America's Legal Climate - A Critical Competitiveness Issue, Remarks by Thomas J. Donohue, President and CEO, U.S. Chamber of Commerce

Address by Thomas J. Donohue
President and CEO, U.S. Chamber of Commerce

San Francisco, California
October 16, 2007

Introduction—the Competitiveness Agenda

Let me begin by thanking our sponsors, Morrison & Foerster and Mayer Brown. We appreciate your support. I'd also like to thank our co-hosts, Steven Law and Robin Conrad, as well as the staffs of the National Chamber Litigation Center and the National Chamber Foundation. They've done a great job organizing this event.

In recent weeks I've been traveling around the country delivering a series of speeches on challenges America must meet and master in order to succeed in a tough global economy. Together, these challenges comprise the Chamber's competitiveness agenda. Over the next five years – and beyond – we plan to focus extraordinary resources to advance these issues because they hold the key to our nation's future economic success.

The equation is simple. First, we need human capital. With 77 million baby boomers starting to retire, where are we going to get the workers at all skill levels to run a competitive and growing economy?

We've got to meet this challenge through major improvements in public education. It's simply disgraceful that in the information and knowledge age, 30 percent or more of our students don't even graduate from high school.

The world is in a global race for talent. We need to get back into this race with a rational immigration policy that allows us to attract the workers we need to pick the crops, care for the sick, work in our laboratories, and teach in our universities.

In addition to human capital, we must have an adequate supply of secure, diverse, and affordable energy. That means developing more coal, oil, and gas as well as alternative energy technologies. And it means achieving greater energy efficiency.

We need to seriously upgrade and expand our infrastructure – the roads, ports, airports, air traffic control systems, inland waterways, power generation, transmission lines, and broadband capacity. Based on current growth, we're going to hit a wall in this country if we fail to act now.

A competitive American economy also depends on having the most vibrant capital markets in the world, and for a variety of reasons we've started to lose our edge. So we're fighting for a regulatory overhaul of our markets, while reining in excessive securities litigation and the abuse of corporate governance rules by third parties such as some labor unions.

We're calling on federal enforcement officials, politicians, foreign leaders, and the public to protect and defend our intellectual property—the ideas and innovations which are critical to America's success and leadership.

We've got to re-educate our citizens and their representatives about the importance of trade and open markets. Our health care system, which is the best in the world in some respects, has also become a financial albatross on our economy and the ability of our companies to compete with international counterparts.

Our tax system is a competitive drag as well. Other nations are starting to cut their tax rates. Yet in our own country, we're now hearing a lot of talk about raising taxes, including capital gains. It doesn't make sense.

And finally, there is a whole series of straightjacket laws and regulations that emboldened labor unions are now trying to impose on America's workplaces. We ought to learn from the mistakes the Europeans have made and stop this effort to over-regulate our labor markets.

The Legal Climate—A Competitiveness Issue

Most, if not all, of these competitive challenges must sound very familiar to our friends in California. Businesses here are grappling with them every day. And they are not much different from the challenges facing any aspiring economy anywhere in the world.

But in the case of the United States and especially California, there is that "elephant in the room" which is massive and unique to America, and which overshadows any discussion of our global competitiveness – and that is our highly litigious legal environment.

In my position, I meet privately with hundreds of CEOs and corporate planners every year. Everywhere I go, it seems like the first question I am asked is, "When is the United States going to fix its out-of-control legal system?" And more often than not, their second question is, "What in the world is going on in California?"

I first respond by telling them that we have over a million lawyers in the United States. And once they get over the shock of hearing that, I point out that the overwhelming majority of these lawyers make important and essential contributions to our society. You can't run a successful economy or a civil society without a strong commitment to the rule of law.

I also tell them that we are making some progress in improving the legal environment but that we have a long way to go.

Our most serious problem is with a relatively small group of class and mass action trial lawyers. They have devised a business model that lines their pockets while shortchanging their clients … that clogs our courts while justice is delayed for the truly wronged … and that perpetuates an endless stream of lawsuits that undermines the competitiveness of our economy.

