America's Legal Hellholes

You have to hand it to America's juries. As social revolutionaries and general redistributors of wealth, these flamboyants rank right up there with Brazil's Lula, Venezuala's Chavez and other classic Latin American populists.

Take this week's finding by a Los Angeles jury that Philip Morris must pay $28bn in punitive damages to one 64-year-old woman, a former smoker. With that single step the jurors transferred from the hands of investors an amount of cash equal to the annual exports of Venezuala's national oil company, PDVSA - or the entire economy of Ecuador or Uruguay. And that calculation does not even include the pounding that Philip Morris stock took following the judgment. Would Lula dare as much?

Now the American Tort Reform Association, an opponent of such socialism-through-the-courts, has come up with a list of those infamous hotspots where juries are most likely to grant giant awards. ('Judicial hellholes' at www.atra.org). The notorious list should prove handy to those investing in the Land of the Free, or thinking of doing so.

First comes the source of Philip Morris's current pain, Los Angeles County. The area's infamous Central Civil West Division hands out huge cash packages so routinely that its nickname is 'the bank' - as in 'that's where the money is'. In Central Civil West Division, judges, lawyers and juries don't even pretend anymore that their work is about the simple meting out of justice: one judge, in a toxic pollution case, urged a jury to 'send a notice out to the world' via a punitive damages verdict. The dutiful jury awarded $760m in punitive damages.

Then there is Madison County, Illinois, whose judges allow the sort of weak and illogical class actions that would be denied certification by justices elsewhere. This means a bonanza for the lawyers, but not necessarily the class members themselves. Thus for example there was the Madison County class action brought against a cable company (excessive late fees were alleged). Wronged customers won some free services or a check for $9.95. That's nice, until you consider that the lawyers got $5.5m.

Even harder to beat is Orleans Parish, Louisiana, where the second highest verdict of 2001 nationwide was awarded: a plaintiff, a former judge, argued that Exxon polluted his land. The plaintiff-judge was awarded $145,000, plus a little extra in punitive damages: $1bn. There are of course other 'hellholes', where legal activity is so intense that they have long since become more venue (the courtroom kind) than actual geographic place: Copiah, Claiborne and Jefferson Counties of Mississippi. Jefferson County is home to 10,000 souls, but 21,000 people have been plaintiffs between 1995 and 2000.

Jefferson County, Texas is also bad; so are the state's Nueces, Starr and Hidalgo Counties. 'In Starr County', as ATRA notes, 'a $13mn verdict was assessed against Wal-Mart and one of its employees for malicious prosecution and intentional infliction of emotional distress in a case involving a woman who had allegedly shoplifted from Wal-Mart.' (This even though the woman had been picked out of a police line-up.)

But what makes a jury in one place more likely to vote for an outrageous award than a jury in another place? One factor, clearly, is income inequality. Economists have not proven that disparities in wealth among rich and poor are actually a bad thing - on the contrary, disparities seem to be a symptom of fast overall growth. Still, obvious differences revealed by such things as the sighting of a stretch limo seem to provoke envy in the poorer corners of the land. And in those corners, the tort lawsuit is, after the lottery, the best available vehicle for getting revenge.

A second factor is bad judges. Juries take guidance from judges, and those who abuse their power to pursue a social agenda find willing co-conspirators in often under-educated juries. Because educated Americans often find a way to evade jury duty, those who do serve as jurors are generally citizens with below-average or average skills - in other words, those most susceptible to the tort-shark's social justice argument.

In the end though, responsibility lies with Congress and America's state legislatures, which have the power to cap award amounts and change rules regarding class and mass actions. Until they act, juries from Louisiana to Missouri to Texas to California will continue to plunder seniors' 401(k) pensions in the name of protecting society's weakest - or at least those among the weakest who found a smooth-talking lawyer. Lula would be proud.

© Copyright 2002 Financial Times

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