Don't mess with Texas

If there weren’t already enough reasons to follow the admonition, “Don’t mess with Texas,” here’s one more: Do it frivolously, and it could cost you.

Republican Governor Rick Perry recently signed into law a comprehensive legal reform measure that will give Texas one of the nation’s toughest protections against frivolous lawsuits. The legislation, which takes effect

Sept. 1, will expedite the trial process in civil cases with claims less than $100,000, give judges the power to dismiss frivolous lawsuits earlier in the trial process and enforce a landmark “loser pays” rule in cases deemed by the court as lacking legal merit.

It’s that last aspect, a “loser pays” rule, that many tort reform advocates throughout the country believe could be a groundbreaking tool in the fight against frivolous lawsuits.

Every year, a few egregious and excessive cases catch the public’s attention. But, more often than not, it’s the cases we don’t hear about that drive up the everyday costs of doing business. That’s because our legal system creates an incentive for serial litigants to file even frivolous claims in the hopes of obtaining an out-of-court settlement. Consequently, businesses must weigh the costs of a settlement versus the ticking clock of an attorney’s billable hours.

In the short-term, it’s much easier to settle so that these cases “just go away.”

However, in the long-term, this settlement approach proves costly. The National Federation of Independent Business estimates that attorney fees, court costs, settlement agreements and jury awards cost small businesses more than $105 billion per year, with roughly one-third of that amount paid directly by small businesses.

The “loser-pays” rule works to equalize the system by giving frivolous litigants something to lose. Critics of a strictly “loser pays” system raise some legitimate concerns. For example, we imagine few consumers could ever afford to take the chance of paying the legal bills of a giant insurance company. Yet, such criticism does not apply to Texas’ new rules, which are limited in scope and only apply in cases that the court has found to “have no basis in law or fact.”

While we aren’t surprised to see Texas embrace yet another pro-business measure, we are impressed with how they did it. Earlier this year, Perry declared the issue of tort reform “an emergency,” and the Texas Legislature responded by unanimously approving the reform package. Even Lone Star Democrats understand the importance of creating a business-friendly climate.

Tom Scott, Executive Director of California Citizens Against Lawsuit Abuse, told us that similar reforms in California could help reduce the more than one million lawsuits filed every year in our state. We don’t expect the California Legislature to adopt the Texas-model for tort reform any more than we expect them to follow Texas’ lead on environmental regulation or tax policy. Nevertheless, when it comes to improving California’s economic climate, we believe tort reform is just as important as an improved tax code and regulatory framework.