02/21/2014 03:37 pm ET Updated Apr 23, 2014

Howard's Daily: The Evil in Investing in Litigation

Abraham Lincoln was an accomplished trial lawyer. He also believed that litigation should only be used as a last resort: "Never stir up litigation. A worse man can scarcely be found than one who does this." Lincoln's view of the role of litigation prompts me to reflect on the new trend of outside investors funding lawsuits, discussed in an excellent op-ed by Gerald Skoning in today's Wall Street Journal.

Americans have always been more litigious than people in other countries. The can-do spirit that drove Americans to push the frontiers (literally and figuratively) also resulted in more human conflict. 

Only in the last 50 years or so, however, has litigation turned into a for-profit industry. A side effect of the 1960s rights revolution was the idea that people had a right to sue for anything. Human suffering became an opportunity to get rich. Entrepreneurial plaintiffs lawyers like Dickie Scruggs, Mel Weiss, and John Edwards congregated at the intersection of human tragedy and human greed, and became tycoons. It was easy work for anyone with a knack for sales. Just find any human suffering -- a baby born with cerebral palsy, a company that went bankrupt, smokers who got sick -- and sue for the moon. It was all about emotion: "How much would it be worth to you to have emphysema?" The families of victims got rich. The lawyers, skimming a third or more out of multiple verdicts and settlements, got really rich. Class actions were the pot at the end of the rainbow. Scruggs reportedly got a billion dollar fee for settlement of mass tort claims on behalf of the State of Mississippi. With this much money slopping around, the temptations were too great to resist. Asbestos cases were rife with fraudulent doctors' reports. Stakes were just too high to take the risk of losing -- better just to pay someone off. Scruggs and Weiss ended up in jail. 

But there are deeper flaws than fraud in this get-rich-through-litigation idea of American success. I forget whether it was Walter Olson or Dan Popeo who observed that "America can't sue its way to greatness." When plaintiffs get rich, defendants get poor. Asbestos litigation has driven a hundred companies into bankruptcy, costing over 100,000 jobs and causing a decline in value of investments by pension funds and others. Southern hospitals who paid several hundred million dollars in 16 cerebral palsy cases brought by John Edwards had to raise prices, directly or indirectly, to pay those verdicts. Oh, not that it matters in today's system of justice, medical studies show that in more than 90 percent of cerebral palsy cases, nothing the hospital or doctor did could have caused it.

These direct costs of sue-for-anything justice are only the tiny tip of a far larger cost -- a pervasive fear of litigation has replaced a sense of freedom and spontaneity in social dealings. A tidal wave of defensiveness has washed over American culture. When anyone can sue for almost anything, people start going through the day looking over their shoulders. Doctors waste billions in "defensive medicine." Teachers no longer feel free to put an arm around a crying child. Businesses no longer give job references. Diving boards and seesaws disappear. Companies don't take risks with innovative new products. Better safe than sorry. America's can-do spirit turns upside down. Welcome to the culture of can't do. 

The flaw in America's litigation philosophy, as I have argued, is the notion that suing is act of freedom, like, say, free speech. No, it's not: Suing is a use of state power, just like indicting someone. The mere act of filing a lawsuit puts a sword of Damocles over the head of the defendant. That's why everyone is so defensive. Moreover, a lawsuit doesn't just affect the immediate parties. What people can sue for establishes the boundaries of everyone else's freedom. If a school in California gets sued when a child falls off a seesaw, you can be sure that schools in Massachusetts will remove seesaws. A laissez faire approach to litigation profoundly corrodes the fabric of freedom. The solution -- the only solution -- is for judges and legislatures to draw the boundaries of who can sue for what as a matter of law. Every claim should first go through a legal gatekeeper, asking whether this claim might erode the legitimate freedoms of people in society. These rulings of law should affirmatively defend the freedom of people to take reasonable risks -- like, say, children on a seesaw. Rulings of law establishing boundaries of lawsuits are not somehow un-American. The role of the jury is to decide disputed issues of fact, not legal boundaries of a free society. They're called "lawsuits," not "claim-anything-suits."

So now let's return to outside investors funding litigation. They should be barred, in my view, as they were under the common law prohibition against champerty. Litigation should always be about right and wrong. Investors care only about money. Litigation should strive to compensate for actual losses, not make people rich when tragedy occurs: "Gosh, it's terrible your dad died. We'll teach them a lesson. You can get a new boat." Legal claims should not be permitted to undermine broader social freedoms, and lawyers should be accountable for professional values that honor broader social goals. Investors have no professional obligations, and will have every incentive to game the system like it's a casino. Turning litigation into a business is corrosive of almost every good value of the rule of law. Abraham Lincoln, if he were here, would make this moral case powerfully.

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