Coyote Blog

Last week, Milberg-Weiss and two of its partners were formally charged with bribery and fraud surround their aggressive pursuit of class-action lawsuits, often against companies with falling share prices.  Walter Olson helps describe in detail what was going on, but the short answer is that the firm, as many of us suspected for years, appears to have been generating class action suits against large companies mainly for the benefit of itself and the legal fees generated.  A few months ago, I questioned shareholder suits and their fundamental logic when I was guestblogging at Overlawyered.

So I am happy that this particular rock is finally being turned over.  However, there are substantial problems on the prosecution side of this as well.  The Justice department is using the abusive Thompson Memo guidelines to go after Milberg-Weiss.  Larry Ribstein is concerned with the firm death penalty approach being taken here that was used to bring down Arthur Anderson.

Milberg is a different story. The case seems to be based on the
alleged misconduct of a couple of partners. If the partners did what
they are accused of, they should go down. Moreover, the firm will have
earned fees under questionable circumstances and should bear civil
consequences for that. But the criminal indictment casts a shadow on
the entire firm that it will have a hard time surviving, given the need
to establish its credibility for courts and institutional investors in
the highly competitive class action industry. Moreover, unlike AA, it's
not clear the indictment reveals a continuing public policy problem,
given the post-PSLRA reliance on unbribable plaintiffs.

We (and I) may not like Milberg's business. But the class action
part of it was one enabled by legal rules. The right way to deal with
the problems of this business is to change the rules, as I've argued
for securities class actions in my Fraud on a Noisy Market.
When we criminally condemn firms like Milberg because we don't like
their business, we set a precedent for other firms in controversial
lines of work -- e.g., Drexel Burnham.

More seriously, the power to criminalize a firm puts a potent tool
in the government's hands to get the firm to cooperate in sacrificing
the rights of criminal defendants. Here the cure seems patently worse
the disease. The questions are no less in Milberg than in KPMG just
because Milberg was in an unpopular line of work.

The government tactic de jour, as outlined in the Thompson memo, is to threaten a large company with extinction, telling them they might get off the hook but only if they agree to throw a number of their employees to the wolves.  These steps include the unbelievable step of forcing companies to waive attorney client privilege, including privilege between any company-paid attorney and any employee.  Does anyone doubt that if the company who employs you was given the choice of having the government prosecute them or you, who they would choose?  In this context, Arthur Anderson should be commended for not sacrificing its employees for its own survival.  KPMG survived, because it chose to roll over on its employees.  I commented on many of the problems with the AA takedown here, and on the dangers of the Thompson Memo here and here.  Tom Kirkendall is all over the story.

Via Overlawyered, one of my absolute favorite blogs, comes my favorite headline of the week, courtesy of KCRA in California:

Paraplegic Activist Leaps From Wheelchair, Runs From Police

That's classic.  Apparently, the person involved had defrauded numerous organizations with spurious ADA complaints under California's ridiculous sue-anyone-with-higher-net-worth-than-yours laws.

Police said Laura Lee Medley, who repeatedly filed claims and lawsuits
for noncompliance with the Americans with Disabilities Act, was a con
artist.

A San Bernardino County spokesman, David Wert, said
Medley had complained to police earlier that she was having medical
problems so she was taken to a hospital for treatment.

Wert said, "That's where the great miracle occurred."

Officers
said Medley, 35, leaped from her wheelchair and ran for freedom after
being placed under arrest by Las Vegas police. The barefoot woman was
caught after a brief pursuit.

According to authorities in
Southern California, Medley was never disabled but used her supposed
condition to file many medical claims and lawsuits. Her questionable
claims led to the arrest in Las Vegas.

The vast majority of my employees and many of my customers are over 60, so we try extra-hard to accommodate people with all kinds of disabilities.  That is why this type of fraud really burns me up.  Not once but twice we have killed incipient lawsuits when we have had customers who were claiming severe physical disabilities observed playing football or unloading a truck.  I have had one person I was interviewing for a job tell me that I had to hire him since he was disabled, because if I didn't choose him I would be discriminating against the handicapped (we chose a different candidate).

Update: More Unruh act silliness:

A Los Angeles psychologist who was denied a tote bag during a Mother's
Day giveaway at an Angel game is suing the baseball team, alleging sex
and age discrimination.

Michael Cohn's class-action claim in Orange County Superior Court
alleges that thousands of males and fans under 18 were "treated
unequally" at a "Family Sunday" promotion last May and are entitled to
$4,000 each in damages.

I am seriously late on this one, but I still want to show my support for Lance Dutson, author of the Main Web Report, who is being sued by an advertising firm and harassed by the state government for uncovering some really dumb activities at the state tourism board.  A summary of what he found is here, and the story of the lawsuits is here.

This story rings absolutely true with me.  Given our significant experience with government agencies, I have seen time and time again that when government bureaucrats embark on an activity out of their traditional comfort zones (in this case, Internet pay-per-click advertising, a new activity for most of us) they tend to combine lack of training with total arrogance that they know exactly what they are doing.  Within my company we have dubbed this "condescending incompetence", and we see it all the time.

