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America's queen of torts: the long arm of Texas law.

All across America people trying to do business are being victimized by frivolous lawsuits and civil judgments that have no relation to elementary principles of justice. President Bush has pledged to make reform of the legal system one of his principal objectives of his second term if he is re-elected. One need look no further than the president's own state of Texas to discover a tort crisis of epic proportions.

Texans have traditionally regarded their state as an entrepreneurial center. Today, however, litigation is the largest growth industry in the Lone Star State. Lawyers and courts have turned Texas from one of the nation's most attractive business climates into a litigation war zone from which major corporations are fleeing.

Texas has become America's "Queen of Torts" through a bizarre array of pro-plaintiff decisions handed down over the last 15 years by the Texas courts. The National Center for State Courts reports a 70 percent increase in the yearly number of Texas tort filings between 1981 and 1989. Home to 6.7 percent of the U.S. population, Texas now accounts for 10.3 percent of all major product liability suits, according to the American Insurance Association--some 50 percent more than the national average. The litigious environment takes a heavy toll on Texas employers and the workers who depend on them. A burgeoning injured-worker litigation industry has pushed workmen's compensation insurance to three times the national average. Meanwhile, thousands of manufacturers are considering pulling out of Texas because of the state's liability laws. Ray Perryman, an economist at Baylor University, recently estimated that "liability costs" have contributed to the layoffs of some 30,000 Texas workers. He also wrote that 3,300 manufacturers employing a total of 340,000 Texans were considering stopping all manufacturing operations in the state because of concern over legal liability.

Boys Named Sue

A horrible accident in September 1989 illustrates litigiousness run amok in Texas. A soft-drink truck in the town of Alton ran a stop sign and rammed a school bus broadside, sending it skidding into a gravel pit with 12 feet of water. Twenty-one of the 81 children on the bus were killed in the tragedy.

Even before all the bodies had been recovered, a barrage of lawyers descended on Alton and began to solicit business from grieving parents at the hospital, during wakes, and through the mail. Ambulance-chasing is not uncommon in America; what made the case unusual is that claims by the children's families represented only a fraction of the more than 100 suits filed. The plaintiffs included the truck driver, several rescuers, and at least one bystander who sued for the emotional distress he suffered from simply watching the 14-hour rescue. Seven volunteer firefighters filed a lawsuit related to the rescue in March 1992, citing mental anguish and physical injuries. Another plaintiff, a police officer, was persuaded to drop his case after his chief pointed out that his only duty had been serving Gatorade at the rescue site.

Alton is not alone. Two hours south of Houston lies Bay City, the unofficial litigation capital of the United States. The Matagorda County courthouse in Bay City offers lawyers the enviable combination of Texas's lenient liability statutes and an almost totally pro-plaintiff jury pool. Matagorda County juries have produced some of the largest jury-awarded settlements on record. In December 1984, one of these juries attracted national attention by awarding $8.5 million to a rancher for the loss of his prized Santa Gertrudis bull, "Superman." The animal died from a reaction to an insecticide applied in clear contradiction of the instructions. Unfortunately, the Mexican workers could not read the label's English-language warning against using the chemical undiluted. The jury ordered the insecticide's manufacturer to pay $1.5 million to cover the bull's value, and another $7 million in punitive damages. As the plaintiff's lawyer effervescently summed up, "That's a lot of moooo--la." At retrial, the settlement was eventually dropped to $3.3 million.

Plaintiffs' lawyers are anxious to file suit in Bay City, even if their cases have no connection to Matagorda County. In one case, a maintenance worker in Edna (200 miles from Bay City) fell 65 feet after a cable snapped; the fall left him a paraplegic. His suit named several people, including a Matagorda County resident who "happened to have done some work on the equipment." By including this repairman, the plaintiff could file his suit in Bay City. Although the phantom repairman was eventually dropped from the case, the trial continued in Bay City, and in 1983 a jury returned an award for $6 million in damages that was eventually settled for $4.75 million.

In response to this rash of suits and large jury awards, businesses have been trying to escape the jurisdiction of Bay City law. Southern Pacific Railroad has started ripping out its tracks from Matagorda County to avoid further litigation. The railroad has already paid out $10 million in legal costs since 1984 and faces 20 more suits in the county.

