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The Covid-19 Lawsuit Epidemic

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The Covid-19 Lawsuit Epidemic

America shouldn’t let trial lawyers’ greed hold up an economic recovery. Summer 2020
Covid-19
Politics and law

The American economy has begun to rebound from the Covid-19 pandemic, but threatening that recovery is another epidemic spreading in the virus’s wake: lawsuits. As early as February 24, the euphemistically named American Association for Justice (AAJ)—the trial lawyers’ organized lobbying group—set up a website to prepare virus-related suits against businesses.

Plaintiffs’ law firms are aggressively trawling for clients, leveraging sophisticated media and online marketing strategies developed over decades of asbestos and pharmaceuticals litigation. In New York, the website for the Napoli Shkolnik law firm touts “national coronavirus lawyers,” standing ready to “fight for compensation if you contracted an illness because of someone else’s negligence.” By mid-June, at least 2,645 Covid-19-related lawsuits had been filed in the United States, according to a complaint-tracking website set up by the law firm Hunton Andrews Kurth. New York leads the way, with 638 lawsuits. Eight other states have already seen more than 75 cases filed.

These lawsuits could drive many American businesses into bankruptcy—win or lose. In America, unlike in Western European countries, the winner of a lawsuit can’t recoup lawyers’ fees from the losing side. This idiosyncratic rule is a major reason that U.S. tort litigation, as a percentage of the economy, costs three times as much as in the average European country. In ordinary times, that’s a significant competitive disadvantage for U.S. firms. But these aren’t ordinary times: businesses have hemorrhaged cash because of the pandemic, and many have depleted their reserves, making them unusually vulnerable to the threat of bet-the-company lawsuits.

Early in the pandemic, bipartisan congressional majorities showed that they understood the problem that litigation posed to dealing effectively with the crisis—even to the public-health response itself. Frontline medical personnel faced severe shortages of protective personal equipment. The threat of lawsuits inhibited addressing this critical need, at least for certain industrial-grade face masks that fell outside the epidemic tort-liability shield that Congress established in the 2005 Public Readiness and Emergency Preparedness (PREP) Act. On March 18, Congress insulated the manufacturers and distributors of such masks from legal liability.

That was then. Battle lines have since been drawn. Speaker Nancy Pelosi and Senate Minority leader Chuck Schumer have signaled an unwillingness to enact any further liability reforms. The reason isn’t hard to grasp. The organized plaintiffs’ bar, which I call Trial Lawyers, Inc., has almost unequaled power with elected Democrats in Washington. The political action committee for the aforementioned AAJ, the plaintiff-lawyer lobby, is the third-biggest donor to federal Democratic campaigns, behind only the PACs for two labor unions. The party whips in each house of Congress—those responsible for rounding up votes—are particularly beholden. Senate Democratic whip Dick Durbin counts three plaintiffs’ personal-injury firms among his five largest donors. The second-largest donor to House Democratic whip Jim Clyburn, excluding a PAC, is asbestos-tobacco lawsuit giant Motley Rice.

In building their public case against legislation to stem the flood of Covid lawsuits, the AAJ promulgated a push poll. Pollsters informed survey respondents: “Corporations and businesses want the federal government to give them guaranteed immunity from lawsuits by workers and consumers . . . even if they could demonstrate that the company engaged in unsafe practices.” With this framing, a majority of respondents, unsurprisingly, opposed this “guaranteed immunity.” The AAJ CEO, Linda Lipsen, declared: “People won’t want to go back to work or shop at a store unless they feel safe.”

Lipsen sidesteps the vast bulk of litigation that has resulted in response to Covid-19, which sweeps far broader than workplace and store safety. With more than 2 million Americans testing positive for the virus, and 129,000 dying from Covid-19-related complications, cases involving workplace infection constitute less than 2 percent of all Covid-19 litigation to date—some 49 of the 2,645 lawsuits filed. Only nine suits involve a claim of contracting the virus in a public place as a nonemployee.

