New York Lawyers Chapter
Tuesday, October 14, 1999

MR. STATHIS: My name is Nicholas Stathis, and I am the Chairman of the New York Lawyers Chapter of the Federalist Society. I want to welcome you all to what will turn out to be a most interesting and thought-provoking discussion.

The subject of our discussion this evening is the subject, "After the G.M. Verdict: Is our Liability System a Friend or Foe of Capitalism?"

Our Discussion Leader this evening is Mr. John Stossel, an ABC news correspondent for 20/20. After introducing Mr. Stossel, and telling you something about his background, I will turn the program over to him and he in turn will introduce each of our panelists and tell you something about their backgrounds.

Each of the panelists will speak for about 5 to 7 minutes and after that Mr. Stossel will start a panel discussion and then finally we will take some questions from the floor.

Mr. Stossel is a 1969 graduate of Princeton University where he received a degree in Psychology. He began his work on TV as a researcher for Station KGW-TV in Portland, Oregon and after serving as Consumer Editor for WCBS-TV in New York City and Consumer Editor at "Good Morning, America" at ABC, he joined ABC News Magazine 20/20 in 1981 and in 1994 he began doing prime time specials.

His first special was, "Are We Scaring Ourselves to Death?," in which he examined our exaggerated fears over such risks as crime and pollution. That particular special was followed by numerous other specials which consistently were rated extremely high and earned for Mr. Stossel uncommon praise in the press.

He has received 19 Emmy Awards. He has been honored five times for excellence in consumer reporting by the National Press Club. Among his other awards are the George Polk Award for Outstanding Local Reporting and the George Foster Peabody Award.

Mr. Stossel.

[Applause.]

MR. STOSSEL: Thank you, Nicholas. The topic I was assigned is, "Is the Liability System a Friend or Foe of Capitalism".  I think most Americans view capitalism as a bad thing, like child molestation. So I would like to broaden this to whether the liability system is a friend or foe of people.

I started reporting as a consumer reporter. Intuitively I felt that when there was a consumer problem, it was a wonderful thing if we had heroes, the reigning army of lawyers who would come in and fix it. After watching for that attempt for a number of years, I have come to the conclusion that this does not work for people. So I should admit that I have some bias here. I think this is a system that is ruinously expensive and horribly destructive for America and there are lots of people who happen to be ground up in the gears of it.

What kind of compensation system is it where it takes five, ten years to be compensated and most of the money goes to the process? Where in many cases it seems the bad guys are not punished, but instead the people who have the pension funds who happen to own the company years later when the verdict is settled? But that is my bias. Now I was told to introduce everyone in alphabetical order and give everyone five minutes to speak. As a Stossel, and being tired of being at the end, I rebel against that. I will introduce everyone in reverse alphabetical order, and our first speaker is Judge Ralph Winter, who is United States Circuit Judge for the Second Circuit. He used to be a Professor at Yale Law School. You want to come up?

JUDGE WINTER: I was asked to speak here not necessarily to answer the question whether our liability system is bad or good for capitalism, or bad or good for people. Rather, I am here to talk about how one of the things that is missed in the debate is that the litigating bars as a group, whether plaintiff or defendant lawyers, have virtually identical interests in maintaining this system.

If it is a good system, it doesn't matter. If it is a bad system you are not likely to get it changed by bashing the plaintiff's lawyers because the defense lawyers have precisely the same interest in preserving it and in many ways is being deceptive about preserving it.

Law is not a product that is consumed by the public. The product of law is Government coercion and lawyers play a role in bringing it about. Even in a good liability system the cost of bringing about that coercion - just to enforce contracts, for example, are going to be passed on from the lawyers through the clients ultimately to the consuming public. The costs of that system will operate as a tax. It might be a very beneficial tax. But if the liability system is bad it will lead to damage verdicts that will skew the economy and ultimately result in a dead weight loss.

But I think if you look around you can see that we have lots of legal rules that exist solely because lawyers like them and they profit from them - the plaintiffs and defense lawyers. You will not find defense lawyers being vocal in defense of these rules in circumstances in which their clients will notice it. But once the rules get low visibility or are of a certain kind, you will find that they prefer the more expensive rules. Let me give you two examples -- not to go on at terribly great length.

One is Civil RICO. Civil RICO allows private plaintiffs to bring an action under what is unquestionably one of the broadest criminal liability laws ever devised. An ordinary contract action can be transformed into a Civil RICO case, a civil organized crime case. Now a lot of ordinary contract cases come in because there is an allegation of mail fraud. But it isn't really mail fraud. The mail fraud statute developed under the criminal law without any thought to civil enforcement. There was always a thought that United States Attorneys would exercise discretion in bringing mail fraud cases, so we didn't have to worry if it got broader.

