Results matching “lawsuit abuse reduction act”

House Continues Push for Reform with LARA - PointOfLaw Forum

Vinny Sidhu
Legal Intern, Manhattan Institute's Center for Legal Policy

Following on the heels of its passage of the FACT Act last week, the House took up the issue of lawsuit abuse more broadly:

On Thursday, November 14, the Lawsuit Abuse Reduction Act (LARA), H.R. 2655, was passed by the U.S. House of Representatives on a 228-195 vote. LARA is designed to curb the filing of frivolous lawsuits by restoring mandatory sanctions (e.g. payment of attorney fees) where a court determines a claim to be frivolous. It would amend Rule 11 of the Federal Rules of Civil Procedure to provide for mandatory sanctions and also eliminate the "safe harbor" provision which currently allows parties to withdraw a frivolous claim within 21 days without consequences.

From a procedural standpoint, this bill would streamline the Rule 11 process by delineating a bright-line rule for remedies if a claim is deemed frivolous. This would allow for increased judicial economy in the decision-making process, because judges would not have to spend additional time determining whether sanctions are appropriate for a given case. Instead, the focus would shift strictly towards determining the appropriate size and scope of the sanctions.

From a substantive standpoint, the Rule 11 reform would create greater certainty of consequences for the claimant. Because the claimant knows that an initial ruling that a claim is frivolous leads to mandated sanctions, the subjectivity of the judge's view on whether sanctions should be applied becomes irrelevant.

At the same time, because the judge retains subjectivity as to the breadth of the sanctions, the claimant does not have the variables necessary to measure whether it still might be worth it to bring a claim or group of claims. As a result, the claimant would naturally be reluctant to bring a substandard claim in the first place, especially because the removal of the safe harbor provision would make it even riskier to do so.

By Richard A. Epstein

On Thursday, July 18, Texas Republican Congressman Jeb Hensarling will hold hearings on his "Protecting American Taxpayers & Homeowners Act." The PATH Act contains many forward looking proposals, on which I have no comment. But on this occasion, I want to focus on one key feature of the Act, which is only obliquely revealed by the statutory title. Mr. Hensarling shows great solicitude for American taxpayers and homeowners. But in a telling omission, he gives the back-of-the-hand treatment to the preferred and common shareholders of Fannie Mae and Freddie Mac, (commonly called Government Sponsored Entities or GSEs). In the interest of full disclosure, let me state for the record that I have advised several hedge funds on the merits of the PATH Act, and on the parallel bipartisan legislation that Tennessee Republican Senator Bob Corker called the Housing Finance Reform and Taxpayer Protection Act of 2013, both of which are designed to wind down the operations of Fannie and Freddie.

Liquidating Fannie and Freddie The source of my concern with Mr. Hensarling's proposed legislation involve sections 103 and 104 of the Act, which, according to its legislative summary provides for "Termination of Conservatorship," such that "Five years following the date of enactment mandates the appointment of the Federal Housing Finance Agency (FHFA) director to act as receiver for each Enterprise (i.e. Fannie Mae and Freddie Mac) and carry out receivership authority." Section 104 then provides for declining maximum amounts that GSEs shall be entitled to own over the five-year transitional period before these entities are liquidated.

In one sense, the demise of Fannie and Freddie should not be lamented, after the long and sorry history of massive government intervention in their internal affairs that created serious dislocations in the marketplace in 2008, including, most notably, the Congressional insistence in 2007 that Fannie and Freddie issue some $40 billion in subprime loans. As a result of these actions, both GSEs suffered major losses during the early part of 2008, not unlike those suffered by other private companies. The nature of these actions are outlined in a complaint attacking the various government actions filed in Washington Federal v. U.S. in June 2013.

Therein hangs the following tale, which leads to the Hensarling hearings. Although not widely known, both GSEs are as organized as corporations whose shares are privately owned and publicly traded. The independence of these corporations was effectively ended in July 2008 when Congress passed the Housing and Economic Recovery Act of 2008 (HERA), which forced both companies, while still solvent and flush with liquid assets that could be either sold or mortgaged, into a conservatorship that was overseen by an agent of the United States, FHFA. I have described much of the early operations of HERA in my Defining Ideas column Grand Theft Treasury. The title summarizes my deeply critical attitude toward this problem.

In September 2008, the FHFA, as conservator of these GSEs, entered into a deal with the United States Treasury to organize a bailout of these still solvent entities. First, FHFA issued to the Treasury a new 10 percent perpetual senior preferred stock for which Fannie and Freddie over time received in exchange about $187 billion in fresh capital. As part of the deal, the Treasury received warrants to purchase 79.9 percent of the common stock at a nominal price of $0.00001, effectively wiping out most of its value. The now junior preferred stock remained on the books but had sharply diminished value. Clearly, the net benefits from this initial bailout were set by the Treasury, which exercised its power to buy into these GSEs at prices highly favorable to itself. At no point did the former directors of either GSE have any say on the terms of the deal. Essentially, the United States was on both sides of the transaction in a clear breach of the standard rule that all self-dealing transactions must be scrutinized to determine whether the shareholders' conservator provide them with fair value.

The Dubious 2012 Amendments to the 2008 Agreement Fast forward now to August 2012, at the start of the housing market recovery. At this time, FHFA and the Treasury entered into their Third Amendment to the 2008 Agreement which provided that "all positive net income each quarter will be swept to the Treasury." It is important to understand the unprecedented magnitude of this Amendment. At the time, Fannie and Freddie had returned to profitability and were thus able to pay both the interest on the Treasury's senior preferred stock and return some of the $187 billion that the Treasury had contributed to the both GSEs. This Third Amendment in effect stripped all the cash out of these companies and gave it to the United States as a "dividend" on its investment, with no reduction in principal.

Any sensible person would instantly realize that the unilateral variation in terms was not done to aid the private shareholders of Fannie and Freddie, but was intended to transfer all their wealth to the government whose crude contractual "amendment" violates the first principle of contract law: A and B may never enter into a contract that binds C without C's consent. What is truly amazing is the spin that Mr. Hensarling puts on this so-called Amendment in a document described blandly as PATH Act Questions & Answers:

Some are arguing that Fannie and Freddie have begun paying a financial benefit to taxpayers. While it's true that both companies had positive net income for the last three quarters of 2012 and have made $65.2 billion in dividend payments, these statistics don't give a complete picture of their financial situation. It is important to note that under the GSEs' contact with the federal government, these dividend payments cannot be used to offset prior Treasury draw, so that regardless of how much is paid out in dividends, the GSEs still owe taxpayers $187 billion in bailout funds borrowed And since their contracts with the federal government state that all positive net income each quarter will be swept into the Treasury as a dividend payment, in their current state the GSEs will never be able to repay that debt to the taxpayers.
His "complete picture" of the financial deal is replete with half truths. It would help if Mr. Hensarling noted that he was speaking of the August 2012 Third Amended Agreement, which was signed only by two government operatives, then acting director Edward J. DeMarco of FHFA and Timothy Geithner, then Treasury Secretary. "Their contracts" with the federal government are not "their" contracts. They are just "contracts" that the government has entered into itself. The simple point here is that neither government agency represented the GSEs's shareholders who assets were stripped bare by government actions. Of course, the companies cannot pay back the debt because the government has seized all the assets that would allow that result to happen.


The Four Lawsuits It is no surprise that this highhanded action has attracted four major lawsuits in recent weeks. In addition to the Washington Mutual case, plaintiffs filed suits in Fairholme Funds, Inc. v. FHFA, (with Charles Cooper as lead counsel), Perry v. Lew(with Ted Olson as lead counsel) and Cacciapelle v. U.S., (with David Boies as lead counsel), attacking these sweetheart agreements and administrative shortcuts.Taken as a unit, these four lawsuits highlight three fatal flaws of the corrupt government deal of August 2012.

The first involves the blatant breach of the FHFA's duty of loyalty to the GSE shareholders, for whose sole benefit this arrangement was imposed. No fiduciary, government or private, may engage in collusive self-dealing that results in a huge one-sided giveaway of all corporate assets. FHFA is not exempt from this bedrock rule. Second, the Treasury's major abuse involves its conscious disregard of the explicit protections for GSEs built into Section 1117 of HERA. For starters, that section gives the Treasury only "temporary authority to purchase obligations and securities" up to December 31, 2009. That authority certainly did not allow the Treasury to engineer its one-sided 2012 sweep, except on the absurd premise that the statutory authorization to "buy" before 2010 implicitly authorizes outright government expropriation of GSE assets after 2009.

To be sure, the Treasury's temporary authority instructs it to "protect the taxpayer," and so it should be. But the phrase must be read in context. This instruction is meant to prevent the GSEs from ripping off the U.S. with one-sided deals. By no stretch of the imagination does that phrase authorize the U.S., in the name of taxpayers, to rip off GSE shareholders. Explicitly, HERA's statutory mandate only invites the Treasury to determine such financial matters as the maturity and risk of these notes, with the eye to making deals that allow for "the orderly resumption of private market funding or capital market access." However, the Treasury has not uttered a single syllable to explain why it's necessary to wipe out GSE shareholders by sleight of hand when ample funds are available to repay, with interest, the full $187 billion advance to these GSEs. Its brief public comment to date has echoed the point that it advanced $187 billion to Fannie, as it were, to maintain the solvency of both GSEs and protect the broader economy. The Treasury's email said "We fully believe our actions have been lawful and appropriate," without of course referring to the details of the Third Amended agreement. The normal tradition of judicial deference to administrative decision only applies to cases where there was reasoned elaboration before the government. It does not attach to imperial actions that are taken without public notice or comment or reasoned explanations.

