With the passage of the Class Action Fairness Act in February, Sean Mooney assesses the chances of major tort reform in the US
Given the shift towards a more conservative US electorate, as exhibited by the 2004 national elections, it was reasonable to expect the tort reform movement would gain strength. And in mid-February 2005 supporters had an early victory with the passage of the Class Action Fairness Act.
Supporters portray it as a return to the principle of the US Constitution's commerce clause, whereby the federal government has the exclusive power to regulate interstate commerce. The class action law grants federal courts original jurisdiction over class actions where any member of a proposed class is a citizen of a different state from the defendant. The bill also restricts coupon settlements, where class members are awarded coupons that are frequently of little value, while attorneys receive cash.
The passage of class action reform has been downplayed in the business media. It is argued the bill involves modest reshuffling of forums without addressing the fundamental cost drivers of the tort system, such as pain and suffering awards and punitive damages.
It also can be argued, however, that this reform is a major step forward for three key reasons. First, any victory, however modest, over the powerful plaintiff attorney lobby provides comfort to small businesses, corporations, professionals and insurers who are fighting every day for a less abusive liability system.
Second, tort reforms need to be judged in the wider context of the common law system of liability in the US. Under common law principles, judges can expand or contract the law, guided by what they view as the interests of society.
In the four decades following World War II, this meant an expansion of liability, as judges viewed that a wealthier and more caring society wanted to make it easier for injured plaintiffs to recover compensation for economic and non-economic losses.
The steady expansion of liability finally resulted in a collapse of the liability insurance system in the mid 1980s. Following this, the system stabilised for a while, partly as a result of tort reforms passed in various states. It, however, also may have been largely due to judges' recognition of the impact of their decisions on society. As judges search for guidance on what society wants, one fairly clear guide is provided by legislators - if the representatives of the people vote to restrain liability, then judges are encouraged to show restraint.
Finally, the class action victory can be viewed as an unusual one for the general populace over special interests. Representative democracies face the problem of the tyranny of the special interest minority over the broad body politic.
SPECIAL INTEREST GROUPS
A special interest group, eg farmers, trade unions or plaintiff attorneys, can have significant power in a representative democracy, particularly when they are not balanced by another group with an opposing position.
The influence of special interest groups has been accentuated by the growing need for massive funding to win public office.
In this context, it is not surprising that the most successful tort reforms at the state level have been in medical malpractice, where the power of the special interest group of plaintiff attorneys was exceeded by another special interest group, namely medical professionals. The class action victory was remarkable, representing a victory by the overall business community.
Given this favourable step in class action, what other reforms may be anticipated in 2005?
At federal level, asbestos and medical malpractice reforms appear to be the next candidates for action.
The plan for asbestos is to create a fund of about $145bn, jointly funded by potential corporate defendants and insurers. Claimants would be paid out of this fund and corporations would see relief from the costs of asbestos litigation. However, there is wide disagreement on the detail. So while there is broad agreement on the need for a more rational approach to resolving the asbestos mess, the differences are probably too wide to allow for change this year.
Proposed reforms to medical malpractice law at federal level include limiting pain and suffering to awards to $250,000 and capping attorney fees. Twice in 2004, federal malpractice reform failed in the Senate, as cloture (a parliamentary procedure requiring 60 votes in the US Senate to close debate) could not be achieved. It will be interesting to see if this log jam can be overcome in 2005.
The legislation was fairly similar and the Colorado Act, House Bill, 1150 was typical of the reform passed. It exempts manufacturers, packers, sellers and others in the food distribution chain from civil liability when the claim is for weight gain, obesity, health conditions related to obesity or weight gain or any other injury caused by the long-term over-consumption of food. The exemption does not apply when there is a claim for a material violation of federal or state law and the injury was caused by the violation.
It is an illustration of the power of special interest groups. Obesity liability was hitting major players, like the fast food chains, and these groups were able to mount an offensive that overwhelmed the plaintiff's bar.
From the insurance industry perspective, the most favourable development at the state level was probably the passage in Ohio of asbestos, silica and mixed dust reform. The Ohio legislation established minimum medial requirements for filing asbestos, silica and mixed dust claims based on the American Medical Association's guides to the evaluation of permanent impairment.
The goal is that the truly sick are compensated more quickly and to abolish the use of mass screenings to recruit plaintiffs who are not currently sick. This legislation, if copied by other large states, could have a significant impact in reducing the overall costs of toxic torts.
At both the federal and state levels, battle lines have been formed and action has been joined in the civil liability war. Given that 2005 is an election off-year, this may turn out to be the year when significant steps are taken in advancing the cause of sensible and measured tort reform.
Sean Mooney is chief economist at Guy Carpenter & Co. The views expressed herein are solely those of the author and do not necessarily represent those of Guy Carpenter & Co.
AT STATE LEVEL
- 20 states passed some form of tort reform in 2004.
- By far the most common measure passed in 2004 was obesity litigation reform.
- No fewer than 12 states - Arizona, Colorado, Florida, Georgia, Idaho, Michigan, Missouri, Ohio, South Dakota, Tennessee, Utah and Washington - passed the so-called "cheeseburger bill." The Personal Responsibility in Food Consumption Act seeks to dam the flow of lawsuits against manufacturers and distributors of non-alcoholic beverages and food on the basis of obesity claims, stating that each individual is personally responsible for the food they consume.
THE PRESIDENT SAYS
President George W Bush, said at the bill signing ceremony for the Class Action Fairness Act: "The Class-Action Fairness Act of 2005 marks a critical step toward ending the lawsuit culture in our country. The bill will ease the needless burden of litigation on every American worker, business, and family. By beginning the important work of legal reform, we are meeting our duty to solve problems now, and not to pass them on to future generations."