« How Employers Are Forced to Hire Murderers and Other Felons | Main | Don't Steal This Book »

A Small Canadian Firm Meets the American Tort Monster

[Originally appeared in the Wall Street Journal, February 14, 1996]

Mississippi doesn't run a state lottery, but it won't ever feel the lack so long as its juries hand out $500 million jackpot awards like the one that just missed bankrupting Loewen Corp.

The British Columbia-based funeral-home chain has emerged from what Reuters called "a small company's worst nightmare" -- complete with stock crash to $8 from $41, publicity about its supposedly "seamy" practices and an extorted settlement on the steps of bankruptcy court. Founder-chairman Ray Loewen says that after surviving this "terrible travesty of justice," with its "outrageous" and "incomprehensible" damage award, his firm "will do everything we can to help the tort reform movement across the United States."

It all began in what seemed a routine contract squabble. The fast-growing Canadian firm, which had bought local funeral homes in Mississippi, found itself sued by Jerry O'Keefe, a former Biloxi mayor and owner of several funeral homes, after it ended his exclusive right to sell funeral insurance in the homes that Loewen had bought. The parties settled by agreeing to cut O'Keefe in on the action: Loewen would buy two of his funeral homes and the two rivals would combine funeral-insurance operations. But during the due diligence process Loewen backed out. The O'Keefe group went back to court, this time charging fraud and antitrust violations.

Things still seemed pretty low-risk at this point: Loewen estimates the funeral homes and related enterprises at stake were worth $ 8.5 million, and in fact turned down a chance to settle the case for a few million. Then what a Loewen exec calls "a very clever, percentage-fee lawyer" got his hands on the case. Peter Hyndman, Loewen's corporate secretary and legal officer, told the Canadian press that the strategy was to "incite" the jury. "Much of the plaintiff's case was not about contractual matters, but an attempt to paint our company as ruthless predators oppressing the poor people of Mississippi."

That strategy worked. After a seven-week trial, the jury picked $100 million and $400 million as suitable numbers for compensatory and punitive damages, sums that would wipe out most of the Canadian firm's net worth. The damage figure "is Alice in Wonderland -- it's beyond belief," goggled stock analyst David Jarrett of Gerard Klauer Mattison & Co. in New York. A bond downgrade and stock crash followed.

Defenders of the litigation biz like to point out that judges can reduce or set aside excessive verdicts. But presiding state judge James Graves Jr. refused to do either, and the Mississippi Supreme Court ruled that if Loewen wanted to pursue an appeal it would have to post a bond for 125 percent of the award -- $ 625 million -- within a week. Needless to say, Loewen decided it would be prudent to settle. To get out of the litigation, the firm agreed to pay well over $100 million -- $50 million cash, 1.5 million newly issued shares of its stock (which has recovered to $27) and annual payments of $4 million for 20 years. The threat of bankruptcy was what allowed the firm to settle even this cheaply.

Ambitious trial lawyers will wonder: How can I bring this kind of success to my own practice? Helpfully, the Vancouver Sun has published extracts from the closing arguments of winning plaintiff's counsel Willie Gary:

* Hype pain and suffering. Seasoned businessman though his client may have been, his damages included not only business losses but an "awesome" amount of mental anguish and emotional distress.

* Dump on outsiders. Decorated war veteran Mr. O'Keefe "fought for his country" and was now willing to "stand up for America" by suing this rich, foreign company. You'd have thought World War II was waged against the Mounties. The lesson wasn't lost on the Canadian press: "Mississippi and Alabama have developed reputations as dangerous places for out-of-state corporations" which "have been hit with large punitive damages in seemingly minor cases," observed the Montreal Gazette. In October, another Canadian company, Crown Life Insurance Co., under siege from a $50 million Texas jury verdict and two dozen other state-court suits, actually went so far as to declare itself a "foreign state" after a quick move in which the provincial government of Saskatchewan bought stock in its parent. If successful, the maneuver will let Crown get into federal court and avoid future jury trials.

Ironically, many Canadians already viewed Loewen as an American company in all but name: it reports financial results in U.S. dollars, reflecting the fact that 90 percent of its revenues come from south of the border, along with the great bulk of both its 10,000 employees and the investors who got dunked for such huge sums.

* Pound the table over conduct that couldn't have hurt your client. Mr. O'Keefe would have lost if Loewen had slashed prices, but instead the newcomer tried to move its homes upmarket by introducing more expensive caskets and the like. "Taking advantage of the needy and downtrodden" was the way plaintiff's counsel Michael Allred puts it, but somehow magically transmutable into damages payable to the affluent Biloxian and his lawyers.

* Play the race card. Loewen thought it might get points with the two-thirds-black jury by citing its exclusive cooperation arrangement with the largest black church group, the National Baptist Convention. This was naive. Mr. Gary simply established that other partners had negotiated more favorable terms. "This is money they're going to get off 8.2 million African-Americans, a contract that was clearly without question unfair to those members, and you know it."

* Cash in your "promise". In many state courts, lawyers screening prospective jurors can get them to "promise" they'll vote a certain way. Mr. Gary: "You said you'd do it, you did, members of the jury....I asked if anyone here, if you felt comfortable sitting on a case that could exceed $ 850 million, raise your hand, and without hesitation, all 12 of you, you raised your hands."

Amazingly, a federal advisory panel is actually proposing rules that could bring such state-court abuses to the federal courts by ensuring lawyers there a right to grill prospective jurors directly rather than, as is now usual, through a judge. March 1 is the deadline for written comments to be sent to Peter G. McCabe, secretary of the Committee on Rules of Practice and Procedure, Administrative Office of the U.S. Courts, Washington, D.C., 20544.

If anyone cares to prevent future outrages like the one that laid Loewen low, derailing this idea might be a good place to start.