Meritless lawsuits and inappropriate damage awards undercut America in the global marketplace by raising the prices of U.S. goods.
Litigation costs the country far more than it costs our competitors, as much as five times more than in the United Kingdom or Germany and seven times more than in Japan. At the same time, U.S. litigation practices restrict innovation, the engine of American competitiveness.
The accounting profession is in the front ranks of those affected by runaway litigation. The Big Six firms spent 9% of their auditing and accounting revenues in the United States - about $477 million in 1991 alone - on legal expenses.
And based upon reported settlements through June 30, no end has appeared in the steady upward spiral of litigation affecting the profession.
Measuring Overall Costs
Some second-tier accounting firms have failed. Firms of every size are limiting services and turning away audit clients.
But the impact of unrestrained litigation goes far beyond the financial drain on accounting firms. The total cost to the country is staggering.
A recent estimate in Forbes, based on an independent study, indicated $184 billion in direct costs last year. Indirect costs (of unnecessary medical tests to avoid the threat of malpractice suit for example) are higher still approaching 10% of our country's gross national product.
The tab for fighting settling, and avoiding lawsuits is passed on to consumers. In effect, it's a tax we all pay for the enrichment of a few.
In Search of Fairness
Of course, those who do wrong should pay those they have wronged. That's only fair. But in reality, those who've done nothing wrong often are forced to pay damages anyway. And that's not fair.
Take the matter of stock-volatility lawsuits. A stock falls in value. Stockholders sue to recover their losses, claiming they were misled as to the company's condition and prospects.
Sounds reasonable. But in fact, these suits are often driven by lawyers who pay bounties to shareholders to join in class actions.
A recent study of initial public offerings by Silicon Valley computer companies published in the Stanford Law Review found that such suits were filed whenever stock prices declined enough to lead to comfortably large attorneys' fees. Settlements were reached in virtually every case, regardless of the underlying merits.
Defendants found it cheaper to settle than fight, given lawyers' fees, potential liabilities, the high cost of insurance premiums, and other economic realities. The study's author wrote:
"We have what amounts to a grotesquely inefficient form of insurance against large stock market losses by giving investors, in effect, a legally mandated |partial put' that entitles them to recover a portion of such losses from insurers. The social value of a system of compulsory insurance for market losses is dubious at best."
This use of litigation to recover ordinary business losses is only part of the equation.
Add lawyers' contingency fees, the "joint and several" rule that allows lawyers to go after any deep-pocket defendant for the full amount of a loss regardless of degree of responsibility, the huge legal costs than even successful defendants must absorb, and other institutional features of the American system.
The sum: an environment that makes it all too easy and all too profitable to sue.
These conditions strike at the innovative core of U.S. industry and competitiveness.
Innovation is speculative an volatile by nature, and volatility attracts litigation. Start-up companies, especially those in hightech industries like computers and biotechnology, are particularly vulnerable.
The threat of litigation frightens away capital for new ventures, makes audits difficult for emerging companies to obtain, and makes it harder for them to attract the most qualified people to their boards of directors.
The threat of litigation also causes established companies to restrict research and to withhold improved technologies from market.
Forbes mentioned advances in toxic-leak detection and small-aircraft technology that have been held back to avoid potential liability costs.
And an article in Science noted that pharmaceutical companies had shelved promising research in vaccine development for fear that damaging lawsuits would be filed - whether or not the resulting products were responsible for injuries that might be claimed.
Remedies have been proposed to curb litigation excesses.
Imposing Costs on Frivolity
Fee shifting, in which those who bring frivolous claims must pay the winner's attorney fees, would deter meritless suits and encourage defendants to fight baseless accusations. And a proportionate liability rule would allocate damage fairly, based on a defendant's degree of fault.
Legal standards could be made clearer to distinguish between unintentional misrepresentations and deliberate fraud. Outright litigation abuse, moreover, such as lawyers' "hiring" class-action plaintiffs, could be prohibited.
But these changes are opposed by legal groups with their own interests at stake.
And so the question remains: Should American business and the American public have to pay so much for litigation that penalizes innovation, undermines competitiveness, and places an unfair financial burden on certain defendants?
With costs rising at an average of 12% a year, the problem is growing rapidly more acute. It's time we all took a hard look at the issue and put the brakes on runaway litigation.