INNOCENT SELLERS LEGISLATION

STATUS

On February 12, 2007, Congressman Dan Boren (D-OK) introduced H.R. 989, the Innocent Sellers Fairness Act.  This legislation seeks to protect sellers from frivolous lawsuits that punish them for simply selling legal products to their customers.

ANALYSIS

Every year, millions of lawsuits are filed in the United States.  Many of these lawsuits turn out to be frivolous in nature, yet the accused party must expend time and resources just to establish that fact.  The abuse of the legal system has had a profound, negative effect on the economy, causing reduced employment and draining national productivity.  Excessive litigation has also driven up insurance premiums.  Frequently, small businesses are the unfortunate targets of these trivial lawsuits.

Frivolous lawsuits have turned the civil justice system into a perverse game of "litigation lottery" for greedy trial lawyers.  However, measuring the problem in terms of actual lawsuits only tells part of the story.  The real story is the overwhelming effect the fear of litigation has had on small business.  Nearly every business decision is weighed against the prospects of being sued.  Operating under a fear of possible litigation, small businesses are increasingly reluctant to hire new employees, expand operations, introduce new products, or improve existing ones.  Legislation is needed to restore common sense to the civil justice system and to allow small businesses to make decisions on the basis of what's best for the economy, not the trial lawyers.

While we believe it is misleading to look at just the hard costs of our civil justice system, even those numbers are daunting.  According to a 2003 study by Tillinghast –Towers Perrin, including insured and self-insured costs, the U.S. tort system cost $233 billion in 2002.  Tort costs increased 13.3 percent in 2002, a lower growth rate than the 14.4 percent increase observed in 2001 but much higher than the long-term average of 9.8 percent.  U.S. tort costs accounted for 2.23 percent of gross domestic product (GDP) in 2002.  This reflects the highest ratio of GDP since 1990.  U.S. tort costs were $809 per person in 2002.  This compares to a cost of $12 per person in 1950.  When viewed as a method of compensating claimants, the U.S. tort system is highly inefficient, returning less than 50 cents on the dollar to the people it is designed to help — and returning only 22 cents of the tort-cost dollar to compensate for actual economic losses.

For the purposes of their study, insured tort cost included first-party benefits (the cost of legal defense and claims handling), benefits paid to third parties (claimants and plaintiffs) or their attorneys, and an administrative, or overhead, component.  Moreover, their definition included such costs associated with all claims, not just those that actually reach the courthouse.

According to a 2004 study done by the U.S. Chamber Institute for Legal Reform, the tort liability price tag for small businesses is $90 billion a year.  The study also finds that small businesses bear 68 percent of business tort liability costs, but take in only 25 percent of business revenue.  The high price of liability insurance forces many small businesses to pay over $16 billion a year in out of pocket tort liability costs because they can't afford insurance.  For a small business with $1 million a year in revenue, the average tort liability cost is $17,000 per year. 

LEGISLATION

Under current law, sellers are held liable for any negative effects of the products they sell, even if they did not have anything to do with the creation, design, installation, or consumer's use of the product.  As a result, our legal system is rife with numerous tort lawsuits targeting innocent sellers.  This climate poses a serious burden on small businesses as they do not have the resources to take each case to court.  Consequently, sellers often settle out of court, which in turn results in insurance rates that continue to skyrocket.

H.R. 989 would correct this gross abuse of the legal system by establishing strict liability guidelines through for damages resulting from a product they sold.  It would exonerate the seller unless the claimant proves the seller was the manufacturer or designer of the product, installed the product, or altered the product in a way not authorized by the manufacturer.  It would provide this protection to businesses involved in the marketing, distributing, advertising, or selling of a product. 

This bill was created with the help of SBLC member the National Lumber and Building Material Dealers Association (NLBMDA), which represents over 8,000 lumber and building material companies.  They have a particularly keen interest in this legislation as a recent winter 2005 survey revealed that over 25 percent of NLBMDA members have been the subject of a product liability lawsuit within the past five years.  Of those members, 65 percent have been involved in more than one lawsuit.  According to the Small Business Administration, the average cost of defending against these lawsuits is roughly $50,000 to $100,000. 

OPPOSING VIEW

Opponents of tort reform believe that the current laws are justified, because they compensate people who have been injured or harmed at the hands of negligent actors.  Furthermore, opponents of tort reform argue that the current civil justice system imposes upon businesses and doctors the appropriate disincentives to avoid irresponsible actions.  Finally, there is concern that more businesses and insurance companies may be more inclined to settle cases out of court, because of the financial limits, instead of proceeding with costly litigation.

OUTLOOK

H.R. 989 has been referred to both the House Judiciary and Energy and Commerce Committees.  As of August 30, 2007 the bill has the bipartisan support of 48 cosponsors.  Last Congress, identical legislation introduced by Congressman Ric Keller (R-FL) was never voted out of committee.

The 109^th Congress had several significant early victories in terms of legal liability reform.  After years of effort, President Bush signed into law both the class action and bankruptcy reform bills in early 2005. Unfortunately, that was the peak.  Both the medical liability and asbestos litigation reform bills have stalled in the Senate.  It does not appear as if this issue will be as high a priority for the new Democrat-controlled Congress.

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