Moore: Time to stop the trial lawyer tax
In the ongoing debate over the impact of trial lawyers on the U.S. economy, concerns have been raised about the consequences of excessive litigation on businesses and consumers alike. High-profile cases, such as the 1990s lawsuit where a McDonald’s customer received $500,000 for a coffee burn, and a Washington man who sought $50 million from a dry cleaner for a lost pair of pants, exemplify the extreme outcomes of the legal system. A notable RAND study highlighted that a staggering 80% of damages awarded in class action lawsuits are consumed by legal and administrative costs, leaving only a fraction to the plaintiffs. This trend is contributing to an estimated annual loss of up to $500 billion in economic productivity due to tort costs, which have been rising at a rate of 7.1%, significantly outpacing inflation.
While it is essential to compensate victims of corporate misconduct, the article argues that not every injury can be attributed to corporate malfeasance. The risk of litigation has the potential to stifle industries; for example, if individuals could sue ski manufacturers for injuries sustained while skiing, it could lead to the end of the sport itself. Historically, the Republican Party addressed these concerns in the 1990s with the “Contract with America,” which aimed to curb frivolous lawsuits. However, the landscape is changing as trial lawyers are now aligning with conservative leaders to challenge Big Tech and Big Media, industries often viewed as oppositional to conservative values.
A concerning development in this arena is the rise of “third-party litigation funding,” where investors finance lawsuits in exchange for a share of any awarded damages. This practice raises ethical questions, as it can obscure the true motivations behind lawsuits, with the bulk of financial gains potentially going to investors rather than the injured parties. With over $2 billion in new financing agreements anticipated for 2024, and total assets in these funds reaching $16.1 billion, the need for transparency is more pressing than ever. To address these issues, Rep. Darrell Issa has introduced the Litigation Transparency Act, which would mandate the disclosure of these funding agreements in federal civil cases. The article concludes by emphasizing that frivolous lawsuits ultimately harm everyone, not just the targeted companies, making the push for reform and transparency critical for the health of the economy.
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Trial lawyers have been the bane of U.S. employers for many decades.
The most famous case was back in the 1990s when the courts awarded a $500,000 judgment to a McDonald’s customer who claimed she was burned by coffee that was too scalding hot. Then there was the Washington man who sued a dry cleaner for $50 million for losing a pair of pants.
A famous RAND study found that roughly 80 cents of every dollar in damages paid to class action victims were absorbed by legal and administrative costs, and less than 20 cents made its way the plaintiffs.
Excessive litigation is estimated to shrink the U.S. productive economy by up to $500 billion a year. Tort costs have exploded in recent years at an annual return of 7.1%, more than twice the inflation rate.
Yes, victims deserve to be compensated for corporate bad behavior, as a matter of justice and to deter dangerous and unlawful behavior.
But just because you have an injured party doesn’t mean you have a company villain. If everyone who breaks a leg skiing could sue the manufacturer of the skis, there would be no skiing.
Back in the 1990s, Republicans put a muzzle on the most rapacious lawyers and passed laws to protect businesses from the most outrageous harassment lawsuits. Lawsuit reform was part of the Republicans’ 1994 “Contract with America.” At that time about 80% or more of the trial lawyers’ political contributions went into the coffers of the Democratic Party.
But now trial lawyers are courting the GOP and conservative leaders with a spate of lawsuits against Big Tech and Big Media, two industries that conservatives have traditionally felt are hostile to free markets and conservative values.
Compounding the problem is the new scam called “third-party litigation funding,” which allows law firms to court investors who will fund lawsuits in exchange for getting a share of the judgment if there is a guilty verdict.
Under this practice, unknown investors secretly bankroll lawsuits with “dark money” in the hopes of scoring big verdicts. What’s really nefarious is that the third-party investors, not the injured party, often walk away with the bulk of the jackpot awards.
These lawsuit investment funds are growing rapidly and captured more than $2 billion in new financing agreements for 2024. The total assets of these funds have grown to $16.1 billion.
This method of encouraging and funding lawsuits is of questionable legality. But it most certainly should be transparent so that defendants and the public know the real economic interests behind those suing employers.
The problem with these arrangements is that juries think they are aiding the victim, when the jackpot award for damages can just as readily be directed to the bank accounts of the investment funds.
The good news is that Rep. Darrell Issa (R-Calif.) has sponsored the Litigation Transparency Act, which would require disclosure of these agreements in federal civil cases.
Frivolous lawsuits make us all poorer — not just the company that gets targeted.
Stephen Moore is a former Trump senior economic adviser and the cofounder of Unleash Prosperity.
