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Judge and Jury
American Tort Law on Trial
By Eric Helland, Alexander Tabarrok
The Independent Institute Copyright © 2006 The Independent Institute
All rights reserved.
Recently, each of us has successfully sued more than half a dozen large corporations. No, we are not outrageously rich plaintiffs' lawyers or the attorney general of New York. In fact, neither of us even knew we were a party to these suits until we received letters telling us that a lawyer had sued on our behalf. Like millions of Americans, we discovered, after the fact, in a mass mailing, that we were part of class-action suits resulting in settlements. Among our winnings was a $5 coupon from Microsoft. "Our" lawyers must have done a good job: They will receive $112.4 million.
It's cases like these that first interested us in the tort system. As empirical researchers trained in economics, however, we prefer data to anecdote. The media thrives on memorable anecdotes. Who has not heard of the lady who successfully sued McDonald's after she spilled hot coffee on herself? But who can say what the average award is in a product liability suit? Or what has happened to awards, filings, and settlements over time?
In our investigations of the tort system we heard many fascinating anecdotes from lawyers. We heard about the "Bronx effect," a term coined by Tom Wolfe, who in his novel The Bonfire of the Vanities describes a plaintiff's lawyer who files malpractice claims in the poor, minority-dominated community of the Bronx because "The Bronx jury is a vehicle for redistributing the wealth." We also heard how plaintiffs' lawyers biased elected judges with campaign contributions and about how contingency fees were encouraging frivolous lawsuits and driving awards skyward. But no one really knew whether these anecdotes, even if true, happened often enough to warrant concern.
In this book, we present some data on the tort system, and we put some of the most interesting anecdotes to the test. As you will see, some of the anecdotes hold water, but others turned out to be all wet. We begin with an overview of the expansion of the U.S. tort system over the past thirty years.
THE EXPANSION OF THE TORT SYSTEM
Newsweek referred to a "litigation explosion" in its December 15, 2003, front-page story, "Lawsuit Hell." Is there a litigation explosion? Not everyone agrees. Public Citizen, the nonprofit advocacy group founded by Ralph Nader, accused Newsweek of gross distortions:
Newsweek has fallen hook, line and sinker for the myths and distortions spread by a well organized campaign funded by the American Medical Association, insurers, tobacco companies, auto manufacturers and others to strip consumers — but, notably, not businesses — of their legal rights. Since big business dominates the political system, the civil justice system is the one branch of government in which ordinary citizens can hope to get a fair shake. That's why these entities are hell-bent on slamming the courthouse door shut.
What do the data say? The longest chronological evidence on the growth in the U.S. tort system comes from Tillinghast-Towers Perrin (2000), a private consulting firm. Tillinghast's estimate is based on insurance industry data and includes the legal costs of defending policy-holders, the benefits paid to policy-holders' victims, the administrative cost of the insurance policies, and estimates of other costs associated with the tort system but not paid directly by insurance companies. By Tillinghast's measure, expenditures in the tort system have increased greatly in the last thirty years, tripling in real terms from 1970 to 2001.
Even measured against GDP, the increase in tort expenditures is significant. Figure 1 shows tort expenditures as a percentage of GDP since 1970. From just over 1 percent of GDP in the early 1970s, tort costs nearly doubled to more than 2 percent of GDP in the late 1980s. In the late 1980s and early 1990s, Florida, California, and other states began to pass tort reform laws capping punitive damages and pain-and-suffering awards, modifying joint and several liability rules, restricting contingency fees, limiting who can be sued, and so forth (CBO 2004). Tort expenditures as a fraction of GDP began to decline in the 1990s, probably as a result of these reforms.
A more direct measure of the growth in the tort system can be found by examining trial awards. Figure 2 graphs the mean trial award (winning cases only) by year from two of the longest datasets on tort awards, the Administrative Office of the U.S. Courts data (hereafter the Federal data) and a series put together by researchers at the RAND Corporation drawing from state courts in Cook County, Illinois and San Francisco County, California (herein after the state/RAND data). Both series are corrected for inflation by converting to Year 2000 dollars. The mean award in the Federal data is about 2.5 times as large as the mean state award. To make the trends clear, the state/RAND awards are graphed against the left axis and the Federal awards against the right axis. Both series show a dramatic increases in mean awards in the 1980s. The roots of the "tort crisis," many observers argue, date back to the 1960s and 1970s when tort law began to move from a negligence standard to a strict liability standard as a means of increasing compensation for the injured (Priest 1991). This explanation may be correct, but, if so, the change in the standard had little effect on the size of tort awards until the mid-1980s. From 1980 to 1990 the mean inflation-adjusted award increased by an average of 8.2 percent a year in the state data and by an average of 17.4 percent a year in the Federal data.