These lawyers often partner with some attorneys general, unions, doctors, short-sellers, investors, and activists to find new ways to game the system and suck the vitality out of American companies. Often their tactics amount to nothing less than legalized extortion. These lawyers are shopping their suits to the friendliest venues, venues where they've used their financial resources to create plaintiff-friendly environments. And, they are even trying to export their business model overseas so that they can use the courts in other countries to sue companies here.

As a result, our nation's legal environment has seriously deteriorated – and the justice system that was once a model for the world has become a serious drag on America's competitiveness.

In some disturbing respects, we have allowed these legal excesses to infect and alter our democratic form of government, our civic life, and our character as a people. We see some courts, juries, prosecutors, attorneys general, and regulators using the legal system not to enforce the law but to make the law. We see troubling attacks on the due process rights guaranteed to every American by ambitious prosecutors – including a frontal assault on the time-honored tradition of attorney-client privilege.

And we have seen America move towards a culture where everyone is a victim, where suing is the first and not the last resort, and where any misfortune in life must always be someone else's fault.

As a result, businesses, governments, health care providers, community organizations and others are becoming increasingly risk-averse. The first order of business is not to innovate, take a risk, build a project, provide a service, or help the community. The first order of business is how do I avoid getting sued?

It's easy to blame the lawyers for all this, but in fact, improving our legal climate, reforming our legal system, and reaffirming our culture of acceptable risk-taking and entrepreneurship are challenges all Americans must confront.

In the remainder of my remarks, I'd like to address these issues in a little more detail — drawing upon California as an example. And I'll conclude by telling you about some of the things the Chamber is doing to improve the legal climate, which is fundamental to improving the competitiveness of our economy.

The California Example

As I suggested, businesses all over the country and world are concerned about the direction of California. In recent years, with all the lawsuits, with all the new regulations, with all the proposals in healthcare, and the new government mandates on global warming, it seems like California is applying for membership in the EU!

Each year, the Chamber's Institute for Legal Reform commissions Harris Interactive to survey key corporate counsels and decision-makers about the legal environment in the 50 states – ranking them from the best to the worst. We then publicize the findings widely through earned and paid media. In our most recent Harris survey, California ranked 45th. Why does the state rank so low? Three reasons.

First, the state is a haven for class actions. Plaintiffs' lawyers choose to file in California courts—particularly the courts of Los Angeles and San Francisco—because they know they will certify class actions that other states won't. Plaintiffs' attorneys are also filing hundreds of lawsuits in California on behalf of non-resident plaintiffs. For example, the Coalition for Litigation Justice reports that non-residents account for 30% of asbestos claims in California.

Second, plaintiffs' lawyers believe the California legislature is not serious about legal reform, and with good reason. In recent sessions, two pieces of legislation that were passed that would have worsened the state's legal environment. One would have allowed a judge to award attorney's fees and court costs to the attorney general when the state prevails in public cases, giving the AG leverage to settle cases. The other would have allocated three-quarters of any punitive damage award to the state. The Chamber joined in the effort to persuade Governor Schwarzenegger to veto both bills and fortunately, he did.

Third, California juries are granting increasingly large awards. Between 1996 and 2001, the average jury award in California tort cases grew 144%. This trend is being exacerbated by the growth of massive labor and employment class actions in California. Lawsuits over wages have become a cottage industry in this state, with employers having to pay back-wages going back three or even four years.

California has also adopted the most permissive appellate standard in the country for reviewing punitive damages. Its appellate courts almost always uphold huge judgments – and often fail to protect defendants from being punished for harm to parties not before the court.

National Legal Challenges

Of course, California is hardly alone in allowing the legal climate to run amok. It has happened across the country. The cost of America's lawsuit culture totals $261 billion a year. This does not include all the opportunity costs we incur as a nation – all the innovations, jobs, breakthroughs, efficiencies, transactions, and entrepreneurial activities that don't happen for fear of getting sued.

Small Businesses

Small businesses take a big hit—they pay $88 billion of total tort costs, money that could be used to hire additional workers, expand productivity, and improve employee benefits.

