TORT COSTS ESCALATE DUE TO LACK OF COMPETITION
September 27, 2004
Improving market competition is the primary key to stemming litigation costs that continue to burden American businesses and economic growth, according to the Cato Institute.
Over the past four decades, the costs of the tort system have increased far in excess of the growth in the economy:
- During this period, the effective hourly rate of the contingent-fee bar has increased in real dollars by more than 1,000 percent.
- Projections for future growth indicate a doubling of tort costs over the next 10 years.
- Overall, tort fees total $22 billion annually, with some estimates reaching as high as $40 billion.
The Cato Institute says contingency fee are the main reason tort liability business is expanding. Such fees are assessed based on the amount of financial awards granted by the courts, and typically run from 33 to 50 percent.
However, such billing practices often yield windfall profits because the rates fail to reflect differences in risk or in the anticipated costs for the production of the tort service or in the projected return on the lawyer's investment.
Unfortunately, a lack of price competition has prevented any downward pressure on these rates, in part due to legal and "ethical" impediments imposed by the bar:
- Imposing barriers to entry into the legal field, such as banning non-lawyers from the purchase of tort claims.
- Prohibiting the outright purchase of tort claims; a process whereby attorneys vie with each other to buy the right to a client's legal claim.
- Prohibiting the provision of financial assistance to clients during their trial.
Additional factors that have inhibited a competitive market include asymmetrical information with regard to the value of tort claims and the quality of lawyer services, prohibitive search costs, and price-cutting as signaling an inferior lawyer.
Source: Lester Brickman, "Making Lawyers Compete," Cato Institute, Summer 2004.
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