Excerpt from The Litigation Explosion

By Walter K. Olson

Medical Economics, September 16, 1991

[first of two parts] [to second part]

America has deregulated the business of litigation. In a series of lamentable legislative and judicial changes over the past few decades, we have encouraged Americans to sue each other. The changes amount to a unique experiment in freeing both the legal profession and the litigious impulse from their age-old constraints.

The experiment has been a disaster-an unmitigated failure. The unleashing of litigation in its full fury has done cruel, grave harm and little lasting good. It clogs and jams the gears of commerce, sowing friction and distrust between the productive enterprises on which material progress depends and all who buy their products or work at their plants and offices. It seizes on former love and intimacy as raw materials to be transmuted into hatred and estrangement. It sets parent against parent, doctor against patient. It exploits the bereavement that some day awaits the survivors of us all and turns it to an unending source of poisonous recrimination. It torments the provably innocent and rewards the palpably irresponsible. It devours hard-won savings and worsens every animosity of a diverse society. It is the special American burden, the one feature hardly anyone admires of a society that is otherwise envied the world around.

Medicine falls victim

Personal injury litigation was first to be transformed. New York officials have estimated that payouts in suits against doctors and hospitals in their state have risen 300-fold in a generation-not 300 percent, but 300-fold. By 1990 many New York obstetricians with good records were paying liability insurance rates of $ 100,000 and more a year. Miami neurosurgeons with good records paid $ 220,000.

Most malpractice lawsuits have nothing to do with genuine negligence. Preliminary figures from a new and exhaustive study by Harvard researchers indicate that in four out of five lawsuits filed, the care given was not in fact negligent. And as the legal firestorm sweeps through the profession, patients as a group are being left worse off, not better. A recent National Institute of Medicine study found that "defensive medicine" had seriously compromised the quality of care, leading, for example, to thousands of unnecessary Caesarean sections. The study also found that one in five rural doctors had stopped delivering babies in the past five years, with liability the overwhelming concern.

By 1990 litigation over birth defects had emerged as a source of immensely profitable business for trial lawyers. Some of those lawyers had responded by learning one of the classic techniques of the expansion-minded business: the cold call. They gain access to registries of handicapped children, approach the families, and propose filing a lawsuit.

A drag on the entire economy

No other country's legal system operates remotely like ours. A study in the 1987 Duke Law Journal concluded that America had almost three times as many lawyers per capita as Great Britain, with American tort claims running at least 10 times higher, malpractice claims 30 to 40 times higher, and product claims nearly 100 times higher, in each case per capita.

Another survey found that America spends five times as much as its major industrial competitors on personal-injury wrangling as a share of its economy, and that the gap is widening. The survey concluded that over the last two generations the cost of injury litigation rose 14-fold after inflation, while the size of the real U.S. economy rose only three-fold.

The mushrooming litigation is also taking an economic toll on individuals. It used to be that mostly doctors among professionals had to worry about buying liability insurance. Now it's a crushing expense for many accountants, nurses, amateur sports umpires, and local charity volunteers. Most hairdressers and veterinarians reportedly buy it. It is the coming thing among social workers, school counselors, and the clergy, who have been sued in much-publicized cases for giving wrongful advice. Lawyers pay dearly for their own coverage, and judges have been added to the list in the wake of rulings that they may now be sued in some circumstances for handing down wrongful decisions.

How the beast broke loose

Yesterday's lawyers were specifically forbidden to "stir up litigation." Unlike ordinary tradesmen, they were expected to sit passively waiting for clients, smothering any entrepreneurial urge to drum up business; they might sometimes be the instruments of suspicion and contentiousness, but they were not to be its instigators. Social pressure backed up these restraints. So did tough laws.

The overthrow of the old barriers began with a simple idea. Squinted at from a distance, litigation would appear to have a brighter side. When successful, it brings some benefit ("relief") to the instigator: money, rights to visit a child, the cessation of some local nuisance. So it might be seen as a generous sort of social welfare program, by which people who crave an infusion of money or some less tangible commodity can get it from other people who (perhaps) could well afford to give it up.

By the same token, those who get sued and lose must (in a court's view) have done something they oughtn't: broken a promise in business dealings, practiced medicine below a certain standard of care, held on to a child that would be better off in someone else's custody. Maybe litigation is also a tough form of punishment and example-setting, which teaches those who misbehave an emphatic, not-soon-to-be-forgotten lesson.

By the 1970s the climate in the law schools had turned around on the subject of litigation, first to ostensible neutrality and then to admiring support. America's lawyers began breaking free of the humdrum role of hired middleman--much as Wall Street's investment bankers were doing at around the same time-to become "players" who thought up the deals, or in this case courtroom fights.

The evil of the contingency fee

By itself, the new enthusiasm for litigation might have given out. What has kept it alive and propelled it to dangerous heights is the contingency fee.

In virtually every other nation, it's assumed that lawyers face many temptations to misbehave in order to improve their clients' chances of winning a lawsuit; that no direct means of policing such misconduct is likely to be even halfway effective; and that the first line of ethical defense for lawyers is therefore to insulate them from a direct stake in the outcomes of their suits. The tradition of the English common law, the French and German civil law, and the Roman law all agree that it's unethical for lawyers to accept contingency fees. In 1975, British judges strenuously opposed even a closely regulated version of the fee, in which a contingency suit could go forward so long as leading lawyers verified its reasonableness. They explained that lawyers would no longer make their cases "with scrupulous fairness and integrity."

Why is America the glaring exception? What has emboldened our lawyers to accept this sort of fee?

