Lawsuits in the Confucian Cycle

A recent article "US legal system 'worse than Russia': A survey shows that European in-house lawyers would rather face litigation in China and Russia than in America" gives another reason why the American economy is hurting - our court system is driving up business costs.

The article reports that the in-house counsel of most large European companies would rather face a major legal dispute in China or Russia than in the US.

It said the US system, although less corrupt than most, is "filled with traps in which the inexperienced or uninformed may easily become caught".

These traps are due partly to the fact that there are 51 legal systems in America, one for each state and one for the federal government, and partly because our society has been more wealthy than most.  Wealth has made it possible for America to afford a regulatory system which interacts with the courts to produce a hybrid combination of laws and agency rules which is insanely opaque and expensive by international standards.

Although the survey found that businesses were most concerned about disputes with customers, suppliers and employers, the fear of clashing with regulators stands out as an emerging area of concern that will "keep lawyers awake at night".

In particular, Lovells [the international law firm which commissioned the survey] highlighted the aggressiveness of American prosecutors and their willingness to apply US laws overseas as another factor making European lawyers nervous.

There are a number of unique features of American legal system which make it hard to navigate:

• The federal system whereby each state has its own separate legal system is built into the Constitution.  Businesses resent having to deal with 50 separate legal systems and have pushed for the Federal government to pass laws which apply everywhere so that they can save money by dealing wtih only one set of laws.  States cooperate with the federal system to varying degrees, so there is not as much uniformity as businesses would like.  However, the result has been a huge expansion of Federal law which raises costs for everyone.  At one time, a business operating in several states would have to obey the somewhat different laws of each state, but in most areas Federal regulation was light.  Today, that same business would still need to obey the somewhat different laws in each state, and also the increasingly intrusive and ever-expanding Federal rules, which overlap with the state laws but do not actually replace them.  Not an improvement.
• In most European countries, the party which loses a lawsuit pays the winner's legal fees. This tends to discourage frivolous lawsuits.  The American system has no such provision, so there is no reason not to file the most outrageous lawsuit; if you win, you hit the jackpot, and if you don't, you've wasted nothing more than your time.
• American law permits contingency fees where the lawyer may take the case at no cost to the plaintiff and count on getting paid when the defendant settles the case.  This arrangement is forbidden in most countries, for the obvious reason that it leads to more lawsuits being filed and supports marginal lawsuits.  Lawyers counter with the argument that poor people can't afford to sue; contingency fees let generous, humanitarian lawyers give poor people admission to the halls of justice which serves the public interest of deterring misbehavior on the part of heartless capitalists.
• American law permits class actions, where a large number of small cases can be combined into one large case.  This technique, combined with contingency fees, allows large law firms to take on cases which have huge payoffs.  This is how John Edwards, a former Democratic presidential candidate, made enough money to be able to afford $400 haircuts.
• Businesses can be sued in any state or even county in which they operate; lawyers who have collected enough people for a class action can bring the suit in any locale where any of their class members are located.  This lets lawyers shop for jurisdictions where judges and juries tend to go along with the plaintiff and give big awards against large corporations.  This has become such a vast problem that the Feds are stepping in to limit venue shopping.  While the relief is welcome, that strategy also leads to other problems mentioned above.
• In some states, judges are elected.  Lawyers tend to be the most important campaign contributors in those states.  Coincidence?  Probably not...
• American lawmakers often write vague laws and leave the interpretation to the courts or to rule-writing agencies.  For example, a law forbidding discrimination against handicapped persons says that an employer must make "reasonable accommodations" in the work place to make it possible for a handicapped person to hold a job and delegated responsibility for enforcing the law to the Equal Employment Opportunity Commission.  Bureaucrats love vague laws because they get to write interpretations and clarifications; lawyers love vague laws because it makes lawsuits take longer and runs up the bill.
• America produces a mind-bending volume of law on every topic imaginable.  For example, a Florida legislator introduced a law requiring restaurants to have "sufficient" toilet paper.  This law not only touches an area where there's no need for a law, it's vague because it doesn't define "sufficient," and it doesn't specify who's going to enforce the law.  Are the police supposed to check the toiler paper supply while on patrol?  Is it the responsibility of the health inspectors?  The law doesn't say.
• American courts often rely on "junk science" when making decisions.  A gang of lawyers advertised for women who thought their silicone breast implants had harmed them.  The lawyers had found a very impressive-sounding "expert" who testified that silicone caused subtle problems with the immune system; damages ran into the billions and bankrupted the manufacturer.  Some of the "victims" got nothing; the lawyers got paid off the top.  It turned out later that silicone breast implants were so safe that the FDA approved them for use again; the whole thing was a sham but nobody went to jail.
• Federal legislators are too lazy to write entire laws; they tend to set up some sort of agency and give the bureaucrats the authority to write rules which have the force of law.  This is how the Environmental Protection Agency works, for example.  Bureaucrats love to write rules because enforcing rules requires that they add staff which runs up the budget.  Unfortunately, agencies don't coordinate their rules.  I had a friend who worked for a warehouse.  The Occupational Safety and Health Administration (OSHA) required a railing on the edge of the loading dock so people didn't fall off the platform; the Interstate Commerce Commission (ICC) required that there not be a railing so people didn't get squeezed between the railing and incoming trucks.  They built a removable railing and told the receptionist to flash word to the loading dock to adjust the railing as needed when an inspector arrived.
• Ridiculous court cases are common enough to have their own web site.
• Juries don't understand that customers actually pay damages.  One of my relatives was on a jury which had to decide whether an auto insurance company had to pay damages to the mother of a child who had run out in front of a car and been killed.  The police experts examined the skid marks and said that the driver was not at fault, yet about 1/3 of the jury wanted to "do something for the mother."
• Lawyers charge insane amounts of money - top New York law partners bill a bit over $1,000 per hour.
• "Discovery" is a phase of a case where each side gives the other side information.  The idea is to get all the cards on the table to see if the suit can be settled, but discovery itself has become complicated to the point that discovery can cost more than an entire lawsuit used to cost.  Instead of just looking in file cabinets, discovery experts image hard drives, take server dumps, and go after electronic data as well as paper data.  You can't buy a hard drive smaller than about 60 gigabytes any more.  Suppose an office has 100 computers.  Imaging 100 computers with a minimum of 60 gigabytes each - any lawsuit discovers a great deal of data for lawyers to wade through at so much per hour.
• Courts don't use modern methods of scheduling; as a result, hours and hours of lawyer's time are wasted.  This runs up the bills and makes resolving issues take longer.  The system has forgotten the proverb, "justice delayed is justice denied."