Most cases do not go to trial. Because trials are just the tip of the litigation iceberg, some people have worried that trial data may misrepresent what has happened in the system as a whole. Unfortunately, for most disputes no information on settlements is collected. But we do have good information on settlements for medical malpractice cases in Florida since 1975 and nationally since 1990. Figure 3 shows that medical malpractice settlements increased from about $75,000 in 1980 to more than $250,000 in 1990 and declined mildly in the late 1990s. (Both figures are corrected for inflation by converting to Year 2000 dollars.) At the national level awards also increased in the 1990s, by approximately 40 percent in inflation-adjusted dollars. We emphasize that Figure 3 is the hidden part of the iceberg; these are settlements, not trial awards, and therefore are not subject to the argument that higher trial awards are due to a changing selection of cases, rather than to a more generous litigation system.
A related measure, the number of tort filings per capita, also suggests an increase in the size of the civil justice system. Figure 4 shows the number of filings per 1,000 people in sixteen states between 1975 and 2000 and the number of filings in a larger sample of thirty states from 1993 to 2002.
For the sixteen states for which we have good data, filings increased dramatically in the mid-1980s before leveling off slowly in the 1990s. Much of this decline appears to be caused by California and Florida, which each enacted extensive tort reforms in the 1970s, but due to litigation (of course!), the reforms were not implemented until much later. The shorter series covering more states shows no decline in the 1990s, thus suggesting that while filings declined in some states, they increased in others.
SUMMARY OF THE TORT "EXPLOSION"
Whether we look at expenditures, awards, settlements, or filings, the basic story is consistent: The tort system in the United States expanded significantly during the 1970s and 1980s. Whether one calls this an "explosion" or a "litigation hell," as Newsweek did, is a matter of personal taste, but either appellation is consistent with the data showing a large and costly increase in the tort system during these two decades. In recent years, this growth has slowed. The retrenchment, however, is a likely consequence of the reform movement and not a reason to regard reform as unnecessary.
What caused the expansion in the tort system? Because this topic has occupied countless law review articles and books, we provide only a cursory sketch here (see Priest 1989 and 1991).
WHY THE EXPANSION?
Tort law traditionally covered injuries between strangers, such as those involved in an automobile accident. Injuries resulting from the interaction between individuals with a prior relationship, such as physicians and patients or workers and employers, were covered by contract law. Contract law let individuals define, prior to any accident, the terms the court would use to resolve disputes. In all other cases, historically, individuals were responsible for paying for their own injuries or received compensation from government-sponsored programs.
This division of responsibility between the tort system, contracts, and private insurance has much to recommend it. It limits the involvement of the courts to non-contractual areas; that is, to instances where one person has potentially harmed another and the parties could not have formed a contract in advance of the injury. In essence, the court's job was to decide whether the defendant was at fault (i.e., liable) and decide on the compensation scheme that the parties to the accident would have agreed to if anonymity had not prevented them from forming such a contract.
Prior to the 1960s, legal cases assigned liability for an injury by applying the negligence standard: Did the defendant exercise the care of a reasonable person under the circumstances? As recently as the early 1960s, ladder manufacturers would not have been liable for falls from ladders, doctors would not have been liable for birth defects, and diving board manufacturers would not have been liable for injuries resulting from diving (Priest 1991, p. 38).
The purview of tort law, in terms of which injuries are now potentially compensated, has changed since the 1960s. Some of the changes concern the standard of care that triggers compensation. Although some tort cases, such as those alleging medical malpractice, still use the negligence standard (albeit a much broader standard than was used before the 1960s), others, such as product-liability cases, are now generally decided using strict liability. In cases decided using a strict-liability standard, defendants are held responsible for any product-related injuries caused by a product defect, regardless of negligence. The move toward strict liability in product-liability cases and the expansion of what is considered a product defect has brought more injuries into the tort system (Viscusi 1991, p. 73).
Tort law traditionally represented a very limited form of ex-post insurance against the negligent actions of others. Compensation was triggered only by a clearly defined set of deviant actions. Since the 1960s, tort's function has shifted implicitly from punishing negligent actors (with the aim of deterring future injuries) to mandating that producers, in effect, bundle their product with a peculiar form of insurance. Potential litigants are also limited in their ability to avoid tort liability. Court decisions have held that a producer must compensate consumers for all losses resulting from a product without regard to what the parties had specified in advance. By the 1970s, all the legal elements were in place to expand the number of injuries that would end up in the tort system.
