In these pages five years ago, I wrote about how the mere threat of lawsuits fills corporate boardrooms with what George Priest of the Yale Law School calls “the fear of the nuclear-bomb verdict.” The collateral damage that baseless lawsuits can do to corporate brand equity, innovation and R&D is devastating. Now a new, much bigger risk is becoming apparent—how excessive litigation weighs down the nation’s sputtering economy.
Tillinghast-Towers Perrin estimates the conservative direct cost of lawsuits to be $246 billion, or $845 for every American consumer, twice the cost of that of our nearest national competitor. One of our partners, Pacific Research Institute, has determined in a sequence of reports that indirect lawsuit costs are more than double that amount. When you consider the declining value of the dollar and the devastation America’s business reputation has undergone of late, our litigation system is yet another reason for international capital to seek returns elsewhere.
If tort costs continue their recent torrid trajectory, the Manhattan Institute estimates the overall cost of this “tort tax” on our economy over the next 10 years will be more than $4.8 trillion. Added to the weight of our existing borrowing, the drag of the personal injury bar’s invisible hand on future economic growth will be overwhelming. As a result, the U.S. as a whole faces the same dire consequences as corporate America. Research shows that as much as 96 percent of a company’s stock market valuation is determined by that company’s brand value. In a similar way, the U.S. enjoys foreign lending on the basis of our brand reputation. We are the world’s preferred venue for investment—and the dollar is the world’s reserve currency—so long as we are seen as a stable country under the rule of law.
Just as the meltdown of the U.S. financial sector and size of the U.S. debt demonstrate the frailty of our finances, so, too, does our country’s refusal to engage in serious legal reform put Brand America at risk . Take healthcare. You would think that current cost-control measures would include medical malpractice reform that would reduce defensive medicine and save (according to an HHS report) $60–$108 billion a year. And yet legal reform is nowhere to be found in the several healthcare “solutions” now making their way through Capitol Hill.
Perhaps it is time for those in Washington to look to the states for leadership. They would do well to follow the example of Mississippi, which enacted reform and is now enjoying far faster recovery from Katrina and recession than anyone expected. Governor Haley Barbour continues to report declining costs and improved access to care and services and, as a result, the state is weathering the recession better than most.
While Washington continues its endless debates, our nation’s economy continues to sputter. Meanwhile, state governors and legislatures have acted, showing the simple and easy way forward: The rule of law is vital in protecting American free enterprise.
Steven B. Hantler is chairman of Foundation for Fair Civil Justice, a coalition of 65 national and state organizations. Until his retirement from Chrysler LLC, Hantler served as assistant general counsel for government and regulation.