FLASHREPORT

CALIFORNIA LAWMAKERS COULD JUMP-START STATE'S ECONOMY WITH LAWSUIT REFORM

Lawrence J. McQuillan and Hovannes Abramyan, Pacific Research Institute

[Publisher's Note:  As part of an ongoing effort to bring original, thoughtful commentary to you here at the FlashReport, I am pleased to present this new column from Lawrence J. McQuillan, Ph.D., Director of Business and Economic Studies and Hovannes Abramyan is an adjust public policy fellow - both at the Pacific Research Institute.-- Flash]

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California’s unemployment rate is 12.4 percent, with 1.06 million fewer Californians employed today than in January 2008. The state’s budget is $19 billion in the hole. This is undoubtedly bad news for Golden State residents, but all hope is not lost. If California lawmakers want to put people back to work and reduce the budget deficit without costing taxpayers a cent for so-called “stimulus,” they can enact desperately needed lawsuit reforms.

California ranks a dismal 41st out of all 50 states in the quality of its civil-justice tort climate, 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 presence of plaintiff-friendly “judicial hellholes.” The data were adjusted for the size of each state’s economy and population.

California fell seven places since the previous 2008 edition, when it was 34th. It has the highest tort losses of any state, more than $16 billion in 2008 (the most-recent year for which complete data are available). Astoundingly, California exceeds the second-highest state, New York, by more than $2 billion.

California also had 16 of the nation’s 101 largest jury-verdict awards in 2008—more than any other state. 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.

Although these problems have gotten worse over time, the state legislature has done nothing to fix them. The Index reveals that, overall, California’s tort rules on the books rank 27th in their ability to contain tort costs and risks. In 14 of the 29 tort rules tracked, 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. California businesses are easy targets for personal injury lawyers, eliminating jobs in the process.

The Index notes that California remains particularly attractive for abusive asbestos and class-action lawsuits. Out-of-state lawyers and plaintiffs 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. Taxpayers are stuck paying court costs for these “litigation tourists.”

An article in the American Bar Association Journal found that asbestos awards in California’s more plaintiff-friendly counties (Alameda and San Francisco) averaged $3 million more than in less friendly counties. Also, on average, nearly five class-action lawsuits are filed in the Golden State every business day.

When deciding where to start a business, expand operations, or relocate, entrepreneurs prefer states with balanced tort systems that discourage excessive litigation. These decisions create big differences between states. 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—business defendants lose at trial 65 percent of the time.

Fear of lawsuits also causes companies to withdraw or withhold beneficial products. Volkswagen 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. And the current system is very inefficient at its intended purpose—less than 15 cents of every tort-cost dollar goes to compensate plaintiffs.

In 1975, California led the nation with its landmark medical-liability act MICRA. California lawmakers should again get serious and enact meaningful class-action and damage-award reforms, in special legislative session if necessary. This would be the best jobs bill and budget fix they could provide.

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, just one 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.

Having an unbalanced and uncompetitive legal climate has spurred some states, such as Oklahoma in 2009, to enact meaningful reforms. If California politicians are serious about jump-starting the economy, they should act to reduce the state’s massive tort burden. Commonsense damage-award and class-action reforms would bring needed jobs to the Golden State and help close the budget gap.
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Lawrence J. McQuillan, Ph.D., is director of Business and Economic Studies at the California-based Pacific Research Institute, where Hovannes Abramyan, M.A., is an adjunct public policy fellow. They are authors of the 2010 U.S. Tort Liability Index, now in its third edition. Contact them at LMcQuillan@pacificresearch.org.