Nick Smith, December 15, 2002

Foreign policy has dominated the news recently, with the continuing war on terrorism, the weapons inspections in Iraq, and the discovery of the North Korean Scud missiles being sent to Yemen. When I met at the White House with the President’s Senior Advisor Karl Rove, there was also interest in speeding up economic recovery. The shakeup in the economic team with John Snow as the new Treasury Secretary is part of that. But another issue is reducing the cost of running a business in the U.S. One problem is the high cost of litigation.

According to a 2002 White House study, the U.S. has the world’s most expensive tort system. The $636 cost per capita - seen in higher prices for American-made products and health care - is more than twice the average of other industrialized nations. It’s also a problem that just 42% of these costs actually go to victims with the rest for attorneys and insurance administration. The $179 billion Americans spent in 2000 for insurance, attorneys, witnesses, and awards to victims is, for example, 150% of what Americans spent on prescription drugs. Tort liability has tripled over the last 50 years, from 0.6% of GDP - the same as what Great Britain spends today - to the current 1.8%.

The problem lies with so-called non-economic and punitive damages. Economic damages are straightforward calculations of a victim’s monetary losses. Non-economic damages are added to those and usually consist of "pain and suffering." These are very arbitrary, with some juries offering little and others making gigantic awards for similar injuries. In three percent of cases, there are in addition punitive damages, which can be enormous. Multimillion dollar awards for things like spilled coffee or injuries while committing crimes not only encourage lawsuits but also reduce respect for our courts.

There are now a wide range of approaches in Congress to reining in excessive liability. Some suggest a statute of limitations of 15 to 18 years, an exemption for retailers who sell but don’t alter products, and a cap on punitive damages at 200 percent of other damages. Caps on pain and suffering and punitive damages have been suggested for medical malpractice cases. Some propose requiring class action cases worth more than $2 million to be filed in federal court to prevent widespread "shopping" for the most generous court to sue in. Asbestos suits are a recent example of overzealous litigation. With asbestos, which involves $200 billion of claims, there is an effort to reserve awards to plaintiffs who are actually sick, thereby deferring the 90% of cases where plaintiffs have no symptoms.

Though it is clear that something has to be done to reduce the cost of litigation, the federal government should move cautiously. Victims deserve full and fair compensation and we need to avoid excessive federal intrusion into state court systems. Most tort law is state law, and some states, including Michigan, have eliminated punitive damage awards and taken steps to reduce abuse. Other states, where there has been no reform effort, have seen businesses leave, insurance companies refuse to write policies, and doctors move to states with more reasonable medical malpractice systems.

Runaway liability costs are an unnecessary drag on our sluggish economy, destroying companies and jobs. We need to end the abuses, and return to compensating victims appropriately rather than generating huge lawyer’s fees and arbitrary windfalls.

Congressman Nick Smith is a Republican member of the U.S. House of Representatives from Michigan.