Third, by stripping the GSEs of their assets by these verbal machinations, the Treasury and FHFA have taken the property of the shareholders--the corporate assets--without paying a dime in constitutionally required compensation. Remember, both Fannie and Freddie were solvent at the time of the August 2008 takeover, notwithstanding their previous run of losses. If the United States is allowed by fiat to throw solvent firms into government receivership, the Treasury's tortured logic would routinely allow the government to force any profitable corporation into receivership, thereafter to force a one-sided renegotiation of contracts that offers it huge dividends on nonexistent investments.

This logic holds even on the dubious assumption that that the GSEs got fair value for their perpetual 10 percent preferred stock. If so, proper accounting procedure requires the Treasury to first credit distributions to its 10 percent interest on the unpaid balance, using the remainder to pay down principal. By rough calculations, about $50 billion of the money paid to the Treasury should have paid down the debt, which would then decline from about $187 billion to approximately $137 billion. In effect, the desired remedy only requires courts to take the unexceptional position that the government cannot escape all of its fiduciary, statutory and constitutional obligations by re-labeling a return of capital as a dividend.

Ominous Long Term Implications The availability of a simple account fix to government overreaching lays bare the inexcusable workings of the Treasury's one-sided deals. Ironically, Mr. Hensarling's conscious effort to undermine property rights works at cross-purposes with his larger, laudable objective of trying to rid housing markets of their past, massive irregularities in order to encourage more private investment. What private fund will invest in projects when their cash can be siphoned off by dubious contractual liberties and administrative shortcuts that make a mockery of the rule of law? Why force hedge fund investors to bear losses created by a government money grab that wipes out all of the shareholders' legitimate anticipated returns? Prompt action is needed to stop Mr. Hensarling before his populist express gives us a rerun of the Chrysler and General Motors political bankruptcies about which I have written elsewhere. But if courts don't invalidate the government's contractual gimmicks and administrative shortcuts, this is exactly what will happen.

Richard A. Epstein is a professor of law at NYU Law School, a Senior Fellow at the Hoover Institution, a Senior Lecturer at the University of Chicago and a visiting scholar with the Manhattan Institute's Center for Legal Policy. His forthcoming book is "The Classical Liberal Constitution," from Harvard University Press in 2013. He has consulted for several hedge funds not involved in the ongoing litigation on the issues discussed in this Op-Ed.


On Thursday, July 18, Texas Republican Congressman Jeb Hensarling will hold hearings on his "Protecting American Taxpayers & Homeowners Act." The PATH Act contains many forward looking proposals, on which I have no comment. But on this occasion, I want to focus on one key feature of the Act, which is only obliquely revealed by the statutory title. Mr. Hensarling shows great solicitude for American taxpayers and homeowners. But in a telling omission, he gives the back-of-the-hand treatment to the preferred and common shareholders of Fannie Mae and Freddie Mac, (commonly called Government Sponsored Entities or GSEs). In the interest of full disclosure, let me state for the record that I have advised several hedge funds on the merits of the PATH Act, and on the parallel bipartisan legislation that Tennessee Republican Senator Bob Corker called the Housing Finance Reform and Taxpayer Protection Act of 2013, both of which are designed to wind down the operations of Fannie and Freddie.

Liquidating Fannie and Freddie The source of my concern with Mr. Hensarling's proposed legislation involve sections 103 and 104 of the Act, which, according to its legislative summary provides for "Termination of Conservatorship," such that "Five years following the date of enactment mandates the appointment of the Federal Housing Finance Agency (FHFA) director to act as receiver for each Enterprise (i.e. Fannie Mae and Freddie Mac) and carry out receivership authority." Section 104 then provides for declining maximum amounts that GSEs shall be entitled to own over the five-year transitional period before these entities are liquidated.

In one sense, the demise of Fannie and Freddie should not be lamented, after the long and sorry history of massive government intervention in their internal affairs that created serious dislocations in the marketplace in 2008, including, most notably, the Congressional insistence in 2007 that Fannie and Freddie issue some $40 billion in subprime loans. As a result of these actions, both GSEs suffered major losses during the early part of 2008, not unlike those suffered by other private companies. The nature of these actions are outlined in a complaint attacking the various government actions filed in Washington Federal v. U.S. in June 2013.


When attorneys affiliated with CCAF first objected on behalf of Professor Michael Krauss in the Classmates.com settlement, that case paid $52,000 to class members and over a million dollars to the attorneys and the class representatives (while falsely characterizing it as a $9.5 million settlement); Gregg Easterbrook of ESPN called it the worst class action settlement of the year. We objected, and the court struck down the settlement. The parties went back to the drawing board without including us in the process, and they came back with a settlement that guaranteed $2.5 million for class members, while still paying the attorneys over a million dollars. The settlement, as we pointed out in a second objection, still overpaid the attorneys and had Bluetooth reversion problems to boot: any fee reduction, notwithstanding clear sailing, would go to the defendant rather than the class. The parties quickly eliminated the kicker: now any fee reduction would go to the class, and the judge agreed with us at the fairness hearing that there should be a fee reduction.

Given that we had won over $2 million for the class, we thought we might be entitled to a token fee award; given our non-profit status, we planned to ask for something in the $40,000 to $50,000 range, reflecting both the benefit to the class and a sub-lodestar amount for multiple rounds of briefing, two trips to Seattle for fairness hearings, and the cost of hiring local counsel. But before we even put pen to paper on the fee request briefing, class counsel retaliated against us for our success in objecting by hitting us with super-burdensome fishing-expedition subpoenas, on, inter alia, a conspiracy theory of cross-referencing our donors with donors to institutions where Professor Krauss had performed work, such that someone paid Cato ten years ago to have Krauss write a paper so that he would successfully object ten years later represented by attorneys affiliated with CCAF to a settlement of a lawsuit against a company that didn't even exist yet. (Dozens of class members contacted us about this bad settlement. As we were figuring out who would be the best objector, Professor Krauss contacted us, and we agreed to represent him within minutes because he taught legal ethics, which added a modicum of ethos to our objection.) We were already overextended with appellate briefing schedules, so we had a choice: we could spend tens of thousands of dollars on outside counsel to resist facially invalid subpoenas requiring a response over the Christmas holidays, and be faced with an additional discovery bill of tens of thousands of dollars if we lost (and thus be put in a position where we might be worse off for requesting fees) or drop the fee request rather than prejudice our other clients. Professor Krauss was generous enough to give us permission to drop the fee request, and we did so. But we asked the court to award sanctions against class counsel on behalf of the class for the abuse of the discovery process to deter future abuses against objectors.

The court did so, deducting $100,000 from the class counsel's fee request and awarding it to the class. So if you're keeping score, class counsel tried to abuse the discovery process to prevent us from collecting a $40,000 fee, and ended up costing themselves $100,000 (plus whatever attorney time they wasted having to defend themselves in the sanctions motion and on their own discovery) in the process. The class will get $2.753 million in cash instead of $0.052 million in cash; the attorneys and class representatives will get $253,000 less than they originally planned. The opinion by Judge Richard Jones (who's rapidly becoming one of my favorite district-court judges) generously praises us for being the attorneys most interested in class recovery. Congratulations to our patient client, Professor Krauss, and to attorney Dan Greenberg, who argued at the second fairness hearing.

(The Center for Class Action Fairness is not affiliated with the Manhattan Institute.)

Apple iPhone 4 bumper class action settlement - PointOfLaw Forum

When there were reports that the Apple iPhone 4's sleek case, which contained the phone's antenna, caused reception problems if held in a particular way, Apple acted quickly: less than four weeks after the product's release, it announced a program that allowed customers to order a free bumper case that would prevent reception problems and created an app so that phone users could simply download the app and upload their requests without leaving their phone. But whenever there's a news story about a deep-pocketed company with temporarily unhappy customers, there's a class action—in this case over two dozen class actions all alleging that Apple had committed consumer fraud. Apple's executives time is valuable, it costs money to pay for lawyers and search everyone's email, so Apple has settled the cases.

At first, the settlement seems generous: "Apple iPhone owners can claim $15 says the LA Times, and several blogs, e.g., MacRumors, iPhone Hacks, TG Daily. But that's not so: only a tiny percentage of iPhone 4 customers are eligible for the $15. (iPhone JD got it correct.) Moreover, the claims process is insane: one must access the settlement website, perform data entry to request a claim form, and then fill out the claim form by hand. Wait a second: I could order the bumper with an app; I have to use the Internet to get a claim form; it costs more to process the claim forms by hand than to process electronic data. Why isn't there an app for that? The answer of course, is that Apple would rather spend an extra dollar in claims processing than $15 in claims. The settlement is designed so that Apple will not actually pay very many claims. Given the hoops and limited eligibility requirements, I will be surprised if there are 40,000 claims—worth about $590,000, $600,000 minus about $10,000 in postage paid by class members to submit claim forms.

