Getting Fat From the Legal System

Recently, a law professor from George Washington University sent letters to the major ice cream manufacturers, threatening litigation if they failed to label their products for fat content. Most people recognize that ice cream is not health food, and that too much ice cream soon translates into unwanted weight. Where the average person sees a need for common sense and moderation, trial lawyers see a profit opportunity. Obesity has become a new target of opportunity for trial lawyers who are busy filing a flurry of lawsuits in search of the next Big Tobacco. These lawsuits threaten businesses, raise costs for consumers, and reduce the availability of important goods and services, all in the name of “consumer protection.”

The vehicle of choice for these legal actions tend to be class action lawsuits, which allow trial lawyers to file a claim on behalf of thousands, or even millions, of consumers alleged to have been wronged. For example, should the case against ice cream manufacturers make its way to court, the trial lawyers will represent the millions of obese ice cream addicts, who have been wronged by companies that produce something they like to eat. It seems that most of us, at one time or another, have received confusing legal notices in the mail stating that we are part of a class action lawsuit brought on our behalf by trial lawyers we do not even know and have never hired.

Filing these massive class action suits provides important strategic advantages to trial lawyers, while not necessarily providing meaningful benefits for the consumers they claim to represent. For the trial attorneys, pulling together a large class of “victims” offers the potential for a larger award, since it must compensate a larger group of people. The trial lawyers, however, work off a percentage of the total award, so the larger the award, the larger their paycheck. Traditionally, trial lawyers receive a third of the award, plus expenses. The fact that a bigger class means a bigger payoff provides another critical advantage for trial lawyers. Raising the stakes makes it much more dangerous for businesses to go to court. Rather than risk a bad decision in the courtroom, many businesses are forced to settle, regardless of the merits of the case.

Consumers, on the other hand, may not fare so well. It is common in these large suits against manufacturers for the class of consumers to receive coupons, discounts, or rebates, while the attorneys who represent them take home millions of dollars. For example, in a suit against zip drive manufacturer Iomega, consumers received rebates of $5 to $40 dollars, while the attorneys walked away with $4.7 million.

Through the courtroom, enterprising lawyers have gained tremendous control over private decisions made by individuals and businesses throughout the country. In the past, the courts had a much more limited role, adjudicating disputes and enforcing contracts between private individuals. In the latter half of the 20th century, however, legal philosophy shifted, with greater emphasis placed on social insurance while the importance of private contracts diminished. As it became easier to file class action lawsuits, clever trial attorneys saw an opportunity to exploit the change in legal philosophy in more activist courtrooms. The legal system’s role expanded as trial lawyers began to exert influence on economic activity in the private sector, ignoring the role of personal responsibility and second-guessing decisions made by businesses and legislatures.

Today, businesses face an array of legal threats that raise the cost of doing business and actually challenge the decisions made by those trying to run a company. In a recent California case, a suit was filed against State Farm claiming that the company was keeping too large a surplus, which should be returned to policyholders. The case, which could allow a single jury in California to determine policy for a national company located in Illinois, would second-guess the managerial decisions made by State Farm about how much cash to have on hand in case of a catastrophe so that it can keep its promises when customers have a claim. Aside from challenging a business decision driven by market forces, the lawsuit ignores the ultimate outlet for those who feel their rates might be too high because the surplus is too large: shopping around. Consumers have a variety of alternatives to choose from, and this competition in fact disciplines the individual firms within the market. CSE Foundation filed an amicus brief making this point, as well as noting that, should the case be successful, consumers would face higher prices and fewer products as insurers were driven out of the market.

Courtrooms have become rich hunting grounds for predatory trial lawyers. Unfortunately, outcomes generated in the courts do not necessarily provide the same benefits as the markets they are fast replacing. In markets, private individuals voluntarily engage in transactions that leave both parties better off. In the courtroom, the results are a zero sum game, where one party wins and another loses. Lawyers get paid, but consumers may end up footing the bill, as the costs of goods and services rise and manufacturers no longer produce certain items for fear of liability. A study by the Council of Economic Advisors estimates the direct costs of the tort system to be $180 billion per year.

The legal system has wandered dangerously from settling disputes in those instances where private interests are in conflict to a system of income redistribution that hampers economic activity. Reforms have been proposed in Congress, and the Senate may consider class action reform legislation (S. 274) shortly. The legislation would shift much of the class action caseload to federal courts, which would limit the ability of juries in one state to set policies for the nation as a whole while ensuring that cases that are national in scope are heard by a court that is designed to cover a broader portfolio than state courts. These reforms are necessary if the legal system is to play a role that supports economic growth rather than thwarts it.