Corporate punishment

America seeks to curb litigation frenzy - as Britain catches it. Paul Rodgers counts the cost

THE American litigation frenzy is costing companies - including British ones that do business in the US - a fortune. ICI, the UK-based chemicals group, was sued last week because fanatics used fertiliser, not necessarily the company's, to make the Oklahoma City bomb. Dow Corning, the US silicone maker, sought Chapter 11 protection, a form of receivership, a week earlier to avoid legal action over its breast implants, despite scientific evidence heavily in the company's favour.

Examples of product liability suits that defy scientific research or ordinary common sense seem routine in the US. What is alarming for British companies is that they are starting to spread across the Atlantic. The US still has 100 times as many suits in this field as Britain, but laws here are being tightened and more writs are being issued.

A Liverpool law firm is preparing a case on behalf of women who claim they have been injured by contraceptive pills. If it succeeds, it will be the first product liability victory over a drug company in the UK.

"There's been a steady move towards more litigation since the mid-Eighties," said solicitor Michael Thornton, a partner specialising in product liability for the London law firm Laytons. Since October, when Britain's new General Product Safety Regulations were introduced, plaintiffs no longer have to prove that the defendant has a duty of care. "If the product was faulty and there was damage then there is liability," Mr Thornton explained.

He also expects a European directive on consumer safety to be bolstered when it comes up for review later this year. Consumer groups and lawyers are lobbying to establish a European Product Safety Agency. The European Commission also plans to take Britain to court in an effort to remove a key corporate tactic, the development risk defence, which allows them to avoid liability for risks that could not reasonably have been foreseen.

Ironically, just as Europe moves towards the American model, the US seems to be stepping back from the brink. Congress is debating rival bills in the Senate and House of Representatives, both aimed at curbing excesses. The Senate bill, passed 10 days ago, would abolish joint and several liability, which forces companies with even a minor role in a case to pay the full damages if those with greater responsibility are unable to do so. It would also cap punitive damages at twice compensatory damages or $250,000, whichever is less. The House bill is more generous. Both could be vetoed by President Bill Clinton.

Juries too are tempering their damage awards, though not yet to the point of realism. A survey last year by Jury Verdict Research, a Pennsylvania publisher, found that awards had levelled off.

James McHugh, an associate justice of the Massachusetts Superior Court, said juries no longer thought they were spending other people's money when they gave big awards. "They know we all pay these costs in insurance premiums," he said.

The open hunting season on companies in the US is expensive. The cost of winning a typical individual case can run as high as $1m. Losing a class action suit can lead to billion-dollar settlements. Just the threat of lawsuits can cause companies to buy extensive insurance cover, sign large cheques over to claimants with weak cases and even to drop product lines and abandon research that could lead to better products.

Cessna, the aircraft manufacturing branch of US conglomerate Textron, has not made a single-engine plane since 1986. It retreated from the market after it was found to be liable for crashes, no matter how old or poorly maintained the aircraft. US production of light planes plummeted from 13,000 a year to 1,000. The industry's collapse is only now about to be reversed, after legislation was passed limiting aircraft manufacturers' liability to 18 years.

Threats also lead to out-of- court settlements that are unjust. Sometimes it is more cost-efficient to fork over cash rather than fight a lengthy legal battle. One small American vintner, after winning a product liability case, was told by the opposing lawyers that if it didn't pay the plaintiff's legal bills - almost $500,000 - the ruling would be appealed. Faced with a ruinous battle, it capitulated.

Among other costs are huge amounts of management time and damaged corporate reputations. In some cases bankruptcy looms, with the subsequent social costs of plant closures, layoffs and unpaid creditors. Lloyd's, the London insurance market, is in deep financial trouble partly because of payments to people critically injured by asbestos. Two US insurers, Continental and Home, have become takeover targets after being weakened by liability claims.

Few people would argue for a return to a pure caveat emptor system, with customers taking on all responsibility for a product's safety. Nor are all the cases farcical. The asbestosis suits seem justified. So do the claims of thalidomide victims, born with severe deformities after their mothers took the drug to treat morning sickness.

Others have become dinner-table anecdotes - true urban legends - such as the one about Stella Liebeck, the 81-year-old woman in New Mexico who won pounds 2m from McDonald's after she spilled a cup of coffee in her lap while driving away from one of its restaurants. On appeal the award was cut to pounds 320,000. Another woman claimed to have found a foreign object in a doughnut, and when a laboratory said it could find nothing wrong, she sued it for throwing away the sample before doing enough tests.

