How Our Civil Justice System Protects Consumers
Why We Have a Tort System
In recent years, America's civil justice system has come under attack from conservative politicians and corporate lobbyists. It is a tempting target. The caricature of the sleazy personal injury lawyer was iconic even before 1965, when Walter Matthau portrayed the ultimate ambulance-chaser in The Fortune Cookie. The media periodically unearth oddball lawsuits for "lighter side of the news" roundups. Late-night TV comedians recycle jokes themed on greedy lawyers and plaintiffs in much the same way that mother-in-law and drunk jokes were fodder a generation ago.
These images allow popular discourse on our legal system to be dominated by anecdotes and spurious arguments. But underneath the rhetoric, there are compelling reasons to maintain the legal system that has evolved over hundreds of years.
Tort law is the body of law governing compensation for wrongful acts. It plays an important role in maintaining public health and safety. Occasionally, as a result of human greed, sloth, or stupidity, an otherwise useful activity will result in an injury to someone. Examples range from the careless truck driver who strikes a pedestrian, to the careless doctor who amputates the wrong limb, to the profit-driven corporation that disregards information about its products' safety, resulting in an exploding vehicle or drug with deadly side effects.
The tort system, by requiring the responsible party to bear the costs of those injuries, creates incentives to take care to prevent such injuries. In economic parlance, it requires each of us to internalize (pay for) the costs of our carelessness.
The goal of the tort "reformer" is to allow businesses to externalize, or shift, some of the cost of the injuries they cause to others. For instance, a law limiting recovery of damages to $250,000 would require a business to bear some of the costs of an injury, and leave the remainder of the costs to be borne by the victim or government assistance programs. Under this scenario, the business can reduce the level of precautions it takes to avoid harming others. By saving the costs of these precautions, the business can make its products seem artificially less expensive.
Tort law always assigns liability to the party in the best position to prevent an injury. In some cases, this is the plaintiff himself. If damages are caused by both a plaintiff's and a defendant's negligence, the plaintiff's damages award will be reduced, usually by the percentage he was at fault.
Manufacturers of products are held strictly liable (liable without proof of negligence) for defects that cause harm. This is because the manufacturer usually has more information about product safety, or better opportunities to learn about its products' safety, than does a consumer. Strict liability is also imposed upon sellers, such as retailers, because they too are in a better position than consumers to know about the safety of products they sell.
Contract law is important to both businesses and consumers. The courts' enforcement of contracts is the foundation of our market economy. In order to produce goods and services, or extend credit, businesses need to know that customers will keep their promises to pay. Consumers, meanwhile, need to know that their reasonable expectations will be met - that goods will not be shoddy, that services will be performed in a professional manner, and that the seller has told them the truth.
Experience has shown that businesses do not always keep their end of the bargain. Sometimes a breach of contract can be devastating, as when an HMO fails to provide necessary medical treatment to a patient. Other times, the breach can be very small, such as an extra $10 or $20 added to a credit card bill or real estate settlement, but amount to large losses to consumers in the aggregate. In either event, it is important that consumers have full and unimpeded access to the courts to hold the business accountable.
Several years ago, corporate lobbyists circulated a paper on the "Tort Tax" an amount they contended that every American pays "to support the lawsuit industry." The authors added up the costs of all liability insurance premiums paid in the United States to reach a figure of $163 billion.
In fact, this is a deliberate mischaracterization of litigation costs. The bulk of the money collected by insurance companies is paid out in claims. This money represents not the costs of litigation but the costs of injuries that are being compensated through insurance. Even if there were no liability for the injuries, the costs would still be incurred, but shifted to the injured persons, their family and friends, or taxpayers, instead of the responsible party. What's more, the costs would be much higher, because without liability there would be no incentive to take precautions for the safety of others. Thus, instead of being reflected in the price of liability insurance, the costs would be reflected in your own insurance (health, accident, disability) bill and would be substantially more; or would go uncompensated.
Insurance premium prices also reflect the transaction costs of litigation. These are the costs incurred while determining whether a defendant is liable. They include plaintiff's and defendant's attorney fees, investigative costs, expert witness fees, insurers' overhead costs, and the costs of maintaining the court system. A study by the RAND Institute in 1985 found that transaction costs in the average lawsuit can be quite high.
Since the release of that report, numerous efforts have been made to reduce transaction costs. Insurance companies have instituted new methods of controlling their legal costs (said, in 1985, to constitute about 16 percent of total expenditures) by carefully tracking the performance of their lawyers. Meanwhile, academics and other experts have engaged in constant research and experimentation to reduce overall transaction costs through procedural and case management reforms. While RAND has not repeated their 1985 study, it is probably safe to assume that over the subsequent decade and a half, transaction costs have significantly dropped.
