I’m scared about this column. I’ll probably get sued.
That’s because when it comes to lawsuits, Los Angeles last week was named as the city having the “least fair and reasonable litigation environment in the country.” (We’re No. 1!)
That means L.A. has the reputation, at least among lawyers who defend companies, as being infested with such matters as unnecessary lawsuits and excessive punitive damages. In the same survey, California came out 45th on the list of states. That means California is the sixth worst, not sixth best.
I’m always skeptical of surveys. Most have some bias. This one was done by the Institute for Legal Reform, which is affiliated with the U.S. Chamber of Commerce, which is biased against excessive lawsuits because it does not like the fact that its members tend to get visited by class-action-seeking lawyers in the same way that 5th century Rome was visited by Ostrogoths, Vandals and Huns. (The survey was put out in conjunction with an advertising campaign. You may have seen the sign that says “Welcome to California, the sue-you state.”)
But even if you discount for any bias, it’s hard to dispute the premise of the survey. No business is too little, no indiscretion too minor, to get sued here in the same way that no celebrity is too washed up to be found not guilty of, well, most anything.
The survey made a fairly big deal of the fact that any state or city with a reputation for certifying silly class actions or granting outsized judgments will suffer economically. That is, businesses tend to shun places with such reputations.
Maybe so. I believe a much bigger problem is the cost of all this. It’s expensive for a business to pay lawyers and pay any settlements, the costs of which get passed on to their customers. The survey said that the cost of the tort system nationwide is about $880 per citizen per year. That’s like a tax of about $3,500 a year for a family of four.
But that’s really only the beginning. As a result of runaway jury awards and other big legal costs, insurance companies, for example, jack up their premiums for all businesses that could be sued in a similar way. And those costs get passed on.
A couple of researchers at the Pacific Research Institute who wrote a book on this subject figured that the real tort tax is closer to $9,800 a year for a family of four. That’s a total of $865 billion a year, or about the yearly sales of the entire U.S. restaurant industry.
They wrote an op-ed in the Wall Street Journal a month ago in which they explained they arrived at that towering figure first by adding up the static costs, such as lawyers fees and settlement costs. Then they added dynamic costs, because the fear of litigation changes behavior. For example, they figure fear of litigation prevents companies from innovating as much as they could, and they withhold or slow down product development.
Again, you can dispute their methods, their assumptions, their biases or their final figure. But you can’t really dispute the reality of a tort tax on all of us.
California’s made some progress, notably by reforming workers compensation. At least it’s one step. But there’s a marathon to go.
Charles Crumpley is editor of the Business Journal. He can be reached at
[email protected]
