total output and the reduction in jobs, in fact, about one out of every two workers is going to move out of the county, one of every two of the displaced workers would move out of the county. The net effect in terms of local income, a reduction of about $15 to $20 million for this county.
Now, we are talking about a county of, you know, 150,000 or so people, not a large community. This could be a significant effect.
So, in summary, to try to understand these questions, any reduction in local employment and income is going to be magnified by this multiplier effect. Trades and services that initially you think would have nothing to do with asbestos related liabilities will also suffer locally. In fact, if you take the roughly $1 to $2 billion reduction in income, due to just the temporary unemployment costs and the reductions in future earnings, we are talking about an additional half a billion to roughly two billion in costs due to the multiplier effect. So, essentially, you can take any loss and multiply it roughly by two, to understand what the total effect on the economy is going to be. Thatís what these models are telling us.
However, I should point out that this $1 or $2 billion are the net costs due to this lost, temporary loss in employment. In fact, for the particular communities in question, they may be impacted much more severely while, of course, the economy as a whole, there may be an adjustment mechanism where jobs are generated somewhere else. So, it is important to identify the impact that you are trying to analyze or you are looking at the impact of a specific group of people or are you looking on the impact on the economy as a whole. It is really two very different questions.
Another effect on local economies will also be felt through real estate values. There has been a fair bit of economics research on the impact of population Ė
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- and income changes on local real estate. And, in fact, what the effect that mass layoffs might have on those owners of local real estate. Basically to summarize that type of literature, the average income effect, as we call it here, is roughly about .2, which basically means each dollar in local income lost in a small community, I guess you could say, I think most of the research is done on the MSA level, each loss in one dollar of local income will Ė excuse me, 1% reduction in local income will result in roughly a 2/10ths of a percent reduction in local real estate values. We are talking everybody, all residential and commercial real estate in the region.
The population effect is actually much stronger. For each reduction of say ten workers in an area that move out because of a mass layoff, you are going to get an effect that is about 10% greater than that or 1.1 times that effect on local real estate values. So, a 1% reduction in local population would lead to a 1.1% reduction in local real estate values, other things being held equal.
Just to go back to our example of Lincoln County, we took a look at what real estate values were there. Per capita income effect and population effect and how those would affect the real estate values. In this particular case the 500 lost jobs and the roughly 250 people leaving the area result in per capita income and population declines of roughly 1/10 of 1%. It may not sound like a big number but when you apply that to the value, now this is just residential real estate in this case, we are looking about a $5 to $10 million reduction in local real estate value. And, in fact, you are going to find that for smaller communities the effect would be even larger on a percentage basis.
In fact, that is a pretty good size reduction. We are talking about an additional $20 to $40,000 reduction in local real estate value for each worker laid off at that facility.
Intuitively, one might think the next cost that you might want to look at is how are these types of impacts going to affect local budgeting, state budgeting and even federal taxpayer issues. Now, we didnít attempt to quantify these because there is so much disparity between the types of local tax structures. But it is clear that falling property values are going to affect local tax collections. On the other hand, there may be some offsets due to the reduced local population expenditures may fall clearly sales tax collections in those localities as well as the states as a whole will be reduced.
And I would point out that actually the bankruptcies themselves can actually impact the payment of taxes from the effected firms, usually temporarily, of course, but there can be some significant local budgetary impacts.
And, of course, obviously, the rest of us end up paying for a lot of these types of expenses, such as unemployment insurance, training and those sorts of things.
So, to conclude quickly here, it is important to recognize that asbestos liabilities impose costs, not just on the intuitively obvious shareholders and even the workers at the firm who perhaps one might say that they are the ones who ought to bear these costs, there are additional costs that generally donít get considered, such as training and health care costs that might occur during the transition.
Local communities can also be hit very hard, depending on the size and makeup of the structure of industry within those communities. As local businesses are hurt, as people are moving out of town, and as jobs are lost and as local income is reduced, local property values are going to fall, and, of course, local governments may face declines in revenues and their ability to produce the services that they are here for.
And then, of course, as I mentioned, a big chunk of these costs are passed on in forms of, in the form of higher payroll and income taxes to the rest of us.
I would say, the numbers that we are talking about here, of course, are just the costs to date. It is estimated that we may have only seen roughly a quarter to a third or even less of the total cost as these law suits continue to escalate, so in any kind of economic analysis it is important to think about not just the workers and shareholders are going to be affected, but the communities and other businesses that are also going to be affected downstream of those affects.
MS. PENDELL: Thank you, very much. Questions?
