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America’s Covid-19 Recovery Tax

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America’s Covid-19 Recovery Tax

Washington must preclude a flood of tort claims that threaten to kneecap the economy even further. May 4, 2020
Covid-19
Economy, finance, and budgets
Politics and law

A battle is emerging over how much Washington should seek to curb lawsuits that endanger America’s economic recovery. The Families First Coronavirus Response Act, signed into law by President Trump on March 18, insulated manufacturers and distributors of certain protected face masks from legal liability. But in the face of a ferocious pushback from the trial-lawyer lobby, Democratic leaders Chuck Schumer and Nancy Pelosi have signaled an unwillingness to go further. Meantime, Senate Majority Leader Mitch McConnell has insisted that any additional Covid-relief package must include liability protections, and the president’s chief economic adviser, Larry Kudlow, has stressed the issue’s importance for business viability in a pandemic.

As a general matter, Kudlow is right. America’s unusually permissive liability system singularly jeopardizes U.S. economic recovery, so long as the virus that causes Covid-19 has the potential of affecting anyone under U.S. legal jurisdiction. Among other idiosyncrasies that distinguish the American legal system from those of Western nations, the U.S. gives civil juries broad powers to decide complex liability trials; grants plaintiff attorneys sweeping rights to “discover” documents and depose witnesses before trial; and refuses to allow the winner of a lawsuit to recoup costs from the other side—imposing costs on civil defendants, win or lose. These and other differences matter, and they help explain why tort litigation in the United States, as a percentage of the economy, costs about three times as much as in the average European country.

Covid-related lawsuits are already proliferating. On April 6, the family of a Walmart employee who died after contracting the virus sued the company for wrongful death. The wife of a man who died after contracting the virus on a Princess Cruise Lines voyage filed a similar wrongful-death lawsuit on April 14. Lawyers have filed class-action suits against nursing homes that have suffered viral outbreaks, on behalf of residents, and against hospitals, on behalf of workers. On April 23, workers sued meat producer Smithfield Foods, which, like many businesses in that industry, has experienced viral outbreaks in its plants. Trump’s April 28 executive order invoking the Defense Production Act to protect meat and poultry processing was intended in part to help insulate food-industry companies from liability that might imperil food-supply chains.

Plaintiffs’ lawyers and their allies have argued that the threat of litigation is vital to promote worker, customer, and patient safety. But it’s folly to think that even a business making decisions designed to protect against viral threats is immune from lawsuit risk. Plaintiffs’ lawyers have also filed suits seeking to recoup already-paid subscription fees from gyms. Universities going online-only have faced lawsuits not only over room-and-board fees but also alleging claims of inadequate instruction. Not all these lawsuits are necessarily wrongheaded, especially if 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. If torts are, in effect, a tax, they are a Covid-recovery tax, in this context.

Indeed, the way American liability law is structured, it can clearly impair our health response, even when often-bungling federal administrators get it right. The FDA has finally worked to clear administrative hurdles to manufacturing alcohol-based hand sanitizers—but lawyers have sued over their purported efficacy. The hand-sanitizer suits offer another peculiarity of American liability law that makes reforming it difficult, in a pandemic or otherwise.

Most U.S. tort and product-liability law is enacted at the state level. This approach has strengths and weaknesses, depending on the context, but state law, as a general matter, can put companies in legal jeopardy even when they follow federal regulatory guidance. Of course, federal law overrides state law when Congress speaks clearly—as it’s done in the context of medical devices—but not generally, as with pharmaceuticals, for example. In 2009, the Supreme Court let stand a state-court jury verdict against the manufacturer of a drug that a medical professional inadvertently injected into a patient’s artery instead of her vein, causing gangrene. It didn’t matter that the precise risk had been known for decades, that the FDA had worked with the company on warning labels since 1973, and that the company’s FDA-approved label warned of the risk prominently in four separate places—including twice, in bold all-caps: “INTRA-ARTERIAL INJECTION CAN RESULT IN GANGRENE OF THE AFFECTED EXTREMITY.” Any manufacturer of a pharmaceutical product used experimentally to treat Covid faces similar legal jeopardy—thus inhibiting medical response to the disease.

