Notorious bank robber Willie Sutton always said he robbed banks "because that's where the money is." Plaintiff attorneys apply the same rule to lawsuits they go for the deepest pocket, making sure at least one of the defendants is flush with cash so they can stick someone with paying the entire judgment if they win. Under California law, you can end up paying all the damages in a liability judgment even if you are only 1 percent at fault.
This oddity in the law dates back more than a century to a time before juries were allowed to apportion damages between defendants. All defendants in a lawsuit were presumed to be jointly liable. It didn't take the lawyers long to figure out that if you had one rich defendant, you could collect all the damages from that defendant no matter that the defendant had only a tiny percentage of the fault. Thus was born the "deep pocket rule" go after the deepest pocket in a judgment.
In recent years, most states have come to recognize the inherent unfairness in this judicial doctrine, known in the law as joint and several liability. It is much easier today to determine degrees of fault in a trial, and to apportion the damages in a settlement according to how much each defendant is at fault.
But California has lagged behind other states. Trial lawyers and their friends stopped repeated efforts to modify the joint and several liability doctrine in the state legislature, until in 1986, the people did so through a ballot measure, Proposition 51. It said that in personal injury cases, individuals would be responsible for the non-economic damages they had caused and liability would be apportioned according to fault.
The principle of apportioned fault, however, was not applied to business transactions. In legal actions regarding, for example, a shareholder suit against a bankrupt company, lawyers can still go after the deepest pocket to pay the economic damages. In many cases that will not be the company itself if it's bankrupt, it probably has few assets but rather some provider of services to the company who may be only peripherally involved with the bankruptcy.
Accountants, for instance, have become a favorite deep-pocket target. They render professional financial opinions, so it is not too hard to drag them into a lawsuit. There's often a big check at the end of the trail because the accountant may be the only one who has any assets.
So an accounting firm may end up paying the full damages for a bankruptcy even though the accounting firm was only indirectly involved with the bankrupt company. These abuses are not limited to the accounting industry; in fact, many other professional service providers such as realtors, surveyors and engineers are extremely vulnerable to deep-pocket abuses.
Big Six accounting firms report that they are now spending 15 percent of their audit and accounting revenue on professional liability coverage. Despite federal legislation in 1995 that limited frivolous lawsuits against accounting firms, suits naming accountants as defendants have not declined.
Accounting firms have done what one would expect: They've refused to take on audits of high-risk clients. According to a recent article in the Wall Street Journal, "the Big Six accounting firms have dropped 30 publicly traded companies," in just a four-month period earlier this year.
California's high-technology firms are big losers when risky clients are dropped. The nature of the high-technology business is risk-taking. Small entrepreneurial firms are a major source of new jobs in California as well as the backbone of global leadership in information-age technology. Predatory lawyers have particularly targeted high-tech firms, often with little merit but the hope that the firms will be forced to settle out of court. This amounts to nothing less than legal extortion.
This tactic has proven so lucrative that plaintiff lawyers often name accountants in the suits simply to force an out-of-court settlement with a deep-pocket defendant. In 1992, accounting firms reported spending over $10 million in legal costs to obtain dismissal in 23 audit-related lawsuits.
Large bipartisan majorities in Congress agreed that the deep pockets law was unfair and recently passed a sweeping overhaul of federal securities litigation. Congress has limited application of joint and several liability only to defendants who were proven to have engaged in knowing fraud. Thirty-eight states have either abandoned the deep-pocket rule altogether or modified it significantly.
It's time California joined them. Senate Bill 232, a bipartisan measure, would replace California's current deep-pocket rule with a standard of proportionate fault in awarding economic damages against service providers such as accountants. Liability would be proportional to the degree of fault with each defendant in a lawsuit. This bill would maintain the federal standard of full liability for a defendant who is proven to have committed fraud.
A recent survey found that 89 percent of Californians agree that the deep-pockets rule is not a fair way to settle civil disputes, and 90 percent agree that if a court finds someone partially at fault, they should pay only their share of the damages.
Just because Willie Sutton went where the money was doesn't give every unscrupulous lawyer in California the right to reach into the deepest pocket every time there is a lawsuit.
Martyn Hopper is California director of the National Federation of Independent Business, which has 44,000 California members. With more than 600,000 members nationally, NFIB is the country's largest small business advocacy organization. Hopper is a member of the Coalition for Fair Liability Laws.
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