PROF. ROTHSTEIN: To some extent (unintelligible) because (unintelligible), the cost of the asbestos compensation system is a tremendous cost to the economy. It is ruining the industrial base, especially it is hurting future claimants who might really be sick and that these costs far outweigh the benefits, especially today where we are compensating people who arenít really sick. But I am interested in getting all the costs and benefits out on the table. And Deborah, Jonathan and Jesse have done a very good job of this. But I think a couple of things still have been overlooked.
Jonathan said to me that we have to count the transaction costs as a net minus, but somebody is getting that money, the lawyers primarily and they are spending it, buying Mercedes and things. So, I think that has to be counted. I donít think it is going to make a huge difference, but I think it has to be counted.
And then, also, you have to count as a benefit of the compensation system the injured people, if there are still injured people in the system. Injured people are, by getting an award returned to working and being productive members of society and earning wages which they are then spending and buying things and buying real estate and paying taxes. They are spending their award which may be a windfall that they got in the big asbestos lottery, but they are spending that and stoking the fires of business that way, buying real estate and paying taxes.
So, I think to get the complete picture down, we have to count these. I have the feeling that still the costs are hugely disparate and outweigh any benefits. But I wonder if you have done any studies on that.
DR. DAVID: To address the issue of the transaction costs, I think, as you point out rightly, the money isnít completely flushed down the toilet. But as an economist, I would say that those are still net losses to the economy because any lawyer that is doing asbestos litigation he could have been doing something else. Well, we wonít pass a judgment on how valuable that would have been. But I would have to assume that he would be providing some other service to the economy in the absence of Ė
PROF. ROTHSTEIN: (unintelligible)
DR. DAVID: Okay, perhaps that lawyer could have also been teaching in the law school instead of pursuing this type of thing, thatís right, so I would say those definitely are still losses.
MS. PENDELL: Thank you, very much. The information you just heard from Jesse, by the way, is being released for the first time today. And both his slides and the slides of both other speakers, in case you havenít already discovered that, are available outside.
I am going to ask our two commentators to join us up here on the dais now. And while I introduce them. Prof. Paul Rothstein, who you have heard from twice today, teaches at Georgetown Law School. He is well known for his work in evidence on criminal lawsuits and the judicial process from the Supreme Court down. He is well known for his Ė he is author of Evidence, Cases, Materials and Problems, Evidence in a Nutshell, State & Federal Rules, Federal Rules of Evidence and several other books and over 100 articles.
He has engaged in numerous professional activities, including chair of the ABA Rules of Evidence & Criminal Procedure, board member and education chairman of the FBA and chair of the AALF Evidence Section of the ABA. He is a consultant to the National Conference of Commissioners of Uniform State Laws, the U.S. Congress and the National Academy of Sciences. He is contributing editor to Legal Times, New York Law Journal. And he is perhaps familiar to many of you as a frequent consultant and guest on the major TV networks.
He has a BS and JD from Northwestern and was a Fulbright Scholar at Oxford.
Our other commenter, Judge Dean Trafelet from 1984 to 1988 was a trial judge in the Circuit Court of Cook County Illinois from which he is retired. There he was on special assignment as he presided over a special calendar of numerous complex toxic product liability and environmental insurance coverage matters.
He presided of Inre Asbestos product liability litigation where for over fourteen years he disposed of in excess of 35,000 asbestos lawsuits. He is the court appointed legal representative for all future asbestos personal injury claimants and the Armstrong World Industries, USD Corp. and Flipa Company reorganizations. He is a trustee of the $5 billion American Home Products Phen Phen Trust and of the Amatex Asbestos Product Liability Settlement Trust.
He is the originator of the Asbestos Plural Registry, which has become a model for state and federal courts. He has served as a special federal mediator to the U.S. Bankruptcy Courts in the disposition of thousands of asbestos related claims by seamen. He is an active lecturer and he has taught at Northwestern Law.
With that I will ask Judge Trafelet and Prof. Rothstein to join us and provide us with comments. Paul, would you like to begin?
PROF. ROTHSTEIN: Well, you have heard from me a couple of times already. Should we let the judge start, because you are sick from hearing from me .
JUDGE TRAFELET: I donít know about that. You may have me stirring the pot a little bit. I have a sense that obviously there is no ready solution and I think that the problems that have been created, there may be some guilt on industry and the solution to work ourselves out of that. I think there are some that are, in fact, in the making.
I think the most important thing is the lessons that we may learn from the asbestos litigation. I think that is particularly the most important. That filters al the way down to the judiciary, which I think there is a lot of fault.
