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November
4, 2002, 9:00 a.m. |
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California jury recently awarded a 64-year-old lifetime smoker a $28 billion
punitive-damages award. You can imagine the glee on her face — and
on the faces of her lawyers who might receive 40% of the verdict. With
an award like that everyone should take up smoking!
An editorial in the Wall Street Journal pointed out that this award was equal to "more than a quarter of the market cap" of Phillip Morris, the loser in the case. While most expect the award to be appealed and whittled down to a saner amount, the damage has already been done. The tort system in the United States is out of control.
While everyone is blaming the Internet bubble, Wall Street's earnings hype, financial engineering, and select corrupt management for most of the stock-market declines of the past several years — all of which are worthy of blame — a less-prominent culprit is the runaway lawsuit and the damage awards that follow.
When I first entered the investment profession, there were a number of articles on the potential health risk of asbestos exposure. On reading those pieces, I recommended to my organization that we sell one of our holdings that was very exposed to the issue. We sold the shares — and that was 30 years ago. But today, trial lawyers are chasing the same asbestos issue, targeting deep-pocketed companies that have knowingly or unknowingly purchased businesses that had some asbestos exposure in the past. Will these trial sharks ever go away?
While we all want to see truly injured individuals receive due justice, the trial lawyers are the central beneficiaries of these outlandish awards and the neverending appeals process. The victims never receive their just settlements on a timely basis. The lawyers, with their endless appeals, make sure of that. The system is not serving justice. Rather, it is being grossly abused — to the benefit of the lawyers.
And the economic impact of this abuse should not only be calculated by adding up punitive-damage awards from over the years. The broader economic impact stems from the cap on stock valuations due to the high risk of being sued and the negative hit on earnings that follow each ludicrous award. Even with insurance as a partial offset to company liability, the economic and systemic risk remains in the system.
From asbestos to tobacco to paint, there is a great need for sane tort rules. Yet the lobbyists have so polluted the legal system that a cure to these excesses may be hard to deliver. Who will stand for sane justice if it is not our own legal system? Who patrols our core systems of checks and balances?
If the legal system cannot police itself, and if they control (through lobbyists) the check-and-balance organizations that were set up to do so, we need a higher authority to step in. President Bush, along with the broadcasting industry (which, by the way, is the largest lobbyist group with the biggest influence on politicians), should join forces in a mutual campaign to educate and debate with the public possible reforms of our costly legal process.
Just like the corporate-accounting ship, the tort boat needs to be righted. If public integrity does not exhibit more balance and transparency, we will sink from our own excesses.
— Patricia A. Small is a partner with KCM Investment Advisors, and is the former Treasurer, University of California.