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POL COLUMNS « Time for Payee Notification | Simply Wrong »

October 16, 2006

End Open-Ended Litigation

By Ted Frank

This piece originally appeared on, 9-07-06

The Patagonian toothfish sold much better once a marketing association renamed it Chilean sea bass, though most such fish are neither Chilean nor bass. The Association of Trial Lawyers of America, which acquired a bad reputation over the years, is apparently seeking a similar rebirth by renaming itself the American Association for Justice. But a perusal of some recent cases pushed by the plaintiffs' bar show much more of an interest in benefiting trial lawyers than in fairness or justice.

One of the fundamental rules of fairness, from the kindergarten playgrounds to corporate boardrooms, is that a deal is a deal. But more and more, trial lawyers are trying to undo this concept retroactively in lawsuits that posit that a deal isn't a deal if it can be rewritten in a way to provide benefits to yesterday's consumers (and, not incidentally, their attorneys). Such lawsuits are not only unfair and unjust; in the long run, they end up hurting future consumers.

Consider the following cases:

Almost every home-owners insurance policy in the United States has a clause excluding coverage for flood damage. (A government-subsidized flood insurance program makes it uneconomic for private insurance companies to include flood insurance in homeowners' policies. Insurers thus only offer the government policy.) Every insurance holder in America benefits from these exclusions by being able to receive affordable insurance for non-flood risks, because the price of the policy reflects the level of risk incurred by the insurer. Nevertheless, trial lawyers—egged on by Mississippi's state attorney general, Jim Hood—seek to retroactively rewrite the policies by suing insurers to force them to pay money for a risk they did not agree to assume.

In New Jersey, a judge certified a class action lawsuit against Merck over Vioxx—but not for the reason you think. The plaintiffs do not claim to have suffered personal injury from using Vioxx; nor do they even claim that the drug failed to aid the users' arthritis. Yet they seek billions of dollars (triple what Merck sold Vioxx for) on a theory that an overbroad "consumer fraud" statute does not require plaintiffs to show that they were actually defrauded or that anyone was injured. Such injury-free theories of class actions threaten businesses every day and have resulted in billions of dollars of payout.

FedEx Ground has a clever business model to motivate its drivers. Rather than hire employees paid by the hour, it contracts with thousands of independent contractors to manage everyday operations and delivery routes. These entrepreneurs get the benefit of additional autonomy and the opportunity to grow their own business. More than a thousand contractors grossed over $150,000 in 2004. Of course, the reward is not without risk, and some contractors end up worse off than if they had been paid an hourly salary. Trial lawyers, with the help of unions resentful of the non-union FedEx's success, have tracked down a small number of disgruntled former contractors and have brought a class action to retroactively reclassify all of FedEx Ground's drivers—winners as well as losers—as "employees" entitled to overtime. Other industries have been similarly targeted with overtime lawsuits; most ludicrous are cases of lawyers bringing suits claiming that stockbrokers making hundreds of thousands of dollars a year are entitled to billions of dollars of overtime from brokerage firms.

It has even gotten to the point that lawyers for big corporations are trying out the game. Last year, Wal-Mart tried to void a contract with one of its former executives in an unsuccessful effort to recover a few hundred thousand dollars it failed to account for in negotiating his retirement package.

You know there is a problem when even Wal-Mart attorneys fail to recognize that the business would be better off on the whole with a legal rule that strictly enforces contracts rather than one that assesses their validity retroactively on a case-by-case basis.
Most of these lawsuits are likely to fail, but our lottery-style litigation system rewards the attempt. With billion-dollar payouts possible, well-funded plaintiffs' attorneys acknowledge that they run a good profit even if they only win a small fraction of cases. FedEx Ground has won the vast majority of its employment litigation cases, but all it takes is for one judge to rule incorrectly to threaten to bring down their entire business model.

In banana republics across the globe, economies come to a standstill because the risk of confiscation or corruption keeps many investments from ever happening. The same danger occurs when the expropriation is conducted by lawyers in the name of "justice." If businessmen and entrepreneurs -- be they insurers, manufacturers of lifesaving pharmaceuticals, or the small businesses that deliver your packages—have to account for the risk that their contractual arrangements will be disregarded by courts, they have to raise prices to account for that risk. Such increased prices mean fewer contracts are signed and fewer businesses are started. Consumers are worse off, not just because they now have fewer options, but because the economy is smaller as jobs and opportunities are lost. The only beneficiaries are the lawyers.

How to solve this problem? The Class Action Fairness Act (CAFA), which was passed last year and effectively consolidates identical class action lawsuits in a single federal court, was a good start. (Alas, that bill isn't retroactive, so thousands of pre-CAFA class actions, like the one Merck faces in New Jersey, remain in state court.) The fuzzy line between "employees" and "independent contractors" needs to be cleaned up with rules that are consistent from state to state. Consumer-fraud laws need to be rewritten so that they are helping consumers rather than attorneys. And politicians and judges need to understand the power and danger of using courts to undo settled expectations. We need laws that improve certainty, thus reducing business risk, lowering prices and creating jobs. That would be real justice and would do more for consumers than any class action lawsuit.

Ted Frank, a former litigator, is a resident fellow at the American Enterprise Institute for Public Policy Research and director of the AEI Liability Project. The author represented Merck in 2005, but does not speak for Merck or its attorneys.

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The Manhattan Insitute's Center for Legal Policy.