How Lawsuit Reform Could Help California Recover

How Lawsuit Reform Could Help California Recover

SACRAMENTO—California is staring down the barrel of a $19 billion budget deficit, huge debt, and an unemployment rate in excess of 12 percent. Legislators can help the state recover by enacting the lawsuit reforms California desperately needs.

The quality of California’s civil-justice tort climate ranks a dismal 41st out of all 50 states, according to the newly released U.S. Tort Liability Index: 2010 Report. The ranking is based on each state’s tort losses, numbers of tort lawsuits and lawyers, number of huge jury awards, and the presence of plaintiff-friendly “judicial hellholes.”

Since the previous 2008 edition, when it was 34th, California dropped seven places. Its tort losses are the highest of any state, more than $16 billion in 2008, the last year for which complete data are available. California exceeds New York, the second-highest state, by more than $2 billion.

In 2008, a full 16 of the nation’s 101 largest jury awards, more than any other state, were rendered in California. These exorbitant costs are passed on to consumers through higher prices, fewer jobs, and lower wages and benefits for working people. The state is now on the “judicial hellholes” watch list of the American Tort Reform Foundation. These problems have been getting worse, but the state legislature has done nothing to fix them.

California’s tort rules rank 27th in their ability to contain tort costs and risks. In 14 of the 29 tort rules tracked by the Index, the state ranks dead last. California emerges as a “sinner” state because of its weak tort rules in the face of high tort costs and litigation risks. Personal injury lawyers find it easy to target California businesses, leaving collateral damage in the form of job losses.

Lawyers enjoy strong incentives to clog California courthouses with asbestos cases. In a 2006 sample of 1,047 asbestos plaintiffs in California courts for whom addresses were available, an astonishing 30 percent had addresses outside California. These “litigation tourists” stick California taxpayers with the court costs.

Asbestos awards in California’s more plaintiff-friendly counties such as Alameda and San Francisco average $3 million more than in other counties, according to an article in the American Bar Association Journal. Every business day, on average, personal injury lawyers also file nearly five class-action lawsuits in the Golden State. That destroys jobs in California.

Entrepreneurs prefer to start, expand, or relocate businesses in states with balanced tort systems that discourage excessive litigation. These decisions matter a great deal. In 2006, job growth was 57 percent greater in the 10 states with the best tort climates than in the 10 worst states.

Business leaders remain leery of California because of its sky-high tort costs and skewed courtrooms, where business defendants lose at trial 65 percent of the time. The fear of lawsuits also causes companies to withdraw or withhold beneficial products.

Volkswagen, for example, planned to sell a 46 mpg three-wheel vehicle that had qualified for California’s carpool lanes. This “green machine” would have cost only $17,000, but VW decided to not market it in the United States because of lawsuit fears.

Abusive lawsuits cost every American a hidden “tort tax” of about $2,000 a year in higher prices, fewer new products, and reduced access to health care. Less than 15 cents of every tort-cost dollar goes to compensate plaintiffs, so the current system is very inefficient at trying to fulfill its intended purpose.

Fortunately, California does have some precedent for reform. In 1975, the state led the nation with MICRA, a landmark medical-liability act. California lawmakers should again get serious and enact meaningful class-action and damage-award reforms.

UC Berkeley economist Lisa Kimmel examined six common tort reforms adopted by states from 1970 to 1997 and found that instituting an additional tort reform increased total employment in a state by 1 percent. In other words, a single tort reform in California would put more than 141,000 people back to work.

If California’s tort ranking improved 10 places—an optimistic but attainable goal—annual state income would increase by $28 billion and annual state tax revenue would jump by $1.8 billion. This would help close the budget gap, boost jobs, and guide the Golden State to economic recovery.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.