Our legal system has perverted its original purposes:

1. To render justice in criminal cases.
2. To enforce contracts so that justice is done.

The Criminal Injustice System

Having started their lives as subjects of a king who had a great deal of power, our founders were familiar with arbitrary "justice."  An early king said, "The gallows is the first servant of the state," meaning that executing political enemies made his rule much safer and easier.

Although the English Parliament had slowly gained power at the king's expense so that King George III could not act as arbitrarily as past monarchs had, the king still had the power to destroy any individual whom he chose.

Knowing that governments could destroy citizens by abuse of the justice system, the founders put limitations on government.  As we've reported earlier, these limitations have been swept away, resulting in a government whose employees are more concerned with promoting their careers by putting people in jail than with justice.

Justice in Civil Matters

The court system also has responsibility for enforcing commercial justice.  Contracts should be honored, products should work as advertised, and people who are damaged by other people should be compensated.

Abraham Lincoln started out earning his living as a lawyer before he went into politics as so many lawyers have done since.  "Honest Abe" gave the legal profession very good advice: "Resolve to be honest at all events. And if in your own judgment you cannot be an honest lawyer, resolve to be honest without being a lawyer."

Mr. Lincoln believed that a lawyer represented the cause of justice.  He believed, perhaps naively, that serving justice was a more important goal than making a lot of money.

In earlier articles, we've discussed the Confucian Cycle whereby government bureaucracies and special interest groups cost society more and more over time.  When social overhead costs more than the society can afford, the society collapses.

Doing justice has a cost - judges have to be paid, courtrooms must be guilt and maintained, and lawyers expect to be compensated for helping their clients navigate the system.

Over time, as Confucius pointed out, pretty much any business, bureaucracy, or interest group loses track of the reason for its existence.  Everybody gets caught up in the daily minutiae of their process and forgets what the product is all about.

This happens to private businesses all the time - RCA owned the tube radio market and was displaced by Sony, for example, and IBM was nearly put out of business by the PC.  When a business forgets what its customers want, it goes bankrupt.