The lawyers, however, are asking for ten times that: $5.9 million. The settlement contains the Bluetooth indicia of fees disproportionate to class relief, a clear sailing clause (Apple agrees not to challenge the fees), and a "kicker" (even if fees are reduced, the reduction goes to Apple, not the class). The settlement is structured to hide the number of claims from the judge: the claims deadline is well after the fairness hearing. This is litigation and settlement designed to benefit attorneys, not class members, and an illegal abuse of the class action system. I am a class member and plan to object.

Writing at the Center for Individual Freedom, Quin Hillyer previews the upcoming Congressional debate over the Lawsuit Abuse Reduction Act, seeing in the legislation an extension of the procedural restraint marked by the U.S. Supreme Court rulings in the Iqbal and Twombly rulings.

Chairman Lamar Smith (R-TX) of the House Judiciary Committee introduced H.R. 966 (called LARA for short) in March and the committee is expected to take up the bill early next month. The legislation seeks to reduce the number of frivolous lawsuits in federal court by amending the sanctions provisions in Rule 11 of the Federal Rules of Civil Procedure to require the court to impose sanctions who misrepresent their claims to the court. The sanction will compensate the injured parties. The bill also ends to so-called "safe harbor" provision, which now allows an attorney to escape sanctions if withdraws his complaint with 21 days after serving it.

Hillyer writes in "Beating Rattlesnakes and Bottom Feeders: Congress Fights Frivolous Lawsuits":

In two recent cases, Bell Atlantic Corp. v. Twombly (2007) and Ashcroft v. Iqbal (2009), the Supreme Court recognized that frivolous lawsuits are problematic. Before Twombly, a case could be dismissed for "failure to state a claim" only if it were "beyond doubt" that "no set of facts" could support it. In Twombly, seven justices overturned that standard. Former Justice David Souter wrote that a valid complaint must assume facts that are not merely "conceivable" or "speculative, but actually "plausible." Otherwise, he wrote, "The threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching those proceedings."

The Twombly and Iqbal cases set the predicate for Chairman Smith's LARA proposal, which well complements those decisions. Just as the high court ruled that what constitutes "anemic" cases must be more broadly defined so as to make it easier to dismiss such cases, so should the penalty for filing those suits in the first place actually act as a deterrent (and as relief to unfairly targeted defendants).

Earlier Point of Law on LARA with background.

And we're glad to see Quin continuing his reporting on civil justice issues in his new gig as Senior Fellow with CFIF, which he joined in April. The strength of The Washington Times' editorials on tort reform, election law, and the politicized Justice Department were largely due to Quin's insights and reporting, and it looks like he's still on the beat -- just from a base of operations in Mobile, Ala.


The American Association for Justice has filed its first quarter lobbying disclosure form with the Clerk of the House, reporting $850,000 in lobbying expenses for the period, down from the $910,000 reported in the fourth quarter of 2010. The report filed with the House Clerk's Office indicates continued lobbying on familiar issues, such as:

  • Notice pleadings in federal courts (Iqbal/Twombly)
  • Preemption of state causes-of-action involving drug manufacturers
  • Various bills to restrict pre-dispute arbitration provisions in contracts.
  • S. 623/H.R. 592 (Sunshine in Litigation Act of 2011); relating to the use of protective orders, sealing of cases, and disclosure of discovery information in federal civil cases. (See earlier POL post.)

In light of the new Republican control of the U.S. House, the trial lawyers are also lobbying some new issues and pieces of legislation. These jumped out at us:

  • H.R. 966/S. 533 (Lawsuit Abuse Reduction Act of 2011); to amend Rule 11 of the Federal Rules of Civil Procedure to make sanctions mandatory.
  • S. 299/ H.R. 10 (Regulations From the Executive in Need of Scrutiny Act of 2011); to provide that major rules of the executive branch shall have no force or effect unless a joint resolution of approval is enacted into law.
  • H.R. 1 (Full-Year Continuing Appropriations Act); specific interest in House Amdt. 85 to defund the Equal Access to Justice program, and House Amdt.159 to defund the the Consumer Product Safety Commission Product Safety Database.
  • H.R. 887(no short title); to direct the Secretary of the Interior to submit a report on Indian land fractionation, and for other purposes, specific interest in the modification of attorney's fees. (This is a post-Cobell piece of legislation from Rep. Don Young (R-AK).

The GOP House has also elicited an increased level of lobbying against federal medical liability reform, specifically, H.R. 5, the Help Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) Act and malpractice reforms generally. The AAJ continues to go outside its own lobbying shop to pay Patton Boggs to work the health care issue, among others, to the tune of $130,000 for the quarter, as well as Forscey and Stinson, $50,000.

The AAJ has also added another lobbying firm to handle medical liability and health care issues, Van Heuvelen Strategies, LLC. Bob Van Heuvelen is the former chief of staff to Sen. Kent Conrad (D-ND), who is not seeking reelection in 2012.

A new, trimmed down version of the Lawsuit Abuse Reduction Act (LARA) was introduced this week, six years after Congress last considered legislation to discourage frivolous lawsuits in federal court.

Rep. Lamar Smith (R-TX),chairman of the House Judiciary Committee, and Sen. Charles Grassley (R-IA), ranking member of the Senate Judiciary Committee, announced the bill's introduction on Wednesday. A news release summarized:

The Lawsuit Abuse Reduction Act (LARA) imposes mandatory sanctions for lawyers who file meritless suits in federal court. Federal rules mandating sanctions for frivolous suits were watered down in 1993, resulting in the current crisis of widespread lawsuit abuse. LARA restores the mandatory sanctions which hold attorneys accountable for lawsuit abuse.

Specifically, the legislation:

  • Reinstates the requirement that if there is a violation of Rule 11, there are sanctions (Rule 11 of the Federal Rules of Civil Procedure was originally intended to deter frivolous lawsuits by sanctioning the offending party).
  • Requires that judges impose monetary sanctions against lawyers who file frivolous lawsuits. Those monetary sanctions will include the attorney's fees and costs incurred by the victim of the frivolous lawsuit.
  • Reverses the 1993 amendments to Rule 11 that allow parties and their attorneys to avoid sanctions for making frivolous claims by withdrawing them within 21 days after a motion for sanctions has been served.

The text of the House bill, H.R. 966, is available here. The Senate bill is S. 533.

Congress last debated LARA in 2005, when H.R. 420 passed the House only to disappear into the Senate. Democrats took control of Congress in the 2006 elections, which put an end to legislative efforts toward tort reform at the federal level.

The new legislation drops the state-specific language that caused political trouble last time and would likely draw the ire of federalism-minded House Republicans. As Victor Schwartz, general counsel for the American Tort Reform Association, tells us, "This new version of LARA has greater political and practical strength. It is trimmer and focuses solely on the problem: stopping frivolous claims. The President of the United States recognized this problem in his State of the Union and Congress should act now to end unnecessary and costly lawsuit abuse."


The Return of the Lawsuit Abuse Reduction Act - PointOfLaw Forum

The House Judiciary Subcommittee on the Constitution has a hearing scheduled for Friday, March 11, on the yet to be introduced Lawsuit Abuse Reduction Act, legislation that would amend Rule 11 of the Federal Rules of Civil Procedure to discourage frivolous lawsuits.

The Lawsuit Abuse Reduction Act was one of the high-profile pieces of legislation promoted by civil justice reform activists in the previous decade. Rep. Lamar Smith (R-TX), now chairman of the full Judiciary Committee, was sponsor in 2005 of H.R. 420, which passed the House 228-184 (16 House Democrats voted yes along with the Republicans) before stalling in the Senate.

The primary provision of the 2005 bill applied to the federal courts:

(Sec. 2) Amends Rule 11 of the Federal Rules of Civil Procedure (Signing of Pleadings, Motions, and Other Papers; Representations to Court; Sanctions) to: (1) require courts to impose sanctions on attorneys, law firms, or parties who file frivolous lawsuits (currently, discretionary); (2) disallow the withdrawal or correction of pleadings to avoid Rule 11 sanctions; (3) require courts to award parties prevailing on Rule 11 motions reasonable expenses and attorney's fees, if warranted; and (4) authorize courts to impose Rule 11 sanctions that include reimbursement of a party's reasonable litigation costs in connection with frivolous lawsuits.

However, the bill also sought to apply the new Rule 11 standards to state civil actions involving matters that substantially affected interstate commerce, and it had other provisions directed at state courts. That kind of language raises objections from federalism-minded conservatives (e.g. new "Tea Party" aligned House Republicans), who would otherwise support tort reform.

Accordingly, it's our understanding that the upcoming version of the bill will drop the state-specific language to apply only to the federal courts.


