Ken McElroy Online

Tort Reform, the Medicine Our Legal System Needs

Ken McElroy
January 5, 2003

Efforts to avoid costly lawsuits affect all Americans, whether they've been directly involved in a suit or not. Companies often settle frivolous suits out of court, in fear of greater losses at the hands of juries, driving up prices for products everyone buys. Doctors will order extra tests when diagnosing patients, just to try to avoid malpractice claims, driving up the cost of medical care for everyone. Surgeons in West Virginia have recently been involved in walkouts, to protest malpractice insurance costs that are skyrocketing due to litigation. Doctors in other states have considered similar actions.

The system of civil lawsuits in the United States is the most expensive in the world, and a major drag on our economy. According to the American Tort Reform Association (ATRA), tort cases cost 2.2% of U.S. GDP, higher than any other industrialized nation. Also, according to ATRA, since 1930 U.S. tort costs have grown almost four times faster than the rate of growth of the U.S. economy.

Of course, there are hidden costs as well. The more likely you are to be sued in court, and the more expensive it is to lose, the more you will modify your behavior to avoid lawsuits. This is a good thing, to a point. We want people to change their behavior when it's a clear danger to others. However, if people start to avoid reasonable activities in fear of lawsuits, it has a negative effect on our economy and society.

The profit motive is a fundamental part of the American economic system, leading people to build new businesses, develop new products, and grow the economy. There are times, however, when it is a counterproductive motivation. A prime example of this is when people seek to profit by suing a wealthy corporation, rather than attaining wealth through their own enterprise.

Punitive damage awards provide the greatest chance for the profit motive to distort the pursuit of justice in tort cases. An individual who is injured certainly deserves to be compensated for actual damages, but should they have any reasonable expectation of becoming wealthy as a result? If an average person has even a remote chance of becoming rich from a lawsuit, it will certainly affect their judgment of whether to file one. The expectations of potential plaintiffs will cause a greater number of cases to be filed, driving up litigation costs, whether punitive damages are awarded at the end of a particular case or not.

A few years ago, in a notorious case, a woman sued McDonald's because she spilled a cup of hot coffee in her own lap. Many argued that she didn't deserve any compensation at all, since a reasonable person would expect coffee to be hot. But that suit went much further than just asking for the cost of medical care and maybe car upholstery cleaning. The plaintiff wanted to become a multi-millionaire as a result of her mishap. Such cases are driven more by the desire for riches - for attorneys and plaintiffs - than by the search for justice. The woman was awarded almost $3 million by a jury. Later, the judge reduced the punitive damage award to $480,000. While awaiting appeal, the parties settled for an undisclosed amount.

Opponents of tort reform argue that the damage award was greatly reduced, as occurs in many cases, and that punitive damage awards are uncommon to begin with. While both points are true, they don't address the fact that plaintiffs seeking big payoffs in court, like players of the lottery, may be motivated more by the small chance of a big payoff than by a consideration of the odds.

The solution? Eliminate punitive damage awards to plaintiffs in civil lawsuits. There should be a wall of separation between the goals of compensating victims and punishing wrongdoers. Injured parties would still be able to sue for actual damages, and limited awards for "pain and suffering" are also appropriate in some cases.

This is not advocating that those guilty of negligence or misconduct be let off the hook, but punishment for wrongdoing should be a matter for prosecution in criminal courts or for fines and penalties by regulators, not a means of enriching individuals and trial lawyers.

For example, OSHA can fine employers that are found in violation of worker safety regulations. The EPA can fine corporations that violate environmental standards. Parties that violate securities regulations, like Enron or WorldCom, can be disciplined by the SEC. Doctors that commit serious malpractice can have their licenses suspended or revoked. Real negligence can be dealt with without encouraging profiteering by trial lawyers and plaintiffs.

If Americans want to gamble for riches, they can fly to Las Vegas or buy a lottery ticket. But get lotto fever out of our courts. Elimination of punitive damages in tort cases would be one step in the right direction.