Moore: Time to stop the trial lawyer tax
In the landscape of American litigation, trial lawyers have long been viewed as a significant challenge for employers, with their influence and practices often leading to excessive costs and burdensome lawsuits. Historical cases, such as the infamous McDonald’s coffee spill incident in the 1990s, where a customer was awarded $500,000 for burns from hot coffee, exemplify the extremes of tort claims. Additionally, a Washington man’s $50 million lawsuit against a dry cleaner for a lost pair of pants highlights the potential for frivolous litigation. A RAND study underscores this concern, revealing that approximately 80% of damages awarded in class action lawsuits are consumed by legal and administrative fees, leaving a meager 20% for the actual plaintiffs. This excessive litigation is estimated to shrink the U.S. economy by as much as $500 billion annually, with tort costs rising at an alarming rate of 7.1% per year, significantly outpacing inflation.
While it is essential to ensure that victims of corporate wrongdoing receive just compensation, the distinction between genuine grievances and opportunistic lawsuits is crucial. The notion that every injury can lead to litigation could stifle entire industries; for instance, if skiers could sue ski manufacturers for accidents, the sport itself could be jeopardized. In the 1990s, Republican lawmakers sought to rein in the most egregious practices of trial lawyers, enacting reforms as part of their “Contract with America.” However, the landscape is shifting, as trial lawyers are now increasingly targeting Big Tech and Big Media—sectors that conservatives often criticize for their perceived hostility towards free-market principles.
A troubling trend in this evolving litigation environment is the rise of “third-party litigation funding.” This practice allows external investors to finance lawsuits in exchange for a share of the potential judgment, often leaving the injured parties with a fraction of the award. This system has grown rapidly, with over $2 billion in new financing agreements anticipated for 2024, resulting in total assets of $16.1 billion in litigation funding. Critics argue that this practice obscures the true motivations behind lawsuits, as juries may believe they are supporting victims when, in reality, the bulk of potential awards may benefit unseen investors. To combat this lack of transparency, Rep. Darrell Issa (R-Calif.) has introduced the Litigation Transparency Act, which aims to mandate the disclosure of these funding agreements in federal civil cases. The overarching message is clear: frivolous lawsuits do not just harm targeted companies; they have broader implications for the economy, ultimately making us all poorer.
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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.