Pacific Research Institute, "Tort Law Tally" - PointOfLaw Forum

Recently out from Pacific Research Institute (PDF), authored by Nicole V. Crain, W. Mark Crain, Lawrence J. McQuillan, and Hovannes Abramyan, "Tort Law Tally: How State Tort reforms affect Tort Losses and Tort Insurance Premiums". From the executive summary:

Of the 25 tort reforms that we examine, the statistical analysis identifies 18 reforms to state civil-justice systems that significantly reduced tort losses and tort insurance premiums from 1996 through 2006. For some categories of tort cases, specific reforms cut payouts by more than 50 percent. The cumulative effect of reforms across all tort categories is a 47-percent reduction in losses and a 16-percent reduction in insurance premiums for consumers. Some tort reforms are highly effective at reducing costs in certain tort categories, but are ineffective in other tort categories. It is important that reformers pick the right tool for each problem. If we order the tort reforms according to each reform's ability to reduce aggregate tort losses, the top eight reforms are: attorney-retention sunshine (12 percent), Daubert/Frye (10 percent), frivolous lawsuits (7 percent), jury service (6 percent), appeal-bond caps (4 percent), negligence standard (3 percent), non-economic-damage caps (2 percent), and medical-malpractice damage caps (1 percent).

Related op-ed: PRI president Sally Pipes in D.C. Examiner.

Rahm Emanuel, tort reformer - PointOfLaw Forum

Yes, that's one of those headlines that warrants two questions marks, an ellipsis and seven footnotes, but still...

Reviewing the voting record for President-elect Obama's designated chief of staff, Rahm Emanuel, we see he has a few good votes on recent legal-reform votes. (This is the voting record on manufacturing-related issues as compiled by my employers, the National Association of Manufacturers.)

  • On February 17, 2005, he voted for final passage of S. 5, the Class Action Fairness Act, which passed 279-149.
  • On October 19, 2005, he voted for H.R. 554, to prevent frivolous litigation against the food industry, which passed 306-120.
  • And on June 12, 2003, he voted for H.R. 1115, that session's class-action lawsuit reform act, approved 253-170.

However, in the 109th session, he voted against several bills supported by business-minded legal reformers, including H.R. 5, federal medical liability reform; S. 397, the Protection of Lawful Commerce in Arms Act (Chicago political sensitivities there, since the city had sued gun manufacturers); and H.R. 420, Lawsuit Abuse Reduction Act.

A political loyalist who judges votes on a case-by-case basis, who take great pains to prevent his boss from being damaged by a lurch to the left (as argues John Fund)? Seems like that's the best that tort-reform advocates in the business community could reasonably ask for.

At least John Edwards isn't going to be the attorney general.

(According to Indiana University's events calendar, Edwards is supposed to resurface this Tuesday to speak on the election. Hard to imagine such a quick rehabilitation.)

What a Difference a Day Makes - PointOfLaw Featured Discussion

Bill,

In our Point of Law featured discussions, we always strive for civility, and I�ll continue to endeavor to do so. You may think my initial post overly �diplomatic� � in your phraseology, �saying nasty things in nice ways.� I don�t really think anything I said was nasty, implicitly or explicitly. I merely have a difference of opinion with you, and I took issue with your characterization of the Trial Lawyers, Inc.: Health Care report vis-�-vis its treatment of med-mal damage caps, as well as what I felt was a caricature of the tort reform movement as a whole � and of my and the Manhattan Institute�s role in it. As to who�s being nasty, I�ll let our readers decide.

In any event, you seem to be frustrated that I�m too �on message� � really, for not saying what you�d want or expect me to say (E.g., �Why be so coy in response to my pointing out that you favor damage caps and blame the legal system? Why deny that caps are your preferred medical malpractice reform while, in the course of that denial, rehashing all your arguments about the virtues of damage caps?�). But I don�t think I was coy: I do favor damage caps, at least at the state level, and my initial post said so. Still, I don�t think they�re the only or even the best reform � your beliefs or suggestions to the contrary notwithstanding.

Why did I give the issue of damage caps so much attention in my initial post, if they�re not my �preferred medical malpractice reform�? Because I think you unfairly characterized the tort reform debate as a simple dichotomy between �tort reformers� who favor damage caps and lawyers who want to defend the status quo, and because you try to fit Trial Lawyers, Inc.: Health Care into that box. You mentioned MICRA six separate times in your opening post. I think that you were basically attacking a straw man � saying that tort reform was just about damage caps, and that Trial Lawyers, Inc.: Health Care was all about support for damage caps: �But guess what? The report would be a lone voice � far out of the mainstream � in any gathering of health policy experts interested in medical malpractice. . . . I know nobody � repeat, nobody � in my professional community who favors MICRA-style reform as a stand-alone solution.�

But I�ve got a guess what for you, too: damage caps aren�t at the core of what most of the tort reform people I talk with on a daily basis think about, either. Damage caps are a significant component of a lot of tort reform legislative activity, but they�re far from the only tort reform policy idea out there, and I don�t know anyone who supports them as a �stand-alone solution� either. The reason damage caps get so much public attention, in my view, is precisely that the plaintiffs� bar and its supporters want to define tort reform down to being all about damage caps. It makes for good soundbites: �they�re taking away your rights,� �it�s all about protecting greedy corporations who injure you,� �what about the woman who loses her breasts through a doctor�s incompetence?� The other major legislative tort reforms out there that actually have been enacted � including those that deal with prejudgment interest, collateral source rules, caps on contingency fees, periodic payments, joint and several liability, or statutes of limitations, each of which you use as variables in your own June 2005 JAMA article that you co-authored with Dan Kessler and David Becker � aren�t quite as easily adapted to this line of attack.

Another guess what: far from advancing an agenda to push damage caps to the exclusion of other policy alternatives, the Manhattan Institute has sponsored writings and programs that do precisely the opposite. We�ve had Phil Howard of Common Good here to speak, twice, on his idea for medical courts (and we�re having another dinner with Phil and other opinion makers this very evening, in Washington, D.C.). Indeed, Phil Howard launched Common Good at a Manhattan Institute luncheon, featuring him and Johns Hopkins�s William Brody, in March 2003. On the issue of no-fault administrative compensation schemes, we hosted a large conference in Washington, D.C. this January. The focus was the 9/11 Compensation Fund � highlighted by a keynote address from the Fund�s administrator, Ken Feinberg � but a clear undercurrent was the adaptability of no-fault approaches to health care. Dan Troy, former counsel to the FDA, was on one of our two panels and spoke on the issue as it relates to drug liability. Finally, last fall the Center for Legal Policy put forth a working paper by Dan Kessler � your JAMA co-author � with commentary in a featured discussion here at Point of Law including, yes, Phil Howard. Kessler�s paper summarized the empirical evidence on various traditional tort reforms (the weight of the empirical evidence does indeed clearly support damage caps and other traditional tort reforms � as does your more recent JAMA article that your co-authored with Dan). But Kessler went further to explore various alternative reforms: guidelines-based systems, enterprise liability, binding alternative dispute resolution, and no-fault systems.

Over the almost three years since I�ve been at MI, we�ve sponsored only one event or publication that could plausibly be construed as focusing on damage caps. And even that event wasn�t really: two leading New York physicians spoke here on the crisis in obstetrics in the state driven by liability. On a panel with them: Dan Kessler, summarizing the empirical evidence. The luncheon keynote speaker: Phil Howard, talking about medical courts. Although the doctors tended to focus on caps as a preferred policy outcome, they mostly chronicled the problem, not the solution.

Characterizing my position, or that of MI, as be all about damage caps simply isn�t accurate. I think they�re a good idea in that they�re proven to be effective. I think states should adopt them. But they�re far from a holistic solution, and I � and most people who think seriously about (rather than lobby for) tort reform � agree with you strongly that we should look for more comprehensive solutions.

So forgive me for being a bit skeptical: defining tort reform down to being all about damage caps is the primary tactic of the trial bar, and your initial post � and your second post � fit well within that paradigm. Your initial post basically said, as I read it: (1) I care about health policy outcomes, not tort law per se; (2) tort reformers only care about legal process, and the tort reform debate is just about people who�re for damage caps and those who aren�t; and (3) we sophisticated folks in the �health policy community� have a much deeper, more nuanced view that you simple tort reform folks can�t or won�t appreciate. My response was guided by that reading, so I freely admitted that there were tons of very important health policy issues outside the scope of tort law, which I wouldn�t be discussing; that your (and the trial bar�s) caricature of the tort reform debate was highly simplistic; and that while tort law is certainly not the only variable at play in improving U.S. health policy, that I thought it plays a very important part, and in fact intersects with all variables of interest to overall health policy, namely cost, access, quality, and innovation.

Just as I think your (and the trial lawyers�) caricature of the tort reform debate as being all about damage caps is inaccurate, I don�t think that support for damage caps is the main point of, or takeaway from, Trial Lawyers, Inc.: Health Care. The report is designed to speak to a general audience � reporters, political staffers, and community leaders � not to academics, policy wonks, or practicing lawyers; and it�s designed to show just how the trial bar operates, increasingly, as a very sophisticated business, how that business is targeting all segments of the U.S. health care industry, and how American health suffers as a result � not to develop or discuss the best legal reform ideas out there. As I�ve described at length, we do that in other venues.

