Sunday, December 28, 2003

Appraising the "Costs" of Litigation

As the proprietors of have somehow failed, so far, to mention, the National Law Journal is reporting on a study assessing the annual "costs" of the "U.S. Tort System" for the year 2002 at $233 billion, or 2.23% of GDP, or $809 per American inhabitant. Some commentators have called this the equivalent of a 5% national sales tax. The study was performed by the actuarial firm of Tillinghast-Towers Perrin, which "provides actuarial and management consulting to financial services companies." That firm has posted a summary at its website.

As someone whose income derives entirely from litigation transaction costs, your humble reporter was naturally moved to investigate further, in the effort to determine why he himself had not received a larger share of this sum. As someone who maintains a website and a weblog about expert evidence, he was also curious to discover what proportion of this figure might be attributable to costs associated with expert testimony and motion practice relating thereto.

But the study, it transpires, is not primarily about litigation transaction costs at all. Indeed, the study's authors say they did not even attempt to estimate "costs incurred by federal and state court systems in administering actual suits" -- the figure that some literal-minded readers might naturally equate with the "cost" of the "U.S. Tort System." The study's estimate does include values for some transaction costs: plaintiffs' "attorney fees" (an estimated 19% of the total); defense "costs" (14%); and "administration," which is apparently the study authors' term for insurance company "overhead" (21%). But the largest component of the "costs" reported in the study is the actual dollar value of damage awards and settlements (46%).

All these numbers, apparently, come from insurance company data on payments under liability policies -- a category that the study treats, somewhat misleadingly, as essentially synonymous with payments involving "torts." There is room to quibble, at the margins, about how reliable those data may be. But what should not be lost, in those quibbles, is the questionable legitimacy of even counting judgments and settlements as "costs" of the "U.S. Tort System." No doubt they are "costs" from the viewpoint of the insurance companies who pay the claims, and from whom TTP derives consulting income (as are insurance company profits, from the viewpoint of businesses and consumers footing the bill for the premiums, although the study fails to mention this). But to claimants, and from the standpoint of the judicial system, damage awards and settlements aren't "costs." They are compensation for legal injury, through which plaintiffs who have suffered an antecedent loss are made whole by the persons who caused the loss -- or at least, in the case of settlements, by defendants who elect not to contest the matter in court. In that sense, they are mere transfers of wealth, which do not necessarily equate to costs to the economy as a whole. No doubt there is some economic sense in which some share of these payments is born by consumers, so that accident victims, for example, won't be left to bear that entire burden themselves. But a comparable consumer burden would exist in a world where consumers insured themselves against the relevant harms. It's just that in the latter world, there would no longer be any temptation to chalk up the costs to the "U.S. Tort System." We'd speak instead of the cost of accidents. Or perhaps, if we allowed subrogation, we'd speak of the costs of tortious misconduct.

To put the point another way, we can think of the "costs" of settlements and judgments as having been incurred in the course of litigation, but it may be more legitimate to think of them as incurred before the "U.S. Tort System" ever gets involved, at the moment that tortious conduct inflicts legal injury.

What about the study's conclusion that only 46% of all these "costs" go to actual claimants? The study's authors cite this as evidence that the "U.S. Tort System" is inefficient. That may well be true, but the authors' math doesn't necessarily establish the point. For one thing, from the authors' description of the data, it appears that defense costs for all claims are included, whether the claimants prevailed or not. That is, the study apparently does not offer a separate estimate of defense costs associated with claims actually paid, in whole or in part. This is no small matter, because defendants' attorney's fees and insurance company "overhead" make up 35% of the total "costs" estimated by the study, and 65% of the transaction costs -- and presumably the study's authors would not wish to count it as an inefficiency, whenever some plaintiff's claim is defeated. At least they probably wouldn't say that aloud.

More fundamentally, however, and even if we suppose the study's figures to be well-conceptualized and accurate, the study's authors do not compare the transaction costs in the "U.S. Tort System" to those that are or would be incurred in any alternative system for resolving civil disputes. They also fail to reckon with the possibility that measures to reduce transaction costs, in any such alternative system, would work injustice. The Supreme Court's Daubert decision, for example, has certainly done its share to escalate those costs. But the defense bar seems to regard this as a small price to pay, for what they conceive to be fairer results -- and nobody calls this the "Daubert tax."
Fed. R. Evid. 702: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.