In this case, Mr. Dutson points out that by bidding up the price in Google adwords of travel-related terms, they are actually hurting Maine travel businesses, both by driving up their advertising costs and by diverting clicks from an actual tourist business to a government site.  And how could any sensible cost-benefit analysis lead to paying over $15 to get one (1) viewer to the government tourist web site?  The answer is, it can't.  The only thing that can drive this behavior is ignorance combined with a skewed incentive system (e.g. some bureaucrat wanted a line in a performance review or PowerPoint chart that said their web site was top-ranked on every key Google search).  And he rightly points out some disturbing conflicts of interest at the advertising agency, as well as the total bonehead maneuver of putting an adult phone-sex number in the ad copy.

By the way, I despise state tourism agencies.  Most of the money they spend is a waste and the rest goes to directly benefit a few cronies.  Most of our local dollars go to high-profile expenditures that gets the governor some extra media buzz but does zero to get anyone new to the state.   And note that I run a business that depends 100% on tourism.  These state expenditures do nothing for me.  In some cases, my customers pay as high as 12% lodging taxes (e.g. tax and bureaucracy hell Mono County, California) to fund tourist boards who don't even advertise the types of operations I run (campgrounds and marinas).

Kentucky, the state that made me get an egg license, is in the news again because it is complaining that it is not getting its fair share of the tobacco settlement funds, and so needs to increase cigarette taxes even more. 

Don't feel guilty if you can't actually remember what the settlement was about other than just more tax money.  The settlement was the result of a series of lawsuits from state AG's against cigarette companies arguing that use of their product is costing the states money in the form of higher medical costs (the health care as Trojan horse for total government control argument I have discussed before).  The substantially increased taxes on cigarettes was supposed to both deter use and to raise money for state health care.

Well, check out this statement form the Kentucky governor as to why he wants to raise the cigarette taxes, and notice what justifications for the taxes are NOT there:

The additional revenue from the tobacco settlement,
according to [governor] Fletcher, would increase the state's debt capacity and
allow for more spending on more projects, such as an information
technology research center and expanding the Big Bone Lick State Park.
He also says the added revenue would allow the state "to ease the tax
burden on small businesses."

I do have to admit that "Big Bone Lick" state park seems the perfect monument to government taxation.

This is a great example of the perverse incentives "sin" taxes put on government.  First put in place to reduce some behavior, once government officials become addicted to the spending the tax allows, the government tends to shift posture to supporting, rather than reducing, the "sin" since its continued existence is required to maintain tax revenues.  This is happening all over with the tobacco settlement, as government has suddenly become the tobacco companies' partner in maintaining revenues and market share.  And here I wrote about a similar occurrence.

Postscript:  By the way, not accounted for by the governor in his "fair share" of settlement funds are the large subsidies that flow to Kentucky tobacco growers.  In surely one of the best examples of how most government programs are all about rent-seeking rather than whatever their stated purpose is, the US is vigorously taxing tobacco, ostensibly to reduce its use, while at the same time aggressively subsidizing the production of tobacco.

In a recent post, I started to develop the theory that people who are positive to neutral about the regulatory state may be so in part because they don't encounter it - e.g. an employee tends to be sheltered from the mind-numbing body of labor law that regulates his relationship with his employer because more efficient HR departments and payroll companies shelter people from this mess.

By the way, let me digress just one second on the nature of my blogging.  When I said above that it was a theory I started to develop in a post, this does not mean that I sat around for days, came up with the idea, and started to flesh out my well-oiled thinking on the topic in that post.  It means it occurred to me literally while I was typing my post, somewhere between paragraphs 3 and 4.  I use the act of blogging as a way to test-drive my thinking on certain topics, which puts you the reader in the position of something between a intellectual sounding board and a psychotherapist.  I actually spend my time trying to keep my business running -- my college roommate is the only one I know who gets paid to sit around and think deep thoughts.

Anyway, with that out of the way, I can return to the actual point of this post which is to point out that the same attitude of "not to know it is to love it" may well apply to torts and litigation.  All romantic and heroic as portrayed in the media (e.g. Erin Bronkovitch), torts as practiced in real-life seldom so heroic, either in their details or their outcomes.  Here is Bookslut wondering about her opposition to tort reform now that she has witnessed some silly lawsuits in her area of familiarity.  Overlawyered has background on the case in question/

The other day, I wrote about the left of late lamenting that the machinery of state control that they created, agencies like the FDA and public schools, are being taken over by their political enemies, the "Neanderthal southern religious conservatives".  I observed that they were not apologizing for creating a statist structure to control individual decision-making, but just were upset they lost control of it.

In using the FDA as one example:

Today, via Instapundit, comes this story about the GAO audit of the decision by the FDA to not allow the plan B morning after pill to be sold over the counter.
And, knock me over with a feather, it appears that the decision was
political, based on a conservative administration's opposition to
abortion.  And again the technocrats on the left are freaked.  Well,
what did you expect?  You applauded the Clinton FDA's politically
motivated ban on breast implants as a sop to NOW and the trial
lawyers.  In
establishing the FDA, it was you on the left that established the
principal, contradictory to the left's own stand on abortion, that the
government does indeed trump the individual on decision making for
their own body  (other thoughts here).
Again we hear the lament that the game was great until these
conservative yahoos took over.  No, it wasn't.  It was unjust to scheme
to control other people's lives, and just plain stupid to expect that
the machinery of control you created would never fall into your
political enemy's hands.