One of the questions that I always like to ask in these symposiums and these discussions, is that, is there an axiom fault in the industry, the asbestos industry and those in manufactured products containing asbestos in toughening it out a little bit too long in taking that stance? Had they made decisions, management decisions earlier, rather than to fight to the bitter end, to realize the scope of the problem? To keep in mind what their corporate strategies would be or corporate strategies were and to fulfill those strategies to not only to the equity of the company but to the employees of that company, might not they have been better off?
I think the more recent bankruptcy, from what I have been able to discern from discussions and my experience currently, getting more involved, is that management has recognized these problems and has made very, very quick changes.
Another segment is the insurance industry and I ask the question to all of us here is, rather than toughening it out, did they not go into just absolute denial and did that obviously, that approach combine with toughening it out? These are questions that exacerbate the entire problem.
The court systems, I think, are somewhat to blame. I can speak firsthand on that. I think there is a great deal of inexperience on the bench. I think that the independence of the bench is not what it should be and, therefore, it becomes very provincial in those areas that we have seen and continue to see around the country, which are hotspots for plaintiffs to file their suits, are a result of that. And, again, there is, I think, a lack of training combined with the experience of those that are on the bench to deal with cases of this nature.
That, in a nutshell, are some of my observations.
PROF ROTHSTEIN: In teaching torts, which I teach at Georgetown, I find that the students love to see tort suits as David vs. Goliath. And I also see that in the press and the public and they see this asbestos litigation as David vs. Goliath. A lot of injured little people suing big giant corporations.
To some extent the public and the students love a good drama, a good stage play. And cold hard facts like we have seen today from the excellent presenters, donít make good drama. No one would buy a Broadway ticket to see that. But it is the truth and I think what emerges is that the asbestos litigation, the asbestos problem is not David v. Goliath, but it is David v. David. Some Davids against other Davids.
The present claimants, many of whom are not sick at all, are taking from a pot which should be reserved for other Davids later who become very sick. They are also taking from the pot of all of us, all of us little people that make up this country because of all the bad effects on the economy and the ruining of our industrial base both domestically and in international markets and the products and services that donít get produced when companies are afraid or reduced to bankruptcy, the jobs that are missing, all of the economic effects, that is affecting all the little Davids in our society. Thatís point one.
Another point I wanted to make is something that you have seen said about baseball fields and super highways. Build them and they will come. Build them and the people will come. I think in large measure thatís what ha been wrong with the asbestos compensation system. The judges, all in good faith have been trying to move the paper, because they are overwhelmed by these cases and so they make it a lot easier to process the claims and then that encourages more claims to be filed. And it is a never ending spiral.
I donít think the judges are in bad faith. They are doing what judges are supposed to do. I donít think even the plaintiffís lawyers are in bad faith. They are doing what they are supposed to do, the role they are assigned by society. Yes, they are making money out of it, but so are the lawyers on the other side and the businessmen and it is good for society if people get paid for helping others in some way, in one way or another. No one is going to help others very much without getting paid for it. And these processes may work well in the normal small tort case, but when some of these processes are applied in legal mechanisms to the gigantic asbestos problem, it causes a great distortion of the system and it doesnít function well.
So, that leads me to my last point which is that I think only a global solution is possible, something done by Congress. I donít think courts and judges have the ability to do it or are even supposed to do it. Because the judges are looking at it and are meant to look at only the case before them, it is kind of parochial. They are also looking after the injured claimants in their particular jurisdiction, and they are not looking at the big picture. They are not looking at the fact that there are Ė and they canít really, that there are other claims around the country and that they are ruining our industrial base, that the whole totality of claims is having a deleterious affect on the economy as I think we have been shown here today. They canít look at whether it causes bankruptcy and how many bankruptcies around the country it is causing, to look at their particular case in a kind of parochial way.
They are most particularly not able to, and not supposed to do a general societal cost benefit analysis, like we have been talking about here today. Thatís not the job of a particular judge, but that is the job of Congress to do and it is Congress that has to do it. And I will just give one example of this.
The punitive damages notion, there are multiple punitive damages being awarded in very large mass product lawsuits, asbestos being a prime example. Punitive damages are to be paid as kind of punishment and deterrents. If a company pays a huge amount of punitive damages in one law suit, thatís supposed to reflect how bad they were, how much they should be deterred, but then some other court in another state with other claimants against the same company, awards another punitive damages award without regard to the fact that maybe the punitive component of this has already been paid and it just does not make any sense, it is an example of how judges cannot, do not and under the role they have been assigned probably should not look beyond their own jurisdiction in the courtroom.
And so once again, just emphasizing, those of you who are here from government and have any influence over congress, I think the ball is in congressí court, congress must do a global and a sensible and a rational settlement that takes account of what this is doing to the whole country, something a judge is ill equipped to do, with all due respect to the judge.
