How to Handle Frivolous Lawsuits
OWN - NOVEMBER/DECEMBER 2013
Small business owners are bogged down with frivolous lawsuits. Can pending federal legislation and state reform rescue them?
When he opened the summons, NFIB member Doug Volpi felt a surge of panic.
His four-employee shop, Frontier Paint, was named as a defendant in a multimillion-dollar lawsuit.
The plaintiff claimed he’d been exposed to asbestos in the 1960s and ’70s while using Fixall, a paint he said he purchased from Frontier Paint, based in Southern California.
Volpi didn’t get it.
For starters, the maker of Fixall claimed there was no asbestos in its paint. Even odder, Volpi bought Frontier Paint and its two locations—one in Ojai and one in Ventura—in 1997 from a man who had founded it in the early 1980s, years after the plaintiff claimed he was exposed to the harmful paint.
Over the next few weeks, Volpi not only spent nearly $1,500 out of his own pocket, but he also had to take time away from his business to address the suit.
And the plaintiff ended up dropping the complaint.
“To defend myself, I had to spend money and time and anguish worrying about it,” Volpi says. “Had the opposing law firm done its homework, it would have realized that I couldn’t have been involved at all.”
Frivolous lawsuits like the one Volpi experienced suck profits from small business owners, raise the price of products and services, and drive up the cost of the nation’s civil justice system. Costs related to civil judgments and penalties were $264 billion in 2010, making our nation’s legal system the most costly in the industrialized world, according to Towers Watson, a human resources and risk management firm.
The Big Cost of Lawsuits
These days, people are far more knowledgeable about their legal options. Although that’s a positive development, it sometimes spawns unintended consequences in an increasingly litigious society.
“When it comes to slip-and-fall claims, discrimination claims or workers’ comp claims, in all these areas, plaintiffs are more aware of their individual rights, and frankly, there’s more access to attorneys,” says Elizabeth Milito, NFIB’s senior executive counsel.
More than 15 million lawsuits surface each year, according to NFIB congressional testimony. While some are legitimate, others are frivolous—which means lost opportunities for small businesses to expand and create jobs.
Approximately half of small business owners were “somewhat concerned” or “very concerned” about the possibility of being sued, according to an NFIB Research Foundation National Small Business Poll.
It’s not hard to see why. In any given year, small business owners in the United States pay an estimated $35.6 billion to settle civil suits. NFIB data shows that 95 percent of small business owners settle out of court.
Those who choose to fight cases pay up as well; in 2008 alone, small businesses shouldered a total tort liability price tag of $105.4 billion.
NFIB member Scott Schroeder, a contractor in Cape Coral, Fla., spent four years fighting a lawsuit he says was frivolous. A subcontractor claimed Schroeder didn’t pay him for a job, but Schroeder’s invoicing system showed he’d actually overpaid. The subcontractor sued him for $32,000; this summer, Schroeder settled for $8,000.
“They can bring these lawsuits on you, and you have to protect yourself,” Schroeder says. “It’s going to cost you, and you’re going to have to settle with these people.”
States Lead Reform Efforts
The need for tort reform is clear—and there are encouraging signs at both the federal and state levels.
After a surge in lawsuits that began in the mid-20th century, states started implementing reforms in the 1980s, providing much-needed relief to businesses. As a result, insurance premiums fell by 40 percent for some commercial policies by 1987, according to a 2004 report by the Congressional Budget Office.
By the 2000s, all 50 states had enacted at least some aspect of tort reform, according to the Heartland Institute, a nonprofit research organization in Chicago.
States are in a prime position to make a difference for small businesses.
“Most of the legal reform should take place at the state level, because that’s where most civil cases are filed that affect small businesses,” says NFIB/OH Executive Director and Vice President Roger Geiger. “For meaningful reform to take place for small business owners, it has to take place in each of the state capitals.”
Some states, such as Ohio, have made marked progress. About a decade ago, Ohioans were filing a new civil case approximately every 17 minutes, Geiger says. That sparked an intense debate about the state’s legal system, which eventually led to comprehensive reform.
Geiger says reform should address at least three issues:
1. Joint and several liability (proportional fault). Reforms should be made so that if a court sides with the plaintiff, the defendant should only be responsible for his or her specific amount of damages. If a defendant is 1 percent at fault, for example, his or her damages shouldn’t exceed 1 percent of the total allotment.