The Long Arm of Texas Law

The Texas Supreme Court is now striving to make Texas's "litigation capital" title an international one. In a recent decision (Dow Chemical Company v. Alfaro), the Texas Supreme Court directly contravened U.S. Supreme Court precedent by ordering its state courts to accept lawsuits arising from incidents in foreign lands. The decision in Dow involved a tort action on behalf of a group of Costa Rican banana-plantation workers who claimed to have become sterile after exposure to a pesticide. The workers filed suit against Dow and Shell, the pesticide's manufacturers. The law firm handling their case was unsuccessful in every other U.S. jurisdiction in which it tried to file the suit, until it finally succeeded in Dallas. Why Dallas? Because Dow Chemical, headquartered in Midland, Michigan, has an office there.

Another example illustrates the lengths to which Texas courts are willing to go to bring the world to their door. A citizen of Singapore was killed in that country while repairing a ship owned by a subsidiary of the Exxon Corporation that is based in Irving, Texas. When his widow sought damages, her suit was denied under federal maritime law. Nonetheless, a Texas appellate court later granted her a trial in a state district court, even though the appellate court's overruling of the federal court would seem to clearly violate the supremacy clause of the U.S. Constitution. In an even more bizarre twist, the case is to be tried under Singapore law.

Says Professor David W. Robertson of the University of Texas Law School, "If there's a message for lawyers outside of Texas with clients in a foreign land, it's, `Call a Texas lawyer.'" Now, any American company or individual that has assets in the state runs the risk of being sued in Texas by a foreign plaintiff for injuries sustained on foreign soil.

Why is the world clamoring to get into the Texas Courts? Texas has some of the most lenient liability rules in the nation, which have in turn given rise to some of the largest awards. According to a survey done by the National Law Journal in 1990, a quarter of the largest verdicts in the United States occurred in Texas, including the largest corporate, asbestos, and product-liability verdicts. In the past three years, there have been 10 verdicts of $100 million or more in the United States. Four of them were in Texas. In 1989, Forbes magazine listed the 10 highest-paid American trial lawyers; six were Texans. According to Professor Tom McGarity of the University of Texas School of Law, Texas courts have expanded the rights of individuals to recover damages in several areas, including insurance, product liability, wrongful deaths, and claims against multiple defendants. "In the past, one could have said the Texas Supreme Court was behind the times," McGarity says. "Now, you could put the Supreme Court of Texas out on the cutting edge."

The Death of Contract

One of the most expensive "cutting edge" theories embraced by the court is lender liability. Lender-liability lawsuits based on undocumented, oral promises have been rife in Texas in recent years. In order to permit them, Texas courts have gutted both the statute of frauds, which prevents oral contracts from being enforceable, and the parol evidence rule, which prevents oral modification of written agreements. It is now up to juries to decide what the banks should or should not do, regardless of what the written loan documents say.

A 1988 case in Hurst, Texas, is a good example of lender liability in action. A business executive, after overdrawing a $500,000 line of credit from Texas Commerce Bank-Hurst and missing payments on a $30,000 Porsche, filed suit against the bank for lender liability. In the lawsuit, he alleged that the bank encouraged him to set a course of rapid growth for his company, and then reneged on promises to fuel the expansion with additional credit, thereby creating liquidity problems for himself and the company. He demanded millions in damages and a new Porsche. Two and a half years later he lost the suit, but only after the case had clogged the courts for hundreds of hours and cost the bank thousands of dollars in legal fees.

In another case, five shareholders of a bankrupt company received an $18.5 million lender-liability verdict from a bank that refused to break federal law to extend them a $3 million loan. Federal bank regulators had issued a cease-and-desist order to Mbank Abilene, forbidding it to lend more money to the consortium because such a loan would violate federal banking lending limits to a single borrower. The shareholders, who had been aware of the law, filed suit. The jury returned an initial verdict for more than $100 million in damages, reduced by the judge to $69 million, and reduced by the appellate court to a still whopping $18.5 million.