I was one of the few judges who found that of little comfort because I have seen mail fraud cases brought that ought not to have been brought. The fact is that with Civil RICO ordinary contract cases, get into the Federal court, with a claim for treble damages and attorney's fees that affects the settlement amount. This overturns a couple of centuries of contract law development. It is almost as though the United States Congress decided that Hadley v. Baxendale was a plot by La Casa Nostra.

Now it is interesting that when Congress thought about to reform, a very powerful industry was able to get something of an exemption. That was the securities industry. The average construction company that is out there with contracts of periodic performance has no relief, and I think RICO stays in effect here because the bar likes it.

Now let me just give you one other example, and that is discovery under the Federal Rules of Civil Procedure. I have had some experience with this as a member of the Advisory Committee on the Rules and member of the Judicial Conference who has to vote on changes. Discovery is something you will find defendants complaining about all the time. The cost of discovery, it's terrible. But the minute you try to reform it, you run into defense lawyers. There was in the law -- it's now coming out -- a very modest provision that listed a couple of things that in any lawsuit any defendant or plaintiff would have to disclose.  The lawyers wouldn't get paid for anything but drafting an answer. No motions that a request is burdensome; no motion that a request is beyond the scope of discovery. None of that. No motions practice. That got in over the screaming objections of the bar, partly the plaintiff's bar.

That reform is now out. It's been done away with. Why? Not because it didn't work. There was a local option and about a third of the districts in the United States that used it. Overwhelmingly it worked. All the more reason for the attacks on it to continue – God forbid that it becomes national and that profit center in our firm that makes money in discovery would go down the drain. But now it is killed. It is replaced.

It has been replaced by a narrowing of the scope of discovery that may in theory be correct or incorrect. Now discovery, instead of matters that might lead to discoverable evidence, has been replaced by the idea that you can discover relevant evidence, (evidence that would be admissible itself).

Now what is there about this that brings us back to the subject? The one thing that is absolutely certain about the new discovery rules is motions practice will expand exponentially. Every request for discovery will have to be accompanied by a showing of relevance and admissibility. It is no accident that we got there. We got there because lawyers as a block wanted to get there. This is a process that I have been involved in, largely as an opponent most of the time, but that is where we are.

MR. STOSSEL: Thank you, Judge Winter. I would like to point out you talk about the securities industry exemption. I understand that there are three exemptions: securities industry, the small plane business, and the vaccination business. Otherwise, everybody else is fair game.

Our next speaker, by reverse alphabet, David Vladeck, is now teaching law at Georgetown University. For 23 years, he has been Litigation Director for Public Citizen.

MR. VLADECK: The vaccine exemption is different because it is a compensation scheme, not an exemption from liability.

I have been invited here to talk about the civil justice system and critique the entire civil justice system in 5 to 7 minutes. It is a daunting task. I am not going to get through all of my concerns about where our civil justice system is headed.

Let me start with an overall evaluation. Overall I would say the civil justice system works reasonably well in compensating people who have been seriously injured. It works very poorly in giving access to the courts for people who have modest injuries because the fact of the matter is most lawyers in the United States serve large corporate interests or people seriously injured and there is an enormous filtering effect that deprives a lot of Americans who have legal claims that have merit for access to the courts.

I also think law does a reasonably poor job in one of its principal goals, which is deterrence of improper conduct. That it is a subject that I hope we come back to tonight because in my view one of the important functions of law is placing a discipline on economic actors in society. As other disciplining forces, such as the regulatory process have been eroded over time, the tort system is needed to provide that deterrent and disciplining effect. I have real doubts about whether law is doing that adequately.

Like Ralph Winter, I have a number of more targeted concerns about where our civil justice system is moving.

The first area I would like to target is preemption. One of the things that I find most disturbing is the trend among lower courts to broadly define preemption of state court claims. One of the things that I would welcome comment from panelists on is why there is this odd dynamic. If you study Federal preemption law, you will see the lower Federal courts typically finding broad preemption, the state courts typically finding no preemption, and when the case ultimately reaches the Supreme Court for review, the Supreme Court sides with the state courts.

If you look at the tobacco liability cases, the Supreme Court largely sides with the state courts, rejecting the unanimous view of the Federal circuit courts. In the medical device cases, once again state courts held that the cause of action could proceed. The Federal courts unanimously went the other way. You can go up and down the line, but I am very concerned about the sweep of adverse preemption rulings which have the effect of denying injured people any access to the courts at all.