The American exception seems to have developed naturally and inevitably from a more profound novelty, one that is central to understanding the problems of our legal system. America is the only major country that denies to the winner of a lawsuit the right to force the loser to pay his legal expenses. In other countries, the promise of a fee recoupment from the opponent gives lawyers good reason to take on a meritorious case for even a poor client. The obvious result of not allowing recoupment is that clients must find some other way to compensate their lawyers. Unless the client has independent sources of cash, the only place for the fee to come from is out of the recovery itself.

The case against the contingency fee has always rested on the danger it poses not to the one who pays it but to the opponent and more widely to justice itself. As other nations recognize, it can yoke together lawyer and client in a perfectly harmonious and efficient assault on the general public. There are things lawyers will do when a fortune for themselves is on the line that they won't do when it's just a fortune for a client.

An endless cash wave

Contingency-fee law has made more overnight millionaires than just about any business one could name. Forbes magazine surveyed the richest lawyers in America and found that the big fortunes were overwhelmingly made in contingency-fee work, not the corporate law and transaction planning that have long represented the zenith of prestige legal practice. Among the top scorers on its list were a Detroit lawyer whose thriving practice takes in an estimated $ 100 million a year in settlements; a Brooklyn Law School grad who specializes in suing doctors and carts home an estimated $ 12 million a year; a Wichita attorney who sues vaccine makers and has made more than $ 5 million in each of the last 10 years.

Tucson's Richard Grand didn't make the list, but Laurence Bodine of the trial lawyers' newsletter Lawyers' Alert reports that Grand has collected $ 200 million in verdicts and settlements over his career, with 60 cases exceeding $ 1 million. At a one-third contingency, that would add up to $ 67 million. Harry Lipsig, czar of lawsuits against New York City, has "been earning well into the seven figures every year for as long as anyone can remember," a spokeswoman for his office was quoted as saying in 1988. South Carolina asbestos-litigation king Ron Motley admits to earning a meager $ 1.5 million a year, but that is still reportedly enough to make his 255-employee firm the third-biggest employer in his section of the state, following a nuclear power plant and a large textile mill.

These men (very few are women) seldom seem to favor sober, understated ways of spending their new-found wealth. One has turned lawsuits against doctors into a villa in the south of France and a $ 2 million Paris apartment. A list of their known holdings is spangled with the ranches, jets, and exotic cars that befit tycoons riding a cash wave with no end in sight. And indeed, no end is in sight. Something about today's contingency-fee system has made these lawyers very much richer than most of the doctors, hospital administrators, and corporate CEOs whose decisions they second-guess, and incomparably richer than the defense lawyers who oppose them.

As lawyers have discovered how very profitable this kind of practice can be, more of them have gotten over their scruples. the contingency fee is coming to be seen as the basis of an industry boldly and openly run for profit, as an enthusiastic first resort for the general case rather than a troubled last resort for the special. Even big-name firms like Washington's Williams & Connally and Arnold & Porter are now reported to take work on contingency. And in a trend that is full of implications for the future, the fee is spreading to litigation over employment matters, child support, will contests, copyrights, taxes, and, perhaps most ominously, divorces.

Rationalizing the winnings

There is a funny thing about this brand of lawyering: the more opulent it becomes, the more cloying an odor of sanctity it gives off. Self-righteousness is an occupational disease in several sectors of the legal profession, but injury lawyers top all. A spokesman for Morris Eisen had no apologies when he was indicted on charges of massive claims-faking. Just the reverse. The charges, he said, were "a brazen effort to cripple the advocates of the men, women, and children who have been crippled and maimed." Suing people for a share of the proceeds has become, like one or two famous television ministries, a venture in hellfire-preaching and unctuous hand-wringing that enables its practitioners to live in the luxury of Babylon.

What is supposed to make all this ethical is that it's done in the name of persons of modest means. Injury lawyers carry on endlessly about how their favored-fee arrangement provides the "key to the courthouse" for the widow and orphan. But they seldom much care for the method all other countries use to provide that key: an hourly fee paid by the losing opponent. And it turns out that they happily charge contingency fees to middle- and upper-income clients and businesses that could easily afford to pay on an hourly basis. A group of companies stymied in efforts to build a coal-slurry pipeline hired the big Houston firm of Vinson & Elkins on a contingency basis to file antitrust charges against several railroads for allegedly blocking the project. The law firm reportedly pocketed nearly $ 200 million in contingency fees from the resulting settlements.

In fact, mysteriously, the contingency fee has become the only way most individual clients can get a lawyer for injury cases, even if they would rather pay an hourly fee. Some clients suspect that a phone call or two from a lawyer, or a letter on his stationery, may be all they need to get a satisfactory resolution of their problem. Giving him a third of the amount won in such a case, they might feel, would be an undeserved windfall. But they're out of luck. A report from the Federal Trade Commission showed that 97 percent of lawyers took injury cases only on contingency, refusing to consider hourly rates, however generous. Lawyers seem to have come to the conclusion that a good injury case is a pot of gold, and, damn it, they have a right to a share. They are also loath to undercut the "going rate" fee percentage, even when success in a case seems virtually assured. In some cities, the going rates over the years have been reported to run at 40 and even 50 percent.

[End of first part] [Second part of article]

*****

THE AUTHOR is a senior fellow at the Manhattan Institute, a public policy research organization in New York City. This article is excerpted from his book, The Litigation Explosion, published by Truman Talley Books-Dutton, a division of Penguin Books USA Inc.  Copyright Walter K. Olson, 1991.

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