When government monopolies like the public school system and the court system lose sight of what their customers need, costs go up, but people have no choice.  Confucius realized that the only way that a government agency could go bankrupt was for the society as a whole to fall apart, taking everything down with it.

Our court system has become so complex and so costly, with the outcomes so uncertain, that one long-ago study says:

According to the Organization of Economic Cooperation and Development, the proliferation of litigation in the U.S. exacts a stiff economic penalty. OECD estimates that direct and indirect legal costs in 1987 amounted to 2.7 percent of our GDP, compared with 0.5 percent to 0.7 percent for other OECD countries. Not all lawsuits are frivolous, but business leaders reckon too many are. Almost half the respondents to the CE/Deloitte & Touche LLP survey of 800 CEOs and CFOs (CE: November/December 1994) report that liability-prevention measures tack at least 5 percent onto the price of products and services; more than a quarter say the premium is closer to 15 percent. These are only the visible costs.

These studies were more than 10 years old.  On Aug 9, 2004, Business Week wrote:

President Bush's Council of Economic Advisers estimated in 2002 that the U.S. tort system's direct costs total about $180 billion a year. ... How much of that $180 billion in tort costs is "excessive"? As a simple guide, only 20 cents of each dollar of tort cost is paid to victims, and that share has fallen since the late 1980s. ... Other leading industrial nations have tort costs half those in the U.S. [emphasis added]

Business Week echoes our earlier article about corporate taxes by making it clear who pays for all this:

Who pays the "litigation tax"? While the cost may be collected from a company, its burden is ultimately borne by workers who lose jobs or see their wages go down, by consumers who pay higher prices, by landowners who experience a decline in property values, and by investors via lower profits and share prices. [emphasis added]

Assessing the true economic burden of a tax requires analyzing how wages and prices are adjusted throughout the economy as a result of it. While the legal burden of litigation costs falls directly on companies engaged in the production and sale of goods and services, overall litigation costs act more like corporate income tax, which has a broader economic impact. Much of this corporate tax is shifted to consumers through higher prices or to workers if wages decline because of lower demand for the goods whose prices rise with the added costs. The remainder falls on investors.

Our legal system has deteriorated to the point that Europeans believe that our courts are "filled with traps in which the inexperienced or uninformed may easily become caught."  Catching people in traps is relevant only when the goal is to win at all costs without regard to where justice lies.  Instead of finding truth, lawyers seek to "put on a play so that the court will see things my way," as an experienced Detroit litigator told me.

People overseas are losing confidence in the American justice system.  If overseas firms don't want to do business with us because they never know when some shyster lawyer will pull a rabbit out of a hat and steal their shirts, we'll all suffer along with our economy.

Lawyers are the Root of the Problem

As Business Week noted, only 20% of the cost of our tort system goes to victims; most of the rest goes to lawyers who like it that way.  Wealthy law firms contribute to the campaign funds of politicians who promise not to change the law to make it harder to bring lawsuits.  Lawyers oppose "tort reform" because making it harder to bring lawsuits would directly cut lawyers' income.  It wouldn't affect victims nearly as much because victims get only 20% of the money.

It's difficult to imagine our politicians doing anything to change our legal system to reduce lawyers' income because far too many legislators are lawyers.

John Sununu was Governor of New Hampshire before becoming President Bush's chief of staff.  Gov. Sununu reported that at that time, 2/3 of the members of the New Hampshire legislature were either lawyers or the spouses of lawyers.  The situation has progressed since then; John Edwards is able to afford his presidential campaigns because of the megabucks he received from lawsuit settlements.

Any member of the bar, which is another term for "lawyer," is by definition an officer of the court and is therefore part of the Judicial branch of government.  There is an inherent conflict of interest in permitting officers of the court, who get paid to interpret laws, to serve in Legislative bodies where they write laws which they later get paid to interpret for us.  Letting lawyers serve in two branches of government at the same time is unconstitutional, but don't expect them to quit writing laws to boost their income just because it's wrong.

Now that the legal profession has lost sight of their obligation to serve the cause of justice in favor of serving themselves, our legal costs can only increase.

Lawsuits place a huge burden on the economy and hold back innovation.  From a social point of view, lawyers are just another bureaucracy who're more interested in feeding themselves than in serving society.  They're another group who are pushing us all down into the abyss of the Confucian Cycle.