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When a Fortune 500
company is sued, it makes the evening news and the front page of
The Wall Street Journal. But people rarely hear about it when
the local dry cleaner is slapped with a lawsuit—unless a
Washington, D. C., judge is seeking $67 million because the dry
cleaners lost his pants.
Seriously. Judge Roy
Pearson sued Jin and Soo Chung and their son for $67 million
because they lost his pants. Fortunately, he came to his senses.
He recently reduced his claim to $54 million.
In 2003, the cost of
people suing for damages in the United States—either for alleged
injuries or wrongful acts, or torts—was $246 billion. That’s
$845 per person, or $3,380 for every four-person family!
The trend is
disturbing. The cost of litigation increased 35.4 percent from
2000 to 2003, and the growth of these lawsuits has exceeded the
nation’s gross domestic product by 2 to 3 percentage points
every year for the past 50 years.
Lawsuits are
increasingly hard on small businesses. The Institute for Legal
Reform at the U.S. Chamber of Commerce found that, while small
businesses earn only 19 percent of the business revenue in
America, they pay nearly 70 percent of the litigation costs.
Those costs jumped 13 percent from 2002 to 2005. In 2005 alone,
there were nearly $100 billion worth of lawsuits filed against
companies with $10 million in annual revenues and employing one
or more people.
There is a mistaken
assumption that a small proprietor slapped with a lawsuit simply
lets his insurance company handle it. Wrong. Many business
owners shoulder the costs themselves out of fear of higher
premiums or the risk that their insurance company will cancel
their coverage. Some start-up businesses simply cannot afford
liability insurance. In fact, the ILR study shows that, in 2005,
small business owners paid $20 billion out of their own pockets
for court costs and out-of-court settlements.
Finally, the smallest
businesses, those with revenues of less than $1 million, paid
$31 billion in lawsuit-related costs. Let’s put that in
perspective. These businesses, which represent just 6 percent of
total business revenues, paid more than 20 percent of the
national tort tab. These lawsuits really do hit the "little guy"
who struggles to make ends meet.
Small businesses are
the lifeblood of America. According to the Small Business
Administration, they employ more than half of all private-sector
workers. Over the past decade, small businesses have generated
60 to 80 percent of the nation’s new jobs and employed 41
percent of all high-tech workers, scientists, engineers and
computer workers.
Small businesses also
inspire a high level of public confidence. A recent Harris Poll
of 1,000 adults found that the public has the most confidence in
small business leaders, followed by military leaders and
educational institutions.
If Americans love
small business, why do Congress and state legislatures continue
to ignore the risk that runaway litigation represents? It would
be different if the victims who are truly harmed received the
money. But the American Tort Reform Association estimates our
legal system returns less than 50 cents on the dollar to the
people filing the claims. The bulk of the rest goes to personal
injury attorneys and for court costs.
It’s time our
political leaders recognize that frivolous lawsuits are
clobbering our nation’s businesses, particularly those who put
their life savings on the line to open a shop. They are hurting
families as well.
Costs matter to employers and people depending upon them for
their jobs. Unnecessary lawsuits endanger job providers, workers
and families, and are destroying one of the things that makes
our nation great—people taking risks to start a business.
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