From the August 1999 issue of Entrepreneur

In response to the looming Y2K crisis, Congress has been debating how to help small businesses cope. Various bills focus not on helping businesses get their computers ready in time but rather on how to avoid a flood of lawsuits filed by consumers suing businesses and businesses suing each other--all seeking compensation for their losses. H.R. 775, for instance, the Year 2000 Readiness and Responsibility Act, seeks to require a 90-day cooling-off period for alternative dispute resolution before a Y2K lawsuit can be filed; eliminate joint- and several-liability; and limit the liability of small businesses to $250,000, or three times the amount of actual damages (whichever is greater, or, for businesses worth less than $500,000, whichever is less.)

It's a sign of the times that in the face of a potential crisis, the primary concern of lawmakers and business groups would be a legal meltdown from a projected $1 trillion in legal claims. The Y2K bug provides only the latest occasion for small-business advocacy groups to push for tort reform and, consequently, fundamental changes to America's civil justice system. Every runaway jury verdict seems to spur another outcry over the need for reform.

One recent verdict concerned an Alabama family who claimed they were overcharged more than $1,100 for each of the two Whirlpool satellite dishes sold door-to-door by a local retailer. Although the Whirlpool Corp. waived the amount in dispute, the jury found that the family had been misled about the credit agreement--and ordered Whirlpool to pay them $975,000 for mental anguish and $581 million in punitive damages.

Lawmakers and business advocates nationwide immediately called for reform, claiming that the tort system has become unfair. Meanwhile, consumer groups and attorneys argue that limiting people's ability to recover damages denies them access to justice.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Major Proposals

So what would tort reform look like? Following are some proposals and how they could affect small business:

  • Eliminate joint- and several-liability. Under the legal doctrine of joint- and several-liability, if two parties are both judged to be substantially responsible for the plaintiff's injury and one can't afford to pay, the other party may be held responsible for the entire amount of damages. Under this deep-pocket rule, defendants are often named in lawsuits because of the assets they possess rather than the harm they may have caused. Numerous tort reform proposals call for abolishing joint- and several-liability so each party pays only as much as its share of the fault.
  • Cap noneconomic damages. If someone is injured because a bottle explodes, it's basically a matter of figuring out such economic damages as medical expenses and lost income. But how should a jury determine to compensate for pain and suffering? That's where damage awards can steeply mount. Some tort reform proposals would limit noneconomic damages to, say, three times the economic damages.
  • Cap punitive damages. While compensatory damages seek to compensate the plaintiff for the injury, punitive damages (allowed in most states) are intended to punish the company found responsible for the injury. As in the Whirlpool case, however, punitive damages sometimes spiral out of control, with no relation to the actual damages.

Nicholas Wittner, assistant general counsel for Nissan North America in Torrance, California, and co-chair of an American Bar Association committee on products liability, says putting a lid on punitive damages--such as an amount equal to no more than three times the actual damages--would be most helpful to small businesses. "In most states, you can't get insurance for punitive damages," he says. "It's the threat of these damages that often leads small manufacturers to settle a case that's not meritorious because they can't take the risk."

On the other hand, some cases do involve outrageous circumstances, where a company is willfully negligent toward safety. One sensible option is to raise the standard of liability so punitive damages may only be awarded if the defendant's conduct showed conscious, flagrant indifference to public safety.

  • Establish statutes of repose. Under a statute of repose, plaintiffs may not sue a manufacturer over accidents that occur a given number of years after a product was manufactured.
  • Abolish the collateral source rule. In most states, a jury deliberating damage awards isn't allowed to know if the injured party has already been compensated by an insurance company or some other party. In many cases, the jury isn't thinking about whether the plaintiffs deserve compensation but rather, how much they need. Knowing that plaintiffs have already been paid hundreds of thousands of dollars would help juries propose a reasonable award.
  • Make the loser pay. To curb frivolous lawsuits, some proposals adopt the English system, in which the losing party has to pay the winner's legal fees. That's likely to discourage people from suing companies on flimsy evidence. But that door swings both ways, because losing in a lawsuit doesn't mean you were wrong. Critics of the English system worry about denying access to civil justice for people with a genuine injury who can't risk losing and having to pay the company's defense costs.
  • Establish sanctions for nuisance lawsuits. Many states have laws on the books allowing judges to penalize plaintiffs and their attorneys who file groundless lawsuits. Unfortunately, because our justice system is founded on the concept of access for all citizens to the courts, judges are hesitant to do so.

Little Progress

Despite tort reform efforts by lawmakers, attorneys, business groups and consumer advocates, not much has been accomplished. On the federal level, even if Congress passes a tort reform bill, President Bill Clinton has vowed to veto it. "It's not likely that we'll have federal reform any time soon," Wittner says.

Numerous states have passed their own tort reform bills, however. Just this year, the Florida legislature passed a package of reforms including caps on punitive damages and limits on compensatory damage awards proportional to the fault of the parties. Texas is considering a law to rein in class-action lawsuits. Virginia has limited medical malpractice awards, Minnesota is debating a modification of joint- and several-liability, and New York is considering a whole package of reforms.

Even if these measures are signed into law, don't expect immediate relief. Typically, opponents challenge tort reform laws in court, leaving everything in limbo. Since 1986, state courts have struck down statutory limits on noneconomic damages in six states, while courts in eight states have upheld them. In some states, legislators are considering bills to roll back earlier tort reforms.

In the absence of meaningful tort reform, small businesses continue to face lawsuits, some of which have no real merit. They may be filed in hopes the business owner will offer a cash settlement just to avoid the expense of going to court. Too often, insurance companies advise businesses to settle rather than pay more for a rigorous defense. "You have to be mindful not only of the money but of your company's reputation and brand image," Wittner says. Fighting frivolous lawsuits protects that reputation--and discourages others from suing for more easy pickings.