Do I, or the report, �blame the legal system�? Yes � inasmuch as I think the legal system exacts a staggering, often unappreciated cost on U.S. health care; no, if you mean that I, or the report, blame the legal system for all of America�s health care system failings � far from it, which is why I referenced the other health care work MI is doing, with which I generally agree, though the areas aren�t my specialties.

Is the Trial Lawyers, Inc.: Health Care report �a political document,� as you suggest? Well, I suppose that too depends on what you mean. Do we want politicians � and voters � to pay attention to the report? Sure, because the Manhattan Institute is all about �turning intellect into influence.� We aren�t about publishing dry articles in academic journals that nobody reads. And compared with empirical studies or policy documents, Trial Lawyers, Inc. is much more intended to reach a lay audience. But no, the report is not �political� if you mean partisan. In the government/public relations section of the report, we specifically explore how trial lawyers have worked to influence both parties. ATLA and major plaintiffs� firms do give overwhelmingly to the Democrats � and in the last presidential cycle were at the center of the party�s fundraising apparatus � so any discussion of how the plaintiffs� bar works to influence politics would have been lacking indeed if it didn�t point to that fact. But we also gave significant attention to Republicans with ties to the trial bar � from Judiciary Committee Chairman Arlen Specter to former trial lawyers Lindsey Graham and Mel Martinez to former Congressman and media personality Joe Scarborough. (Believe me, I got phone calls and emails from those in the �tort reform community� to complain about our having included some of the folks we highlighted in the report.)

Our regular readers on Point of Law and the followers of my and Walter Olson�s work over time know well that we take issue with both parties on quite a regular basis. Last fall, we scheduled a featured discussion in which Ted Frank, now at the American Enterprise Institute, and Ron Chusid, of Doctors for Kerry, debated the merits of the Bush and Kerry approaches to med-mal reform. I think that Ted won the debate � and that Chusid took the all-to-familiar tack of reducing the issue to damage caps, and recycling trial lawyer talking points against them � but you can decide for yourself. The point is that we presented both points of view.

OK, enough about all that. We agree that damage caps aren�t a holistic solution � we merely differ on whether they should be supported at all � so let�s get down to the business of trying to explore other facets of the problem, on the way toward looking at other reform ideas. I�ll begin with problem definition. In your most recent post, you say the following:

Medical liability expanded during the late 20th century because of the tremendous success of modern medicine, not its failure. . . . Liability is never truly �unlimited,� whether or not damages are capped. Rather, liability expands incrementally as medical care improves, costs of receiving services and remediating injuries rise, and care delivery processes become industrialized. In the late 1980s, now UCLA law professor Mark Grady argued persuasively that negligence law is primarily a response to technologic progress. (You might know Prof. Grady � he used to be Dean and Chairman of the Law and Economics Center at George Mason University School of Law, hardly a front for the trial bar).

In general, well put, and an important caveat to the debate. I�m familiar with Professor Grady�s work � his seminal article Are People Negligent? Technology, Nondurable Precautions, and the Medical Malpractice Explosion, 82 Nw. U. L. Rev. 293 (1988) and subsequent follow-ups � and I think his point is very well taken, if perhaps overstated. Simply put, in medical malpractice law, technological change can drive new types of litigation precisely because the costs of failing to use the new technology can result in death, whereas people would have died regardless before the technology was in place. That�s important to keep in mind, as is the fact that the explosion in observable health care costs is also to a significant degree technology (and division-of-labor) driven: a very strong case can be made that health care costs, rightly understood, have fallen dramatically in the last fifty years. My colleague Peter Huber made just such a claim last year in Forbes:

The cost of health care in the U.S. has been declining steadily for the last 50 years. It will decline faster still in the next 50. All of the doleful commentary about mushrooming costs and budget-busting programs ignores the principal economic costs of illness, which are falling fast, and the science of pharmacology, which is transforming the economics of health care.

By far the largest economic cost of illness is lowered labor productivity. Sick people can't work, and when adults die in their prime, they take all their intelligence, skills and initiative with them. Until recently, the cost of illness among children and the elderly was also shouldered mainly by the healthy adults who devoted countless hours to their care. Such costs aren't reflected in revenues to doctors or hospitals, still less in federal insurance programs. They are felt in lost corporate profits, lower wages and, for many women, tireless but entirely off-budget toil in the home.

Several developments radically changed this economic calculus in the second half of the 20th century. Vaccines all but eradicated many of the most common childhood diseases and substantially curbed infectious disease among adults as well. However much it cost to develop the whooping cough vaccine or to distribute it free to families who couldn't afford it, the cost must surely have been dwarfed by the economic gains that came from freeing up mothers to engage in other pursuits. Antibiotics had a comparable impact. Tuberculosis was a fantastically expensive disease a century ago--think of the balconies in the mountains of Davos or New York's Saranac Lake. Polio meant braces and iron lungs. Those costs have all but disappeared.

But while the costs of incapacity, home care and the sanitarium declined, spending on hospitals and physicians rose sharply. Families began outsourcing their health care, particularly for the elderly. This pushed the costs out into the open, where they could be covered by insurance programs and decried by budget experts. The real cost of health care--avoiding disease or recovering from it--certainly continued to drop fast, but now the costs were incurred not in time but in dollars--often government dollars--and that of course changed the debate.


It�s important, though, that we correctly characterize Professor Grady�s work. While he looks to technology rather than doctrine as the primary cause of the medical malpractice litigation explosion, he isn�t saying that the explosion isn�t a problem. He certainly isn�t saying as you do � echoing the favorite mantra of the trial bar � that these crises �largely reflect the failure of cyclical insurance markets.� What does Grady say? �New lifesaving technology can easily create a tort crisis by expanding the amount of insurance that doctors are obliged to offer their patients. For various reasons, patients and other potential victims may not be willing to pay for the amount of insurance that the new technology, operating through the tort system, foists upon them.� Not the �insurance cycle� (I agree with you that insurance companies� investment returns matter, by the way, due to the time value of money; but the long-term driver of liability insurance is liability, which you essentially agree to in your last post) � but rather insurance that new technology �foists upon them� �through the tort system.�

Let�s put this point in different terms. Patients cannot �opt out� of tort contractually (notwithstanding that they�re really in contractual relationships with their medical care providers � they don�t run into doctors accidentally on the street). They can�t buy health insurance policies that are cheaper but have binding provisions that, say, cap the damages they could recover in a tort negligence claim. (Paul Rubin argues rather convincingly that they should be able to, but his ideas, like some of yours, haven�t gained political traction.) In essence, the tort system �foists� unwanted insurance on health care consumers.

Grady�s work merely points out that rather than being due to changes in substantive or procedural legal rules, this effect may be due in significant part due to the rapid pace of technological change itself. That doesn�t mean it isn�t a problem. Grady again:

Technology-induced insurance effects are practically indistinguishable from the older insurance effects that are implicit in applying the negligence rule to old activities. While negligence liability generally has a beneficial deterrent effect, liability for inadvertent negligence inevitably has an undesirable insurance effect that after a point outweighs the benefits of increased deterrence. . . . [F]or a variety of reasons already emphasized by Danzon, Priest and others, the normal measure of damages may exceed the amount of insurance against physician inadvertence that the patient would wish to purchase, and this may be especially so in periods in which risk-loading technological change has an edge over the risk-dumping variety. The very magnitude of medical benefits relative to most people's income can make unwanted insurance very costly to consumers, and this problem becomes more acute as medical technology improves.

I think that the �point� Grady describes has been reached. Access to health care is limited for many Americans, in no small part, due to the fact that American tort law � operating on what law and economics scholars call strict �liability rules� � can�t be contracted around in the medical malpractice (or products liability) arena. So all Americans must purchase the maximum technologically feasible health care � as determined by courts (ultimately, lay juries) � or be left unable to afford health care at all. Do you really think that liability problems don�t �come within an order of magnitude of threatening medicine�s success�? (Caveat: I know that you write �success in the future,� which shouldn�t be overlooked. But I�d say the effects on innovation of product liability abuses � see, e.g., Bendectin, breast implants, Fen Phen, which we detail in Trial Lawyers, Inc.: Health Care � are enormous. Vioxx and Fen Phen will cost their companies ten times their respective research and development budgets. The annualized cost of the liability for these two drugs alone is roughly one-tenth the annual sales of the whole U.S. pharmaceutical market. That doesn�t have a significant impact on innovation?) I think here�s the crux of the issue: we just don�t agree on the degree to which the liability system generates health care problems.

I�ve gone on for a while, but problem definition is important. I will however touch upon each of the health care issues you call out, at least briefly.

1. Compensation for avoidable injury is inadequate.

I can�t imagine how flat caps on damages would help get more injuries fairly compensated in conventional litigation, or would fail to harm the most severely injured. But perhaps you see possibilities I don�t.

