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California Counts the Costs of Lawsuit Mania

[originally published in the Wall Street Journal, June 3, 1992]

Baseball-and-Olympics hero Peter Ueberroth has just pitched a fast one past California's legal sluggers. Those who expected a bland exercise in blue-ribbonism when Gov. Pete Wilson named Mr. Ueberroth to head a bipartisan business/labor group were disabused when the Council on California Competitiveness issued its report April 23.

"Our conclusion is that we are suing ourselves to death," Ueberroth told the San Diego Union-Tribune. "[W]e are legally the most expensive state of the fifty. We add huge costs to our products and we don't add value. That makes us noncompetitive and so we call for tort reform."

Mr. Ueberroth singled out workers' compensation, where avid lawyering and outright fraud have driven a huge wedge between what California businesses must pay and what their workers can expect to receive if seriously hurt on the job. The state is somewhere around "the third to the fifth most expensive in workers' comp in the nation. We are 44th in benefits. What the hell is going on?"

One thing going on is stress claims, available to disgruntled workers from Napa to Needles who suffer psychic trauma when, say, the boss fails to come across with a juicy raise or promotion. Lawyers push stress claims in their ads ("Headaches, stomachaches, or poor sleep?....Sue for money and benefits!") while law-firm "runners" collar prospects as they step into unemployment offices. 1990 payouts in what might be called the Cal-Stress program ran at $450 million a year -- the equivalent in insured losses of an L.A. riot every 15 months.

An appendix in the council's report offers some glimpses of the beleaguered businesspeople behind the numbers. High comp costs are driving California natives Linda and Harry Prod out of the coffee shop business. "We have one restaurant in Monterey Park which maybe we will keep, but otherwise we will not be in California again. We are aware the recession is not just here, but to add insult to injury, California is so against business."

The Prods are lucky compared with Roger and Stephanie Valek of Escondido, who built up an auto body shop over 20 years. More than a decade ago, the council says, they paid an approved disposal company to take about 15 barrels' worth of thinner to a barrel yard in L.A. Liability buffs can guess what came next: the state declared the yard site hazardous, the disposal company went broke, and as next of legal kin the Valeks have been ordered to pay $7.9 million.

To hear the American Bar Association (ABA) tell it, the Prods and the Valeks and everyone like them may be purely imaginary. The venerable bar group, which lately resembles a trade union for people who sue people, keeps churning out tracts pooh-poohing the idea that litigation burdens the economy.

The ABA press office, for example, is at pains to deny that lawyers are too numerous in this country.* The real problem, its handout explains, is that "other countries with large populations have too few". Glad that's settled.

Then there's the great hoo-ha about the estimated costs of tort law. Some legal critics have cited a ballpark figure of $100 billion in direct costs, and much more when indirect effects (behavior changes to duck liability) are counted. Terribly inaccurate, says the ABA: A better estimate would be $29 to $36 billion. The Association of Trial Lawyers of America (ATLA) offers the same number, as does lawyer Joan Claybrook of the Naderite group Public Citizen.

ABA-'n'-ATLA must be kidding. Start with cars. There are 120 million private cars on the road, most insured, and the liability component of those policies runs to $350 or so a year per car. That's at least $35 billion out of consumer wallets right there. Add in trucks and vans and you're over $40 billion, not to mention trains and planes. To that, add estimates for medical malpractice insurance and self-insurance, which start at $10 billion and go up.

We're now well past $50 billion and haven't even counted workers' comp, which the Ueberroth report says eats up $1.5 billion in litigation costs -- not pay-outs, just process costs -- in California alone. Or product liability, environmental suits like the Valeks', litigation against town hall, premises liability or a hundred other profitable legal specialties.

The $100 billion lower boundary for the cost of American injury law comes from a consulting firm named Tillinghast (it's since risen to $117 billion). What the ABA-cadabrists don't say is that the Rand Corporation's Jim Kakalik, who originated the $29 billion-to-$36-billion estimate, says he sees no contradiction between the two studies; they were simply trying to measure different things, that's all.

The latest effort along these lines, in the April ABA Journal, was, if nothing else, ill-timed. It dismissed as "fundamentally false" the idea that lawsuits are inhibiting research and innovation, but arrived on desks within days of a truly grim article in the April 10 Science drawing the opposite conclusion.

A "careful examination" of the state of AIDS-vaccine research, Science said, "shows that liability concerns have had negative effects". Depressing specifics follow: Bristol-Myers Squibb dropped one promising approach, Immune Response Corp. has had to delay human trials because its partners fear being sued, and so forth. After the California Trial Lawyer Association gutted tort reform in Sacramento, Genentech suspended its AIDS vaccine research for a couple of years, then resumed after a favorable court ruling.

What rattles vaccine makers is the prospect of getting sued not just for genuine side effects, but for imaginary ones as well. If a thousand unborn children of drug-abusing mothers are given shots to protect them from HIV, a certain number will be born with brain damage no matter how innocuous the serum. And every one is a potential big-ticket lawsuit.

It's happened before. "Whooping Cough Vaccine Found Not to Be Linked to Brain Damage," the New York Times reported in 1990, but by that point trial lawyers had reaped fortunes saying it was. With huge defense costs, no loser-pays rule in American courts, and a given random factor in jury outcomes (even trial lawyers must doubt their jury-infallibility theory after recent California events), bringing false but plausible-sounding speculations to court can pay good money.

"Is tort reform possible so long as certain lawyer groups exert so much influence over the Legislature?" the San Diego Union-Tribune asked Peter Ueberroth. His reply: "Anything is possible in this country if enough people care about it."

*According to the Ueberroth report, the United States has 281 lawyers per 100,000 population, Germany 111, Britain 82, and Japan 11.