MS. PENDELL: I have a question for Judge Trafelet relative to devices that the courts have used in the past, but relatively infrequently to sort through the claimants, some of whom in a masse filing are seriously, clearly seriously injured and some of whom are unimpaired.
The late Carl Ruben from Cincinnati, I know, once had a large number of cases before him. He hired several neutral court appointed medical experts and had them sift through the medical records and divide them into three groups, the first group being people who were clearly exposed to and seriously injured form asbestos, those people proceeded to trial. The second unclear whether they were serious injured by asbestos, they proceeded to discovery and the third group not evidence of either exposure or injury, and those plaintiffs were told that they could come back to the court at some point in the future and that he would waive the statute of limitations, but that they were not to come back again until they had evidence. And a very large percentage of those plaintiffs in his court fell under the third group.
Why isnít that sort of device used more often? And why havenít the courts been able to separate out the plaintiffs in these ways?
JUDGE TRAFELET: We attempted to do that in Cook County with the establishment or creation of a plural registry. If I can go very briefly to some background on it, a claimant who has a medical diagnosis of a disease that is on the lower end of the spectrum, if you will, but the doctor has told that patient/claimant that this is some condition that must be monitored and watched over the years, but presently, although the condition can be identified and there can be a causation because of his work history and exposure to asbestos, he is not presently impaired.
He then seeks an attorneyís advice and as soon as that is done that triggers a statute of limitations that forces the attorney within letís say a two year period of time that he has to do something with this claim that he knows, he knows has very little value in the tort system at the present time. So, he must file the claim. And when he files that claim, he starts getting into transactional costs, he files it against twenty or thirty defendants and each one of them must file, each one of them must retain counsel, so the costs are just driven up enormously over claims everybody knows has very little, if any, value t the present time.
What we try to do is take that claim, get rid of the statute of limitations by agreement of the parties and to take that claim and park it until that disease either got worse or manifested through other disease such as mesothelioma. That worked, it was voluntary.
Why did that not catch on in other jurisdictions to the extent that I thought that it would? My feeling of that is that on the federal level, all the cases were sent to Philadelphia under an MDL, they were parked there, they are still parked there and the idea was that they would all be able to settle under one jurisdiction. That never occurred.
Around the country, I think where we find these hot spots and why an asbestos pool or registry or something similar to that has not taken on is because of local politics and the closeness between the -- or the lack of independence is probably a more politically correct way to say it, between the judiciary and the plaintiffís counsel that are practicing in the area.
DR. HENSLER: Yes, I would like to add to that. One of the things that has happened in state jurisdictions that have adopted plural registries and there are several of them besides the Illinois example, is that plaintiffs attorneys observing what the judges have done with cases that have been filed there, just go elsewhere to jurisdictions where there arenít plural registries.
One has to understand of course that when a case is placed on a plural registry, because a payment has not been made, there is no payment that is made to the plaintiffís attorney and plaintiffsí attorneys also argue that at least some of those plaintiffs, if not all of them are being precluded from getting payments that might pay them for some kind of medical monitoring.
So, there are arguments about plural registries, but I think the reason that they have not been more successful in the sense of affecting more of the asbestos caseload is that they are not financially attractive to the plaintiffís attorneys who lead this litigation and in our federal system those attorneys can take their cases elsewhere to jurisdictions that donít have such registries.
MS. PONDELL: Questions from the audience. Prof. Brickman.
PROF. BRICKMAN: I have a question for Judge Trafelet. During your tenure as a judge in Chicago, having established a plural registry there, approximately how many people were on the registry during your tenure there and perhaps more importantly, of that number, how many came off the registry to sue for mesothelioma or lung cancer or asbestosis?
JUDGE TRAFELET: As I recall, I left the bench in 1998, and I think in the last four to five years, my recollection is that we had on average about seven or eight cases that would come off of the registry. Virtually all of those being mesothelioma cases. The registry, I think, started with, well, let me skip over that, because I am not quite sure, I think that it reached a number somewhere in the area of around 2,500, 2,800 Ė Margaret, do you recall?
MARGARET: Claimants in Chicago are a little different because there is no (unintelligible) people that there are in other places. Thousands of people at any time would be on the plural registry by agreement of the parties, the plaintiffsí counsel would fill out a form, it came to their attention that these people had some diagnosis of a condition, but there were certain criteria to come off and it was very few and far between that a cases was attempted to be moved from the plural registry, that there was not a diagnosis of people. It was very rarely disputed about a case legitimately coming off the registry.
