Profs – Class-action suits a drag on the economy

When it comes to resolving contract disputes, the U.S. and other industrialized nations do a far better job than emerging economies. The typical contract dispute consumes about 300 days and 24% of the value at stake, the authors conclude, compared with 400 days and 50% in Sub-Saharan Africa.

Where the U.S. diverges from virtually every country is its treatment of mass torts and class actions, procedures the authors call “second order.”

In the typical accident or contract claim, U.S. courts do reasonably well. They may face somewhat more litigation than other rich democracies, but not much. In the second-order cases, however, the U.S. courts entertain claims that courts in other well-functioning economies would dismiss in short order. In the process, they necessarily create a drag on American business.

Relatively few countries even allow class actions (Brazil and Canada do, although few cases are filed) and the track record of jailed mass-tort and class action lawyers like Dickie Scruggs, Bill Lerach and Mel Weiss speaks to the deep corruption that is always lurking around this form of litigation.

Given the trivial size of their claim, few victims pay attention to settlement bargaining. The defendant can take advantage of that by negotiating a settlement that is generous to the lawyers and stingy to his clients. The attorney agrees to take a generous fee, always in cash, and a much smaller recovery for his clients, often “in-kind” as free samples of the defendant’s product.

Forbes
9/6/11