The court ignored the absence of a written loan document for the $3 million, and also rejected the bank's defense that it was following prudent federal regulations. Even more shocking, the borrowers had signed a release of their legal claims. The court found that the release was signed under financial duress and was therefore invalid. This was a different kind of decision than the famous $11 billion judgment in favor of Pennzoil, which claimed that Texaco's purchase of Getty Oil had violated a wholly oral contract between

Pennzoil and Getty. In the Mbank suit, the litigants insisted that their written contract was superseded by a self-serving oral statement. With the Mbank decision, the court invalidated the very concept and purpose of a written contract. In Texas, apparently, one need no longer bother.

Victory in Abilene set litigious pulses racing cross the state. By 1989, more than 400 so-called lender liability lawsuits had been filed. According to Karen Neeley, general counsel of the Texas Bankers Association, state banking officials have determined that if all the current lender-liability suits against state banks were successful, the damages would "approximate the total capital of all the state banks." The reason for this huge potential liability? Once convinced of lender impropriety, Texas juries come out swinging. Sunbelt Savings Association of Texas (Dallas) was issued a $62.9 million penalty for violating covenants of a $16 million construction loan. Texas Commerce Bank- McAllen was ordered to pay $59.5 million for failing to extend $1.5 million of promised funding for a furniture store.

The notion of financial liability is spreading to accounting firms as well. This February, a Galveston jury slapped a $568 million verdict on accounting firm Coopers & Lybrand and California investment firm Hambrecht & Quist in a suit over losses incurred by a computer-component manufacturer. As is typical with Texas-sized verdicts, the judgment was 50 times higher than the damages found by the court.

A Mouse in His Beer

Symptomatic of all of Texas's tort problems is product liability, the area that the Perryman study fingered as the most crucial factor in Texas job loss.

A recent case involves a plaintiff who suffered vision loss in an eye that was hit by a bottle cap as he opened the bottle. The Houston jury awarded damages that now stand at about $2 million. In a 1990 ruling upholding the judgment, the Supreme Court of Texas agreed with the plaintiff that "the evidence shows conclusively that [the defendant] was consciously indifferent about the possibility of bottle cap blow-off." What makes the judgment so unfair is that the party found negligent in this case, the manufacturer of the bottle capping machine, had indeed warned the soft drink maker of the danger of caps blowing off the bottles. It is unclear what the machine's manufacturer should have done further, since it had no control over the product's label, where a printed warning presumably would have gone. Nonetheless, the court held the defendant negligent, and further stated that no reasonable jury could have done otherwise.

In another well-publicized case in 1988, a Texas policeman, who claimed he found a headless mouse in his beer, won $550,100 in a product liability action against the manufacturer of the beer. The officer claimed damages on the grounds that he suffered from nausea for a month after the incident, was unable to deal with drunken driving or public intoxication suspects on his job, was unable to watch beer commercials on television, became terrified of rodents, and was forced to give up hunting.

The courts have made further expansions in the field of wrongful death. In a recent case involving a collision between a car and a train, a jury in Angleton ordered the Missouri-Pacific Railway to pay the car driver's family $12.5 million, including $10 million in punitive damages. The train had been moving at a lawful speed and had legal right-of-way over the car. Nevertheless, the jury found that the railroad had acted with "malice" because the rail-highway intersection was insufficiently marked, having no lights, bells, or gates. This finding was reached even though the railway had no legal right to install such warnings even if it deemed them necessary. A railway official explained, "We cannot put signage up on our own....It's within the exclusive authority of the state highway department."

Workmen's Compensation Travesty

Judicial activism has contributed to the Texas tort crisis in two ways. First, it has expanded the basis of liability well beyond the common law. Additionally, and potentially more dangerously, Texas courts have used their power of judicial review to insulate themselves from legislative control, declaring attempts to limit litigation unconstitutional.