Well, one of the comments about the culture of the plaintiffís bar and the nature of the cases that are pending in Cook County Illinois as opposed to other places is the plaintiffs firms there primarily represent the insulators union and they are seeing cases third generation families of insulators and so you are going to have heavy duty long term, your typical asbestosis, legitimate asbestosis case. I mean, these asbestosis cases, the few that did come off had extreme, you know, 2/3s, we are talking about significant medical findings.
I also recall one time a case of a true pleural thickening causing impairment that actually went to trial back in the mid 90ís, but, you know, they were also pursuing these cases against insulation manufacturing companies, not these 8,200 new defendants. I mean, that is one of the reasons that the system worked there, is because there were not hundreds and thousands of people being sued. I mean, I think, Judge Trafelet can comment that there was a weekly call and all the parties would come into the courtroom every week and whatever issues needed to be addressed were addressed. Well, there wouldnít be a courtroom big enough for that with 8,400 people being sued. I mean, that was just not what happened. And thatís why the system worked, because the plaintiffsí counsel there were not suing everybody in every kind of case.
MS. PENDELL: Another question back here.
MR. DERKER: I am Bob Derker of the Circuit court in St. Louis. I have run the asbestos docket three for the last ten years and I just have a couple of comments, if I can trespass on your patience.
MS. PENDELL: No, please, do, Judge.
MR. DERKER: Prof. Rothstein, I agree in substance with much of what you say about the role of the judiciary, but I think the judiciary is very good at evolving rules of liability that expand the frontiers of liability and then create these problems that the legislature has to try to extricate us from.
I think 402A, the restatement for 402A is a prime example of how the judiciary has created a liability principle that has now created in its turn this state of litigation. But your program intrigued me because I had made a decision to terminate our asbestos docket because my observation was that the nature of the claims had changed and that we were getting a large quantity of cases that represented people who were not impaired and, in addition, our docket was so efficient that we were attracting cases that were being used as a bargaining chip in other jurisdictions and particularly in our nearby Madison County, Illinois, which I am sure Judge Trafelet is familiar with.
But the question, I guess the one question I had was if anybody had ever studied what appeared to me to be a market in the settlement of these cases that mesotheliomas were worth X and lung cancers worth X minus and pleuraplax were down at the bottom. It would seem to me that here was a nationwide market in settlements and I was just curious if any of the economists had ever studied that.
And I guess my second question to Judge Trafelet would be, would he endorse the idea of discontinuing specialized asbestos docket, in view of the changing nature of the claims?
DR. HENSLER: I am not an economist, but I will comment on the market. There clearly is a market in claims and it is a market that takes account of differences in severity and there are understandings about the ratio and is often talked about in terms of the ratio of these different injury categories and thatís the basis of most of the settlements that are negotiated around the country.
Now, thatís not the only factor that enters into the valuation of the claims, who the lawyer is is an important part of that calculus, some lawyers are known to be more aggressive more successful, more likely to go to trial, more likely to succeed if they go to trial, they get more money. Other lawyers are known to be interested in quick and easy settlements, they get less money per.
There are issues about jurisdiction, there are still some issues about where you can actually get jurisdiction and venue and that clearly affects the going rate for cases.
I think one of the things that in my view was missed in the very hot controversy over the MCAM settlement and the Fiberboard settlement that because the Ortiz case, was that there was a great deal of commentary, certainly among legal academics, but also among legal practitioners about the nature of the settlements that were proposed there because they were essentially attempts to create administrative schemes within the context of class actions. And people who didnít understand how asbestos litigation was being managed in the United States, criticized those settlements for not taking proper account of the need for individualized due process and individualized outcomes.
But long before Georgene was proposed and the Fiberboard settlement was proposed, asbestos litigation had become an administrative process, characterized by settlements that are shaped, as I said in my presentation by a small number of verdicts and other developments in this country. And one of the problems, I think, in our policy debate, to the extent that we are ready to have the debate that Prof. Rothstein invites us to have, a congressional solution or some kind of legislative solution is that proposed options are evaluated against this fantasy that asbestos cases are being pursued on an individualized basis and in what we imagine court processes to look like. Instead what we have is a financial transactional system.
One of the things that as happened in the last few years that has led to this heightened tension and some of the consequences that the other speakers presented, is that the assumptions underlying those settlements fell apart, okay, and defendants who thought they understood the nature of their exposure found that that exposure had changed.
Some people believe that what we are in is a period of transition and particularly those who would like the current system to continue more or less the way it is, argue that we will reach another plateau and everybody will understand what the rules of the game are. But I think it is important to understand that this is a marketplace in which claims are being traded and it is also worth saying that the claims that have more value and that some of us think deserve more of the money that is being spent are being discounted in order to provide funds for this large flood of claims in which people at least currently have less need.
MS. PENDELL: Do any of the economists have something to add?