I am also quite concerned about the use of class action cases in consumer and mass tort cases. This is an issue that I am sure all of you are concerned about. My office has for the last eight or nine years made a practice of intervening in class action cases around the country to oppose settlements that we think are unfair to the class members and end up lining the plaintiff's lawyers' pockets in an unfair way. For that we have received no end of grief from our brothers in the plaintiff bar who are not happy with us trying to take large amounts of cash out of their pockets, but the abuse of the consumer class action is a serious problem.

It has prompted what I think is terribly ill-advised legislation that has already been reported out of the House of Representatives that would in effect Federalize class action law. State class actions by and large would be removable provided that there was minimal diversity, and for those of you who remember civil procedure, that isn't complete diversity. That is two parties, no matter what, being diverse and at a certain amount of money at stake in the cases would automatically be removable or fileable to Federal court.

I think it is a mistake to clog our already overburdened Federal courts with what are in essence state law claims and I think that there are all sorts of other serious problems with that proposal. Nonetheless, there still is a problem with administering mass justice in the United States that we need to address.

I would like to close by dealing with two myths, and since I am in the Federalist Society, I am sort of in the habit of dealing with these issues, because they tend to come up repeatedly.

One is the question of punitive damages. The fight over punitive damages is in my view unfortunately still alive. If you look at the evidence, the facts seem to me to completely undercut the idea that punitive damages are a serious problem that impede innovation and give lottery windfalls to plaintiffs. If you look at the data, punitive damages are awarded generally nationally in less than 1 percent of the cases in which the plaintiffs prevail. They are exceptionally rare in medical malpractice and product liability cases. Indeed, according to Judge Posner's study, they serve a relatively insignificant role in product liability cases.

They are rare but more commonly awarded in intentional business tort cases. If you look at the jurisprudence on punitive damages, many of those awards arise when one business entity is suing the other. When punitive damages are awarded there tends to be a fairly close association between the award and the severity of the injury and the wealth of the defendant, giving lie to the idea that there is a lack of predictability about punitive damage awards.

The last point -- particularly since the Oberg case there really is no argument anymore that the appellate courts are insufficiently supervising the administration of punitive damage awards. Judge Posner's study a decade ago suggested that that argument was wrong and more recent data I think confirms that.

The last point I want to make is where I began, which is that the tort system is one of several disciplines society tries to place on economic actors to ensure they don't do things deliberately that are wrong. Over the past 10 years you have seen an enormous erosion of the strength of our Federal regulatory agencies, and just look at the G.M. case that we were asked to highlight in our presentation.

That case had to do with safety standards concerning fuel tanks in passenger vehicles. The standard for that aspect of motor vehicle safety requires that a gas tank be safe and not split if it is dropped from 25 or 30 feet. That standard was adopted back 35 years ago when engineering principles had not developed to engage in better testing and dynamic testing.

I yet have seen an automobile accident that occurred when someone dropped a car from 30 feet onto pavement, but that is the standard for fuel tank safety. The reason why there has been no modification of that standard is because the auto industry has fought the regulatory equivalent of war over it for the past 30 years. It seems to me that if the auto industry wants to stave off Government regulation it ought not to avoid regulation through the other discipline that society places on its activities, which is the tort system. Thank you.

MR. STOSSEL: Now there is another discipline which society places on these activities, which is called the market. There is not just the tort system to punish bad actors.

MR. VLADECK: The market does play a role, but the market oftentimes is very inefficient because of the lack of information controls. If you take a look at something like aspirin and Reye's Syndrome the pharmaceutical industry fought for several years to have labelling on aspirin products to warn parents about the dangers of Reye's Syndrome. The association between taking aspirin and the disease was not well known and the market inefficiency came about because parents simply didn't have access to the information they needed to make a good judgment about whether to give their child aspirin products or Tylenol products.

Where there is a market failure like that, we either need the regulatory agencies to intervene or we need the tort system to provide a deterrent.

MR. STOSSEL: I find it fascinating that David talks about the erosion of the regulatory standards, which may be eroding. I don't know if it's because the auto industry resists or because Governments are notoriously incompetent and they erode in any form. But if they are eroding they are eroding while they are growing in size and cost, which is a scary thought. But I should compliment both David and our next speaker for being here, because I assume they are voluntarily appearing before a relative, hostile audience, given that this is the Federalist Society.

Our next speaker is Stanley Levy. He is a plaintiff's lawyer specializing -- his practice areas in asbestos and toxic substances. As well as, securities law and class action litigation.