That has spurred a lot of email pointing me to other FDA-related articles.  I posted this one in the updates of that same post, pointing out how the FDA process (and the tort process, by the way) puts a much higher value on a life lost to drug side-effects than to a life saved from drug benefits.

Today I was pointed to this article by Derek Lowe who has been a drug development researcher for a number of years:

As a drug discovery researcher, I can tell you something that might sound
crazy: many of these older drugs would have a hard time getting approved today.
Some of them would never even have made it to the FDA at all.

The best example is aspirin itself. It's one of the foundation stones of the
drug industry, and it's hard to even guess how many billions of doses of it have
been taken over the last hundred years. But if you were somehow able to change
history so that aspirin had never been discovered until this year, I can
guarantee you that it would have died in the lab. No modern drug development
organization would touch it.

Thanks in part to advertisements for competing drugs, people know that there
are some stomach problems associated with aspirin. Actually, its use more or
less doubles the risk of a severe gastrointestinal event, which in most cases
means bleeding seriously enough to require hospitalization. Lower doses such as
those prescribed for cardiovascular patients and various formulation
improvements (coatings and the like) only seem to improve these numbers by a
small amount. Such incidents, along with others brought on by other oral
anti-inflammatory drugs, are the most common severe drug side effects seen in
medical practice....

That brings us up to penicillin, a drug with a clean reputation if ever there
was one. But at the same time, everyone has heard of the occasional bad allergic
reaction to it and related antibiotics. Even with the availability of skin tests
for sensitivity, these antibiotics cause about one fatality per 50 to 100,000
patient courses of treatment. Other severe reactions are twenty times as common.
Those are interesting figures to put into today's legal context: over 9 million
prescriptions were written for Vioxx, for example. Any modern drug that directly
caused that number of patient deaths and injuries would bury its company in a
hailstorm of lawsuits, because (unlike the Vioxx cases) there would be little
room to argue about

In the first of what promises to be the first of a number of lawsuits against 527 groups under the horrendous McCain-Feingold act, the Federal Election Committee is suing the Club for Growth for its television adds in 2000 and 2002.  Essentially, the FEC is attempting to declare the Club for Growth to be under the control of and an arm of the Republican Party, and therefore subject to McCain-Feingold spending and donation limitations. 

This is absurd.  First, current election law and McCain-Feingold are a brazen assault on the first amendment, and shouldn't apply to anyone.  Second, to the extent that they are allowed to be applied to the two major political parties, their reach should be limited as much as possible to allow private citizens full freedom of political speech.

While the Club for Growth often supports Republicans over Democrats, browsing their web site makes it clear that they are by no means a shill for the Republican party.  They are strong supporters of reduced regulation and taxes, and have been just as hard on Republicans of late when Bush, Delay and Company have apparently abandoned these goals.  I have supported The Club for Growth for years and I am by no means a Republican.

Several lefty blogs have gleefully piled on because they don't like the Club for Growth.  This is very very shortsighted.  My sense is that the case against CfG is no better or worse than the case they can have against MoveOn or Soros or whatever.  The CfG suit may well be a Trojan Horse first case to immunize the Bush Administration and the FEC against charges that they are going after the President's critics.  Once immunized, under this theory, lefty organizations will be next. 

Bloggers represent one of the strongest and most vocal constituencies for freedom of speech -- we should be united in opposing this kind of action, whoever it is against.

Update:  More from Reason's Hit and Run

Last week, Tyco's Dennis Kozlowski was found guilty of looting the shareholder's assets for his own personal gain.  Good.  Too many CEO's treat public companies as their own, rather than other peoples' companies for which they have fiduciary responsibility.  And, unlike the Dick Grasso mess I commented on earlier, this was a much clearer case of looting as opposed to just negotiating themselves a good deal.  (update:  Stephen Bainbridge has a different take here)

According to the Wall Street Journal, which requires a subscription:

The guilty verdicts are in for L. Dennis Kozlowski and Mark H. Swartz. For Tyco International Ltd., the company they looted, there may be more court dates to come.

Tyco was hit with dozens of shareholder lawsuits in
2002 and 2003 as the company disclosed waves of accounting problems
that sank its stock. It has restated results several times, going as
far back as 1998. A July 2003 restatement cut about a billion dollars
from pretax profit over several years.

The convictions
lend credence to the plaintiffs' allegations that Tyco was grossly
mismanaged. The suing shareholders already have a strong leg to stand
on: Tyco's string of past restatements amount to an admission that its
accounting was deeply faulty. Shareholders claim they were deceived by
accounting practices that presented rosy pictures of the performance of
the company and its acquisitions, then suffered losses following the
revelation of allegations against Mr. Kozlowski and the restatements.

I have never been able to justify most lawsuits by shareholders against companies in which they own shares.  Any successful verdict would effectively come out of the pockets of the company's owners who are.. the shareholders.  So in effect, shareholders are suing themselves, and, win or lose, they as a group end up with less than if the suit had never been started, since a good chunk of the payout goes to the lawyers.  The only way these suits make financial sense (except to the lawyers, like Bill Lerach) is if only a small subset of the shareholders participate, and then these are just vehicles for transferring money from half the shareholders to the other half, or in other words from one wronged party that does not engage in litigation to another wronged party who are aggressively litigious.  Is there really justice here?

