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Salting the soil of prosperity.

If new legal mechanisms to extort and extract money can be called products, then the U.S. leads the world in product innovation. In addition to the now-familiar product-liability suit, creative trial lawyers have diversified their product line with class-action suits, shareholder "strike" suits, and wrongful termination suits. Each of these products is justified with a claim of consumer protection, but invariably it is these same consumers who foot the bill.

Deep-pocket corporations are the targets of lucrative class-action suits. San Francisco-based Wells Fargo and First Interstate Bank in Los Angeles recently were sued by two non-profit groups, Consumer Union and Consumer Action, over their $5 late fee on credit-card accounts. The court ruled in favor of the plaintiffs, but this was hardly a boon for consumers: While credit-card holders were awarded a whopping $3 per card, they ultimately will finance the $1.4 million award to the two consumer groups, as well as the combined attorneys' fees of $32.5 million.

A recent class-action suit against a Northern California water district makes explicit what is implicit in the credit-card case - consumers are being duped into suing themselves. In this case, each lot owner happily received $500 from the company for discriminatory pricing; they later discovered that as owners of the uninsured district, they were on the hook for millions in attorneys' fees. Consumers can ill-afford such protection rackets.

The most recent mutation of the litigation virus is the shareholder class-action, or "strike" suit. Strike suits are brought by predatory lawyers on behalf of aggrieved shareholders, usually their friends or professional associates, when a company's stock price drops by 10 percent or more. Richard J. Egan, chairman of EMC Corp. in Hopkinton, MA, and the victim of two recent strike suits, aptly defines them as "meritless class-action suits in which the attorneys rush to the courthouse without any basis in fact."

Strike suits disproportionately affect the most entrepreneurial and innovative firms and are salting the soil of the world's most fertile crescent: California's Silicon Valley. Silicon Graphics President and Chief Executive Edward R. McCracken aptly calls strike suits a "tax on innovation." Like taxes, these suits are proliferating. According to the Securities and Exchange Commission, settlements from such litigation nearly tripled in four years, increasing to $1.4 billion in 1993.

Adaptec, a high-tech firm in Milpitas, CA, boasting 35 consecutive quarters of profitability, was sued by a legal entrepreneur when the firm's earnings failed to meet expectations, and the stock price suffered. It cost the attorney a mere $120 to file the suit, but to kill it, Adaptec produced more than 1,500 boxes of paper at a cost of over $1.5 million. Thus, environmentalists may be keen to note, the effort also killed quite a few trees.

"Clairvoyance is required to avoid these lawsuits today," Adaptec President and Chief Executive John G. Adler told the Senate Subcommittee on Securities. "If a company such as Adaptec can be sued for not serving its shareholders, there's a problem."

As with traditional class-action suits, lawyers benefit from strike suits, but the public ultimately pays. Firms protect themselves by releasing less information, something inimical to investors' real interests. The money spent deflecting these cases - an average of $692,000 per case, according to a survey by the American Electronics Association - comes at the expense of R&D, new jobs, and new products.

The third area of runaway litigation is wrongful termination. The Rand Corp. in Santa Monica estimates that such cases alone have depressed employment in California by 4 percent to 5 percent. This translates into 650,000 jobs, or approximately the number of jobs lost during the recession from which California is just emerging.

The terms of the statutes that generate these suits are broad and allow an employee with a grievance to collect even if he or she quits the job voluntarily. In the now-famous case Hunio v. Tishman, a manager of a construction company who quit his job after his employer said he might be laid off, and who then sued for age discrimination, was awarded $7.1 million. A California state appeals court upheld the verdict but noted "that commerce in California cannot flourish with such multimillion dollar verdicts readily attainable."

Clearly, consensus exists in the business community that excessive litigation is running rampant (see roundtable, this edition). The general public also supports that conviction. in California, where recent polls indicate that more than 70 percent of its residents recognize that proliferation of litigation harms the economy, drives up taxes, and increases insurance premiums, a budding movement is pushing tort reform. Nationally, the SEC is developing ways to protect investors without enriching lawyers, and tort reform bills will be introduced in both houses of Congress next session. Perhaps 1995 and a Republican-dominated Congress will bring real control.

Sally C. Pipes is president of the Pacific Research Institute for Public Policy, a San Francisco-based think tank that analyzes national economic and social problems and proposes free-market solutions.
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Title Annotation:Capital Ideas
Author:Pipes, Sally C.
Publication:Chief Executive (U.S.)
Date:Jan 1, 1995
Previous Article:Turn off the technology spigot!
Next Article:Preparing for the knowledge economy.

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