Frivolous lawsuits cost everyone

Editorial

Washington, D.C., administrative law judge Roy Pearson last week lost his $54 million case against his drycleaners for losing a pair of his pants.

Fifty-four million dollars. Over a pair of pants.

Thankfully, he lost the case, but why was such an absurd lawsuit even allowed to get that far?

Not surprisingly, the wrangling over Pearson’s pants is only the latest in a long line of such lawsuits. America’s “out-of-control legal system imposes a staggering economic cost of over $865 billion a year” on business and the economy, according to a study released in March based on figures from 2006 by the Pacific Research Institute, a free-market think tank in San Francisco.

That figure includes all costs related to tort law, including administrative and legal fees as well as the cost of lost innovation for businesses.

A “tort” is wrongful conduct or negligence by one person that results in injury to another.

One particularly striking consequence of our nation being sue-happy (remember the McDonald’s hot-coffee incident?) is that it’s hurting U.S. businesses’ ability to compete overseas because it unnecessarily raises costs.

PRI found the U.S. spends 2.2 percent of gross domestic product on direct tort costs, whereas other advanced countries spend on average 0.9 percent. This means more than half of all U.S. tort costs are excessive, if compared with other advanced countries, PRI estimates.

When our rivals don’t face a constant barrage of absurd lawsuits, they gain a competitive advantage.

Of course, access to the courts is necessary for consumers and businesses as a system of checks and balances in the marketplace for serious misdeeds and product failures. However, lawsuits too often become the first-reach response to compensate for even the smallest misfortune, and sympathetic juries too often order companies to pay large sums to individuals who see the court system as little more than an ATM.

What are the potential reforms? In the U.K., as in other developed countries around the world, losing plaintiffs are required to pay the court costs. This allows for serious allegations of business negligence and the like to surface, supported by strong evidence, while keeping citizens from taking advantage of the system to score a big payday.

PRI’s research gives credence to a growing movement for legal reform in the U.S. “If tort reforms that eliminate waste are enacted in the United States, the U.S. economy will approach its full productive potential,” PRI argues.

PRI estimates $684 billion in annual wealth is lost to U.S. stockholders because of tort lawsuits.

It’s past time for making changes to this system.