The courts have prevented the state legislature from returning the Texas Workmen's Compensation system to its original purpose--providing a regular procedure that would simplify recovery for injured workers without the need for lawyers. Texas workmen's comp rates are currently three times the national average. Texas employers' workmen's compensation costs have risen dramatically since 1984, and are now the fifth-highest in the nation. Lawyers get most of the benefit: injured workers in Texas receive the eighth-lowest benefits in the nation. Insurers writing workmen's compensation policies in Texas lost more than $580 million in 1988 alone. One large employer in the Texas panhandle, Excel Corporation, puts the estimate of an average worker's comp claim at more than $20,000. Such a claim usually includes visits to three or four medical providers and, in almost all cases, consultation with an attorney.

The method to all this madness lies in Texas's unusual trial system. Under this system, almost all Industrial Accident Board (now the Workmen's Compensation Commission) decisions are challenged with an appeal for a jury trial. This course is particularly effective for the claimant, since the jury is not allowed to consider the hearing-officer's findings. Texas is one of only three states to follow such a system (Maryland and Ohio are the other two). In all other states, appeal to a jury is permitted only when the law is misapplied. Under Texas's system, attorneys are involved in almost all cases, and receive up to 25 percent of litigated workmen's comp awards. The procedure defeats the whole purpose of workmen's compensation, which is to take these decisions out of the regular courts.

In 1989, the Texas legislature rewrote the workmen's comp laws to permit fewer appeals and to lower attorney fees. These legislative reforms, however, were declared unconstitutional by Judge Ray Perez of Eagle Pass, who ruled that the new system was "unreasonable and arbitrary." In other words, the new system did not guarantee each claimant his day (and what is more important, a lawyer's day) in court.

Since the invalidation, more and more companies have decided there is no point in paying workmen's comp premiums if the system can't protect them from arbitrary court judgments. "There are now more non-subscribers than there are subscribers" to the Texas workmen's comp system, according to Bennett W. Cervin, a Dallas attorney. He continues, "Historically, a subscribing Texas employer's liability has been considered to be limited to its insurance premiums and, with the exception of the recovery solely of exemplary damages under a claim of gross negligence, the employee's exclusive remedy was the benefit scheme provided by workers compensation." Texas employers now face unlimited liability for workplace injuries, and given the past tort decisions in the state, may well be the ones incurring the worst of these injuries.

A similar situation occurred when the Texas Supreme Court declared unconstitutional a legislative attempt to limit doctors' liability in malpractice cases. In May 1988, a 7-to-2 majority struck down the medical-malpractice caps in personal injury cases. The court claimed that the Texas legislature violated the open courts provision of the state constitution, even though a medical malpractice claimant is allowed to recover all past and future medical expenses without limitation. After the decision, Texas doctors involved in obstetrics saw malpractice claims double, and insurance premiums triple, in only three years. In response, almost two-thirds of family physicians (who in many rural communities are the sole providers of obstetric services) and one-third of the obstetrician-gynecologists stopped delivering babies altogether. The problem is especially severe in Houston, where verdicts have been especially high. According to a recent Texas Medical Association study, 35 to 40 percent of Houston's obstetricians have left their practices in the past five years.

Deep in the Heart of Excess

The Texas judiciary has essentially become an instrument of the plaintiffs' bar. Judges in Texas are elected, with no restrictions on campaign contributions. The result is a takeover by special interests of the sort predicted by public choice theory. Public choice theory, first--and most eloquently--propounded by Nobel laureate James Buchanan and Gordon Tullock's path-breaking work, The Calculus of Consent, argues that vote-maximizing legislators and rent-seeking interest groups combine to subvert the democratic process.

According to this theory, small groups of powerful or wealthy people organized around some common interest will seek to gain state-enforced economic privileges (rents) by exercising disproportionate influence on the political process. Texas lawyers have received national attention for their rent-seeking. In December 1987, CBS' "60 Minutes" posed the question, "Is Justice for Sale in Texas?" The segment discussed Houston personal injury lawyer Joseph Jamail's large contributions to the Texas Supreme Court Justices who were to preside over his multi-billion dollar verdict in the Texaco-Pennzoil case. Subsequent to Jamail's contribution, the Court denied Texaco's appeal, an appeal based in part on the fact that Jamail contributed $10,000 to the trial judge Anthony Farris days after Farris received the case.