OK, you could argue that many of these shareholders are not suing themselves, because they are past shareholders that dumped their stock at a loss.  But given these facts, these suits are even less fair.  If these suits are often made by past shareholders who held stock at the time certain wrongs were committed, they are paid by current and future shareholders, who may well have not even owned the company at the time of the abuses, and may in fact be participating in cleaning the company up.  So their argument is that because the company was run unethically when I owned it, I am going to sue the people who bought it from me and cleaned it up for my damages?  Though it never happens, the more fair approach would be for current shareholders to sue past shareholders for the mess they left.

The vast majority of these suits are dreamed up by attorneys for the benefit of attorneys.  They help shareholders not at all.

Postscript: There are a couple of circumstances where these suits are entirely justified.  The two that come to mind are:

• Suing a particular group of shareholders who somehow got disproportionate rights in the company or disproportionately benefited financially at the expense of other common shareholders.  A good example would be suing the Rigas family at Adelphia Communications for hosing the minority shareholders.  Note, however, I am talking not about suing the company, but suing certain owners who abused minority shareholders to their benefit.
• Suing to modify certain governance rules that are seen to be unethical or illegal.  I would hope this would be a last resort after trying a number of proxy fights and other remedies, but this can in certain circumstances be the last protection of minority shareholders abused by the majority.

Apparently, the mortality rates from obesity that the media has been breathlessly lecturing us with were overestimated by at least 1500%:

But in a study released this week by the CDC
and published in the Journal of the American Medical Association ("Excess Deaths
Associated with Underweight, Overweight, and Obesity"), the public health
community has finally owned up to their massive fib by acknowledging that the
number of deaths due to obesity in the US is closer to 26,000 not 400,000 as
previously reported.

The part of the earlier study that really got people's attention was the fact that even those slightly overweight but well short of obese had a significantly increased risk of death.  Now, the CDC channels Emily Littella in saying "never mind":

for the merely overweight with BMI's from 25-30 there is no excess mortality. In
fact, being overweight was "associated with a slight reduction in mortality
relative to the normal weight category." Being overweight not only does not lead
to premature death, something that dozens of other studies from around the world
have been saying for the last 30 years, but it also carries less risk from
premature death than being "normal" weight. In other words the overweight=early death "fact" proclaimed
by the public health community is simply not true.

In fact, the study argues, the risks from being underweight are greater than overweight, something that resonates with me having known two women who died due to complications from anorexia.

Other studies will have to replicate these findings, but this study does seem to have taken a more careful approach than previous approaches.  One thing you can be sure about, is that this will not stop lawsuits against fast food companies, since overwhelming medical evidence of the safety of breast implants has not stopped litigation in that arena.  Heck, the fact that most people who are suing asbestos companies admits they are not even sick has not stopped litigation in that arena.

I have written several times that one of the perverse effects of lawsuits aimed at unsafe products is that they generally punish any company that has an open, honest internal debate on safety.  However, as I wrote here, that honest internal debate is critical to selling safe products and services.

Today, Marginal Revolution links a New Yorker article that points out the same deadly paradox:

Merck would seem to have one big thing in its favor: the company voluntarily withdrew Vioxx from the market. But while Merck executives may have hoped to persuade people that they were acting responsibly, plaintiffs' attorneys have taken the withdrawal as an admission of guilt...internal company documents show that Merck employees were debating the safety of the drug for years before the recall.

From a scientific perspective, this is hardly damning. The internal debates about the drug's safety were just that"”debates, with different scientists arguing for and against the drug....While that kind of weighing of risk and benefit may be medically rational, in the legal arena it's poison. Nothing infuriates juries like finding out that companies knew about dangers and then "balanced" them away. In fact, any kind of risk-benefit analysis, honest or not, is likely to get you in trouble with juries....Viscusi has shown that people are inclined to award heftier punitive damages against a company that had performed a risk analysis before selling a product than a company that didn't bother to. Even if the company puts a very high value on each life, the fact that it has weighed costs against benefits is, in itself, reprehensible. "We're just numbers, I feel, to them" is how a juror in the G.M. case put it. "Statistics. That's something that is wrong."...

Before a jury, then, a firm is better off being ignorant than informed.

Yesterday I mentioned employment at will in this post about police officers who were fired for assaulting a handcuffed man and who successfully sued for wrongful termination.

Via George's Employment Blawg comes this article on employment at will and things a small business should consider to reduce the possibility that fired employees will sue:

Here's where things get tricky. In between employment at will and the law is a whole mess of claims, counterclaims, lawsuits, disputations and confusion. It's enough to make anybody scratch their head.

We have had several instances where employees have threatened legal action over termination.  I have observed at least three reasons for this:

• Employees sometimes have a skewed view of the termination process, thinking that a company must hold to some kind of courtroom "beyond a reasonable doubt" standard in amassing reasons for termination.
• The most inept employees never seem to know that they are inept
• Some employees are far more adept at working the system than they are at their jobs.