I agree with you on point one, and at least somewhat on point two. Damage caps (here we go again�) aren�t a solution that would help compensate the many avoidable errors that our liability system doesn�t reach. Why aren�t many injuries compensated? Because the administrative costs of the tort system are enormous. (A side point: in your last post, you snarkily remark: �I�m always surprised that tort reformers, despite their business allegiances, fail to grasp the basic economic fact that, administrative costs aside, a reduction in insurance premiums unaccompanied by a reduction in insurable events is merely a wealth transfer, not a net savings to society.� Well, the administrative costs can�t be left �aside� � they represent over half of all litigation costs. Tort awards themselves are nothing but wealth transfers, effected by a system with extremely high administrative costs. The question is whether those transfers make sense in the first instance. If, say, the tort system were merely a random lottery in which one out of every 100 medical patients struck it rich, it probably wouldn�t make a heck of a lot of sense, even leaving administrative costs to the side. Why should the other 99 patients have to pay to support this lottery? Now I�m not saying that the tort system is literally a lottery, but if the system is just transferring money without properly meting out its deterrence function (which can include deterring the wrong things, it�s not simply having no deterrent effect at all), it�s not a system we�d want to defend, since we could operate a no-fault or alternative system at much lower administrative cost.)

Why are these administrative costs so important? We have this peculiar �American rule� that means the losing party to a lawsuit doesn�t pay the other side�s expenses. So if Jane Roe is injured by a clearly avoidable error, but her injuries only amount to $25,000, she won�t be able to get a lawyer to take her case, since the lawyer won�t recoup enough to cover his own legal bills � and the defendant insurance company knows that.

A loser pays rule, like the rest of the developed world enjoys, dramatically changes this calculus. The lawyer can recover all his fees for a clearly avoidable injury, once he goes to court and wins. The insurance company knows that, too, so it offers to compensate her reasonably.

My colleague Walter Olson has written about loser pays for years, and it�s something we at the Manhattan Institute continue to work on. Unfortunately, like some of the other reforms � many potentially salutary � that you�ve advanced, the �political will� to implement loser pays in almost any U.S. state isn�t really there at the moment.

A quick caveat on point two: I agree that at least some severely injured claimants would suffer, at least somewhat, with damage caps. But it�s important to emphasize that other reforms adopted in conjunction with damage caps can soften this blow. California�s MICRA, for instance, has contingency fee caps on higher-dollar cases, in addition to damage caps. Some severely injured claimants make out better under this system precisely because their lawyers� fees fall, even though their noneconomic damages are capped. Some percentage of claimants � 7 percent, according to a RAND study � do see an actual reduction in damages received (presumably because their damages are predominantly noneconomic). This effect is a real negative for some, though not one in my view that trumps the generally sensible notion that society can decide a reasonable ceiling for noneconomic damages, which if that ceiling lowers costs is worth adopting.

2. Too many avoidable errors occur.

Again, one would think that capping damages alone would do nothing to reduce errors, and might increase errors by removing financial incentives for safety improvement.

Now, I can almost see the saliva dripping onto your keyboard as you mouth �defensive medicine.� I agree that defensive medicine matters; in fact, I co-authored the most recent empirical study of defensive medicine to appear in the health policy literature (JAMA, June 1, 2005). Defensive medicine is important for more than the aggregate-health-care-cost arguments intended to sustain political momentum for tort reform between crisis periods even though physicians have easy access to cheap malpractice insurance. Defensive medicine is important during malpractice crises because physicians who fear an imminent loss of affordable coverage treat patients worse as a result � not only engaging in wasteful �assurance behavior� such as expensive diagnostic testing, but also performing unnecessary invasive procedures that plausibly increase risks of physical harm and avoiding types of medical care and types of patients they consider unduly risky, even when those patients need services. But MICRA-style reforms are tangential to defensive medicine. The deeper causes of defensive practice are clinical uncertainty, fragmented medical practice, and a malpractice insurance system that is as isolating and unforgiving in bad economic times as it is oblivious to health care quality in good economic times.

I�m not sure I agree with you here. Yes, I agree that too many �avoidable errors� occur (though we may have a normative disagreement about what an �avoidable error� really means; I think individuals should be able to contract around liability rules that mandate an immutable standard of care consistent with the most cutting-edge technologies available). But in some sense it�s an �error� if there aren�t enough ER doctors, no? Moreover, the fear of unlimited liability undoubtedly keeps doctors from honestly admitting mistakes, and discussing them, and working to improve practices and procedures that could reduce mistakes. Limiting the scope of that liability would free doctors and hospitals to be more open. I think that most doctors genuinely want to help their patients. Most hospitals want to rectify errors. But they don�t want to risk crippling liability in the process.

As for defensive medicine, I�m not sure liability is � or caps are � tangential (again, you reduce the entire discussion here to the �MICRA boogeyman� so I feel I have to respond). Doctor surveys suggest otherwise. Kessler and McClellan�s seminal 1996 study, and many others, suggest otherwise. Kessler and McClellan found a 5 to 9 percent cost reduction from �MICRA-type� reforms. That�s pretty sizable.

3. Litigation is too slow, too costly, too uncertain, and too unpleasant.

Physicians and patients should be intimates, treating each other with respect, concern, and compassion. Third-party liability coverage turns them into strangers, and litigation turns them into adversaries. Caps do not help. At most, MICRA results in somewhat less of a bad process, not a better process. Ask any doctor in California.

I agree that litigation is too slow, costly, uncertain, and unpleasant. I disagree that �caps do not help.� A �somewhat less bad process� is a better process, in my book. But enough about that. For someone who complains that the tort reform debate is all about caps, you sure do want to talk about them a lot.

4. Premiums for primary coverage are too volatile and, for some physicians, too expensive.

This is an insurance market problem. Caps help, but very bluntly. Why not address risk-pooling problems and the clinical bottlenecks they create during crisis periods directly? For example, try revamping specialty- and geography-based rating practices for physician liability coverage and moving more of the market into stable, diversified institutional settings?

Now we�re getting somewhere. Time constraints prevent me from responding fully here, but I would like you to expand on this idea in your next post, if you�re willing. Precisely how do you propose �revamping specialty- and geography-based rating practices�? And what�s your mechanism � by reducing insurance regulations to permit more insurer innovation or by mandating how insurers work through a top-down central command?

5. Excess coverage and reinsurance are too costly for hospitals and other institutions.

The biggest insurance problem during the current malpractice crisis is high-dollar coverage for institutional defendants, say $10 million or more per claim. Even in the most severe malpractice crisis, hospitals can handle smaller cases just fine (a $250,000 cap is a rallying cry, not a policy prescription, and is irrelevant once one looks beyond individual physician defendants and the narrowly exposed liability carriers that insure them). Caps might help in the large cases, though again very bluntly, but not when applied only to non-economic damages as their proponents � bowing to political reality � generally urge. Economic damages, not non-economic damages, are the principal source of financial exposure in the largest malpractice cases � usually involving newborns or children who have suffered lifelong debilitating injury.

I certainly agree with your initial factual claim. And I also agree with an implication of your point, if I�m reading it right, that it might make some sense to cap economic damages in addition to noneconomic damages. While some economic damages shouldn�t be capped � say, the cost of medical care (which as you note can be exceptionally high in some cases) � I�m not sure why we shouldn't cap lost wages after a certain level. If someone�s earning over $100,000 a year, and fails to buy long-term disability insurance, I don�t have too much sympathy, and I�m not sure the tort system should bail him out. I think that capping lost wage recoveries � precisely because the only ones who�d suffer would be the better heeled � would add to the political salience of tort reform, and I wish someone would get behind the idea.

I�m less confident in your claim that noneconomic damages aren�t a huge part of the med-mal problem. Overall, we know that noneconomic damages exceed economic damages in the tort system. Is medical malpractice liability really that different � and if so, why?

Finally, I�ll touch on your �neutral, court-appointed experts� idea. I agree wholeheartedly that expert evidence is a huge part of this equation. My colleague Peter Huber wrote two books on the issue in the 1990s. In short, I enthusiastically support state experiments in this area. A caveat though. The political reality is that many state-court judges are captives of the trial bar. There isn�t good empirical evidence that I�m aware of that shows such reforms to be effective in practice. So while I�m all for such approaches, that�s in addition to � not in lieu of � traditional tort reforms (yes, Bill, including damage caps), which have a strong empirical track record of success.

I hope that�s enough to chew on for now. I will get into the �plaintiffs� bar business model� in the next post. For now, I�d refer you to our original 2003 report, which outlines the concept in more detail. This new report builds upon that idea.

I�ll also, in my next post, want to go into at least some more detail on drug and device products liability, not just medical malpractice. I�ll give some attention to the FDA preemption point, which you lampoon.

And in your next post, if you want to advance some of your other ideas that you�ve worked on in addition to court-appointed experts, please do. I�d love to discuss them.

Looking forward to your response,

Jim

P.S.: I�m not going to get into a universal health coverage debate, though I�m curious as to how it has much to do with tort reform � unless you want the government to take over health care and use its sovereign immunity. But maybe I�m missing something.


Thursday Vote on LARA Possible - PointOfLaw Forum

The Lawsuit Abuse Reduction Act may come to a vote in the House on Thursday.

(Past coverage)

Washington Examiner on LARA - PointOfLaw Forum

Like us, the new D.C. paper thinks the Lawsuit Abuse Reduction Act (OL Sept. 15, 2004) is a fine idea as it pertains to federal litigation, but should be shorn of its overreaching provisions which attempt to compel state courts to impose sanctions (see Overlawyered, Jun. 21, 2004, Jonathan Wilson, May 27, Point of Law Jul. 1, Oct. 4)(same piece at author David Thomasson's site).

