U.S. Legal System Ranked as Most Costly

U.S. Legal System Ranked as Most Costly

By Shannon Green |Corporate Counsel | May 17, 2013

The U.S. legal system is the world’s most costly, according to a study released this week [PDF] by the U.S. Chamber Institute for Legal Reform (ILR). The study, conducted by NERA Economic Consulting, showed that the American system costs about one and half times more than the Eurozone average.

The NERA study compared liability costs as a percentage of a country’s gross domestic product. The 13 countries included in the study have similar levels of regulation and legal protection, leading analysts to conclude that higher costs could be attributed to more frequent and/or costly claims.

The U.S. costs were about 1.7 percent of GDP. Countries on the low end of the range—the Netherlands, Belgium, and Portugal—had costs around 0.4 percent. Legal liability costs in the U.S. were found to be about 50 percent more than costs in the U.K.

ILR president Lisa Rickard says excessive litigation is putting U.S. companies at a competitive disadvantage globally. Lawsuits create high costs for businesses, she says, and they affect consumers, employees, and the overall economy.

“The worse a litigation system becomes in a country,” says Rickard, “the more companies think twice about whether or not to do business there, to locate there, to expand there.”

A Reuters article Thursday cited antitrust plaintiffs lawyers Douglas Richards and Michael Eisenkraft, who counter the ILR survey’s conclusions. The lawyers central argument is that many of the pro-business procedures, “made on an ad hoc basis rather than through a formal rule process, have compounded ‘the problems of cost and delay that they often were ostensibly intended to solve.’ ”

ILR also released the results of a survey of 800 registered U.S. voters’ views on class action lawsuits [PDF]. Sixty-nine percent of respondents said they thought there had been an increase in abuse of the legal system over the last decade.

The U.S. Chamber of Commerce represents businesses of all sizes, and problems with the legal system are worrisome for all members, according to Rickard. “It doesn’t matter if you’re the largest company in the world or a one-person solo proprietor,” she says. “There is an equal level of concern about this country’s lawsuit abuse.”

Smaller business may be just one lawsuit away from shutting down, she says. But larger, deep-pocketed companies are usually the targets of plaintiffs lawyers. “Entrepreneurial trial lawyers target them, particularly in class action litigation,” she says, “because they know at the end of the day the company will end up settling because it’s just not worth the time, expense, and impact on shareholder value to litigate those cases.”

ILR promotes reform to the civil justice system. Rickard says there have been some recent improvements to the litigation system in the U.S., including the Class Action Fairness Act of 2005, which expanded federal jurisdiction over many large class action lawsuits. But if the litigation system is to become competitive with other industrialized nations from a cost perspective, she says that more reforms are needed.

The voter poll on class action suits raised similar concerns in the civil justice system. Eighty-nine percent of voters surveyed found it at least somewhat problematic that lawyers, not plaintiffs, receive most of the money paid out in class action lawsuits. Sixty-one percent found the practice to be a significant problem.

Of the respondents who had joined a class action lawsuit in the past, only 14 percent reported having received anything of value as a result.

Plaintiffs lawyers argue that civil lawsuits, particularly class action suits, are necessary to ensure products sold are safe for consumers. Sixty percent of respondents acknowledged that lawsuits offer at least some benefit in that respect, but just 19 percent said the benefit was significant.

“Far from helping consumers, the U.S. litigation experience really does show that consumers are not better off in terms of their pursuit of justice,” says Rickard, “and that the system really benefits the lawyers that control it more than it does the consumers.”