Fortunately, the manufacture of experimental vaccines—unlike drug treatments—will be afforded protection from litigation. That’s because in 1986, Congress created the National Vaccine Injury Compensation Program, which preempts lawsuits involving vaccine side effects. That legislation was essential to preserving any U.S. vaccine industry: by the time of the legislation, the number of U.S. vaccine manufacturers had plummeted from 26 to three, as the dollar value of liability claims dwarfed critical-vaccine sales by 12-fold for the polio vaccine and by 200 to 1 for the DPT vaccine.

Notably, the vaccine program that Congress established offers generous compensation to those injured by vaccine side effects—a real risk for a small minority of vaccine-takers.

Similarly, Congress set up a compensation system for families of individuals killed on September 11 and its aftermath, precluding potentially ruinous lawsuits against airlines and companies involved in disaster response. The Obama administration followed this template in negotiating a $20 billion fund to process claims stemming from BP’s 2010 Deepwater Horizon oil spill. The vaccine and September 11 solutions suggest a broader template for preempting state-law product-liability lawsuits in health care. At a minimum, these precedents put the lie to the argument that precluding liability would leave vulnerable workers in vital health and food industries necessarily exposed. Congress has shown that it knows how to compensate injured parties, while keeping plaintiffs’ lawyers at bay, when it wants to.

Nor would precluding lawsuits necessarily blunt incentives for companies to take adequate safety precautions. Congress could condition liability protection on companies’ compliance with statutory or regulatory “safe harbors”—such that liability immunity required following a prescribed level of social distancing, protective equipment, and the like. To be sure, lawsuits would still inevitably follow—alleging that companies had not, as a matter of fact, complied. But a statutory safe-harbor defense would afford companies some level of protection. And Congress could deter such legal gamesmanship by adopting the “loser pays” principle in force in Canada and Europe, which requires unsuccessful litigants to reimburse defendants’ legal expenses.

Absent congressional action, there’s nothing preventing state legislatures from acting to shield against lawsuits, which will usually flow under state rather than federal laws. Indeed, employers will generally be shielded by state workers’ compensation laws—adopted beginning in the late nineteenth century precisely because an onslaught of worker-injury lawsuits was jeopardizing the economic development realized in the industrial revolution. Clever lawyers will try to find loopholes—as witnessed by the worker-based lawsuits filed against Walmart, Smithfield, and New York hospitals. But states have strong incentives to limit at least some of these claims, and many have done so—including New York, which, in the Emergency or Disaster Treatment Protection Act, enacted April 3, raised the bar for liability claims against health-care facilities and providers.

Still, a federal role here is essential, as a state decision to prioritize local impacts like worker injuries—however well-intentioned—can compromise national commerce; and states and local governments captured by the trial bar might deliver liability awards crippling companies vital to essential national production and distribution chains. We’re already seeing some states, including New York and New Jersey, considering legislation that would foist business-closure costs on insurance companies, even in the face of express contractual language precluding liability—a foolhardy approach not only contrary to the rule of law but also likely to generate pernicious national spillover effects in the finance industry that an economically reeling nation can ill afford.

We can’t fix America’s longstanding liability mess in the middle of a pandemic. But we can take steps that smooth the road to economic recovery without imperiling public safety or leaving workers, patients, and consumers unprotected. Congress and the White House should be looking at liability preemption, safe harbors, and possible administrative-compensation systems—focusing on sectors necessary for the health response itself, like pharmaceuticals, as well as manufacturing and retail enterprises necessary to nationwide supply chains and finance. States should realize that they, too, have a role—and not wait for the federal government to act. In the face of a pandemic unlike anything we’ve seen since the end of World War I, and an economic contraction deeper than any we’ve experienced since the Great Depression, we shouldn’t let trial lawyers’ greed hold up our national response.

Photo: josephgruber/iStock

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