Captain Ed wrote an enthusiastic post regarding President Bush's plans for tort reform in his coming second term. This is one plank of the Bush platform to which I am opposed and, rather than continuing to take up Ed's bandwidth with my comments, I thought that I would post something about it here.
The article that Captain Ed cites could have been written by the Bush Administration, as it parrots a number of his talking points without any sort of critical analysis. For example, there is this very misleading statistical pronouncement:
Strikingly, plaintiffs received less than half the money awarded by the courts in 2002, while 54 per cent – or $126 billion - went to the lawyers and to pay administrative costs. As a result, doctors and hospitals are weighed down by expensive insurance policies that further inflate medical costs for Americans.
For one thing, there is no connection at all between the two propositions found in these sentences. The fact that plaintiffs actually receive less than half the average award has nothing to do with the cost of insurance policies. But importantly, the two propositions, by themselves, are presented in a manner that is, at best, highly misleading.
The first sentence suggests, without really saying, that plaintiffs are being unfairly deprived of more than half of the average damage award, and that the lawyers pretty much pocket the rest. This is wrong. A lawyer's typical contingency fee is from 30% to 40% of the award after costs have been deducted. Costs include such things as expert fees (which can be extraordinary in med mal and complex tort cases), court reporter fees, transcripts, filing fees, travel costs (many people don't realize how many depositions have to be taken in far flung locations to prepare a case for trial).
Also, in the typical personal injury case and med mal cases, insurers are entitled to collect on monies paid out to the plaintiff by right of subrogation. Medicare, for example, is entitled to be repaid 100% of what it may have paid out to care for a patient who is suffering the results of medical negligence.
Let's say that you have an award after trial of $1 million. The plaintiff's lawyer might easily have about $100k in costs sunk into that, so those costs come off the top right away, reducing the total award to $900k. The attorney takes (typically after trial) 40% of that, reducing the plaintiff's collection to about $540k. But then an insurer might have the right to collect $200k from the plaintiff by right of subrogation, thus reducing the plaintiff's take to $340k.
This easily shows how a plaintiff can end up taking much less than half of an award. But it's not due to those evil, greedy lawyers.
Ed suggests that plaintiffs have to then pay income tax on the remainder. This is simply untrue. Tort damage awards are not taxed, at least not by the IRS (some states might, but I doubt it).
Placing caps on damages, or limits on contingency fees, will not make things any more just for plaintiff, either.
First, a cap on non-economic damages simply makes no sense. As I wrote in Ed's comments section, what if, for example, you lose your family jewels due to medical negligence? Or what if (like what happened to my mother) a woman loses her uterus because of a defective IUD? What would be the economic damages arising from such an event? Practically nil, assuming that you had proper post operative care and suffered no medical complications. Your damages would axiomatically be, almost exclusively, non-economic. Would you feel justly compensated for such an error by a cap of $250k?
Maybe some guys would, but I think most wouldn't.
It's getting late, so the rest of my comments I'll simply borrow from what I wrote in Ed's comments section:
It's popular among conservatives to beat up on trial lawyers, but if there's one thing that conservatives should be able to understand is how people monetize risk when entering into a business transaction. A complicated med-mal or products liability case can cost a plaintiff's lawyer up to $100k or more out of his own pocket. Even relatively simple cases will cost a plaintiff's lawyer tens of thousands of his own office and staff time, expert fees, and so forth, all of which has to be fronted by him.
The high fees that are taken by plaintiff's lawyers in this country are a result of a system that gives tort plaintiffs access to the courts that is absolutely unparalleled anywhere in the world, and all for absolutely no risk or up-front cost to the plaintiff!
If you start to take away the incentive for a plaintiff's lawyer to represent average people who have been wronged and injured by the acts or omissions of another, then those people simply will not have access to the courts.
The notion that med mal reform reduces med mal insurance rates is simply a non-starter: it has been proven to be a bogus argument. For example, California has one of the most restrictive med mal liability laws in the country, and its med mal rates are not significantly lower. It's now impossible to go forward in Florida without first getting an affidavit from a medical expert attesting to an opinion that the plaintiff's injury was the result of malpractice. This can only occur after the expert has reviewed the plaintiff's file. Also, the expert affidavit has to be tendered to the physician (or his attorneys), and the physician has 90 days to respond before you can file suit. If the physician admits to liability, then you have to proceed to binding arbitration where the plaintiff is limited to $250k in non-economic damages. Only if the physician fails to admit, or refuses to admit, liability in that 90-day window can you then file suit in court. Yet none of this seemed to lower med mal rates, and more recently a constitutional referendum passed capping lawyers' contingency fees. As noted above, this will only have the effect of limiting people's access to the courts.
As well, I have serious federalism concerns when it comes to the notion of a one-size-fits-all, federal tort reform. Our federal system was supposed to allow the various states to function as laboratories of democracy, where different solutions to problems could be tried. For example, if State A's tort system is too unfriendly to business, then State B might have an incentive to develop amore business-friendly law. North Carolina, for example, has some of the most business-friendly environmental laws, and people there are hopping mad that they can't protect themselves from the environmental depradations of the large, industrial pig farms.
