Stephanie Mencimer

Risk vs. Reality

University of Wisconsin law prof Marc Galanter once wrote an article called "An Oil Strike in Hell," on legends about the civil justice system. In it he gives a run down of some fascinating research comparing the views of corporate CEOs to those of corporate risk managers about the so-called "litigation crisis" back in the 1980s.

Risk managers and mid-level public employees viewed most lawsuits as a nuisance and thought the impact of the liability issue was "far more related to rhetoric than reality." The CEOs, who were much less likely to have direct experience with litigation but whose companies may have also funded major tort reform initiatives, thought that lawsuits were a huge menace. Galanter suggests the CEOs might be drinking their own Kool-Aid. He observes,

"As in the case of chemical weapons, it is hard for those who launch media distortions to keep them away from their own troops."

I was reminded of this article today when I was looking at the new data on securities litigation from NERA. There are some amazing nuggets buried in it, including this one about the impact of a 44 percent decline in the rate of shareholder lawsuit filings over the past decade:

With the drop in filings, the average corporation now faces less than an 8% probability of being the target of at least one such suit over a five-year period. The annual likelihood of a suit has fallen 9% since the period of 1993 to 1995, from 1.8% to 1.6%, prior to the PSLRA.

Despite Treasury Secretary Henry Paulson's recent suggestion that the threat of lawsuits was deterring foreign companies from doing business in the U.S., this new data means that most companies have less than a 2 percent chance of getting hit with a shareholder suit in any given year.

Even if a company does get sued, odds are also slim that it will ever have to pay out in a verdict or settlement. NERA reports that nearly 40 percent of all shareholder class actions filed between 1999 and 2004 were dismissed. Dismissal rates have doubled since passage of the 1995 Private Securities Litigation Reform Act. All told, this hardly seems like enough to deter corporate Europe/Asia/etc. from profitable ventures here. (Maybe those would-be investors have just seen too many of the scary lawsuit abuse ads the U.S. Chamber of Commerce keeps putting up in the Union Station Metro!)

Nonetheless, I'm sure this sober assessment will do nothing to dampen corporate enthusiasm for yet more restrictions on securities litigation in the coming year. Indeed, the U.S. Chamber of Commerce's Institute for Legal Reform has already released a press release insisting that the decline in shareholder suits is but a "temporary blip" and that more and bigger suits are just over the horizon, thus necessitating further dire measures to "fix the broken securities litigation system"...

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Posted at 9:58 AM, Jan 08, 2007 in
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