2. Caps on noneconomic and punitive damages (pain and suffering awards and punitive damage or “punishment” awards). A dry cleaner losing a pair of pants shouldn’t result in a $65 million suit. The loss of a pair of pants just isn’t that painful, nor does the sum prevent a cleaner from losing another pair, except to the extent it puts them out of business.
3. “Statutes of repose,” which are similar to statutes of limitations. A company shouldn’t have to defend suits concerning a product it stopped producing in the 1950s, for example.
Ohio is now reaping the benefits of addressing all three of these issues, with reform efforts improving its economic climate, according to Geiger. Indeed, taking on tort reform can boost a state’s private-sector employment as much as 2.8 percent, according to a 2011 study commissioned by the U.S. Chamber Institute for Legal Reform. “[The legal climate] is really one of the critical factors that companies look at when they expand to other states,” Geiger says.
Meanwhile, states such as California experience a rash of suits each year. The state is the “undisputed heavyweight champion of the consumer class action,” according to a 2013 report by the American Tort Reform Association. The report said the state’s small businesses are “under siege.”
Although small businesses in California are pushing for reform, there’s no pending legislation.
“NFIB/CA remains on the front lines advocating for meaningful, sustainable legal reform for our members,” says NFIB/CA Executive Director John Kabateck. “Frivolous lawsuits can close a small business faster than higher taxes or onerous regulations. We have advocated for businesses to have time to fix violations and for clearer guidelines on compliance for small business owners.”
How LARA Can Help
Skepticism abounds over the possibility of true tort reform at the federal level, especially considering legal industry lobbyists dumped more than $28 million in Pres. Obama’s campaign coffers in 2011 and 2012—and spent a total of $3.31 billion lobbying during 2012.
Still, the issue seems to be gaining traction. This summer, the House of Representatives Judiciary Committee was considering the Lawsuit Abuse Reduction Act of 2013, a bill that aims to, among other things, discourage plaintiffs from filing frivolous suits.
“LARA would go a long way in reducing frivolous lawsuits that threaten many small businesses,” says Karen Harned, executive director of NFIB’s Small Business Legal Center. “By putting teeth into penalties imposed on lawyers filing frivolous lawsuits, small business owners will have a meaningful way to challenge lawsuits that are not based on fact and just intended to extort settlement fees from them.”
At press time, the bill had passed the Subcommittee on the Constitution and Civil Justice by a vote of 6–2. Next, the full Committee on the Judiciary will consider the bill.
Whatever LARA’s fate may be, NFIB will continue to fight for small business owners hit with frivolous lawsuits. Every year, NFIB’s Small Business Legal Center files amicus briefs in court cases that could affect the small business community. Last year alone, the legal team filed 40 briefs to help tip court decisions in favor of small business owners. “Legal reform is something that’s always on our radar,” NFIB’s Milito says.
When Volpi, the Southern California NFIB member, received his summons, he called Harned at NFIB’s Legal Center, who encouraged him to retain a local attorney. After the plaintiff dropped the suit, Volpi’s lawyer offered to write a letter asking the plaintiff ’s law firm to take care of his legal costs, but he tamped down Volpi’s expectations: “He told me, ‘I can write another letter, and I’d be happy to do that. But this is a large law firm, and you’re going to end up spending a lot more money with a relatively slim chance of getting anything out of it. So you’re best off just to let it drop,’” Volpi says.
In March 2013, Milito shared Volpi’s story with the House of Representatives Subcommittee on the Constitution and Civil Justice in testimony about class action abuse.
“Mr. Volpi’s story, unfortunately, is not unique,” Milito told the subcommittee’s members. “Class action cases are rife with stories like Frontier Paint’s situation. In these cases, plaintiffs’ attorneys use a shotgun approach—hundreds of defendants are named in a lawsuit, and it is the defendants’ responsibility to prove that they are not culpable. In many cases, plaintiffs name defendants by using vendor lists or even lists from the yellow pages of certain types of businesses (e.g., auto supply stores, drugstores) operating in a particular jurisdiction.”
Milito argued for evidentiary standards, an approach that, if LARA becomes law, would require plaintiffs to back their complaints with evidence.
“The complaint, in and of itself, is so scary to small business owners that it’s often enough to shake up settlements,” Milito says. “This goes to the point of discouraging frivolous claims—penalizing plaintiffs’ attorneys who file complaints that lack these facts.”
But as LARA winds its way through Congress, and states such as California wrestle a powerful legal lobby over reform, small business owners like Volpi and Schroeder continue to weather a storm of suits.
“Whether they are right or wrong, you have to defend [yourself from frivolous lawsuits],” Schroeder says. “It takes all your time and all your money.”