Small and Family Business
Small & Family Businesses – “One Lawsuit Away from Bankruptcy”
Looking for what to do next? Find out at the end of this article.
Runaway litigation and the outrageous jury awards that go with it have become a grave problem in America. The country is in need of legal reform. Its tort system, the civil structure in which citizens settle their legal differences by seeking compensation for injuries and other harm, is the most expensive in the world. Think about the business you worked so hard to make a success and consider that it can be wiped out by a single lawyer. Or how much our quick-to-litigate society adds to the cost of feeding your family.
As former Michigan Gov. John Engler, now president of the National Association of Manufacturers, says, what we have is “an out-of-control, unpredictable legal climate” that “can negatively impact the economic vitality of just about every segment of state commerce, hurting job creation and the well being of families.”
Wiped Out
Mississippi Gov. Haley Barbour once said that every small business in his state was one lawsuit away from bankruptcy. Why, then, would anyone bother to own and operate a business if a single lawsuit – especially a frivolous suit – could wipe out a lifetime of work?
That’s a decision that current and potential small-business owners, the top job providers in the country, have to make every day – not just in Mississippi, but across America.
Small businesses, defined as those with less than $10 million in annual revenue that have at least one employee in addition to the owner, are hit particularly hard by tort costs. They simply cannot afford to be named a defendant in a civil suit. As noted by Gary Palmquist, legislative affairs manager for the National Federation of Independent Business, merely responding to a single lawsuit can bankrupt a small business. The NFIB found that one in 10 of its members, which average $350,000 a year in gross sales, had incurred legal expenses of $25,000 or more.
G. Edward Arledge, a San Diego attorney, has said that “Unless a small business is very careful (some might even say lucky), it can expect to face a major lawsuit some time during its first five years of business. And the more successful the business, the greater the likelihood it has of being sued.”
The $67 Million Pants
What happened to the Chungs in Washington, D.C. is one example of what hardships a small business can face when it is slapped with a frivolous lawsuit. In 2005, the Korean family’s dry cleaning business was sued for $67 million – later reduced to $54 million – by a judge who claimed the Chungs lost the pants from his $1,000 business suit. Though the Chungs eventually won in court, they ran up $83,000 in attorney fees to defend themselves. The bills were paid off by supporters and through money generated at a fundraiser, but no small business should expect such an outpouring of generosity.
Unfortunately, most small businesses rank the possibility of being sued at the bottom of their concerns. A Business Week survey reported that two-thirds of small-business owners questioned said they “do not believe, or were not sure, whether tort reform would benefit companies of their size.”
In today’s litigious society, they should be worried. One survey has found that nearly half of all small-business owners and managers have been threatened by lawsuits. Of that group, three-quarters reported that the threats increased their expenses and required them to spend more time on their business operations. More than half say the threats forced them into making business decisions they would not otherwise have made.
Instead of expanding, businesses facing litigation will stand pat or pull back; rather than creating new jobs or raising salaries, wages and benefits for their employees, they will let workers go. For companies under legal assault, coasting is easier than pursuing a new idea or innovating.
Lawsuits Hit Too Close To Home: $9,827 Per Year, Without a Lawsuit!
Even Americans who are not named as defendants in civil lawsuits feel the effects of excessive litigation. Research organization Towers Perrin found that increases in tort costs in the U.S. each year since 1950 have exceeded annual GDP growth on an average of two to three percentage points. As a portion of GDP, tort costs soared from 0.62 percent of the economy in 1950 to 2.24 percent in 2003 before falling to 1.83 percent four years later. The tort costs in Japan, France, Canada and the United Kingdom are less than 1 percent of GDP.
Meanwhile, tort costs per capita, when adjusted for inflation, have exploded from $102 to $835 over the same period. Steve Hantler, chairman of the Foundation for Fair Civil Justice, notes that for an American family with average income, tort costs could pay for more than three months of groceries, six months of utility payments, or eight months of health care costs.
The Pacific Research Institute figures that, when forgone benefits are included the entire annual price tag, or “tort tax,” for a family of four is $9,827.
Legal Reform Works!
On the opposite side of the costs are the benefits yielded when states put a leash on plaintiffs’ attorneys.
Texas, once known to plaintiffs’ attorneys as a profitable state in which to sue, reformed its tort laws in 2003. Policymakers placed limits on noneconomic damages, punitive damages and medical liability. Since the reforms have been in place, Texas has been named by Site Selection Magazine as the state with the best business climate in the country, and doctors have flooded in from other states. Earlier reforms (1995) had been saving the typical Texas household $1,078 per year, according to a 2000 study by the Perryman Group.
Mississippi, another state in which plaintiffs’ attorneys liked to sue, enacted tort reform in 2004. Federal Express, Toyota, Textron and other companies noticed and brought investment and jobs – about 60,000 – to the state. In the four previous years before reform, Mississippi had lost 38,000 jobs. The Mississippi Development Authority reports that due to tort reform, the state had “record employment levels in 2008 and a 26 percent increase in per capita income the last four years.”
Staying Alive – Legal Reform Adds Years to Your Life
The benefits of reining in runaway litigation are not all monetary. A 2006 study by Paul H. Rubin and Joanna M. Shepherd found that tort reform laws passed at the state level from 1981 to 2000 prevented roughly 22,000 net accidental deaths from occurring during that period. The researchers say excessive legal liability increases the costs of developing and selling many risk-reducing products and services, but because some states have put limits on lawsuits, these products have become more available to consumers.
Injured parties need a judicial system that will appropriately compensate them for the harm they suffer. But the country needs reasonable tort laws that limit the damages juries can award and minimize the incentives that encourage plaintiffs’ attorneys and plaintiffs themselves to seek fortunes through the civil justice system. None need it more than small businesses and families.
Now What Do We Do?
Foundation for Fair Civil Justice (FFCJ) exists to bring empowering programs and education to small and family businesses.
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Please take the time to sign up for our Fairness Matters e-newsletter, which will bring you news items right to your email that tell the ongoing story about the need for legal reform by clicking here. We don’t share your email address with anyone – that’s important to us.
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Learn more about the bread-and-butter, common sense need for legal reform and how lawsuit abuse affects your business life by listening to our “Let’s Be Fair” radio commentaries, hosted by FFCJ Senior Fellow Bob Dorigo Jones by clicking here.
Bob is a bestselling author and founder of the nationally profiled “Wacky Warning Label Contest,” which annually picks the wackiest warning labels on products to underscore the absurd lengths to which American business has to go in response to the threat of lawsuits.
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