Federalism is something that conservatives should hold dear. It would be a pity if they threw away that principle on the altar of what would undoubtedly turn out to be a very dubious tort reform effort.
As a lawyer who sometimes does maritime personal injury defense, I have seen plaintiff's lawyers abusing the system, and I have seen clients offer unreasonably large settlements in order to avoid unwanted publicity. But these sorts of abuses could be more justly curbed by the most desirable "tort reform" of all: a system of judicial appointments that would place judges on the bench who are unafraid to dismiss, or grant summary judgment on, meritless cases.
That is something worthy of another post, altogether.
UPDATE: Econopundit writes that I am "way, way off the mark," but then launches into a discussion of relative societal costs that my post did not address at all:
To get a grip on the issue go through the following simple thought experiment. Imagine how a single bicycle is manufactured in China, then imagine how it would be manufactured in the US. The materials are identical. The actual physical process of putting the thing together is vitually identical in both countries. The actual physical cost of getting a bicycle made is virtually the same in the US and China. What differs is the hourly cost of labor and the general cost of society itself.
I haven't asserted that tort litigation does not cost society something. I agree that it does. Whether that is a good thing or a bad thing depends on where you sit. For example, I know of a case of a man who was helping a tech inflate the tires on an electric wheelchair when the wheel blew up in his face, destroying one eye and causing permanent damage to his orbital socket. It turned out that the manufacturer knew of this defect, yet continued to place the product on the market. Who should bear the risk of injury in such a situation? How much do you compensate a man for the loss of an eye? Do you trust the federal government to determine a flat rate compensation scheme for such a scenario?
And if you're a Chinese citizen who is injured by a defectively manufactured product in China, good luck getting access to the courts for redress of your injury.
ANOTHER UPDATE: Slammed by Ramesh Ponnuru, who seems to take me to task in part for not having read other "careful work in this area." Well, excuse me for hashing out my thoughts near midnight after putting the baby to bed and having a long conversation with my mother-in-law (in the Czech language, which is tiring enough) about the problems of socialist democracy. I have a day job. These things happen.
Actually, based on the substance of Ramesh's post, there is not a huge degree of difference in our opinions -- he actually agrees that there may be federalism problems with federal med mal reform, but he disagrees as to other tort reform. I agree that it's a debatable issue given post-New Deal Commerce Clause jurisdprudence.
Ramesh mischaracterizes my argument as being that tort reform is bad "because high fees for plaintiffs' lawyers are the price of having such a wonderful legal system." I am not so sure that our legal system is "wonderful," but just that it is better than all others I have encountered. Contingency fees allow individuals with nothing to have their day in court. That is a remarkable thing that should not go unappreciated. That there are those who abuse this privilege should not be a reason to throw out the baby with the bath water.
STILL ANOTHER UPDATE: Reader Bryan sends this authoritative-sounding correction to my assertion that tort awards are not taxed:
Compensatory awards for physical injury are not taxed, but punitive damage awards, lost wages and mental anguish are.
If you turn your bible to IRC section 104(a)(2) you read:
"Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include--
(1) amounts received under workmen's compensation acts as
compensation for personal injuries or sickness;
(2) the amount of any damages (other than punitive damages) received
(whether by suit or agreement and whether as lump sums or as periodic
payments) on account of personal physical injuries or physical
And it goes on to list exceptions, but translated into English, generally only damage awards for personal physical injury are excludable. In a bizarre example, suppose Bob wins a lawsuit against Multinational Inc.. He receives the following damages:
Lost Wages $100,000
Mental Anguish from Racial Discrimination $100,000
Physical Harm $200,000
Pain & Suffering $100,000
It seems Multinational Inc. has been a bad boy. Regardless, only the $200,000 for physical harm is excludable from income; Bob would treat as taxable income the remaining $3.3 million of the settlement.
It could be worse. In some states, the contingency fee is not excludable from income either. Here is a link to some footnotes.
Let's think about what this means. Suppose Bob Lives in one of those states where the fees are not excludable. He gets his $3.3 million (lets exclude the physical harm bit here) from Multinational Inc., and pays $300,000 in expenses, leaving $3.0 million. $1.2 million (or 40%) goes to the (hardworking I'm sure) lawyers. He then has to pay taxes on the remaining 1.8 million. Sure, he can deduct the $1.2 million as a miscellaneous itemized deduction, but not for AMT purposes, so he will pay AMT on the entire 3.0 million. The AMT is essentially a 28% rate for 2004 so he pays about $800,000 in AMT. So the actual amount he receives is $1.0 million of the $3.3 million, or about 30 cents on the dollar of the verdict.
Regardless, I'm sure that the statement "Tort damage awards are not taxed, at least not by the IRS (some states might, but I doubt it)" is not an accurate statement.
I stand corrected.