DR. DAVID: Well, I was going to add that we have developed models that try to identify what are the factors that drive the size of individual settlements and individual judgments. And one factor that was left out is the characteristics of the defendants as well. Obviously, some have developed a reputation for settling quicker than others, others have more funds that are simply available to pay.
And, also, the timing. Early on obviously settlements were larger before it was estimated how many would finally come out. So, there has been decline perhaps over time in some cases.
DR. DAVID: And you are getting a layering too, because you are getting your first wave of target defendants are out of the picture now and the plaintiffs are now looking for second level, the second level moves out going through reorganization and people keep moving up the ladder.
PROF. ROTHSTEIN: It has been noted that the parties on both sides of these cases are getting more and more peripheral. That is their connection with asbestos is getting more and more attenuated, that the plaintiffs are less ill as time goes on and the defendants have had less to do with asbestos. They are now things like universities and mom and pop businesses that may have some asbestos on their premises, or that they made something at one time that had some asbestos.
And at the same time that that is happening, the threshold of what an injury is has been lowering, as we have noted. And concurrent with that has been the tendency of some courts to recognize things that arenít even present physical injuries at all, like cancer phobia, compensation for cancer phobia, you know, fear that you will get sick, although you are not sick now or compensation for loss of chances of being well, the chance of getting sick has increased even though you are not sick. So, that is sort of the evil triumvirate, the low threshold of injury, cancer phobia and loss of chances and combined with that is the notion of medical monitoring that you can now get the court to order that you be watched to see if you are going to get sick.
And I just wondered if either of the judges that has spoken, if in their jurisdictions some of these quite novel legal devices, like lawsuit for cancer phobia or loss of chances, whether you have had any experience with that in your jurisdiction?
JUDGE TRAFELET: We did, we did not allow any such action. We were, however, a two disease state. In other words, somebody who had asbestosis, or anything less than cancer could settle or go to trial and get a verdict for that disease and then come back for a separate cancer disease, because we felt, and it was upheld by the Supreme Court, that there was sufficient medical evidence to support the two diseases standing distinct. They still could come from the exposure to the same product.
Could I add one little thing here. Prof. Hensler, in her presentation estimated that there were 27 million workers that were exposed. And if we were to take that number alone and say that all of those were unimpaired at the lowest level that we are dealing with and that this is people and as part of the judiciary, it has got nuisance value. We canít handle the transactional costs, we want to close our books on it, letís get rid of them at $2,500. We might do that very simply without blinking an eye, if we are an auto case, a soft tissue auto case.
But if we take $27 million and if my math is correct, times $2,500, we are at $67.5 billion. There is a tremendous, tremendous impact, not on the asbestos litigation as a whole, I think, but what is occurring through the unimpaired claims in our tort system. And it is a very big debate, very big.
MR. DERKER: I would like to respond to the professorís question. Missouri law is not particularly hospitable to being afraid you are going to get cancer, so we have had a few claims of that sort, but very few. What we have experienced, I mean, you pretty much have to have a diagnosable physical or mental condition to be able to pursue the claim and the juries have not, even in redistributionist city of St. Louis, we have not been, the jury has not been too sympathetic to those sorts of claims. So, most of the asbestos related claims that have gone to trial in St. Louis, in fact, all but two that I can remember were cancers or mesotheliomas and the two pleuraplax that went to trial were modest verdicts.
JUDGE TRAFELET: The asbestos is not very popular. I tore this out within the last few weeks and I am sorry, this is not very academic on my part, but the source of this was Decision Quest, it was a survey and the gist of this is, of jurors that were perspective jurors that were surveyed, on a tobacco case, where would their tenancies be. For somebody that was being sued for an illness caused by smoking, the blame would be put on the tobacco companies, 28% of the time, a pharmaceutical company being sued for side effects caused by a prescription drug, 46.7% would favor the plaintiff, would find against the defendant. An airline being sued for hijacking 30% would be in favor of finding against the defendant. But an asbestos company being used for injuries caused by exposure to asbestos is 64%.
So, over the years I think, I get a sense, with my years of experience with asbestos litigation is that there is a higher level of education on what the asbestos industry was all about, the exposures and what has happened in the court system, then there had been years ago. And that is certainly favoring the perception that the public has about the asbestos or anybody that manufactures it.
MS. PENDELL: Judge Trafelet, I think there is an outstanding question to you about whether or not you think it makes sense or desirable to eliminate asbestos dockets in the courts?
JUDGE TRAFELET: My answer would be, no, I would disagree with you. My reason would be, letís keep it going. I donít know the reason for it, Your Honor. To me, if doing that, you are going to back up your docket.
MS. PENDELL: Questions? Wait, letís give it to someone who hasnít asked a question yet over here.
