EXCESSIVE PRIVATE LITIGATION:
THE IMPACT ON BUSINESS AND CONSUMERS
As the Commission considers whether to advocate legislation to increase the incentives for private
litigation of competition law claims, a key issue will be how such prospective changes could affect
Europe’s economy, specifically the impact on consumers, businesses and employees.
1
The
2
experience of US businesses – including US divisions of European and Canadian companies –
demonstrate how broad procedural and substantive rules providing incentives to litigation produce
economic harm not only for individual companies, but also for their employees and the greater
society. The cost of litigating is exorbitant in the US for all types of civil cases including antitrust. For
example, US tort litigation costs have increased nearly three times faster than its GDP since 1950 –
to a 2003 total of $246 billion (€196.8 billion) or $845 (€676) per US citizen per year3.
Moreover, while a review of US federal court filings from 1990-2004 shows a substantial increase in
virtually all areas of civil filings, the increase is particularly pronounced in the most expensive types of
litigation4. For example, the total number of federal civil cases filed during the five-year period from
2000-04 was 17 percent higher than the number of cases filed during 1990-94. During those same
periods, the total number of civil antitrust cases rose 33 percent – almost twice the overall rate. This
increase is particularly noteworthy since antitrust cases are typically more complex and expensive to
litigate than the average civil suit because they often require examination of complex facts and
economic issues. In the courts of the 50 states, antitrust filings show an even greater increase, more
than doubling between 2000 and 20035.
The growth in private antitrust litigation has rapidly outstripped the number of government cases. In
1961, the US Justice Department and the Federal Trade Commission initiated a total of 54 antitrust
1
For example, just this past February Credit Lyonnais agreed shortly before commencement of a trial to pay $600
million (€492 million) to settle civil actions stemming from the 1991 collapse of a life insurance company that was
subsequently purchased by Credit Lyonnais, which at the time was owned by the French government. The Los
Angeles Times, “French Settle Executive Life Suits,” February 16, 2005.
2
For example, in Mississippi in 1995, a local funeral home owner sued the Canada-based Loewen Group, a publicly
traded company that purchases and operates funeral homes, for antitrust and fraud violations. After a two month trial,
a jury awarded the local owner $260 million, which jurors later increased to $500 million during the punitive phase.
Andrew Nikiforuk, “Eleven Feet Under,” Report on Business, December 2004, p. 67.
3
Towers Perrin Tillinghast, “US Tort Costs: 2004 Update,” p. 3.
4
See Administrative Office of the US Courts, “Federal Judicial Caseload Statistics,” Table 2.2 (Civil Cases Filed by
Nature of Suit), 2004.
5
Actual numbers were 122 cases filed between October 1, 1999 and September 30, 2000 and 249 cases filed
between October 1, 2002 and September 30, 2003. See Howrey Simon Arnold & White, LLP, “Trends in Antitrust
Litigation: The New Breed of Class Action” The Antitrust Review of the Americas, 2005. For context it should be noted
that the state court systems are much larger and have many more judges than the federal system. For example, the
National Center for State Courts estimates that in 2002, 16 million civil cases were brought in US state courts
(“Examining the Work of State Courts 2003”, p. 11). This compares with fewer than 300,000 civil cases brought
annually in federal district courts (Administrative Office of the US Courts, “Federal Judicial Caseload Statistics 2004”,
Table 2.2).
and restraint of trade cases while private entities filed 378 cases6. By the late 1970s and early
1980s, the number of federal cases initiated annually had remained fairly constant at between 50 and
60.7 However, private antitrust litigation exploded, as between 1,000 and 1,600 new private claims
were filed annually. The ratio of private to public filings had gone from roughly 7:1 to an average of
about 25:1 between 1977 and 1984.
Many of the examples of the costs of private commercial litigation discussed in this paper are of large
tort cases involving issues like product liability. However, these cases also serve as good proxies for
the costs of other complex and expensive litigation such as antitrust. Most importantly, antitrust and
other commercial and tort cases are brought in the US in the same state and federal courts under the
same procedural rules that make US litigation so expensive. As discussed in the other papers these
include very intrusive discovery rights, contingency fees and liberal class action rules. To make
matters even more expensive for antitrust litigants US antitrust law provides for treble damages8.
This increase in complex, multi-year litigation, such as civil antitrust, is important because of what it
portends for the future of the economies in Europe and America. As the Commission is most likely
well aware, the financial burdens caused by America’s legal system and its growing caseload are
beginning to directly harm European businesses. Zurich Financial reports that for directors and
officers liability policies, “increases of 300 or more percent are not uncommon for [European]
companies with a US [stock] listing”9. Moreover, the liability coverage limits on these policies are
being lowered “dramatically… and several restrictions are being introduced in the policy wordings”10
as European business leaders become embroiled in US civil litigation which often has a “scorched
earth” character because it is so expensive. With American trial attorneys already teaming up with
European firms to pursue trans-Atlantic litigation in such areas as asbestos, product liability, and
securities11, procedural changes by the Commission to promote antitrust litigation will only expedite
this already increasing cost burden.