While relatively rare so far, those lawsuits do matter. Early lawsuits include one on behalf of a Walmart employee who died from the disease and workers at a Smithfield Foods meat-processing plant that experienced a viral outbreak. If such companies were to do what Lipsen suggests and close shop until safety is guaranteed, American food distribution and production could be imperiled. It’s precisely that fear that underlay President Trump’s April 28 invocation of the Defense Production Act to protect meat and poultry processing.

Some Covid-19 litigation has directly jeopardized the virus response and public health. Lawyers have filed class-action suits against nursing homes that have had viral outbreaks, on behalf of residents; and against hospitals, on behalf of workers. When the Food and Drug Administration (FDA) finally removed administrative hurdles to the supply of alcohol-based hand sanitizers, lawyers pounced with a class-action lawsuit against hand-sanitizer manufacturers. The legal claim was that preexisting product labeling violated state consumer-fraud statutes; language asserting that the hand sanitizers kill “99.9 percent of all germs” obviously hasn’t been tested for accuracy in regard to Covid-19.

It’s folly to think that a business making decisions designed to protect against viral risks is adequately protecting itself from lawsuit risk. Even closing one’s business can trigger liability. Lawsuits targeting educational institutions—typically seeking refunds for not offering in-person instruction—have been far more numerous than those seeking redress for physical injuries or death from contracting Covid-19 on the job. Scores more lawsuits have sought refunds from businesses forced to close by government order, such as gyms. Not all these lawsuits are wrongheaded—especially if they’re predicated on clear contractual language. Still, it’s clear that America’s lawsuit industry will punish businesses that stay open as well as those that close. The tort tax is a Covid-19 recovery tax.

“By mid-June, at least 2,645 Covid-19-related lawsuits had been filed in the United States.”

Most U.S. tort and product-liability law is state law, an approach that has strengths and weaknesses, depending on the situation. Federalism works in the context of tort litigation when states have an incentive to mitigate excesses—what economists call “internalizing” liability costs. Lawsuits against small local businesses, for instance, will punish a state’s recovery, while not having an impact on other states. States with hospitals overwhelmed by crippling lawsuits will see impaired health-care access and increased health-care costs. State elected leaders generally have incentives, therefore, to find a reasonable balance between local businesses’ viability and local citizenry’s access to lawsuits in the courts.

Unsurprisingly, then, many state legislatures have acted. North Carolina granted lawsuit immunity to any “essential business,” as defined in the governor’s executive order. States with legislatures more in the grips of the trial bar didn’t go so far, but many—including New York and New Jersey—still moved to protect hospitals and other health-care businesses.

But state actions to shield against improvident Covid litigation will not generally be sufficient to ward off lawsuits that threaten national businesses with operations and distribution networks outside a state’s borders—companies like Walmart and Smithfield. Such lawsuits benefit local populations—including plaintiffs’ lawyers—at the expense of out-of-state defendants. This can generate significant biases, as former West Virginia Supreme Court justice Richard Neely candidly admitted. “As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so,” Neely said. “Not only is my sleep enhanced when I give someone else’s money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me.” Neely’s claims have been empirically verified by economists Alex Tabarrok and Eric Helland. Their statistical analysis found that plaintiffs in state-court cases, before elected judges, tended to win higher tort awards in lawsuits against out-of-state companies.

Plaintiffs’ lawyers can exploit these biases by filing suit in courts that they believe will be particularly hospitable to their claims. In theory, an out-of-state defendant company can move the case to federal court, at least for lawsuits above a certain dollar threshold. And federal judges with lifetime appointments would face different incentives from Justice Neely. But current federal rules—referred to as the “complete-diversity” requirement—allow a plaintiff to keep a case in-state simply by naming an in-state defendant. That’s what happened to Hilda Bankston, a pharmacist in Jefferson County, Mississippi, named in scores of lawsuits on behalf of thousands of plaintiffs alleging injuries from pharmaceuticals; she was never assessed liability, but by naming her, lawyers kept their case in a favorable local court overseen by a favorable elected judge.

