Tort reform still lives in Oregon

By Tyler Smith,

Recently you may have heard about Initiative Petitions #51 and #53 and the litigation surrounding the efforts to get these initiatives on the ballot. The initiatives were two tort reform measures (#51 was contingent fee caps and #53 was sanctions for frivolous pleadings). The labor unions were preparing to spend millions to defeat these measures. Before we get too far, this raises and interesting question- What do Oregon’s teachers union (OEA) and public employee unions (SEIU) and (AFCME) have to do with tort reform? I will let you comment on that”¦

However, it now appears that the suspensions the Secretary of State placed on these measures at various times during the spring of 2008 caused enough disruption in the circulation efforts that these initiatives will not have enough signatures to qualify for the ballot. Even though these initiatives may be gone for now, I doubt this is the last time you will see proposals for this type of tort reform. Polling numbers I have seen show that support runs about 66%-69% for the concept generally. So this interim period merits discussion of the arguments. If being on the opposite side of the labor unions isn’t motivation enough, then let me give you some points to ponder, and then point out why even free-marketers can consider tort reform.

The main tort reform method in question is to limit contingency fees in personal injury cases with the hopes that this will stop the “hot coffee” and “slip and fall” type cases. Proponents of tort reform point the vast numbers of cases that settle for large amounts rather than go to the expense of litigating all the way to the end to find out exactly who was or was not at fault. They point out that these large settlements drive up the cost of insurance and have an inflationary effect on all business when in fact the business is often not actually at fault. Further the proponents argue that we need to return to some sense of personal responsibility in our society and stop blaming, and suing, someone else for our own mistakes.

Two main arguments made by those like me in the legal profession who oppose contingent fee caps are that: 1) this would particularly harm the poor and reduce access to justice for those that cannot afford to pay hourly fees; and 2) that capping contingency fees violates free market principles.

My argument is that there is a better solution to the “˜access to justice’ problem and therefore that argument should not be the argument to stop you from supporting tort reform. Second, if the public and existing power groups are unwilling to fix the access to justice issue by allowing more supply, and returning the industry to a free market, then capping contingency fees or other regulation of the industry may be the only remaining solution.

If you are a “free-marketeeer” like me, then at first glance you may say, “I don’t want contingent fee limitations because businesses should be able to charge whatever price the market will bear for their goods and services”. True enough. After all that is a basic principle of the free-market, and why should we interfere with a free market, after-all we know that competition is the consumer’s best friend. When there are multiple service providers competing for the same customer it will tend to drive prices down and quality of service up. A free market will lead to a Pareto-efficient allocation of goods and services where there “invisible hand” will distribute goods to those who desire them in a way that no one could be better off without making someone else worse off. The best part of the free market is that it is all voluntary, thus maximizing personal freedom. Basic economics”¦

Well, hang on just-a-minute while we take a little more in-depth look at free-market principles relating to the legal profession.

In any marketplace there is room for government intervention to fix problems that past government intervention caused, or to repair the free market from other market failures. In the legal profession, most states have made the choice to allow lawyers to regulate themselves and thus lawyers have done so by demanding a very high ethical, educational and professional standard in the profession. Some argue this is industry protectionism, I tend to think it is intended truly for the good of the profession. However the side effect of this is undeniably that it accumulates and results in high costs, and high overhead.

For instance, to practice law in Oregon you have to have graduated from an American Bar Association accredited law school. (symptom: law students frequently leave law school $100,000 or more in debt). California, in comparison, has no such requirement and any law school graduate that can pass the bar exam can practice law. Attorneys in California can obtain their training for much less money and could pass this savings along to clients. The U.S. Supreme Court has also decided that it is constitutional for states to require state bar association membership including payment of mandatory dues and mandatory insurance plans. Thus even beginning attorneys can start out with $15,000 to $20,000 in annual overhead before they even accept their first client.

Requirements like these make the market for legal services far from a free market. In fact the legal marketplace it is VERY highly regulated and has VERY high cost barriers to entry. Monopolistic tendencies exist when the costs of regulation, technology, legal hurdles, or other barriers to entry in any industry block new, competitive firms from entering the market. Monopolistic tendencies slowly create a shortage of competition in a given segment of that market.

In the case of the legal profession, these barriers to entry make it such that there is an artificially low supply of low cost legal services available because the firms (individuals) that are willing to enter the industry must sell their legal services at high enough rates that will allow them to recover the large sums of money they invested into education, insurance, and other overhead so that they can stay in business. There may be plenty of lawyers in business; however few of them can afford to service the low-cost/low profit client market. Thus there are economic factors that inevitably lead firms away from servicing these smaller matters or looking for one large contingency fee out of many cases to remunerate the attorney for their effort.

I believe there is a better way to solve the problem of ensuring access to justice for the poor. Oregon could solve most, if not all of that issue by simply eliminating the cartel and increasing the supply of service providers. This should drive down the price, and ALLOW attorneys to compete in the market for low cost-volume based business. In all fairness, the Oregon Bar and many other bar organizations make valiant attempts to recruit or pay attorneys for working in non-profit practices which service these low profit clients. But again, that is essentially a subsidy, further driving un-subsidized competition for those clients out of business and harming the free market.

In Summary, the economic pressures, prior government regulation, and monopolistic tendencies of the legal profession itself are much of the actual cause of the shortage of low-cost service providers for the poor. My preferred fix for that would be to free up the market and let it do what free-markets do best — provide the highest quality of service available for the lowest price.

Unfortunately, in the absence of any public willingness to return to the principles of economic freedom, sometimes more regulation becomes the only option. Thus we are left having to choose between two undesirable options. Do we simply do nothing and endure the abuses in the tort system or do we do something and try to create reasonable tort reforms?