6
William F. Shughart II, “Private Antitrust Enforcement: Compensation, Deterrence, or Extortion?”, Regulation, Fall
1990.
7
Id.
8
By contrast: “In the United Kingdom, as a direct response to the extraterritorial application against UK companies of
treble damages awards in litigation under the Sherman Act, parliament enacted the Protection of Trading Interests Act
1980 (the 1980 Act) . This essentially confirmed the English court's lack of jurisdiction to enforce US treble damages
awards on the grounds that they are penal in nature and therefore unenforceable under commonly accepted principles
of private international law. . . . Other jurisdictions have adopted similar legislation.”
http://www.crowell.com/content/Resources/Publications/treble-damages.htm
9
Vincent Vandendael, “D&O Liability in Europe: Litigiously Lagging, But Catching Up Fast,” Industry Insight, July
2003.
10
Id.
11
See “Can You Say Tort?,” Forbes, December 27, 2004.
1.
THE IMPACT OF MASSIVE PRIVATE LITIGATION ON BUSINESSES AND THE ECONOMY
There are two ways to measure the economic harm caused by the flood of often meritless
litigation. First, there are the direct costs that defendants must bear to defend themselves,
even against groundless suits. For business, these costs include spiralling legal fees and
expenses for discovery and document production costs, pre-trial proceedings, trials, time that
executives must spend preparing for and being deposed and testifying at trial, and increased
budgets to fund in-house law departments. Under the rules of America’s legal system, these
costs are rarely recouped, even when a suit is so lacking in merit that a judge dismisses it.
These direct costs also factor into an additional litigation cost: a company’s decision to pay a
settlement simply as the price of avoiding the costs (financial, to a company’s reputation and
in terms of executive distraction) of a trial.
The second area of economic harm goes well beyond defendants’ immediate litigation costs
to include the larger losses to society as a whole. As litigation costs take an increasing share
of company budgets, the result is fewer resources available for research, capital investment,
market development and other areas that boost productivity and generate new jobs. As the
evidence shows, America’s litigation burdens directly impact its business’ ability to produce
new goods and services and overall employment:
•
A survey of 500 US CEOs by the Conference Board found that lawsuits caused 36 percent of
their companies to discontinue products, 15 percent to lay off workers, and 8 percent to close
plants12.
•
A Gallup survey of US small businesses found that 26 percent of owners said that fear of
liability kept them from releasing new products, services or operations to the market13.
•
A (US) state-by-state economic analysis of employment and productivity in 17 industries
showed that “reductions in liability levels [by individual US states] are associated with
increases in measured productivity and employment.” Specifically, the study by two Stanford
University professors found that US states that adopt reforms to reduce abusive litigation
practices “exhibit higher productivity growth” than US states that do not14.
At a macroeconomic level, the impact of America’s litigation system is severe. In 2002, a
federal government analysis concluded that excessive tort litigation costs in 2000 were an
12
See US Senate Commerce Committee Report on Product Liability Reform Act of 1997.
See National Federation of Independent Businesses, National Small Business Poll, June 11, 2002.
14
Thomas J. Campbell et al., National Bureau of Economic Research, “The Causes and Effects of Liability Reform:
Some Empirical Evidence,” Working Paper No. 4989.
13
$87 billion (€69.6 billion) drag on the US economy15. The study estimated that the impact of
wasteful legal expenditures equates to a 1.3 percent tax on consumption or a 2.1 percent tax
on wages – and this assumes that all monies paid to plaintiffs for both economic and noneconomic damages are appropriate16. Given that US defendants often find that paying to
settle is less expensive than mounting a defense and given the absence of a “loser pays” rule
in US courts (see paper on contingency fees), an assumption that all damages are legitimate
seems out of touch with reality, as the study’s authors concede. (For a particularly expensive
example of this problem, Yale Law School professor George Priest has noted that
manufacturers of silicone breast implants paid $4.2 billion (€3.36 billion) in 1994, to settle
health-related litigation, despite “predominant scientific evidence indicating no relationship
between the implants and the diseases claimed by the plaintiffs”17.)
When federal
economists factored in the excessive nature of non-economic damages, they concluded that
the cost to the US economy was $136 billion – the equivalent of a 2.0 percent consumption
tax or a 3.3 percent tax on wages.
2.
LITIGATION COSTS: IMPACT TO SOCIETY
Innovation is often a casualty of excessive litigation.
Few industries feel the effects of
litigation more acutely than do the pharmaceutical and biotechnology industries, where
litigation (or even the threat of it) is keeping medical advances away from patients who may
die without them. "We have technology in hand to prevent [newborn deaths from a fatal form
of strep],” says Dr. Paul Offit, chief of infectious diseases at Children's Hospital of
Philadelphia, “But no company is going to step forward to prevent that disease because it
would mean giving the vaccine to a pregnant woman, which in this country can't happen
because of fear of litigation"18.
In 1998, the US Food & Drug Administration approved a vaccine for Lyme Disease, which
strikes more than 20,000 people annually. But under US law, FDA approval does not shield a
company from liability. The producer, GlaxoSmithKline, stopped production of the drug in
2001 after class action lawsuits were filed based on rumours of a link to arthritis19. Finally, on
15
US Council of Economic Advisors, “An Economic Analysis of the US Tort Liability System,” April 2002.