Bankston’s testimony proved persuasive to Congress when it enacted the Class Action Fairness Act in 2005, with bipartisan support. Following that legislation, plaintiffs in high-dollar class-action cases can no longer escape federal court by naming a local defendant. But that’s not the case for any other type of litigation—some of which can be high-dollar indeed. Congress would be well-advised to revisit its complete-diversity rule for federal court in general, when things return to normal; it certainly should jettison it, now, for high-dollar litigation related to Covid-19.

For some classes of litigation, states can’t come to the rescue, given a congressional failure to act. Some lawsuits arise exclusively out of federal laws and regulations.

Federal securities class-action lawsuits are an example. During the Depression, Congress created the federal Securities and Exchange Commission and tasked it with developing regulations to stop securities fraud. The agency came out with a regulation, Rule 10b-5, designed to deter company officials from making fraudulent statements. Neither Congress nor the SEC authorized nongovernment lawyers to file lawsuits alleging fraud based on the rule, but courts permitted them. In 1988, the Supreme Court removed the final barriers to bundling these claims into class-action lawsuits on behalf of millions of shareholders.

Such securities suits soon became paradigms for “shakedown” litigation. When stock prices dropped, lawyers swooped in to sue. When companies paid out settlements, they essentially shifted funds from one group of stockholders to another. And there was essentially no supervision of lawsuits filed by, and principally for the benefit of, the lawyers. Securities class-action lawyer Bill Lerach boasted: “I have the greatest practice of law in the world. I have no clients.”

Congress moved quickly to try to put the brakes on securities class-action shakedowns, with the Private Securities Litigation Reform Act of 1995. Yet the practice has continued unabated—and typically costs companies billions annually. To date, 15 securities class-action lawsuits related to Covid-19 have already been filed, and the threat of many more is obvious, given the stock market’s volatility during the pandemic. Congress could act to forestall such suits, which hardly seems unfair, considering the uncertainties surrounding the new virus, about which the government’s own official statements have vacillated wildly.

Absent congressional action, federal securities lawsuits might offer a backdoor litigation option for lawsuits otherwise foreclosed by substantive liability protections. Consider the 2005 PREP Act, enacted in response to a bird-flu scare. The PREP Act offers a liability shield for manufacturers of vaccines, other drugs, and medical devices involved in targeting or protecting against a pathogen in a pandemic. But the protection extends only to the “manufacture, distribution, administration, or use” of a drug or other “medical countermeasure.” It wouldn’t cover the prospect of securities suits premised on gyrating stock prices. And such stock gyrations are likely in a context of uncertainty—particularly for medical companies searching frantically for treatments and vaccines. The threat of such litigation implicitly acts as a tax on that very research.

Where federal and state law intersect, Congress should tread carefully. It may be unwise to nationalize all state workers’ compensation claims, even if federal courts would permit it. The risk of a bad one-size-fits-all approach probably outweighs the costs of individual states getting the mix of safety and liability wrong. Again, however, certain national industries critical to public health and safety shouldn’t be ignored. Congress should consider broadening the PREP Act’s scope beyond FDA-regulated products, as it did for certain industrial masks. An already-existing federal statute with a broader set of covered businesses—the Support Anti-Terrorism by Fostering Effective Technologies (SAFETY) Act of 2002, enacted post-9/11 and applying to terror threats, not viral pandemics—could offer a useful template.

We won’t be able to repair America’s long-standing liability mess in the middle of a pandemic. But we can take steps that make economic recovery more likely. And such steps need not imperil the public safety or leave workers, patients, and consumers unprotected. Congress and the White House should be looking at issues of federal jurisdiction, federally based causes of action, and manufacturing and distribution businesses necessary to nationwide supply chains. States should realize that they, too, have a role—and not wait for the federal government to act. As Americans confront a pandemic unlike anything since the end of World War I, and an economic contraction deeper than any since the Great Depression, we shouldn’t let trial lawyers’ greed hold up our national response and recovery.

Photo: Early lawsuits include one filed on behalf of workers who contracted Covid at a meatpacking plant. (DANIEL ACKER/BLOOMBERG/GETTY IMAGES)

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