Monday, May 21, 2007

U.S. Chamber Of Commerce Study Shows Deterioration In The Fairness Of Alaska's Tort Liability System

Last week, a news story about litigation environments briefly broke the national radar screen, then slid back into obscurity. The U.S. Chamber of Commerce had reported on the least fair and reasonable litigation environments in the United States. The worst local jurisdictions included Los Angeles, Chicago/Cook County, Madison County (IL), Mississippi, New Orleans, and Miami (the only real surprise on that list is Mississippi). Since Anchorage, Alaska wasn't even considered, this led me to search if there was more to the study than originally reported. And yes, there was.

The U.S. Chamber of Commerce has released a study performed by one of their affiliate organizations, the Institute for Legal Reform (ILR). The purpose was to determine and compare the tort liability climate in all 50 states from the business perspective. In other words, how often must a business go to civil court to either defend themselves or to enforce an agreement, and how often does a civil court rule in favor of the business?

The ideal tort climate is one where businesses litigate infrequently and successfully. The next best environment is where businesses might litigate more frequently, but still successfully.

And why are these numbers important? The higher your state's score and ranking, the easier it is for your state to attract new business, with the associated job creation and contributions to local and state tax bases. In addition, local residents, particularly high school and college graduates, will be more motivated to stay in your state for employment or to create a local business. And the impact of litigation abuse is much more severe upon small business; the average small business spends $17,000 per year on litigation-related costs. And it affects the general public, too; litigation costs each individual an estimated $880 per year in effects.

The American Tort Reform Association (ATRA) issued a press release on April 25th lauding the Institute for Legal Reform's report, and noted that both organizations identified the same geographical judicial hellholes. The Alaska Judicial Council has yet to react to this study.

However, not everyone was thrilled with the ILR's results. The American Association for Justice (AAJ) issued a press release characterizing the study as "bogus". Jon Haber, CEO of AAJ stated, “This latest propaganda is a made-up survey primarily of corporate lawyers earning millions of dollars defending their CEOs from being held accountable. The Chamber will stop at nothing to destroy the civil justice system in America, which protects the rights of consumers, employees, and shareholders against corporate wrongdoing and negligence.”

The AAJ release also listed "ten states where not to get sick", including Alaska.

In Alaska, restitution for “noneconomic” losses is limited to the greater of $1 million or the injured person’s life expectancy in years multiplied by $25,000. That may not sound bad until one remembers that people can live 50 years or more after they are injured, and these injuries can include something as serious as the permanent loss of urinary and bowel function. Fifty years of tending to the necessary medical needs – let alone the initial treatment – would not come close to being covered by this limited amount. Alaska Statutes § 09.17.010; State v. Johnson, 2 P.3d 56 (Alaska 2000).

This is clearly a "Chicken Little" assessment of Alaska's situation. Will the number of people to fall into such an extreme category justifying returning to a wide-open, "sky's the limit" tort environment? I think not. Furthermore, AAJ is assuming that in the prototypical case they cite, that there would be no advances in medical technology during the next 50 years sufficient to seriously mitigate or even reverse the permanent loss.

Methodology: The overall methodology is somewhat complex and is explained in full detail HERE. I present a short overview below.

The study was conducted for the U.S. Chamber Institute for Legal Reform by Harris Interactive, Inc. The final results are based on interviews with a nationally representative sample of 1,599 in-house general counsel or other senior litigators at companies with annual revenues of at least $100 million. Interviews averaging 22 minutes in length were conducted by telephone and took place between December 27, 2006 and March 2, 2007.

A representative sample of companies with annual revenues of at least $100 million annually was drawn using sample from idExec, Dun & Bradstreet, and AMI. Alert letters were sent to the general counsel at each company. These letters provided general information about the study, notified them that an interviewer from Harris Interactive would be contacting them and requested their participation.

The sample was segmented into two main groups. Of the 1,599 respondents, 77 were from insurance companies, with the remaining 1,522 interviews being conducted among public corporations from other industries. The proportion of interviews with insurance companies represents 5% of the total sample. Typically, in the universe of companies with $100 million or more in revenues, insurance companies represent 6% of this population. Since property casualty insurance companies have extensive experience with state liability systems, for the purposes of this study they worked to ensure that our proportion of insurance companies matched the overall population.

Respondents had an average of 22 years of relevant legal experience (including their current position), had been with their company an average of 13.8 years, and had been in their current position an average of 11.4 years.

For the "Ranking on Key Elements" tables, states were ranked by their mean grades on that element. The "Overall Ranking of State Liability Systems" table was calculated by creating an index using the scores given on each of the key elements. All of the key element items were highly correlated with one another, and with overall performance. The differences in the relationship between each item and overall performance were trivial, so it was determined that each item should contribute equally to the index score. The index was created from the mean across the 12 items, which was rescaled from 0 to 100 prior to averaging them together. You can access these tables by clicking on the highlighted state of choice from the list below.