You may have heard about the Chung family in the Washington, D.C. area. These Korean immigrants started a small dry cleaning business. They hung the signs on the wall that you always see in such establishments, such as "Satisfaction Guaranteed." When a pair of pants was briefly misplaced, a disgruntled customer seized on the promises implied on those signs and sued the Chungs for $54 million.

They eventually won their case but not before enduring a nightmare of legal proceedings and crushing legal bills. We felt so strongly about this abusive lawsuit that we hosted a fundraiser in our building and helped raise $70,000 for the Chung family.

Health Care

In addition to small businesses, lawsuit abuse is also adding to the high cost of health care. And it is threatening patients' access to medical services and drugs.

Many doctors—particularly those performing high-risk procedures such as obstetrics and neurology—have been forced to quit or limit their practices due to the cost and fear of liability.

There's also the cost of "defensive medicine" — doctors ordering more tests and treatments than necessary solely to help avoid lawsuits. This adds tens of billions of dollars to medical costs every year.

Some class action lawyers have gone into the health care business themselves – in their own special way! They have generated mass tort claims involving asbestos and silicosis by setting up mass-screening enterprises known as "lawsuit mills." They paid select doctors millions of dollars to conduct mass screenings of so-called patients, some of whom they never saw in person. Most of these individuals had only a passing exposure to these substances and weren't sick.

A U.S. District Court judge blew the lid off of these sham suits in 2005. There it was for all to see – a small group of lawyers, doctors and union officials working together to rip off the system.

Capital Markets

Take a look also at our capital markets and the impact of lawsuit abuse on public companies. The threat of securities litigation is the most frequent factor mentioned by foreign companies when they decide to list outside the United States, or attempt to delist here.

Furthermore, we're just one lawsuit away from the collapse of another major auditing firm. Today, all the top audit firms face multi-billion dollar lawsuits, any one of which could put them out of business. This exposes our entire capital market system to serious risk.

We're shooting ourselves in the foot by failing to reduce unreasonable litigation risks and driving away investment and capital. We've allowed a situation to develop where bad actors can mug public companies and their investors by manipulating the legal and regulatory systems that are actually intended to protect the public.

For example, illegal short sellers can drive down a company's stock price by spreading bad information and, if they are lucky, maybe even generate a government investigation. Their friends, the class action trial lawyers, can then swing into action and sue the company because the price has dropped. There are two paydays — one on the short sale and one on the class action settlement — and the company and its real owners pay the price.

Public companies worried about stock price can't fight back even when they want to. They are easy targets for class action lawyers and regulators and prosecutors looking for trophies to hang on the wall. The game is to accuse first - and use every procedural means available to keep the accusation alive and in public - in order to force a settlement by companies that can't afford hits to their stock price.

There's a word for this kind of behavior – and it's called extortion.

Due Process Rights

We are also very concerned about the erosion of due process rights.

In recent years, government prosecutors and agencies have been pressuring companies to waive attorney-client privilege or face an indictment. They have required that companies not pay the legal fees of their employees or else be deemed "uncooperative" in an investigation.

The Chamber has made some good progress in getting the government to change these abusive tactics. We won important revisions in the U.S. Department of Justice's so-called Thompson Memorandum, and we are pushing bipartisan legislation through the Congress right now that would codify even greater reforms.

The Chamber's Legal Action Plan

So what should the business community be doing in California and nationally to improve the legal climate — to restore balance in our legal system, and, to reform a legal environment that is hurting our ability to attract capital, take risks, and create jobs for our citizens? Let me conclude by highlighting some of the things the U.S. Chamber is doing.

Pro-Business Litigation and Legal Advocacy

For starters, we are greatly expanding our program of work here in California, and a large focus is on the legal climate.

Twenty percent of the cases in which our National Chamber Litigation Center is involved originate from California or the 9th Circuit, ranging from punitive damages awards cases to labor and employment class actions. That's one reason why we created a California Litigation Advisory Committee last year to solely focus on California cases that adversely impact the state, national and international business communities.

