Opinion and Economic Analysis and Banking & Finance

HICKS: The high costs of an over-lawyered society

December 4, 2010

Inside a pine toy box at the foot of my son’s bed are a few toy helmets. One is a bronze-colored piece: a child-size Roman centurion’s helmet. The helmet is made of stamped, flexible plastic, perhaps 1/8-inch thick. Inside is inscribed some useful advice: “Not for Uses in Actual Combat.”

Presumably, this warning by a Chinese manufacturer is to prevent an errant shipment arriving at a distant outpost in Afghanistan to be mistaken for Kevlar. Some gentle readers might disbelieve me, but I assure you, I could not make this stuff up.

Somehow, makers of plastic toys have decided that, to prevent lawsuits, they should clearly mark their goods against the possibility that someone would don a Roman toy helmet to ward off an AK-47 round. How much does this silliness cost? How have we descended into such madness? How can we extricate ourselves from this insanity? Good questions without easy answers.

Estimates of the private-sector costs of civil litigation top out at about 2 percent of our gross domestic product, so for every $50 spent in the United States, $1 goes to support legal costs and settlements. I think this estimate is a little high, but even if it is twice, or even four times, too much, it is a tragedy.

Lawyers are an easy target, but they are not to blame. A good lawyer (that is one who isn’t out simply to make a short-term buck) will readily assess risks with a client. This process, if done well, will reduce costs and, to no surprise, get the lawyer more long-term business.

Lawyers who are insulated from the profit motive are perhaps the worst offenders. In the dozen years I have worked at university research centers, overseeing hundreds of studies for close to $10 million, I have delivered only four completed reports that were longer than the university contract for the project.

These contracts are largely meaningless because no one who matters could swear under oath that he read the contract and understood it. In contrast, through my small consulting firm, I have performed hundreds of thousands of dollars of work, for dozens of clients (including law firms), without a single agreement extending past two pages. So who’s to blame and how can we fix it?

It is really managers without leadership skills or the capacity to undertake simple benefit-cost analyses who burden us with the inanities of over-lawyering. The legal system is merely a costly instrument of their inadequacy.

Good leadership, both public and private, could do much to cut legal costs, but good leadership is not oversupplied. Instead, we might turn to extensive tort reform. We could limit civil judgments, cut contingency fees, and place restrictions on types of injuries. Sadly, this carries the very real worry that those truly wronged will have less recourse to litigation.

Whatever course we take, we must craft a legal environment that doesn’t scare a business into warning us that we shouldn’t wear its toy helmet into combat.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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