MR. LEVY: I think plaintiff's lawyers always look for the opportunity to have a chance to espouse their views, particularly in a situation where one could say that this is a hostile audience, and I don't believe that it is, deep down.

I think I have a somewhat broad perspective. I would like to think I have a broad perspective. Having been involved in the asbestos litigation since 1975, I have had the opportunity to see what effect a litigation with the impact that the asbestos litigation has had can affect industry.

I served as Chairman of the Claimants Committee in the Manville bankruptcy, and as a result of that I ended up as a member of the Board of Directors of Manville when the company came out of bankruptcy. At that time, in 1986, Manville was still a $2 billion corporation. I was the only plaintiff's representative, if you would, that was on the Manville board.

I can remember the first time that I attended a board meeting, a Manville board meeting. You know, it was almost like going into the den with the lions on one side and me coming in. I think the effect was quite different. I served on the board for 10 years, and during that 10-year period I had the opportunity, which I think is probably fairly unique, to see from the inside what the impact of significant litigation caused to a company, to the management of the company, to the philosophy of that company, to the philosophy and the attitude of the Directors of that company. And those Directors were not company employees so much as they were people who were senior executives in a dozen other companies that are part of the Fortune 500.

The one thing that struck me, and I think you would get the same response if you were asking this question of the people who were on the board who came at it from a different perspective, is what kind of effect litigation really had. One of the things that happened is that there was an awareness on the part of everybody in that company of what had happened and why it had happened. I started in the Manville asbestos litigation when there were only seven cases pending in the entire country. I was one of the group that travelled around the country taking depositions, doing the discovery from the very beginning, and in putting together the case that led to the litigation and the acceptance of the fact that this was an industry that knew what it was doing, consciously knew what it was doing, and nevertheless went ahead and did it regardless of the effect it was going to have on the people who were being exposed to the asbestos products. That is not unusual. I mean if you talk to plaintiff's lawyers who have been involved in the tobacco litigation and in other litigation they will also tell you in those types of cases that the probing by the plaintiff's lawyers, had a tremendous impact on how internal corporate boards view what they were doing.

I can remember the Manville board because of the change in approach. Manville ended up looking into when fiberglass became a carcinogen, and because of what had happened to that company, Manville was committed to never doing again what the Manville of the 1960s and 1950s had done. Manville committed millions of dollars to that fiberglass research project, looking around at the others in the industry gone and wondering why they were not doing what Manville was doing, which was funding research, basic research, to find out what really was going to happen when people were exposed to these products.

I think a litigation experience brings to a corporate board a recognition of the importance of accepting a social responsibility with regard to their products. Not that you are going to necessarily put out any product to make money but that you are going to take the time and effort and the financial commitment to assure that the product you are putting out to the best of your ability is going to be one that doesn't harm people (or if it does that they are going to be alerted, advised and warned) that so, I do think that, product liability litigation has the potential and has the effect of being a deterrent if people understand exactly what the risks are.

The asbestos industry suffered, has suffered and will continue to suffer. But I think you see the history and the lessons of the asbestos litigation elsewhere at this point. You see it in how a company that manufactures and market’s toxic substances react. They may not do it as well as we would like, but they are more careful. They are spending more on research. They are trying harder. And I give that as part of the positive impact of product liability litigation.

Could you measure it? No. I don't think you can measure it, but I think for people who have been involved, people who have had an opportunity to see the effect, people who have had an opportunity to talk to people on the corporate side, there is an awareness that didn't exist 15 years ago to try to make products that are safer and better for people who are exposed to those products.

I am not an apologist. Quite the contrary. I am proud to be a plaintiff's lawyer. I think that the responsible members of the plaintiff's bar have done an outstanding service. Are there problems? Yes. There are problems. Are there things that I would like to see not happen? Yes, there are things that I would like to see not happen. But I think when you sit back and you look overall, at what has happened, whether it is in toxic torts, whether it is in aviation, or whether it is even in the automobile industry, I think you have to come away with the conclusion that product liability litigation has made its contribution, and I, for one, am proud to be a part of it.

MR. STOSSEL: Thank you, Stanley I hear three issues. One, does it deter bad action? In the fiberglass case the board was enlightened. There's awareness, concern. It's hard to argue with that.

What are the other purposes? To compensate victims and to punish the bad guys, in your case, who knew what they were doing. I would argue the system is not all that effective at doing that, but that is for later.