Texas has extraordinarily liberal campaign finance laws for judicial elections. Only three other states allow their judges to solicit funds directly: Alabama, Louisiana, and California. In 1989, the Texas Supreme Court amended the Texas Code of Judicial Conduct to allow judges to solicit contributions for office-holding expenses, including living expenses. For example, out of the nearly $1 million raised by Harris County district judges in 1990, only 30 percent went toward campaign expenses. The rest of the contributions paid for travel, dues to the state bar association and other organizations, magazine subscriptions, meals, charities, car phones, season tickets to Houston Rockets basketball games, a handgun, other political campaigns and, in one case, a judge's personal car payments. "That comes real close to being a salary supplement paid for by lawyers who practice before their court," says Anthony Champagne, professor of government at the University of Texas at Dallas.

According to a study by the Texas Supreme Court Justice Committee, from 1978 to 1988 23 firms and individual attorneys contributed $2.6 million to Texas Supreme Court Justices. Of that sum, 85 percent came from trial lawyers. By 1989, contributions from eight lawyers and law firms accounted for 18 percent of the nearly $8 million spent by Supreme Court jurists in the previous decade, according to election studies. And members of those eight firms appeared at least 28 times before those judges since 1985.

An Electoral Challenge

Texans may have had enough of the financial ties between judges and the plaintiff lawyers who benefit from large awards. A recent Gallup Poll conducted for the Texas Public Policy Foundation in San Antonio found that 91 percent of Texans believe that there are too many lawsuits, and 73 percent favor capping contingency fees. Opinion polls show that Texans strongly support the continued appointment of judges through popular elections.

An important race in the 1992 general election could turn the corner on court reform; current Supreme Court Justice and former plaintiff attorney Oscar Mauzy is facing a challenge from state appeals court Judge Craig Enoch. Enoch criticizes Mauzy for taking large campaign contributions from lawyers who argue cases in his court. In a recent gift to the University of Texas School of Law, Jamail donated money in the name of Oscar Mauzy. In 1990 in his try for election for chief justice, 86 percent of Mauzy's contributions came from trial lawyers--and another 6 percent from their spouses. In the current election Mauzy is running again at the 86-percent rate.

The most efficient way to go after judicial distortion is to disqualify lawyers before interested judges. If judges were disqualified from hearing cases involving their contributors, parties would no longer contribute solely to seek rents.

As to the legislature, laws must be written to reflect the public costs of the tort crisis. The state's liability statutes must be amended to provide for punitive damages only when there is clear and convincing evidence that a defendant's actions showed willful misconduct, malice, or fraud.

In product liability lawsuits, judges should assess the portion of the responsibility for a product-related accident, and install a two-part trial system that would require juries to determine first whether a manufacturer was liable for damages and award compensatory damages, and then separately decide the amount of any punitive award. Further, the absence of a warning or instructions should not necessarily allow a product liability action if the danger or safe use associated with a product is obvious, known by the person using the product, generally available to users, or not known to the manufacturer or seller at the time the product is supplied. A defendant should not be found liable in cases concerning alleged design defects unless it is proved that a "practical and technically feasible safer alternative design existed" when the product was made or sold. Many of these proposals have already been suggested in tort reform proposals put forward by Texas Representative Curtis Seidlits in 1989, and again in 1991.

Reasonable limits should be placed on the jurisdiction of Texas courts, limiting them to cases where suit in Texas is most convenient for all the parties. Texas should not be the world's courthouse.

The open courts provision of the Texas constitution (originally adopted to allow frontier counties that did not yet have a courthouse to use those of their neighbors) should be amended to limit its reach to its original intent. Limits should be placed on punitive and other speculative damages, and the workmen's compensation system should be overhauled to remove the lawyer's right to "their day in court."

With these changes, the disproportionate effect that plaintiff lawyers have on the judicial system would be minimized and democracy could again take control. These changes could also have a profound impact of the state's economy. Texas could again become a world leader in something other than litigation.
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Title Annotation:nuisance suits distort the judiciary system
Author:Weiss, Michael D.
Publication:Policy Review
Date:Sep 22, 1992
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