MR. DERKER: Iím sorry. Well, I was going to respond that my reason for terminating, my chief judge may overrule me, is that the people who are not functionally impaired, they are really glorified rear end collision cases and my secondary reasons was we are attracting cases that would not otherwise be filed in St. Louis, because we are so up to date. We were getting cases to trial in less than a year and we actually had to slow it down. Well, I am talking about putting them back on our regular dockets to be reached in the ordinary course as opposed to the specialized docket which has reached, and this is not me crowing, but we were very efficient in disposing of them and then we got more of them as a result. So, thatís the reasoning, but I understand your position.
DR. HENSLER; I just want to add, while we are talking about this interesting docket question, that we have several things going around the country, are around the country in terms of asbestos dockets. We have these plural registries that we have been talking about in some courts. In other courts we have so-called expedited dockets and expedited dockets for asbestos have generally been focused on the more serious injury cases that are put at the front of the trial line because somebody may, in fact, be approaching death.
As you look at what has happened to litigation values around the country, I think you can make a pretty compelling case that expedited dockets have, in fact, contributed to the rising value of asbestos cases, because it made it possible for cases to get to trial that up until the rise of these dockets had not been getting to trial. Juries in many jurisdictions awarded more money than not only the defendants had expected, then the plaintiffs attorneys had expected.
And so it just highlights, I think the importance of judicial management strategies in shaping the course of the litigation, including affecting the outcomes.
MS. PENDELL: Okay, question here.
MS. BENNETT: Cathy Bennett with Pfizer. Professor, I had the honor of being one of your students at Georgetown at one time. You mentioned the concept of a global solution in enacted by Congress, what are the elements of such a solution as you would see that?
PROF. ROTHSTEIN: Well, I think and I donít want to cause a riot here, but bottom it is well redistribution problem. There is some class of people who are seriously ill or will become seriously ill and then there are those who are not. It is good for society to see that they get something that restores them to some kind of functioning status in society or their families given what is needed for them to survive. And it should Ė the companies that are only peripherally related to asbestos and even those that have made asbestos and are directly related to asbestos arenít really anymore at fault than anybody else in our society. It is strict liability, which means no fault.
So, it is a slim argument to say that those companies that have some relation to asbestos have done something wrong and ought to pay and we have all benefited from asbestos, the whole country has, so I think it should come out of the Ė
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But that hasnít deterred anybody else with worthy claims for money, asking the government for money for their causes and so if I had my druthers, thatís what I would have. And I would think it would be a limited amount of compensation, not a huge amount for each particular person.
I know the judge is actually against the global settlement.
JUDGE TRAFELET: The question that disturbs me or the question that raises itself when you say that is, you know, who is next in line to come before congress and say, get me out of this jam. And thatís the disturbing thing I have.
PROF. ROTHSTEIN: Well, asbestos is of a different kind, because it is so huge. I think thatís a different thing. If the president had to pick between North Korea and Iraq to hit, we have to pick what is the most pressing and take care of it.
DR. DAVID: Just to add, I mean, it is a very special case, in my opinion. I mean, you think of a typical product liability case, taking an example, a tire maker who doesnít make a high quality product, people sue right away, the workers and managers of that firm bear the cost of not creating a good product or it is relatively close in.
Asbestos with this huge latency period, you have managers who made decisions years ago, decades ago and the costs are now being borne by the managers and workers at the firm today. So, in many ways, I mean, thatís something tat also has to be considered. It is a different kind of product, it is a different kind of issue and is it really, in my opinion, an extreme form of the need for some reform or tort reform. And you can sort of, regardless of people who think there should be or shouldnít be tort reform, you can say, you know what, this is an extreme case and the system from our work and I think from the work of others on the panel, suggests that it isnít working and should be reexamined and made more efficient. And you can do that without addressing all the other issues that folks like to raise, and it can be a sort of specialized case, in my opinion. But I am not a lawyer.
PROF. ROTHSTEIN: It is big and unusual, but our society is filled with new chemicals and new compounds and new products that we donít know will they manifest disease in ten or twenty or thirty years from now.
The asbestos thing is even one step worse than you just portrayed, it is not the original companies that are being hit, it is successor companies or companies that were bought by other companies and then the company that bought it finds themselves with an asbestos liability that wasnít factored into the original purchase price.
On the judgeís point, I would just say, if it comes up, something like asbestos comes up again, the same system should be applied to it.
DR. DAVID: And we do have past experience. I mean, Congress has stepped in in certain cases and taken steps. And so I personally donít find it, if the benefits of congressional action outweigh the cost, which I think there is a solution here where that is achieved, it is a worthy action to take from a public policy perspective, and each case where this may come up should be evaluated, and if you can come up with a solution thatís better than the current system, then you do it.