I can promise you, we are going to put significant and growing assets into this kind of legal advocacy in the years to come.

Those on the other side of the Chamber in the courtroom have learned to take us very seriously. Since our Litigation Center was founded 30 years ago, we have participated in over 1,000 cases. In recent years, we have greatly increased our caseload and our win record. In the most recent term of the U.S. Supreme Court, we broke all previous records with 13 victories.

This includes cases such as:

• Philip Morris v. Williams — which made clear that plaintiffs may not obtain punitive damages for harm done to others not before the court;
• Bell Atlantic v. Twombly — which strengthened pleading rules so that baseless complaints can be weeded out before onerous discovery is sought; and,
• Ledbetter v. Goodyear — which rejected the ability to expand the statute of limitations for pay discrimination.

More recently, we directly intervened to stop the Department of Homeland Security from forcing employers to take action against employees whose Social Security numbers may not match up with official government records. Just last week, a federal judge here agreed to delay that program.

We are also a direct party in the California case of Chamber of Commerce v. Brown (as in "Jerry Brown"). In this case, we're challenging a California law restricting employers that receive state contract funds from spending any resources on legitimate efforts to resist unionization. The case is pending before the U.S. Supreme Court which has asked the Solicitor General to weigh in.

In addition to representing business in court, we have and will continue to sue federal and state regulatory agencies, state Attorneys General, Governors, and others — when they overstep what the law intends and allows. We will not hesitate to do just that up and down the great state of California!

The bottom line is that aggressive legal advocacy on behalf of the business community works. It is real, it is substantive, it has saved companies and shareholders tens of billions of dollars, and you are going to see the Chamber doing a lot more of it.

Legal Reform and Voter Education

In addition, we will continue to expand our work in legal reform.

In 1998, the Chamber founded the Institute for Legal Reform –which we call ILR for short — to stop the steady stream of frivolous lawsuits clogging our courts and to restore fairness and balance to our nation's civil justice system. Nine years later, we can point to substantial progress at the federal level, in the states, in the courts, and in the court of public opinion.

ILR led the fight in Washington for federal class action reform. At our urging, we've also seen many states pass good legal reform packages.

We have launched aggressive voter education campaigns in states where Supreme Court justices are elected. The composition of a number of these state courts has been fundamentally changed.

While much has been accomplished in improving the legal climate to enhance our competitiveness, there is even more left to do. That's why we are having this summit … why our law firm is in more than 100 cases … why ILR will spend $40 million advancing reform and voter education efforts.

But ultimately, we must get away from a culture where everyone's a victim, where anytime something unfortunate happens, someone gets sued … where infrastructure projects can be tied up in courts for years and civic life is diminished because of the fear of liability … and where public policy is made through lawsuits and by courts, not by elected legislatures.

On this last point, we were very pleased to have Attorney General Jerry Brown join us this morning. He's a likeable, able, and interesting fellow. But the last time I checked, he's in the AG's office. He's not in the legislature and he's not Governor—not yet anyway! So we respectfully suggest that he should be vigorously upholding the law and protecting due process rights, rather than trying to make new law and new policy by threatening to take companies and counties to court.

Conclusion

Ladies and gentlemen, in a competitive world, decision-makers at all levels of government must understand that there is a clear link between any economy's legal climate and its ability to attract business, jobs, and investment.

As an institution, business needs a swift, fair, and impartial legal system as much, if not more than, any other institution in society. And business needs a level of certainty. Tell us what the rules are and we'll obey them. But give us a system and an environment where we can take the risks, start the new companies, create the new jobs, and invent the new products and technologies – including life-saving advances in medicine and health.

California has led this nation in so many respects. The capacity for innovation and problem-solving here is tremendous.

It's time for the Golden State to once again lead the way, to lead America away from a legal environment where the lawyers replace the legislators, where lawsuits replace laws, and where legalized extortion replaces the due process rights guaranteed by the Constitution of the United States.

Thank you for your attendance and your attention. All of us at the Chamber look forward to working with you closely in the months and years to come on this compelling challenge facing your state and our country.

View The Competitiveness Agenda