The ABA and Rule 11 - PointOfLaw Forum

This month's ABA Journal (July, 2005) contains an article (page 62) describing the actions by the ABA Governmental Affairs Office to oppose the Lawsuit Abuse Reduction Act.

I write a little bit about LARA in Out of Balance and in recent posts have praised its approach to reinstating the original, 1983 version of Rule 11.

Although I'm an ABA member I find myself, more often than not, disagreeing with its stance on political issues. I must reluctantly, however, grant the ABA some credit for opposing those provisions of the LARA that would seem to over-reach and violate principles of federalism.

Section 3 of the LARA provides:

In any civil action in State court, the court, upon motion, shall determine within 30 days after the filing of such motion whether the action substantially affects interstate commerce. Such court shall make such determination based on an assessment of the costs to the interstate economy, including the loss of jobs, were the relief requested granted. If the court determines such action substantially affects interstate commerce, the provisions of Rule 11 of the Federal Rules of Civil Procedure shall apply to such action.

While a state law that required the courts in that state to undergo such a process might be a healthy reform, allowing Congress to stipulate procedure in state courts would seem to run roughshod over state prerogatives.

I would be happy to be dissuaded from this view, however. If you can make the case that Section 3 of the LARA would be constitutional, please drop me a line.


In considering caps on malpractice settlements we must consider questions such as whether they really affect malpractice insurance premiums, whether they reduce the cost of health care for the general public, whether they affect the filing of frivolous suits, whether they reduce the prevalence of defensive medicine, and whether they have any deleterious consequences which might outweigh possible benefits At most Ted provides a weak case that maybe caps will lower malpractice premiums slightly, with caps failing miserably on all other measures.

Ted starts by claiming that the statistics I cited about malpractice act to underestimate the problem. The statistics I presented do not reflect upon the seriousness of the crisis unless a campaign wants to use scare tactics to make problem appear even more serious than it actually is. Statistics used in opposition to the efficacy of caps are not a measure of the seriousness of the malpractice problem. Instead the statistics provide useful information about the malpractice problem which help evaluate possible solutions, and which place doubt on the ability of caps to be very beneficial. Solutions based upon mistaken assumptions about malpractice are likely to be faulty. To offer a solution for malpractice is not enough--any solutions must be efficacious and without undesirable side effects. For those of us in the medical profession, the caution that above all we must do no harm applies both to our practice of medicine and to the public policy positions we can endorse.

The elimination of most punitive awards under Kerry's plan is quite different from caps when you understand the principles guiding Kerry's opposition to caps. Kerry supports elimination of most punitive awards, which are to punish the doctor on top of seeking whatever awards are deemed justified based upon the injuries. Abolishing most punitive awards does not compromise Kerry's objections to limiting the rights of those who have truly been injured. Punitive awards are not required for patients to receive fair compensation for damages, especially in states such as Georgia where portions of punitive awards go to the state.

It is conceivable that abuses of the system with unjustifiably high awards will promote the practice of defensive medicine, although objective attempts to quantify this have failed to provide evidence that this amounts to a significant amount of health care dollars. During the years I've been in practice there has been a significant decrease in the urgency to perform Caesarian sections. The philosophy of "once a C-section always a C-section" mentioned in one of Ted's links was the prevailing philosophy in the past, independent of malpractice fears. This philosophy has been dying out despite the increased fear of malpractice. Picking an isolated example to the contrary does not change the overall trend.

Even if true that cases with unjustified awards, which Ted acknowledges are outliers, increase the practice of defensive medicine (and available evidence shows this as a very minor part of overall health care costs) the use of outliers would be poor justification for arbitrarily restricting the rights of every person who has been injured. There are much fairer solutions available. The legal system, to some degree, has reduced the problems of extreme settlements as they are frequently reversed on appeal. If solution of this problem were the real goal, additional solutions could surely be devised within the legal profession. There are additional solutions possible within the medical profession. For example, practice parameters utilizing principles of evidence based medicine could define both medially and medical-legally when CT scans or Caesarian sections are indicated. Under John Kerry's proposals for pre-trial review, if the only argument against a physician is failure to do a Caesarian section in cases where it was not required by established practice protocols, the case might not even make it to trial, reducing the drive to perform unnecessary tests or procedures.

Ted provides alternatives to the legal system for providing compensation to victims, despite exaggerating opposition to an arbitrary cap of $250.000 to support of mufti-million dollar settlements. I do not find it reasonable to limit compensation to victims of true negligence to those who have purchased insurance for this purpose, but other possibilities are open to consideration. I've wondered myself if systems analogous to no-fault insurance could partially replace the current malpractice system. Such plans would undeniably have problems as Ted notes, but it is conceivable that a system with problems could wind up being preferable to our current system that we both would agree has many flaws.

Replacing the current system to compensate victims is an interesting subject, and I would be interested in hearing Ted's views on the possibility of using such systems if he should desire to pursue this further. However, this intellectual exercise is irrelevant to his current argument. Current proposals containing caps, such as those supported by President Bush, do not include any such provisions. In the absence of containing a mechanism to protect the rights of those truly injured, my previously stated qualms about arbitrarily capping compensation for injuries such as loss of vision or loss of a child where the loss is primarily non-economic remain unanswered. Ted agues against even the validity of such damages. I would hope that even as physicians object to the current problems in malpractice, we have not allowed this to destroy all compassion for those who have truly suffered such losses. This illustrates a true difference in beliefs between physicians supporting John Kerry and the positions of George Bush. While we see many problems in malpractice, including the need to lower premiums and reduce the risk of suits when there has been no negligence, we also respect the rights of those who have suffered injuries to obtain fair compensation.

Previously Ted incorrectly claimed that I was arguing that malpractice is not a significant issue. While I did not take such an extreme and absurd position, here we see Ted (with views reflected in George Bush's proposals) taking the view on the opposite extreme as he denies the validity of damages I have discussed for problems such as loss of vision or death of a child. This would replace our system with one more analogous to what exists in veterinary medicine, where the death of a pet might only be compensated by the monetary value of the animal. Children are not dogs or cats, and the negligent death of a child would be a far greater loss. This desire to reduce the areas that are open to compensation is particularly worrisome as this philosophy is seen throughout George Bush's policies which would greatly reduce liability for negligence in areas beyond medical malpractice. The denial of compensation for such injuries is a serious consequence of accepting George Bush's views on tort reform which leads us to look for other solutions, especially in light of the limited efficacy of caps.

Ted is incorrect when he describes my quotation of CBO figures as a "mistaken assumption." As I noted he was doing in my previous entry, Ted is again comparing apples and oranges when he misquotes the data and my arguments. Ted is mixing up statements made about health insurance premiums with malpractice insurance premiums. George Bush is promoting caps as his primary mechanism to reduce health care costs. Therefore it is significant to note that the CBO found that Bush's proposals would only reduce such health insurance premiums by less than half of one percent. This distinction is also clear in the statement of the Democratic Policy Committee which he links to.

Ted again confuses apples and oranges when he discusses the estimate that malpractice only accounts for 2% of health care costs. Nobody is claiming that this number in any way corresponds to the percentage of income a physician pays for malpractice insurance, as Ted later cited these numbers. In reviewing studies on the impact of malpractice on medical costs, as well as the cost of defensive medicine, I agree that this 2% estimate might be lower than the true cost. However, the types of expenses Ted mentions have already been considered, and a more exact figure would not change the argument. Even if the exact figures were as much as double the CBO's estimates (and it is unlikely they are off by that much) the fact remains that lowering malpractice costs would have minimal impact upon the health care expenses of the general population or of employers in an era when premiums are rising by double digits annually.

The lack of savings from caps was also found in the nonpartisan analysis from Annenberg Political Fact Check, which concluded that "both the General Accounting Office and the Congressional Budget Office criticize the 1996 study the Bush administration uses as their main support. These nonpartisan agencies suggest savings � if any � would be relatively small." Addressing the cost of defensive medicine, they also report "A 1990 study by the Harvard University School of Public Health �did not find a strong relationship between the threat of litigation and medical costs,� CBO said. And a 1999 study in the Journal of Health Economics found only tiny savings � less than three-tenths of one percent � when studying the cost of Caesarian sections in states with limits on lawsuits, compared to states without limits." (http://www.factcheck.org/article.aspx?DocID=133)

Ted also appears to misunderstand the significance of the data presented by the Institute of Medicine. Their figures are of injuries and deaths due to errors alone, not due to poor results. These numbers are relevant to malpractice reform as they present an opportunity to reduce malpractice risk. While some have used these numbers as evidence of poor performance by doctors, John Kerry shows better understanding of the health care system as he realizes that many of the problems are due to systems errors, not negligent physicians. Physicians are at risk of receiving the blame for bad outcomes due to systems errors beyond our control, and reductions in such injuries as a result of Kerry's proposals will reduce physicians' risk of suits.

