CaliforniaRepublic.org, April 9, 2004

According to Governor Arnold Schwarzenegger, excessive litigation against businesses has contributed to California's poor business climate. The governor's argument was recently buttressed by a U.S. Chamber of Commerce report that ranked California's legal system 46th out of the 50 states in terms of fairness to business.

The Chamber survey asked corporate lawyers to grade states in various categories. California ranked last in the area of tort and contract litigation, last in jury fairness, and next to last in its treatment of class-action lawsuits and the award of punitive damages. In addition, Los Angeles was ranked the least fair and reasonable jurisdiction in the country, with San Francisco tied for second.

Why is California ranked so low? Bad laws are a big reason. The infamous section 17200 of the state business and professions code, for example, allows lawyers to file suits against businesses for unfair or illegal practices even if they don't have an actual injured client to represent. Law firms have combed state records for minute regulatory violations by businesses and then threatened expensive lawsuits if the businesses don't settle out of court. Democratic Attorney General Bill Lockyer has called 17200 lawsuits "extortionate."

Angelo Mozilo, chairman and CEO of the mortgage giant Countrywide, cited 17200 lawsuits as a reason his company decided against expanding in California. Writing to then-Governor Gray Davis, Mozilo said, "Nowhere is the state's legal system more dysfunctional than in the area of so-called 17200 'unfair competition' suits." He warned that failure to enact real reforms to 17200 "threatens to permanently consign the state to the bottom rungs of the 50-state economic ladder."

At the other end of the spectrum, small businesses such as auto shops and nail salons have been hard hit by 17200 lawsuits. Garage owner Gary Balikji was sued for paperwork problems and was told by his attorney that it would cost $10,000 to defend himself in court. Balikji settled out of court saying: "I gave them $2,000 just so they would get out of my face. It's complete robbery, but I don't have the time to deal with it." However, Nhan T. Vu, a Chapman University law professor, warns businesses: "Any other groups or attorneys can just find another plaintiff and sue you again. There are auto shops, for example, that have been sued five or six times."

Section 17200 isn't the only area of lawsuit abuse. Lawsuits alleging housing construction defects have mushroomed because builders often require subcontractors to carry liability insurance, which makes the subcontractors part of any suit regardless of whether or not it involves their part of the work. Thus, even if a suit involves a roofing problem, the plumber and the landscaper are also sued.

Contractor Jeff Wilson, whose company has been named in 50 lawsuits in the last two years, which is typical for the industry, says: "It's legalized extortion.... They name everyone they can name because the more insurance carriers, the more money." Unsurprisingly, contractors' insurance premiums have risen 300 to 500 percent. These higher costs are passed on to homebuyers.

No one wants to close off the courts to legitimate complaints. However, California's legal system must strike a fair balance between the interests of both consumers and businesses. As it stands now, there is little fairness or balance in that system.

Lance T. Izumi is director of education studies at the Pacific Research Institute. He can be contacted at lizumi@pacificresearch.org.