October 5, 2004
Improving market competition is the primary key to stemming litigation costs that continue to burden American businesses and economic growth, says the Cato Institute.
Furthermore, says Cato, 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 ten years.
- Overall, tort fees total $22 billion annually, with some estimates reaching as high as $40 billion.
According to Cato, the central cause of tort liability expansion is rooted in contingency fees. Such fees are assessed based on the amount of financial awards granted by the courts, typically running 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, says Cato, 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:
- There are barriers to entry into the legal field, such as a ban on nonlawyers purchasing tort claims.
- Attorneys are prohibited from vying with each other to buy the right to a client's legal claim.
- Lawyers are prohibited from providing financial assistance to their 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 legal services, prohibitive search costs and the lack of price competition on legal services, says Cato.
Source: Lester Brickman, "Making Lawyers Compete," Cato Institute, Summer 2004.
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