We do several things to help make things go smoother:

• Unless the violation was outrageous, where we fire on the spot, we try to give employees written warnings and coaching before they get terminated
• Every new employee signs a 60/90 day probationary period letter.  If there are problems, they almost always occur in the probation period -- ie they turn up quickly -- and the probationary period gives us more leeway to quickly terminate.  Update:  This article says why this policy can be a mistake, or at least you have to be careful with it.  This is less of a problem for us since most of our employees only work a 5 month season anyway.
• We don't give references.  I have said that this makes me feel guilty, but negative references about fired employees are a big source of litigation, and frankly, I am sorry to admit, the treat of wrongful termination suit is greatly reduced if the ex-employee finds a good job somewhere else.  Kind of the business version of hot potato.
• Being a seasonal business saves us.  For many employee problems, we limp along until the end of the season when we can terminate the person for lack of work, then we make sure not to rehire them in the spring.

Update: Via Overlawyered, this story in the New York Post (gotta love the headlines) about a teacher fired 17 years ago and still filing suits:

But the Clifton, N.J., instructor never got over it. Instead, he has filed 15 lawsuits in Manhattan federal court and three others in Brooklyn and New Jersey courts, seeking reinstatement and millions of dollars in damages.

Each lawsuit has been tossed out as meritless. But a defiant Malley hasn't gotten the message or doesn't care.

There are legitimate concerns that need to be addressed in putting together tort reform legislation; and there are shortcomings, as usual, in the GWB proposals (see below).  This, however, via Kevin Drum, is grasping at straws by tort reform's opponents.  Drum cites a recent UC San Diego Study described here that shows that there are a disproportionate number of medication errors in the first few days of the month.  The study claims that this is due to pharmacists being overworked and making mistakes because they claim poor people all rush to buy their drugs after their government checks arrive.

Kevin Drum cites this study as evidence that malpractice tort reform is misguided, because, as he puts it "one of the causes of malpractice lawsuits is "” surprise! "” malpractice".

OK, its hard to know where to start.  Though I am a supporter of tort reform, I would probably not have gotten worked up enough to bother to post.  However, this is another example where science and "studies" are misunderstood and perverted in the media, which DOES tick me off enough to write.  Here goes:

• This study has nothing to do with medical malpractice!  The debate is around doctors and doctors getting driven out of business by their malpractice rates.  What do pharmacist mistakes have anything to do with the types of medical malpractice and medical malpractice insurance rates.  The departure of doctors from certain counties has nothing to do with pharmacy errors.
• Though the authors and Mr. Drum wish to imply that all the medication mistakes measured are by medical professionals, the study in fact includes:

"wrong drug given or taken," or "accidental overdose of drug," or "drug taken inadvertently."

Note that of the four categories of mistakes above and included in the numbers (wrong drug given, wrong drug taken, accidental overdose, and drug taken inadvertently), three of the four are reasonably the fault of the individual taking the drug, not the pharmacist.  However, since most supporters of the current tort system tend to reject the notion individual responsibility, I guess this little issue was ignored. 

• The authors never have anything to say about Mr. Drum's point, ie they do not correlate these deaths with actual malpractice suits, so it is impossible to actually make Mr. Drum's point in the first paragraph.  The best evidence I have seen is equivocal - it says that a large number of lawsuits are baloney, but that a large number of true malpractice victims go uncompensated.
• The authors actually have no evidence, other than their supposition, that these deaths are due to pharmacists being overworked.  They did not do any research into the specific cases involved - they just surveyed notoriously inaccurate death certificates.  In fact, though it may be in the actual report, I don't see any evidence that demand actually increases or that pharmacists are indeed overworked the first few days of the month - they just seem to hypothesize it without proof.  And, if there really is more work load the first few days of the month, they never mention any data on staffing - presumably if there is such a trend, pharmacies may actually staff up for it, which would also defeat their supposition.  My business gets more traffic on certain days of the year and we staff for it.

OK, while we are on the topic of medical tort reform, I will offer up a couple of more thoughts beyond just the silly use of this study:

• No one denies that some malpractice torts are from real malpractice.  Wrong legs ARE cut off, etc.  No one wants to protect people who are guilty of obvious malpractice.
• The issue is less with the existence of medical torts but with their enormous escalation in the last 10-20 years.  To argue that malpractice torts mostly result from real malpractice, you have to argue that the incidence of real malpractice has gone up dramatically over the last 20 years.  That may be, given the great increase in complexity of medicine, but I doubt it is the entire explanation

As usual, part of the problem in this argument is that GWB and his minions suck at getting a message out that can drive a consensus.  Here is my alternate message on medical malpractice:

The system today is broken for two reasons: 

• First, bad doctors and real malpractice is not punished strongly enough, and some of the worst practitioners go on to hurt more and more people.   Insurance today spreads the cost of bad medicine to all doctors, reducing the negative impact on the worst.  In addition, insurance premiums and torts are a poor substitute for better discipline and penalty systems for bad medicine
• Second, too many good doctors are punished with suits because they had bad outcomes from good medicine.  Sometimes babies are born with birth defects, sometimes medications that help millions have unpredictably bad side effects for a few unlucky people, and sometimes people die and there is nothing that can be done.