Economists have hypothesized the existence of incentive costs of litigation - inefficient or unnecessary expenditures of resources meant to avoid potential lawsuits. An example of this would be "defensive medicine," where risk-averse doctors order unnecessary tests and procedures to bolster their defenses to lawsuits.
We believe that phenomena such as defensive medicine are rare. In the years since that practice was identified, health insurance has shifted from a fee-for-service to a capitation (managed care) basis, so doctors can no longer pass along the costs of unnecessary services to others. In fact, there are very few circumstances in which this can be accomplished. Generally speaking, most people and businesses will direct an appropriate amount of resources to precautionary measures.
Some commentators have suggested replacing the tort system with no-fault compensation in an effort to reduce transaction costs. It is conceivable that eliminating litigation over fault could result in savings. However, once the threat of being sued is removed, there will be fewer incentives to take safety measures. Thus, for net savings to be realized, the reduced transaction costs must exceed the increased costs to society resulting from more injuries and deaths.
More importantly, the raw numbers of savings, as calculated by an economist, would fail to account for the diminished quality of life we would experience if many more of us were killed or seriously injured due to negligence or other wrongful conduct. The economist can put a dollar figure on the value of a life; and juries can even put a dollar figure on the grief we experience when a parent, spouse, or child is taken from us. But for most Americans, the dollar amounts would not accurately compensate for things like health or companionship that we find priceless.
Some commentators argue that jury awards are too high. This raises the question: Compared to what? Jury awards sometimes seem excessive because every jury issues an individualized determination of damages. Some elements of damages, such as medical bills and lost wages, can be determined objectively. Other elements, such as pain and suffering or disfigurement, are more subjective. Damages vary greatly from case to case, and in cases of serious injury can be very high.
An alternative approach would be to leave determination of compensation to an administrative official. This approach was recently taken by Congress in compensating victims of the September 11, 2001 terrorist attacks. The special master designated to decide the damage amounts surprised observers by announcing that he would use a schedule to determine awards, rather than make an individualized determination. This, he said, would even out disparities in awards given to rich and poor victims. Many victims' families immediately protested that their lost loved ones would not be treated as individuals. Needless to say, the families of victims of the Oklahoma City terror attack were upset that they did not qualify for compensation at all.
These conflicts demonstrate the advantage to having juries apply general standards to specific cases. Under tort law, every victim's case is governed by the same principles, but with their unique circumstances given due consideration. Rather than just one person mandating the amount of damages, potentially imposing an idiosyncratic view, the jury system allows twelve randomly selected people to weigh in and reach consensus. This is why our nation's Founders enshrined the civil jury in the Bill of Rights.
Punitive damages are awarded in especially egregious cases. They are controversial, because we are accustomed to punishment being meted out under criminal law. Why do civil juries have the power to award punitive damages in addition to compensation?
A number of theories have been advanced to justify punitive damages, but one is the most compelling - that they will deter future misconduct that might result in injury or death. It is possible for companies to project dollar amounts of future compensatory damage awards, and to thereby apply a "cost/benefit analysis" to a decision to fix an unsafe condition or cease a fraudulent practice. This type of calculation was seen in the infamous "Ivey Memorandum." In this memo, a General Motors executive estimated the costs to the company of fixing its autos to prevent crash-related fuel-fed fires. Ivey's analysis placed a "value" on each "fatality" and multiplied the number of fatalities per automobile manufactured to reach a figure of $2.40. The memo implied that if it cost more than $2.40 per automobile to fix the problem, then GM should not bother making the correction.
Punitive damage awards make it impossible to engage in such cold calculation. Punitive award amounts cannot be anticipated in advance, and a jury can always fix a punitive amount sufficient to render a cost/benefit analysis meaningless.
The business community has often claimed that punitive damage awards are too arbitrary or too high.
Are punitive damage awards getting higher? Conservative commentators have argued that punitive damage awards are "skyrocketing." Many other commentators have embarked on research in an effort to show that punitive awards have remained stable. In fact, award amounts probably are getting higher as a result of the increased value that Americans place on human life and dignity. Thirty years ago, our society accepted the fact that over 50,000 men could die in a war overseas. Today, Americans have demanded that war casualties be kept to a minimum, or even zero, if possible. Given modern technological capabilities, we rightly expect that every possible effort will be made to protect us from unnecessary injuries. These values are reflected in punitive damage awards just as they are in a president's determination whether to risk the lives of military personnel.
Of course, every defendant is entitled to due process. There have been abusive punitive damage awards in the past, as demonstrated by several instances of civil rights leaders being hit with huge awards by all-white Southern juries in the early 1960s. The question is one of how best to protect defendants' rights without also defeating the ability of punitive awards to deter misconduct.