Delaware : Rank - 1, Score - 75.6
Minnesota: Rank - 2, Score - 70.6
Nebraska: Rank - 3, Score - 70.0
Iowa: Rank - 4, Score - 68.9
Maine: Rank - 5, Score - 68.9
New Hampshire: Rank - 6, Score - 68.2
Tennessee: Rank - 7, Score - 68.2
Indiana: Rank - 8, Score - 68.2
Utah: Rank - 9, Score - 67.7
Wisconsin: Rank - 10, Score - 67.5
South Dakota: Rank - 11, Score - 67.0
Virginia: Rank - 12, Score - 66.9
Kansas: Rank - 13, Score - 66.7
Connecticut: Rank - 14, Score - 66.3
Arizona: Rank - 15, Score - 66.3
North Carolina: Rank - 16, Score - 65.9
Oregon: Rank - 17, Score - 65.7
Massachusetts: Rank - 18, Score - 65.7
New York: Rank - 19, Score 65.6
North Dakota: Rank - 20, Score - 65.4
Colorado: Rank - 21, Score - 65.1
Wyoming: Rank - 22, Score - 64.7
Michigan: Rank - 23, Score - 64.2
Ohio: Rank - 24, Score - 63.9
Washington: Rank - 25, Score - 63.7
New Jersey: Rank - 26, Score - 63.4
Vermont: Rank - 27, Score - 62.5
Nevada: Rank - 28, Score - 62.0
Maryland: Rank - 29, Score - 61.7
Idaho: Rank - 30, Score - 61.3
Georgia: Rank - 31, Score - 61.2
Pennsylvania: Rank - 32, Score - 60.8
Kentucky: Rank - 33, Score - 60.8
Missouri: Rank - 34, Score - 60.0
Rhode Island: Rank - 35, Score - 58.5
Florida: Rank - 36, Score - 58.2
South Carolina: Rank - 37, Score - 58.1
Oklahoma: Rank - 38, Score - 57.7
New Mexico: Rank - 39, Score - 57.5
Montana: Rank - 40, Score - 57.2
Arkansas: Rank - 41, Score - 56.5
Hawaii: Rank - 42, Score - 56.3
Alaska: Rank - 43, Score - 56.0
Texas: Rank - 44, Score - 54.3
California: Rank - 45, Score - 53.5
Illinois: Rank - 46, Score - 50.8
Alabama: Rank - 47, Score - 50.7
Louisiana: Rank - 48, Score - 47.3
Mississippi: Rank - 49, Score - 46.1
West Virginia: Rank - 50, Score - 38.0

Alaska: The main concern is Alaska's ranking - a relatively dismal forty-third among all fifty states in the fairness of its litigation environment, according to Lawsuit Climate 2007: Rating the States, an annual assessment of state liability systems conducted by Harris Interactive and recently released by the U.S. Chamber Institute for Legal Reform (ILR). Tom Donohue, President and CEO of the U.S. Chamber of Commerce, describes the agenda succinctly. “The best thing a state can do to attract business is to have a balanced legal system,” said Donohue. “An unfair legal system sucks the life out of a state’s economy. It affects business expansion, it affects jobs and it takes money out of consumers’ pockets.”

However, Alaska's adverse trend is a second concern. The study attributes Alaska’s drop of seven places in this year’s survey to changes in their score on four key elements: perceptions of how the state handles non-economic damages, the courts’ timeliness of summary judgment or dismissal, handling of punitive damages, and overall treatment of tort and contract litigation. A recent actuarial study estimated the annual cost of the tort system in America to be $261 billion, or $880 per citizen. Following those estimates, the price tag of tort litigation for the entire population of Alaska is more than $500 million.

A more detailed categorial breakdown of Alaska's rating can be found HERE. In summary, it shows that respondents considered Judges' Impartiality and Competence to be a relatively strong point, while Non-Economic Damages and Timeliness of Summary were considered weak points. The timeliness problem may very well reflect bleedover from an understaffed and overburdened criminal justice system in Alaska plagued with an insufficient number of prosecutors and public defenders, which causes backups in judges' court calendars.

The general public contributes to the problem by voting in favor of complicated, catch-all initiatives such as last year's Cruise Ship Initiative which imposed a gaggle of petty nuisance restrictions on the cruise ship industry. The affirmative vote not only sent a message to industry that Alaskans are somewhat hostile to new business, but, when combined with Alaska's downward slide in the perceived fairness and balance of our tort system, may be undermining oil industry confidence in the veracity of Governor Sarah Palin's proposed Alaska Gasline Inducement Act (AGIA). We as Alaskans need to send a balanced message to industry - that we welcome new investment and development, but that we merely want a fair piece of the pie. We want everyone who does business with Alaska to benefit - we merely ask that Alaskans benefit first.

Tort reform has a long way to go before it finally streamlines the civil justice system to increase accessibility while decreasing obstructionism and weaponization. Check ATRA's Issues page for a detailed laundry list of their suggested reforms. Here's a few of my own to generate some thought:

1). Optimally fund the criminal justice system to prevent court calendar backups.

2). Intensified pre-screening of cases to weed out those cases which are clearly frivolous or spiteful. Plaintiffs insisting on pressing such cases agree to pay ALL costs if they lose.

3). Economic damages only - eliminate punitive damages. Punishment is the job of the criminal justice system, not the civil justice system.

4). No one should be allowed to use the civil justice system to profit from lawbreaking. This means if a guy breaks into a house and gets shot and crippled by the homeowner, the housebreaker wouldn't even be allowed to file a civil suit against the homeowner.

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