More important than damage caps, both for truly injured patients and good doctors, is to bring scientific sanity to the system, and to make sure that bad medicine, not bad outcomes, are punished.

By the way, in a previous post Mr. Drum said that there is no cost to "frivolous" suits since they don't go to court.  This is quite wrong:

• I am not in medicine, but I am in a public contact business that gets some slip and fall suits, but I assure you that your insurance premiums can go up substantially even for suits that don't go to trial
• You still have to have a lawyer at $400 or so an hour to defend against a frivolous suit.  You can't walk in the first day and say, "hey judge, this is BS, let's drop it".  I have spent tens of thousands of dollars before frivolous suits against me get dropped
• Frivolous suits do go to trial and can win.  Just think McDonald's coffee.

And yes, I have had experience with frivolous suits.  In one case, a person who claims to have stepped on a nail head protruding from a board in our campground sued us for sexual dysfunction.  That case is still active more than 3 years later!  In another case, a person claimed to have hurt her knee falling on some steps.  Excluding the issue of why I am at fault if she fell down a perfectly safe set of steps, we eventually discovered that she had hurt her knee several weeks earlier, had no medical insurance, and was visiting a number of local businesses making the same claim to try to get someone to pay for an operation.

So please, don't lecture me on frivolous suits.  When Mr. Drum has to pay $400 an hour to defend a suit from someone who got an infected paper cut while reading his article in a magazine, then he can talk about why frivolous suits are OK.  However, he is right in this respect - I don't think the answer is capping damages.  The answer is having a way to defeat these things, to drop them out of the system quickly and inexpensively.  To have some kind of sanity filter.  This would help those of us subject to BS suits, and would help the truly injured get to trial faster.

I am up to here with zero tolerance policies in public schools.  Zero Tolerance policies are not designed to make rules enforcement better or safer -- the are designed to relieve school administrators of all decision-making responsibility.  Now, I am sympathetic to school districts that are constantly getting hit with all kinds of lawsuits for about any decision they make, but the answer is not to stop making decisions.  Zero Tolerance is a way to cover bureaucrats backsides from criticism while trashing the lives of individual students.  There are many many examples, but this is as good as any:

A 10-year-old fourth-grade girl at Holme Elementary School in the Far Northeast was pulled out of class, handcuffed, and taken to the local police station in the back of a police wagon earlier this week after a pair of 8-inch scissors were found in her book bag, according to authorities and her angry mother.

I have a ten year old - I can't imagine how nuts I would go about this if it happened to my kid.  You can find more examples at Zero Intelligence.  This is yet another reason why, while I might be willing to invest more public money in education, I would no more likely give more money to the current management of most public schools than I would give money to a Nigerian emailer.

It seems like a huge percentage of the people we fire for cause, even after warnings and write-ups, etc, immediately threaten to sue us or report us to the Department of Labor or both.  Several times a year, I get contacted by an employee's lawyer, though generally nothing comes of it except wasting a lot of my time.  Ditto the Department of Labor.  According to George's Employment Blawg, we are not alone:

In many Federal district courts, employment-related litigation represents 50% or more of all court filings, and approximately 98% of lawsuits are resolved outside of court.

Small businesses (i.e., businesses with fewer than 50 employees) are not exempt either. This newsletter notes that it is not uncommon for such businesses to have 3 or 4 claims of employment discrimination annually!

In many cases, I think the need to do this is psychological - a kind of face saving to convince themselves that their job failure was due to someone else's shortcomings rather than their own.  This article has some more advice on terminations to help cut down on suits.

Beyond this explanation, there are also people out there who want to deal with all problems through litigation.  I have had people send lawyers after the company when they never once brought their concerns to a manager -- they just went straight to a lawyer, either because that is the modern way or because they are looking for an opportunity for an easy pay-off.

Something I would love to see, but will never happen, is a list of "serial litigators" to avoid.  I know a couple of people tried this but got shut down.  Too bad.  We had one such person seek employment at one of our establishments.  This is all this person does for a "living" - seek employment, show up at the job interview limping with a cane, and then suing people for discrimination if he is not hired.  Apparently this person has nearly a hundred different lawsuits going. 

For this post, I will leave aside for a moment the unfairness of monetary penalties for ridiculous claims or the incredible erosion of individual responsibility that is being created by jackpot litigation.

In addition to these problems, runaway litigation is causing people and organizations everywhere to take defensive postures to protect themselves from suits, and many of these defensive tactics are generally not in the public's interest.  Here are some examples:

• College forces depressed students out of school to avoid potential liability if the student commits suicide.
• Swings are disappearing from playgrounds, subject first to liability suits and more recently to ADA suits
• Doctors spend billions on tests and drugs that are not necessary but prescribe anyway to cover their butt in lawsuits  (and here and here and here)

One area that bothers me a lot is the area of safety engineering, whether it be for cars or whatever.  I was a mechanical engineer at an oil refinery for several years.  A big part of my job was assessing if a certain condition was "safe" or "unsafe".  Very often, I was working with shades of gray - safety is never absolute.  In fact, the only real way to make a refinery 100% safe is the same way you make cars 100% safe:  you don't have any. 