Measuring the number of frivolous cases is difficult. Some legitimate ones fail for lack of evidence. Others that are unfounded succeed through an emotional appeal to the jury. Trial results seem to indicate either that fewer cases have merit, or that juries are becoming more discerning. From1960 to 1989 plaintiffs won about 60 per cent of the cases that went to court. Since then the figure has fallen to 40 per cent.

The problem with the US legal system is three-fold. First, product liability cases are dealt with by juries, which tend to identify and sympathise with victims rather than the large "money-grabbing" companies. This encourages them to rule in the plaintiff's favour, and to make big awards for compensation.

Secondly, they have the power to levy virtually unlimited punitive damages, often running far higher than the compensatory awards. Where several customers file separate claims rather than a class-action suit, the company can end up being punished several times over.

Finally, there is the contingency fee system of paying lawyers. Instead of billing for time spent working on a case, litigation lawyers agree to take a percentage of the award if they win. Although this opens up the field to victims who otherwise could not afford to sue, it also encourages lawyers to build cases and then go looking for clients.

The contingency fee system also helps to inflate the awards. Juries know that between a quarter and a half of the amount they order the defendant to pay will end up in the pockets of the plaintiff's lawyers, so they increase the awards to compensate.

In Britain, things are different. Such actions are decided by a judge alone and only in exceptional cases, such as libel, is a jury involved. There are no punitive damages, only compensatory ones. And up to now lawyers have not been allowed to charge contingency fees. But changes to the law proposed by Lord Mackay, the Lord Chancellor, would allow lawyers to take some cases on a no-win, no-fee basis.

The Consumers' Association hopes a review of court proceedings, expected shortly, will back a system similar to America's class-action suits, which dramatically reduce legal costs for plaintiffs.

Although every product liability case is different, Dow Corning's predicament is illustrative. The company's troubles began in 1991 when a California woman won $2m in compensatory and $5m in punitive damages. She suffered from an auto-immune disease, in which her body's natural defences were attacking healthy cells.

Her doctors, unable to find any other cause, pointed the finger at her breast implants as the likely cause.

David Kessler, head of the US Food and Drug Administration, responded in 1992 by calling for a voluntary moratorium on breast implants, saying that there was not enough evidence to convince him they were safe. Thousands of women lined up to file complaints, alleging implants had caused a variety of ailments.

"The irony of this thing is that science shows there's no connection between breast implants and these diseases," said Richard Hazleton, Dow Corning's chairman and chief executive officer. Dow Corning has spent $30m investigating the link - money which could have been spent on other medical problems. Seven independent studies have found no significant links between implants and increased incidence of auto-immune or connective tissue disease.

Researchers who worked on them have, however, been inundated by demands from attorneys acting for the plaintiffs that truck-loads of documents be turned over to them. Some have complained of harassment.

Despite its strong scientific position, Dow Corning and almost 60 other defendants tried to forestall a costly court battle by offering $4.25bn in damages, $2bn of it to be paid by Dow Corning. Although claimants did not have to prove their implants were at fault, many were still unhappy with the offer. British plaintiffs complained their cut was too small. At least 200 women have filed separate suits against Dow Corning. Although the company is solvent now - its last quarterly report showed net income of $49.5m on sales of $612m - the open-ended liabilities it faced could eventually have forced it into liquidation. "We were afraid of bleeding to death slowly," said Mr Hazleton. "We are not threatened at the moment but eventually, yes, that's a very serious possibility."

Under Chapter 11, the company's current and future debts are frozen until it comes up with a reorganisation plan. This will probably see bankers, trade creditors and employees paid 100 cents on the dollar, but will place a cap on the amount that will have to be paid to breast implant claimants. Some of this will eventually be recoverable from the 100 insurers that have each provided part of its cover. But many of those companies have been reluctant to pay. Dow Corning is confident of getting just $1.5bn back.

ICI is taking an even tougher line. In its only comment on the Oklahoma bomb, it said it would vigorously contest the cases brought against it: "We deeply resent the attempt to implicate a responsible company in this terrible tragedy."

The two suits filed so far claim that it was negligent in not putting an additive in its ammonium nitrate fertiliser to make it less explosive. This is not the first time ICI has fallen foul of US product liability laws. It was taken to court by bank robbers who claimed pain and suffering damages after being sprayed with anti-theft paint hidden in their loot. The case cost the company more than $200,000.

Neither Britain nor the EU is likely to go as far as the US in protecting consumers at the expense of companies. But Dow Corning and other affected companies are watching the situation here closely. "If we extricated ourselves in the US and just had to deal with it elsewhere, it would be a nightmare on top of a nightmare," Mr Hazleton said.