While the CBO figures show that caps will have a negligible effect on health care costs, their effects upon malpractice premiums is less clear. Ted acknowledges that initial estimates have been scaled back. The more evidence we have, the more scaling back is necessary. As I noted above, tort reform in Texas has been followed by increases in malpractice premiums of as much as 35% (Houston Chronicle, Nov. 19, 2003), and the same has been seen in other states. Analysis of the situation is often murky because multiple reforms have been enacted, and reforms other than caps are likely the cause for rate reductions. The reductions in premiums in California have been attributed to state regulation of insurance rates, which the Republicans oppose in their national malpractice plans. In many cases, improvements in the malpractice situation has also come about due to mechanisms of pre-trial review, as advocated by John Kerry, and not necessarily from caps. The more experience we have with caps, the more it is appearing that, in the absence of such controls on insurance rates and other mechanisms to address the problem, malpractice premiums tend to move towards the same levels as in states without caps.

There is a profound difference between how partisan attorneys and doctors look at evidence. For an attorney, data which supports one side is useful to make a point, and it is fair game to attack the evidence which contradicts their stand. In contrast, physicians are more accustomed to reviewing all the data and weighing both sides before settling on a course of treatment. One could pick and choose statistics which show that caps have lowered premiums, but others fail to show this result. We need clearer evidence of efficacy before choosing George Bush's proposals over those of John Kerry, which are more likely to succeed and which have less deleterious consequences. As we question the long-term value of caps on malpractice premiums, physicians have seen an analogous situation with HMO's. HMO's start in an area with the promise of lowering health care costs, but after a few years the costs begin to rise as before, but we remain stuck with the consequences.

The insurance industry and lobbyists have conceded the lack of correlation between caps and premium rate reduction in many statements on public record:

"Insurers never promised that tort reform would achieve specific premium savings..."
--Press release published March 13, 2002, by the American Insurance Association (AIA).

"No responsible insurer can cut its rates after a [medical malpractice tort 'reform'] bill passes."
--Bob White, President of First Professional Insurance Company, the largest medical malpractice insurer in Florida, talking about a proposed $250,000 cap in the January 29, 2003 Palm Beach Post.

"I don't think we would argue that the premiums are likely to go down. We believe it will have the effect of reducing the increases in the future. And one of the reasons the premiums won't go down is that even if noneconomic damages are capped, the losses for economic loss, medical expenses, for example, are still in this current environment escalating at, medical inflation is running in the double digits. I forget exactly what it was last year. So even if you were to cap noneconomic damages, the economic damages
will still cause acceleration in the premiums. So it would not go down, I want to clarify if I misspoke and said I thought the premiums would go down."
--Cliff Webster, Chairman of the Washington Liability Reform Coalition, testifying before the Washington State Legislature, House Judiciary Committee, Feb. 21, 2003.

"[M]any tort reform advocates do not contend that restricting litigation will lower insurance rates, and 'I've never said that in 30 years.'"
--Victor Schwartz, General Counsel of the American Tort Reform Association, "Tort Reforms Don't Cut Liability Rates, Study Says," published in Business Insurance July 19, 1999.

"We wouldn't tell you or anyone that the reason to pass tort reform would be to reduce insurance rates."
--Sherman Joyce, President of the American Tort Reform Association, "Study Finds No Link Between Tort Reforms and Insurance Rates," Liability Week, July 19, 1999.

Even if caps were to result in a modest reduction in premiums (something which could also be accomplished in a less objectionable manner) this does nothing for the other problems caused by malpractice. The failure of caps to reduce health insurance premiums have already been discussed. Attorneys, and most likely the general public, often fail to understand the reaction of physicians towards malpractice suits. While being in the courtroom is part of every day life for an attorney, being sued is something a physician never wants to face. For a physician, the main concern is not to be sued at all, not simply avoiding huge settlements. Most suits do not result in a finding against a physician, but physicians want to avoid being sued win or lose. Exclude the five percent of physicians who are responsible for most of the large suits, and the majority of remaining settlements are below the level where caps would be a factor. Caps would not protect us from frivolous suits, and therefore would also do nothing to reduce the forces which promote defensive medicine. For example, The Palm Beach Post, reviewing tort reform in Florida (June 20, 2004), quoted doctors who did not find the caps to be helping with their malpractice concerns.

The evidence is questionable as to whether caps have any significant long-term effect on malpractice premiums. Caps do not significantly lower health insurance premiums, reduce the risk of frivolous suits, or reduce defensive medicine. For the benefit of physicians reading this, resorting to caps is like treating diabetic patients with a marginal reduction in blood sugar (without a significant decrease in the glycosylated hemoglobin), but failing to address their hypertension, hyperlipidemia, and tobacco use. Even if caps did reduce premiums, their adverse consequences would be like treating a fungal infection with Amphotericin B. Just as we have newer, safer, antifungal agents we also have safer and more efficacious answers to the malpractice crisis from John Kerry and John Edwards.

Some might find it reasonable to combine caps with other measures such as those proposed by John Kerry and John Edwards, but even this option appears to be closed to us. Ted has indicated his intention to next criticize John Kerry's proposals. Apparently it is not possible to support George Bush and to support proposals such as pre-trial review, encouragement of arbitration, regulation of malpractice insurance rates, and possibly tax credits to offset excessive premiums. While I would encourage my colleagues to think twice about the effects of caps, some proponents of John Kerry's other malpractice solutions support him in the hope of simultaneously obtaining caps on the state level.

Ted continues to dwell on John Edwards, but this is all irrelevant, as it has never been refuted that his cases were consistent with the medical knowledge at the time of the suits. I see no point in engaging in debates as to whether Edwards' decisions of a decade ago were correct in light of the medical knowledge of today. No physician would want anyone evaluating their medical decisions of a decade ago based upon the medical knowledge of today.

Even if caps were of some value, we must consider their deleterious effects, and chose alternatives when offered others which are as efficacious. It is inevitable that settlements in different cases will be inconsistent, and there are difficulties in quantifying a fair settlement. This does not mean we should not try, and does not justify mandating an arbitrary nation wide cap. In reading the news it appears Ted suffers from a common phenomenon of increased awareness to information which supports one's interests. We see this as Ted stressed the isolated hospital which bucked the trend in reviving old policies on Caesarian sections. This is again evident, as Ted believes there have not been media reports of people failing to receive adequate compensation for injuries. In contrast, I have noted that such examples are common in articles critical of caps.

The National Journal's review of malpractice plans by nonpartisan experts provided an objective comparison of the plans of John Kerry and George Bush. Their numerical scores are partially a gimmick to make the article more readable, but this does not diminish the significance of their conclusions favoring John Kerry's proposals. This nonpartisan group felt that John Kerry's proposals would do more than George Bush's proposals to reduce the squeeze on physicians despite opposition to caps. It is unnecessary to limit the rights of those who have truly suffered from negligence to reform the system and protect innocent doctors.

Ted's repeated arguments against compensation for victims adds credence to the belief often expressed by Democrats that the Republican goal is not really malpractice reform but to change the entire legal system so all industries beyond the medical profession to be virtually immune from responsibility for damages they cause. As I cautioned in a post above, the effects of George Bush's policies, and his ultimate goals, are often quite different than those he states. When viewed from the point of view of those who want to restrict all ability to obtain compensation for negligence of any cause, the prejudices expressed against John Kerry are more understandable, if misguided.

If the goal is to prevent those who have truly suffered from negligence from being able to receive just compensation, then yes, it is true that John Kerry and John Edwards are not on your side. However, for physicians who want true malpractice reform, John Kerry will do more for us than George Bush. John Kerry's plans will help to lower malpractice premiums, reduce physicians' risk from frivolous suits, and reduce the forces driving defensive medicine, without denying individuals their rights to receive fair compensation for injuries and without allowing the federal government to arbitrarily supersede the decisions of local juries. Under John Kerry's plans, we can do better.

Not quite beach reading but still good... - PointOfLaw Forum

The Washington Legal Foundation has a variety of interesting new articles on its website, including one analyzing the new California law granting the state 75 percent of punitive damages awards. The article (written by three of my Shook Hardy colleagues) addresses problems with so-called "split recovery" laws but ultimately concludes that given the two-year operational window, the California law is unlikely to affect many cases. The issue bears watching, though, because the enactment of a split recovery law in a trend-setting state like California may encourage other states to adopt similar laws. See Victor E. Schwartz, Mark A. Behrens & Cary Silverman, Legal Opinion Letter: New California Law Grants State 75% of Punitive Damage Award, Sept. 3.

Other articles well worth reading include Rep. Lamar Smith's piece on the federal Lawsuit Abuse Reduction Act, H.R. 4571, which seeks to combat rampant nationwide forum shopping and frivolous lawsuits by identifying appropriate forums for the filing of personal injury lawsuits and strengthening sanctions against attorneys who file frivolous claims in federal court, and Jones Day litigator Chuck Moellenberg's piece on the potential for the use of public nuisance standards against obesity lawsuit defendants, in light of their earlier use in regulation through litigation suits against other industries. See Congressman Lamar Smith, Legal Opinion Letter: Stopping Frivolous Litigation and Protecting Small Businesses, Sept. 3; Charles H. Moellenberg, Jr., Legal Backgrounder: Heavyweight Litigation: Will Public Nuisance Theories Tackle the Food Industry?, Sept. 3.

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