Although it is difficult to measure, the changes in legal standards seem to have been accompanied by a greater willingness of the courts to consider claims that previously would have been thought laughable. Jason Love is a good humorist and when he drew this cartoon shortly after the infamous hot-coffee case in August of 1994, his audience probably laughed. Imagine, someone suing McDonald's for obesity! Today such a possibility is no joke. Suits against fast food companies are now common (e.g., Pelman v. McDonald's; see also Bradford 2003, and the website of obseity lawyer, John Banzhaf, http://banzhaf.net/obesitylinks).
THE COST AND BENEFITS OF THE TORT SYSTEM
The tort system has grown significantly in size and cost over the past decades. But we should not assume that the expansion is necessarily to be decried. We also spend more on health care and more on video games than we did in years past, but neither development is a problem if we receive value for money. Similarly, if the civil justice system works well, then greater use of the system may be a net benefit.
The tort system has two primary functions: It compensates the injured, and it deters injurers. How well does the system perform these two functions? We begin by examining the issue of compensation. An interesting indication — and perhaps an indictment of the tort system — comes from the September 11 Victim Compensation Fund. Congress created the fund to avoid tort law, and nearly every family of a person killed in the 9/11 attacks chose to participate in the fund, voluntarily giving up their rights under tort law. Of course, the 9/11 fund was a response to a unique event. We do not know whether future disasters, man-made or otherwise, will lead to the creation of similar funds. Similar funds have been created, however, for those few children injured by pediatric vaccines. Some states now have no-fault auto insurance. Workers' compensation, basically no-fault accident insurance for on-the-job accidents, has long been a staple of the American workplace. Why would anyone want to give up their right to sue? The primary motivation behind these reforms is the large administrative costs of the tort system: lawyer fees and other expenses push administrative costs to 54 percent of benefits (Tillinghast-Towers Perrin 2003; Economic Report of the President 2004; Hensler 1991). No-fault systems have lower transaction costs and deliver payments to victims sooner than does the tort system.
THE ADMINISTRATIVE COST OF ALTERNATIVE SYSTEMS
More generally, the tort system can be compared with other compensation systems, such as health insurance and workers' compensation. Compensation systems can be broadly classified by what triggers compensation. Even today, the tort system is primarily fault-based; it does not compensate the injured party unless someone else was negligent or in some other way liable. But if you are injured in an accident, you want compensation whether you were hit by a drunk driver or your vehicle skidded out while you were driving alone on an empty road. As a compensation system, therefore, the fault-based tort system is defective — this is one reason why reformers in the 1960s and 1970s pushed for strict liability. Under a strict-liability standard, the injured party is paid even if the "injurer" was not negligent. But what to do with the driver who skids out on an empty road? It's simple — look for someone, anyone, who can pay. Perhaps the auto-manufacturer could (or should?) have included a better braking system? Or maybe the tires were defective? Or perhaps the local government should have better lit that section of road? Notice that the drive to adequately compensate the injured pushes against the fault aspect of tort in two ways: The idea of negligence is weakened, and the number of actors who may be considered liable is expanded and extended.
By contrast, a cause-based system is one in which the specific cause of the injury entitles an individual to compensation. The largest cause-based program in the United States is workers' compensation, which pays for many workplace injuries regardless of whether or not the employer was negligent. Finally, loss-based systems pay compensation based simply on the claimant being injured or ill. These include private loss-based systems such as private health insurance and public systems such as Medicare.
Table 1 places the tort system in context with other systems for compensating injuries. The tort system is considerably less important to overall compensation than private, first-party health insurance companies or Medicaid and Medicare.
Tort awards and other methods of compensation overlap considerably. Studies from the mid-1970s found that 40 percent of all payments to victims made by product-liability insurers involved injured workers who were already entitled to workers' compensation (Dewees 1996, p. 430). It is quite possible that a similar overlap exists between tort compensation and private health insurance in states that do not explicitly allow juries to consider a plaintiff's other sources of compensation when awarding damages. Nevertheless, tort cases are no more than 7 percent of annual expenditures on injuries and illness. If we include only economic damages such as lost wages and exclude noneconomic damages for pain and suffering, the number falls to 3.3 percent — a share comparable to that of the workers' compensation system. The tort system is not the principal way in which the costs of injuries are paid. Moreover, it is important to point out that no one would rely on the tort system as their "primary insurer" to protect them against injury. The scope of tort insurance is narrow and the payout uncertain and delayed.
Excerpted from Judge and Jury by Eric Helland, Alexander Tabarrok. Copyright © 2006 The Independent Institute. Excerpted by permission of The Independent Institute.
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