Moore: Time to stop the trial lawyer tax
In the United States, trial lawyers have long been a contentious presence in the legal landscape, often viewed as a significant obstacle for employers. Notable cases from the 1990s exemplify this sentiment, such as the infamous McDonald’s coffee lawsuit, where a customer was awarded $500,000 for burns from excessively hot coffee, and a Washington man who sought $50 million from a dry cleaner for losing a pair of pants. These cases have contributed to a perception of a legal system rife with frivolous lawsuits, with a RAND study revealing that approximately 80% of class action damages are consumed by legal and administrative costs, leaving a mere 20% for the plaintiffs. The economic impact of excessive litigation is staggering, with estimates suggesting it could shrink the U.S. productive economy by up to $500 billion annually, as tort costs have surged at an alarming rate of 7.1% per year—more than double the inflation rate.
While it is essential to ensure victims receive just compensation for corporate misconduct, the line between legitimate grievances and opportunistic lawsuits can be blurred. The notion that every injury could lead to a lawsuit against manufacturers raises concerns about the viability of entire industries; for instance, if every skier could sue ski manufacturers for accidents, skiing itself might become untenable. In response to the rampant trial lawyer influence in the 1990s, Republicans enacted reforms to curb excessive litigation, a key component of their “Contract with America.” Historically, trial lawyers have favored Democratic contributions, but a shift is occurring as they now target Big Tech and Big Media with lawsuits, industries often seen as antagonistic to conservative principles.
Complicating the situation further is the rise of “third-party litigation funding,” where investors finance lawsuits in exchange for a share of the proceeds. This practice has raised ethical concerns, as it allows unknown investors to profit from legal battles, often at the expense of the actual plaintiffs. With over $2 billion in new financing agreements anticipated for 2024, and total assets of these funds reaching $16.1 billion, the potential for exploitation is significant. Jurors may mistakenly believe they are aiding genuine victims, while substantial awards might flow to investors rather than those legitimately harmed. In light of these challenges, Rep. Darrell Issa’s introduction of the Litigation Transparency Act aims to mandate disclosure of these funding agreements in federal civil cases, offering a potential remedy for the lack of transparency in this burgeoning industry. Ultimately, frivolous lawsuits not only burden targeted companies but also diminish economic prosperity for all, highlighting the urgent need for reform and transparency in litigation practices.
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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.