The way we dealt with the gray was to have a lot of discussion.  I might observe that I was concerned with a certain situation, and my colleagues and I would discuss it.  With some additional research, we would generally reach a consensus on the best approach.  Because we usually made these trade-offs with an inherent bias to err towards safety, I can't think of a decision we made that led to a problem.  We did have several fires/explosions, and one man was killed in one of these, but each and every one was generally caused by some combination of factors we never anticipated, e.g:

there was a steam leak under the insulation of that pipe, and since the pipe was running at a lower temperature than expected, the water condensed, and it turned out the water had an unexpected contaminant such that when it came in contact with the flange bolts it caused an unusual crack propagation mode, made worse by the fact that the flange bolt material was not the kind specced because the vendor had made a mistake on delivery, and the flange eventually gave way and a fire started.

Yeah, this really happened- I include it to say that the situation is never like on the TV mini-series -- evil corporation skimps on 30 cent part knowing it created an unsafe situation.  Safety engineering means tough trade-offs, and, after a ton of work, problems usually occur in an area no one imagined.

Anyway, this is the type of thing I used to do, and doing it well relied mainly on open, honest dialog about safety problems.  Nowadays, however, my sense is that this open dialog in corporations may soon be over.  Corporations are legitimately worried that some young engineer like myself might have written a memo about a potential hazard, and that this memo will end up being exhibit A in some plaintiffs case that the company "knew about" some hazard and did nothing about it.  Think about all the cases you hear about, even the recent Vioxx case -- the center piece of every plaintiffs argument is often that the company "was warned" and is therefore truly evil, because it knew of the problem and did nothing.  The words "smoking gun memo" are practically attached to these lawsuits, but I have always asked myself - are these smoking guns that point to culpability, or are they in fact pointing to a robust safety engineering process?

So, if we have gotten to the point where having internal people asking questions and challenging the company's product and process safety makes companies more vulnerable to lawsuits rather than less, then companies are going to start clamping down on the open internal dialog about safety.  And then the world really will be a less safe place.

UPDATE

Having written this post, I had a flashback to a training video I was shown early on at Exxon.  The video was anti-trust training, and the only message I remember is "don't write it down".  The message was mainly aimed at sales people, who tend to be gung ho and competitive and say things like "lets go out there and crush the competition this week".  This is all fine and good for Joe's Auto Body, but written on an Exxon letterhead, it becomes the central exhibit of some anti-trust trial.  Thus the don't write it down advice.  Anyway, I will be very sad, but not surprised, if they are now showing this video to the engineers as well.

For those who still hold out belief that the tort system today is still primarily about justice rather than just hijacking deep pockets, read this post at overlawyered.com.  From an online ad:

We will show you how to prove you had taken Vioxx, to prove that you had related side effects, and to find a good lawyer to win your case. There are still places selling Vioxx after the recall, you can find them online. Merck is still 100% fully responsible for any side effect. If you purchase Vioxx now, not only you can sue Merck, you can also sue the pharmacy store for selling recalled products. The purchase is risk free, as Merck will pay you every penny you spend on Vioxx including tax and shipping fees.

Quick, buy some before they take it off the shelf, so you too can get in on the lawsuit!

By the way, this little tidbit, also via Overlawyered.com, gave me a chuckle.  A woman is suing a railroad for hitting her when she was walking down the railroad tracks.  In part, she is suing the train for "failure of its engineer to...yield the right of way".  LOL - I can't believe the train didn't swerve out of the way.

UPDATE #1

Legal Underground has a post critical of this article:

As grist for its anti-lawyer message, Overlawyered.com is featuring this obvious Internet hoax: "Get Your Million Dollars from Vioxx Lawsuit."  Does Walter Olson really think his readers are so gullible?

In the comments section, I responded as follows:

Hmmm. I am one of the listed disciples (lol). I am willing to believe the ad is non-serious, meaning that it was aimed more at getting traffic and probably was not written by a law firm, and am posting an update as such with a link to this site.

Hoax? In my mind, its a hoax only if the legal advice is wrong or if you think no one would respond to the plea. I can't tell you if Vioxx can still be bought nowadays (that may be a hoax). However, if it was still on the shelf somewhere, ask yourself two honest questions:

1. Is there a lawyer out there who would happily try to make the case that a person who bought Vioxx after the recall can still be awarded damages?  Even if the attorney knew the person bought the Vioxx mainly to get in the class action?
2. Are there people out there who, if they thought it would get them in on a big class action, would go out today and load up on Vioxx solely to get a chance at having a lawsuit?

The honest answer is yes to both (just read the billboards in Florida). I mean, I would bet about any amount of money that someone out there has read this on the Internet and has tried to go buy Vioxx to get in on the jackpot. Guaranteed. Would any of you take the other side of this bet?

The fact that this ad may not be from a real lawyer does mean that I may have overstepped in painting law firms as being this bad (sorry), but I don't think its being fake in any way hurts the case that the notion of individual responsibility is on life support in this country.

By the way, after looking at Walter Olson's original post, I think he was pretty careful not to claim that the page was from a real law firm, and basically pointed to the same issues with the page's provenance that Legal Underground pointed out.

