U.S. Chamber: ‘Broken Lawsuit System’ Hurts Small Businesses

May 18, 2007

The tort system in the United States cost small businesses $98 billion in 2005, with the fear of lawsuits altering the way the small business owners make decisions, according to studies released at a Congressional hearing by the U.S. Chamber Institute for Legal Reform (ILR).

“The simple fact is this: our broken lawsuit system is a serious problem for America’s small businesses, costing jobs and dampening the spirit of entrepreneurship and innovation at the very core of America’s greatness,” ILR president Lisa Rickard told members of the House Small Business Committee.

One study, conducted for ILR by NERA Economic Consulting, found that small businesses (those with $10 million or less in annual revenue) paid $98 billion in tort-related costs in 2005, the latest year for which data is available, with $20 billion coming from the assets of the businesses rather than through insurance. For a small business with $10 million in annual revenue, that translates into about $200,000 a year that it will pay out in tort-related costs, the study says.

“The lawsuit culture transfers billions of dollars in assets critical to the continued survival of small businesses into the bank accounts of trial lawyers,” Rickard said.

A second study, conducted for ILR by the nonpartisan market research firm Harris Interactive, examined the effect of lawsuits on business decisions. Harris surveyed owners and managers of small businesses who were most concerned about the tort liability systems in their own states.

Of the qualified respondents indicating that they were very or somewhat concerned about being the target of a frivolous or unfair lawsuit, six in ten say the fear of lawsuits makes them feel more constrained in making business decisions generally, and 54 percent say lawsuits or the threat of lawsuits forced them to make decisions they otherwise would not have made.

The survey found that, if they felt like they would be protected from lawsuit abuse, 62 percent of these concerned owners say they could grow their businesses by improving their facilities or buying new equipment, increasing wages and benefits for their current employees, or by hiring new employees.

The Harris study polled 1109 owners and managers for businesses with $10 million or less in annual revenues who had at least one employee, and who were very or somewhat concerned about being sued in a frivolous or unfair lawsuit.

More than three-quarters of all small business owners in America are concerned they might be the target of a frivolous or unfair lawsuit, with fully 48 percent being “very” or “somewhat” concerned. The researchers considered those who said “very” or “somewhat” concerned to be “qualified respondents.” Their views reflect those held by the owners of some 2.8 million companies with nearly $2.3 trillion of annual economic output-or about 20 percent of the gross domestic product.

A survey with this sample size has a theoretical sampling error of plus or minus three percentage points.

“Although some liability costs represent legitimate compensation for damages sustained, these studies leave no question that small businesses pay an extremely high price for the excesses of our lawsuit system-money that the business owners could use to expand operations, develop new products, hire additional employees and grow the American economy,” Rickard said.

Source: U.S. Chamber of Commerce
Institute for Legal Reform

Copies of the NERA Consulting study and the Harris survey are available onl

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