The business community has argued that placing a cap on punitive damages is the best way to achieve fairness. We believe that caps will defeat the purpose of punitive damages, by allowing corporations to figure them into the cost of doing business. A much better safeguard is the case-by-case review of awards that is currently undertaken by trial and appellate judges. These judges have either heard the evidence in court or reviewed a transcript of the trial, and can determine whether a jury's verdict was reasonable or motivated by passion and prejudice. In practice, it is not unusual for judges to reduce awards that are unreasonably high, but the review process still allows just enough "arbitrariness" to create a disincentive for disregarding safety.
The tort system prevents the marketing of unsafe products. By requiring manufacturers to internalize the costs of injuries caused by their products, they must build such costs into a product's price. If that price would exceed what a consumer is willing to pay for the product, the company will not make the product.
This may have been the case with general aviation aircraft, the small planes flown by private pilots. Manufacturers lobbied for passage of the General Aviation Revitalization Act in 1994, which now immunizes them from liability for defects in planes that are more than eighteen years old. This means that manufacturers may produce planes with "planned obsolescence"- planes that deteriorate and become unsafe after the statutory period expires.
The transaction costs of litigation must also be added into the price of a product. This is unfortunate; however, the alternative is equally unpleasant. If there were no litigation over where to assign blame for an injury, there would be no incentive for corporations and professionals to take safety precautions.
Most tort law is formulated and applied by state courts. The common law- legal decisions by judges that set precedents followed by later courts' is supplemented by laws passed by state legislatures.
When Congress considers pre-empting state laws, it must strike the appropriate balance between two competing values - local control and national uniformity. Local control is an important value because we all believe, as did the Founders two centuries ago, that state governments are closer to the people and better able to assess local needs and desires. National uniformity is also an important consideration in federalism - Congress' exclusive jurisdiction over interstate commerce has allowed our economy to grow dramatically over the past 200 years.
A Harvard political science professor, Paul Peterson, has laid out a formula for addressing this issue, which he calls the Functional Theory of Federalism. Under this theory, policymakers take into account the value of the diversity in state policies that our federal system allows.
The first part of the theory involves choice. Each state can adopt policies in accordance to its needs and its voters' preferences. People in different states have different ideas about making injury claims, and state laws differ slightly in accordance with the people's preferences. The Dakotas have the smallest rate of personal injury claims per auto accident- only about 6 claims per 100 car wrecks. California has the highest rate, about 60 injury claims per 100 accidents. The national average is about 30. For some reason, people in the Dakotas are willing to pick themselves up, dust themselves off, and forget about a minor injury. And that's probably why South Dakota still adheres to a contributory negligence rule that prohibits even a slightly negligent plaintiff from recovering damages. In California, for whatever reason, people get riled up about bad drivers, and want to vindicate their rights. That's probably why California voters have rejected ballot measures that would limit liability.
There are some areas of law where uniformity is necessary. We know that the right to travel within the United States is a precious constitutional guarantee. All would agree that an African American should enjoy the same right to use public accommodations in Alabama as he or she would in Illinois. We know that the segregated hotels and restaurants in the South inhibited the free movement of citizens, and uniform federal legislation was an absolute necessity. But does Alabama tort law impede the free movement of people and goods in interstate commerce? Alabama is viewed as our most pro-plaintiff jurisdiction, yet there's just no evidence of an impact on commerce. Even though one German auto manufacturer was hit by a stiff punitive damage award by an Alabama jury, it did not prevent another German carmaker from building a plant there.
Actually, Alabama's laws are not all that different from those of other states. While Alabama is viewed as tough in assessing punitive damages, it also has a defendant-oriented contributory negligence rule. Rules that were viewed as too pro-plaintiff, such as the ex parte class action certification, have been changed. Why is it that, on the whole, Alabama is as balanced as other states? This is where the second part of Peterson's theory comes in. Peterson says that states' decisions "are disciplined by market forces as well as by political pressures." In other words, states compete with each other to provide the proper mix of laws relating to economic development that will attract both residents and business investment. Two examples demonstrate how states' own incentives to foster local development lead them to examine their liability policies. In January 2002, the U.S. Chamber of Commerce released a poll of corporate lawyers that asked them which states had the "best" and "worst" civil justice systems. At the top of their list was Delaware, a state that has always made a special effort to induce businesses to incorporate there. At the bottom was Mississippi, whose state legislature only days later decided to study the issue.
The third part of Peterson's theory involves "laboratories of democracy," by which states can test out policy innovations, and provide a model- or a red flag- for sister states. We have states with unlimited punitive damages, states with caps on punitive damages, and states with no punitive damages. There are states with no-fault auto insurance as well as states with tort auto accident compensation. States can observe whether and how different policies work, and adopt them if they seem good, reject them if they seem bad.
As an organization dedicated to defending public health, safety, and the environment, Public Citizen favors a strong and accessible civil justice system. Tort law is one of three prongs of an overall health and safety system, which also includes regulation by government agencies, and consumers making informed choices in the marketplace. None of these three elements alone is sufficient to prevent hazards. Instead, all three must act in concert.
April 29, 2002