In the companies I have run, I have spent an inordinate amount of time dealing with a few really ridiculous lawsuits.  Here are two examples (that happened to companies I ran - this is not Internet hearsay or friend of a friend):

1. A visitor to one of our facilities claims to have stepped, while walking in his bare feet, on a nail that was on the ground.  He did not come to us for first aid, but called us later after he had left our facility.  He never could produce the nail, nor could we ever find one in the area, but we agreed to pay any small bills he had -- we assumed he might have gone to the emergency room for a tetanus shot or maybe to get a band-aid.  It turns out he eventually claimed that the injury caused him to - get ready -  experience sexual dysfunction, which he eventually sued us over when we refused to pay any treatment costs.
2. A woman came to our office at our facility limping, claiming to have fallen down the stairs and saying that we were gonna pay.  Despite the fact that it was a crowded area, no witnesses could be found.  We offered her a ride to the hospital which she refused.  Several of our employees thought we saw her come into the facility limping already.  Within the week, she was threatening to sue us for the cost of her knee operation.  Fortunately, since our employees saw her limping coming in, we did some more research, and members of her family told us she was also suing a restaurant she had visited the week before for the same injury.  It turns out she was uninsured, and had hurt her knee elsewhere, and was out trying to find some public business that she could get to pay for her operation. 

Given this experience, I am not going to apologize for believing that the referenced ad might be real.

UPDATE #2:

By the way, I don't think that Legal Underground was calling the train story a hoax, only the Vioxx.  By the way, the exact wording on the complaint against the railroad is even better than I thought:

"The [engineer] did not stop the train in a timely manner, and failed to yield the right of way to a pedestrian walking along the tracks in plain view"

A freight train's topping distance is measured in miles, even with full emergency braking.

She and her attorney's further argue:

that the railroad was negligent for failing to post signs warning 'of the dangers of walking near train tracks and that the tracks were actively in use

Lets leave aside the obvious point about individual responsibility, and ask what would happen if this were the legal standard, to have such signs.  To make sure someone saw one, you would have to have one say every 30 feet.  Since there are just over 200,000 miles of freight railroads in the North America that works out to a bit over 35,000,000 signs that need to be posted.  At $100 per sign this would cost $3.5 billion.

Here is the serious point:  Never would any legislature pass a law that said there had to be warning signs every 30 feet on railroads.  It would be way too costly for little benefit.  At grade crossings today, we have signs and flashing lights and even gates and still thousands of people a year drive in front of trains on grade crossings.  So, if we would never require it legislatively, how have we gotten to a point where a jury might effectively retroactively require such signs, and assess a multi-million dollar penalty for not doing it?

I am feeling a little guilty tonight.  I just dumped a pain in the butt troublesome employee on another company.  Without warning.  Specifically, we fired him a couple of weeks ago, for a variety of issues, but mentioned no negative information in his reference check from his new employer.  Here's why.

It has become dangerous to give out negative references.  Ex-employees have become increasingly succesful at suing employers for bad references.  I don't have to tell any small business owners that  lazy, incompetent, unreliable, whining, trouble-making employees never believe that they are lazy, incompetent, unreliable, whining, or trouble-making.  You give them a negative reference, and before you know it they are in front of a jury saying "I never did any of those things, that employer was just biased against me, that's why he fired me and then tried to get revenge on me by lying to all these other companies and blackballing me from getting a job to feed my family".  Now, you are stuck trying to prove in a court of law that the reasons for termination, and what you said in the reference check, are valid.  It's always good to document these situations well, but no business documents this stuff well enough to survive a plaintiff's attorney's cross examination.

You can learn more about these lawsuits here and here and here.

As a result, our company policy is to not allow any employee to give out any references whatsoever.  They are not allowed to give out any information about employees except the dates of their employment.  They are most definitely not allowed to discuss reason for termination.  In a few cases, I will make an exception for good employees, but even in that case I require their permision in writing.

So, sorry employers out there.  I feel bad about it, but I have to protect myself because the sharks are always circling.  While its inconvinient to hire a bad employee in our business, it can be a disaster in places like hospitals that have life and death situations.  Crazy?  Check this out.

Dear Congress:  If you would like to do something useful for a change, please consider granting employers some sort of liability shield for the information they give out in references.

When I first started this blog, I promised myself I would take the time to post featurettes on small business topics for which business school really did not prepare me.   The first such feature was on buying a business.

This week, I turn to the topic of workers comp. insurance.  Never in 2 years at one of the more storied business schools in the nation, nor in nearly 20 years at the largest corporations in the world, did I once encounter the topic of workers comp.  Now, since I bought my own business, I spend inordinate amounts of time dealing with it.

This article will focus on workers comp. from the employers point of view (most state web sites are useless to employers - they have reams of detail for workers on how to file claims or complaints, but nothing to help employers learn how it all works).

Continue reading ‘A Primer on Workers Comp.’ »

In the previous post on buying a company, I discussed what I have learned about finding and valuing a small company. In this post, I will discuss a second technique I used to find a seller, and then show how we conducted due diligence and selected the form of the deal (e.g. C vs. S Corporation, Asset vs. Equity purchase). In the next installment, we will get to the various legal documents and financing strategies.

Continue reading ‘Buying a Company, Part 2’ »