America's class-action culture in the dock

Wall Street and Washington draw battle lines over reform of US tort liability rules

The eyes of legal storms don't come much more unlikely than this prosperous little town just across the Mississippi river from St Louis. But, for corporate America, the Madison County Courthouse on Edwardsville's Main Street has become the symbol of everything it believes is wrong with America's tort liability system - the class-action lawsuits and crippling ten-zero damage awards, the rich and powerful trial lawyers and the ever-rising cost of insurance.

A "judicial hellhole" is how Tom Donohue, the President of the US Chamber of Commerce and the American Tort Reform Association, describes the place - living proof of how "even courts in a small rural county can wreak havoc on companies". Madison County has achieved this celebrity because of one simple fact - under US law, attorneys may pursue a multi-state class action wherever success seems most likely. For reasons rooted in its unhappy industrial past, Madison County is the anti-business plaintiff's heaven.

In proportion to population, more lawsuits are pending at the Edwardsville courthouse than in any other US jurisdiction: 43 on target for over 90 this year, led by a $10.1bn verdict against cigarette-maker Philip Morris, and a $250m asbestos damages award against US Steel.

But now, to the delight of the corporations - and the alarm of Edwardsville's bars and restaurants - all this may change. The chances are higher than at any time in 30 years that Congress will enact serious reform to US tort liability laws.

If that should happen it would not be a moment too soon for Jean-Pierre Garnier, chief executive of UK-based pharmaceuticals giant GlaxoSmithKline, who recently made a scathing attack on the US system. He said that, to stop costs flying out of control, "we have to settle cases that in Europe you would call frivolous. It makes us mad."

The pharmaceutical industry has found itself particularly at the mercy of the litigious US system. Patients routinely seek redress through class actions for side-effects from drugs, even though medicine safety is highly regulated by the Food & Drug Administration. Product liability insurance is now so expensive that the biggest companies are no longer taking out cover.

The struggle to reform the legal system is both financial and political. It pits Democrats and their traditional allies and benefactors, the trial lawyers, against Republicans and their allies in boardrooms, with important implications for both Wall Street and the 2004 presidential campaign. Tort reform is a top priority for corporations desperate to control legal costs. It is also prominent in the platform on which President Bush will seek re-election. For Republicans the wind could not be set more fair.

For one thing, the party has simultaneous control of the White House and both houses of Congress for the first time since 1952, giving the Republicans power to shape the entire legislative agenda. Even more importantly, Americans are growing increasingly fed up with the vast fees garnered by lawyers in contrast with the often derisory individual payouts in class-action cases.

People also realise that while the lawyers' fees can run into the tens or hundreds of millions of dollars, the costs will almost certainly be passed back to the consumer, in the form of higher insurance and other costs.

Just how lopsided is the existing tort system is clear from a recent study by the management and insurance consultants Tillinghast-Towers Perrin. Although it costs America $205bn a year, plaintiffs receive on average just 50 cents per dollar awarded, while only 22 cents in the dollar goes to compensate genuine economic injury.

Reducing this burden would improve business balance sheets. But for the Republicans, the political bonus would be even sweeter. Curb the lawsuits and thus the income of trial lawyers, argues President Bush's strategist Karl Rove, and you are emptying the Democratic Party's "bank".

Over 90 per cent of donations by the Association of Trial Lawyers of America, one of the mightiest lobby groups in Washington, goes to the Democrats. Not for nothing is John Edwards, North Carolina Senator and a former trial lawyer, one of the best-funded Democratic challengers to Mr Bush.

In the past the ATLA has swatted away such challenges. This time it has put together a special $5m war chest to defend its cause, on top of its annual lobbying budget of $25m. But that pales beside the $40m expected to be raised this year by the Institute for Legal Reform, a group formed by Mr Donohue in 1997 to press tort reform. On Capitol Hill, the ATLA is in a fight it cannot be sure of winning.

The legislative war is a three-front affair. The first is a measure, already passed by the House of Representatives, to change the rule for class-action suits so that any case involving total claims over $2m goes before a federal rather than a state court. Federal judges are reckoned less likely to hand down massive compensation.

The second front involves medical malpractice, and a Bill - again already passed by the House - that would cap non-economic damage awards at $250,000. The measure is obviously backed by doctors. But even its opponents concede that one major contributor to the ever-rising cost of healthcare in the US is malpractice insurance.

Finally, Congress is trying to sort out the chaos of asbestos litigation by creating a 50-year $100bn fund, mostly paid for by the industry, to pay victims of asbestos diseases. The scheme would replace the thousands of separate lawsuits that have bankrupted over 60 companies, and ensure the bulk of compensation went to the right people.

But for all its political and financial muscle, the Republican-business juggernaut cannot be sure of success. The class-action bill has yet to secure in the Senate the eight or 10 Democratic votes to prevent a filibuster. The odds are this will happen, but not until the autumn at the earliest. A similar problem bedevils the medical malpractice initiative. The Senate, meanwhile, continues to wrestle with the asbestos fund even though unions, once arch-opponents of the measure, now recognise that bankrupted companies mean lost jobs.

All three measures would curtail the right of redress in the courts, protecting big companies, insurers and the rest who need that protection least of all. As long as the argument is unresolved, Madison County Courthouse will remain the improbable ground zero of America's class-action wars.