Id.
17
George Priest, “What We Know and What We Don’t Know About Modern Class Actions,” Civil Justice Report,
February 2005.
18
United Press International, May 24, 2005
19
William Tucker, “The Flu Vaccines Shortage,” Science & The City Magazine (a publication of the New York
Academy of Sciences), January/February 2005.
16
an even more pressing vaccine need, the EU has recognized how liability concerns
“contribute to under-investment” in the effort to produce an HIV vaccine20.
For manufacturers, higher litigation costs lead to higher production costs, which hinders their
ability to compete internationally with producers in countries with lower legal costs. A 2003
analysis of tort litigation costs for the United States and five of its largest trading partners
(Canada, Japan, Germany, the United Kingdom, and France) shows that US tort costs, at two
percent of Gross Domestic Product, were 50 percent higher than tort costs in Germany (1.3
percent of GDP) and more than twice as high as tort costs in the other four nations21. The
study concludes that these increased US litigation costs – particularly asbestos litigation –
threaten the economic viability of domestic manufacturing plants.
Litigation costs can also be a key determinant as to whether an undertaking will enter or
continue in a product market. This is particularly important given the financial and time
strains that litigation places on a corporate defendant.
For example, in the late 1980s,
litigation began in the US involving medical implants manufactured by a company named
Vitek. Since each joint contained approximately US$ 0.05 (€0.04) of Teflon, a product of the
E.I. DuPont de Nemours Co., DuPont was named in more than 650 US lawsuits. During
nearly 10 years of litigation, DuPont won every case, but with litigation costs totalling almost
$50 million, the company decided it would no longer sell medical device products.
For a more specific example of the relationship between exposure to litigation and economic
development, consider the US single-engine airline industry.
In 1978, US companies
manufactured 17,800 planes. By 1994, due largely to increasing litigation expenses, singleengine airplane manufacturing had declined 95 percent to 928 planes and the industry had
lost more than 100,000 jobs.22 Cessna Aircraft Co., the largest small aircraft manufacturer in
the world, had stopped making single-engine planes and Piper Aircraft Co. was in
bankruptcy. Over a 10-year period, Raytheon Beechcraft Co. averaged $535,000 (€428,000)
per accident in litigation costs, although there was no indication from federal investigators of
any design flaws23.
In 1994, President Bill Clinton signed a law giving aircraft manufacturers limited liability
protection. Within six years, US production had grown to 2,816 planes and the industry
generated more than 25,000 manufacturing jobs24.
20
“Making An HIV Vaccine Available For The Developing World: The European Union’s Strategy And Actions,” EU
website (http://europa.eu.int), May 31, 2000.
21
Jeremy Leonard, “How Structural Costs Imposed on US Manufacturers Harm Workers and Threaten
Competitiveness,” prepared for the National Association of Manufacturers, 2003.
22
See General Aviation Manufacturers Association (GAMA.org), “GARA: Ten Years Strong,” December 2004.
23
Id.
24
Id.
Finally, America’s continuing litigation over asbestos-related injuries provides an even starker
example of how the US legal system is expensive for business and ill-suited to resolve
injuries. An independent study, released in May 2005, describes asbestos litigation as the
longest-running mass tort litigation in the United States25. More than 730,000 people have
filed asbestos-related claims, with the number increasing sharply in recent years, primarily by
people who claim non-cancerous injuries (90 percent of all new claims). This litigation has
forced more than 70 companies into bankruptcy, cost to business more than $70 billion –
while claimants receive only 42 cents per dollar of litigation cost.
Compare the US situation with that in the Netherlands where asbestos-related disease in the
1970s-80s was five to ten times higher than in the US26. From 1981 to 1991 fewer than ten
asbestos suits were filed (out of a total population of 15 million), compared with more than
200,000 suits in the US (out of a total population of 248 million)27. Instead of litigating, Dutch
residents received compensation from the government.
3.
CONCLUSION
In recent years, America’s legal system has produced significant increases in private litigation
mostly against businesses. One report found that between 1988 and 1998, federal class
action filings increased by 340 percent and state class actions increased more than 1.000
percent28.
This increasing caseload absorbs significant company time and resources but
provides little economic benefit to plaintiffs (as will be explained in the paper on class actions)
and harms the employees and shareholders of the defendants. The costs of litigation in
America seem destined to grow during the coming years and they may to spread to Europe
depending on policy choices made by European legislators and officials. Given the economic
risks of these burdens, the Commission would be well advised to consider what unintended
consequences might result from its well meaning efforts to enlist the enterprising resources of
the private sector in bringing law suits against putative violators of the competition laws.
25
RAND Institute for Civil Justice, “Asbestos Litigation,” May 10, 2005.
Robert Kagan and Lee Axelrad, “Regulatory Encounters: Multinational Corporations and American Adversarial
Legalism”, University of California Press, 2000.
27
Id.
28
Federalist Society, “Class Action Watch,” Vol. 1 No. 1, 1999.
26