Wednesday, November 12, 2003
I want to investigate the economic arrangements for trial lawyers. Asbestos litigation is a notable class of suits resulting in enormous settlements that have combined to bankrupt corporations. Recent movements for tort reform at the federal level have included proposals to cap total damages awarded in cases. The theoretical problem with this approach may make it economically attractive for large corporations to commit enormous transgressions without suitably large liabilities. I believe inefficiency of the system is not in the size of awards, but in the number of cases brought to trial, which have no merit. The system relies on incentivizing both plaintiffs and their lawyers to bring suit. In theory, trial lawyers, who are only paid if they win, should seek to represent clients they believe can win. However, extremely large settlements and correspondingly large fees for lawyers make another strategy more attractive. If a very large possible payout exists, it is more compelling for a lawyer to prosecute as many trials as possible rather than seeking trials that have merit. The system therefore encourages lawyers to seek as many trials for which a large payout is possible. So how could a system be arranged to incentivize lawyers to focus on cases with merit? How could the market forces be tailored to encourage lawyers to be more selective in the cases they try? The answer is not to cap the total damages, but rather, to cap the dollar amount a lawyer can collect in fees. If the total fee amount were capped, the winning strategy for trial lawyering would be to seek as many high-probability cases as possible. The legal system could still reward damages commensurate with the resources of guilty parties, but the artificial pressure to try more and more big ticket cases could be alleviated. Has this idea ever been proposed? Trial lawyers operate an enormous lobbying infrastructure, but I believe it would be easy to popularly promote a policy based on capped fees for trial lawyers and open damages for plaintiffs.