An effective legal system is critical to advancing free enterprise. Unfortunately, many lawsuits in this country lack merit or are downright abusive. Making matters worse, the lawyers who bring these types of suits tend to be the real beneficiaries—not their clients.
What You Need to Know:
Excessive Tort Costs Affect Everyone
America has the costliest legal system in the world. In fact, in 2016, costs and compensation paid in the U.S. tort system reached $429 billion.That figure was equivalent to 2.3% of U.S. gross domestic product, or $3,329 per household. This per household cost is even higher in certain states.
The U.S. Tort System Is Hugely Inefficient in Compensating Victims
Not only do the high tort costs drain the U.S. economy, America's litigation addiction provides little redress for injured parties. Economists have found that only 57% of the money spent in the tort system in 2016 went to plaintiff compensation, and that's before contingency fees are subtracted.
Lawsuit Abuse Takes a Disproportionate Toll on Small Businesses
A study of tort liability costs for small businesses indicates that litigation costs small businesses in America over $105 billion per year. These small businesses bear 81% of business tort liability costs but take in only 22% of revenue.
Because small businesses do not often have significant resources to defend themselves in drawn-out, costly litigation, being named in a frivolous lawsuit could mean a small business must close its doors for good. One in three small business owners have been sued or threatened with a lawsuit, according to a national opinion survey of voters by Penn Schoen Berland and Public Opinion Strategies.
Lawsuit Climates Matter and Drive Critical Business Decisions at Home and Abroad
Perceptions of the fairness and reasonableness of a state's liability system can influence business decisions about where to conduct, expand, or constrict operations or sales. According to the U.S. Chamber Institute for Legal Reform's 2019 Lawsuit Climate Survey, 89% of respondents felt that a state's litigation environment is likely to impact important business decisions at their companies.
The effects of lawsuit abuse extend beyond America's borders. High liability costs make U.S. businesses less competitive internationally. One study found that liability costs in the U.S. decrease manufacturing cost competitiveness by at least 3.2%. These factors have the potential to discourage foreign direct investment by making the U.S. less attractive to foreign capital.
The U.S. has one of the most robust legal systems in the world. However, America's tort system suffers from structural flaws and inefficient or unbalanced laws—both at the national and state levels—and American consumers are paying the price. Policymakers must take note and enact commonsense reforms to improve America's lawsuit climate.
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