I donít find having sort of unique solutions for certain products offensive to myself or to the general system from the perspective that I come.
JUDGE DAVID: Everyone, well, not everyone, lots of people have said, well, the system is broke and the cause has been asbestos. I disagree, I think the system has been terribly beat up by the asbestos litigation. I have a feeling and some confidence that it is very slowly working its way out of the problem. I am really hopeful of that. That isnít to ignore the fact that a lot of lessons should be learned and some corrective action should be taken by industry as well as by the judiciary, because of what we have learned. I just sense that this is extremely a very drastic approach. And I am concerned what it will create in the future.
PROF. ROTHSTEIN: Briefly, I would venture to say that you as a judge, when you took the job, thought you would be handling pretty near single party litigation, contract litigation, maybe a company against another company, maybe some fender benders, a few criminal cases. This kind of thing is not at all what judges are traditionally versed in and meant to be doing. It is a whole new role for the judiciary and I am not sure that it is equipped to do that. They donít have investigative arms gathering data like we have seen today. I just think Congress Ė
JUDGE TRAFELET: I agree with you, but the judiciary has had twenty years dealing with these or twenty-five years and in some parts of the country have done very little about trying to get up to speed on handling them or managing them.
MS. PENDELL: We have a question here and then we have a question over here.
MS. REISTROP: Katherine Reistrop, Liability & Insurance Week. I would like to ask Prof. Rothstein about his point on punitive damages. Were you recommending that Congress step in and set a federal standard on punitive damages? We saw how difficult that was when the Supreme Court asked Larry Treib the other day if he could come up with one in State Farm.
PROF. ROTHSTEIN; Well, if we continue with the present system, with the courts doing it, I think there ought to be some obligation to look at what other punitive damage awards have been given against the same company for the same conduct, to have some kind of collateral estoppels or if the punitive component has already been taken care of, some kind of coordination.
Think about what punitive damages is for, is it for those people who havenít been able to come to court, should the punitive damages be put in some kind of fund to give to other claimants rather than given to this one claimant? This claimant reaps all the punitive damages for all the claimants in the whole country.
So, I donít have an exact system, but thinking along these lines should be done.
JUDGE TRAFELET: I agree with that. The jurors are not allowed in most jurisdictions, if not all, to be educated as to the consequences of them awarding punitive damages, as to whether it has been awarded in similar cases elsewhere and to what extent. So, what extent that punishment has been, they are kept totally in the dark and they think, as the professor said, this is their only way to retaliate and exercise the punishment that the court is instructing them they can do.
MR. GABRIEL: Chuck Gabriel, Prudential Securities. And I just want to ask you to think about insurance for one second. The Rand study roughly estimates that about three-fifths of the payouts so far have come from U.S. and foreign insurers and reinsurers, and I was just curious if you thought about whether we can expect a rough continuation of a ratio like that. It seems like some of these peripheral cases we have been looking at in the last few years, that some of the insurance liability is capped. So, thatís one of the reasons I asked.
And I also want to ask if the costs of higher insurance premiums as a result of all this is something that has been factored into the costs being born by the private sector?
DR. HENSLER: I kind of ducked the question about the future distribution, because that is a piece of the analysis that my colleague Steve Carroll has done. But I know that weíve been concerned about not simply extrapolating straight line from the past for a number of reasons, including the reason you suggested. So, I donít know the answer to that question. And perhaps one of the other panelists would like to comment on the costs of insurance premiums.
DR. DAVID: Well, in some sense that would show up at the firms that are bankrupt and those, and we didnít quantify those effects, but, you know, they are certainly real. I mean, you hear anecdotal stories about insurance payments and the impact that is having on firms. So, I am sure that it is having a negative consequence of some form in terms of all the factors that we looked at. But in terms of quantifying it, it is not something that we did. I donít know if you want to talk about the secondary effects.
DR. ORSZAG: I am not familiar with the actual trend in insurance premiums and that may be something that we might look at in the future. But it is an interesting question about whether those dollars are going to address risks that are basically sunk and already happened or whether the trend in asbestos lawsuits actually reflects a broader trend and the likelihood of future risks faced by firms that are paying those premiums. So if, in fact, thatís the case, risk to firms for any kind of lawsuit, any kind of product liability lawsuit have increased because of this history, thatís an important question about whether that is some loss that is being borne by industry or maybe it reflects the true risks that perhaps werenít reflected in the past.
MS. PENDELL: Anymore questions? I want to thank our panelists, it has been a terrific discussion and presentation from all of you and thank you all for coming.