2/28/2005

Lawsuit Abuse is Holding Back Our Economy

http://www.truthnews.net/world/2004090107.htm

This article discusses some of the effects of frivolous lawsuits and some of the remedies that can be made to curb the massive amounts of these suits that are filed.

One thing it fails to mention that I feel is very important is that part of the reason the filing of suits has gotten so out-of-hand is what is called a "nuisance value." Basically, a nuisance value is a small amount of money (often $10,000) that an insurance company (or other large corporation) will pay out to rid themselves of the "nuisance." This amount of money is miniscule in relation to the amount of money it will cost in litigation. However, the err in this way of thinking is that now, every Joe Blow with a desire for a quick buck is filing suit, knowing they will probably get at least a "nuisance" award. If companies would simply pay out the larger sums of money now to litigate, it would discourage lawyers from filing the frivolous suits in the first place. Remember, most plaintiff lawyers will not see a dime if their clients don't win. It is very costly in the short-run, but I believe more economically sound in the long-run.

Case in point, (the short version) the firm I used to work for dealt with one lawsuit in which the Plaintiff was claiming a large sum in damages, we offered about $14,000 (nuisance), which was declined. This case was taken all the way to trial in which the Plaintiff was awarded nothing, not one, single dime. The Plaintiff's lawyer went broke and had to close shop.

27 comments:

Dr. Tufte said...

-1 for a poorly formatted link in Jane's post.

This is actually a similar phenomenon to the one we discussed in class about why portions are so large in restaurants. The defendent can often "give away" a settlement "for free" because it will make the plaintiff happy.

There is also a component of finance in here. Filing a lawsuit is like buying a call option. In financial markets, a call option is where you pay a fixed price to buy a right (but not an obligation) to purchase some equity at a fixed price. If the value of the equity goes down, you lost the price of the call option. If it goes up, you get to purchase it at the fixed price and keep the difference. The wonderful thing about understanding options is that they open up a host of new ways of looking at the world around you.

In this case, filing a lawsuit is something you do for (more or less) a low fixed price. If it fails, you lose that amount. If you win, you get to keep the difference. Because our tort system has made awards that are not proportional to damage common, the upside potential in filing a lawsuit is very large.

This also points out why there has been talk in the U.S. for a long time of moving towards "English Rule" lawsuits. In the U.S., if you bring a frivolous suit and lose, it is very hard to be sued for damages. But in England you can be. What this does is greatly reduce the call option aspects of the lawsuit in the American legal system.

Who knew? Economists that's who ;)>

Chuck said...

Maybe my understanding of law is insufficient but from what I read and understand, I'm going to comment. First off, it's disgruntling that we live in such a 'sue happy society'. I understand that there are situations that sueing is appropriate but I feel that alot of people are abusing the legal system. I feel it would be bennificial to move toward an "English Rule" system. If a plaintiff brings a ridiculous case and looses, they should understand that they could be counter sued by the defendant for at least legal expenses.

Vincent said...

It’s true we live in a litigious society and some type of tort reform is necessary. The author has a good suggestion. We could also put a cap on what lawyers can make on lawsuits. This will help deter lawyers, but plaintiffs will bear the burden of not having representation since little of the legal fees can be paid directly by the plaintiffs at least until there is a settlement. This is an interesting topic; unfortunately I am not sophisticated enough in the legality and politics involved to come to a decision. Good post.

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