Our next speaker, on the other side -- he used to be General Counsel of Johnson & Johnson -- is George Frazza who is now with Patterson, Belknop, Webb & Tyler.

MR. FRAZZA: Thank God John didn't introduce me as I was last week, as "the former George Frazza" --

[Laughter.]

MR. FRAZZA: Well, David echoes the standard dictum of many including Robert Reich. That is that the litigation system superimposes on a very weak regulatory climate or nonexistent regulatory climate and provides checks and balances to regulate properly economic conduct, as David has espoused.

I come from a background of the pharmaceutical industry and health care industry - a very rigorously regulated industry - and I think virtually everyone will agree that our regulations on pharmaceuticals and medical devices are the most stringent in the world by far.

So we start off with a situation where we are in a regulated industry. You could argue whether the automotive industry is sufficiently regulated, but that is a political issue and society has to deal with that in both the legislature and the administrative agencies. But take for a minute the pharmaceutical industry, which as you know is one of the biggest actors in this product liability system.  There are hundreds of thousands of product liability cases brought against pharmaceutical manufacturers -- oral contraceptives, NSAIDS, the non-steroidal stuff and so forth.

Okay, David, we'll grant that -- there should be an alternative system that keeps an eye on all of these people. But what kind of system do we have and what kind should we have?

One, it should have predictability, a certain modicum of predictability, and I submit that the system is the most unpredictable in the world because you could have 15 oral contraceptive cases, win 14, and then in the 15th there's $300 million of punitive damages award. Rare, agreed. But if you are in Hurricane on the shore nobody tells you, well, these hurricanes are rare.

Is that thrown into the calculus when you decide what drugs to manufacture? It absolutely is. Oral contraceptives weathered it because it was a large drug and a very profitable drug, so you tuck away some money for the aberrations. A typical aberration was that the FDA told us to put on the warning label, "Oral contraceptives may cause blood clots which could be fatal." Awoman had a disabling stroke. She said that warning was inapplicable to her because they didn't say that you could have a disabling stroke which may not be fatal. The court held there are fates worse than death -- you should have told her about this and we paid through the nose.

Now did that regulate the conduct? Yeah. We went back and tinkered with the package insert, which is now as long as "War and Peace", and which nobody reads, incidentally. They put in something about disabling strokes and we went on about our business. Did that have any impact on anything?

The second thing is the quality of this system that rides herd out there, this vigilante system which keeps an eye on these weak regulatory agencies. The regulation is often by way of anecdote. It is often retrospective rather than prospective. There is often a disconnect between real science and junk science, and as I said, normally the actors in this drama are very sensible, intelligent people who are often not equipped scientifically to handle the very arcane issues that are put before them. I am not saying that drug companies do right in every case. I am not saying that they don't cut corners. But who is the judge here?

The third area is the emotion. These are emotional situations. All of economic activity is risk and benefit. We make this decision when we get in a car. We know that if you ride in the front seat it's the "death seat," right? You look at the statistics. You know that. Everybody should ride in the back except the driver. But we don't; we choose to take that risk.

There are risks and benefits in everything. These NSAIDS, they are helping people with arthritis now. We know they will kill about 16,000 people a year. The FDA knows it. The pharmaceutical companies know it. The doctors know it -- whatever. When those people are killed, the people go into court and you have an exercise. And in that exercise the drug company may win, it may lose, it may pay punitive damages, or it may pay nothing. My question is, does it significantly impact on the conduct of that manufacturer? Is it really what it says it is, a superimposed regulatory system to keep these people honest? I submit that it does not, and that it fails miserably in that.

I will switch from the pharmaceutical industry to the automotive industry because we are supposed to talk about the G.M. case, which I am not terribly familiar with. But I do know that right after the G.M. case you had the Ford Bronco case, which was a turnover, and Ford paid I think $390 million and I think it was reversed by the trial judge. But because it was a turnover and the roof, which complied with all of the standards that people think are not strong enough, wasn't crushproof enough, they paid that money.

Now Ford has tried about eight of those cases. They have won four; they have lost four. You go to the Ford engineer and you say to them, "How do I design this car?" He said, "Well, you have got to properly balance risk-benefit." "Well, I do. What do you mean by that? What standards do I have?" "Well, you got to make the roof a little stronger." "But if I make the roof a little stronger, that is more weight. That means it is going to turn over a little faster." "Well, I don't know. Two, you got to meet consumer expectations." "Well, what are consumer expectations?"

The point is that Ford, scratching its head here, says, "how am I going to design this car?" And what Ford does, really, in the real world, is sit down, try to design the car to the best of their ability and hope that the amount of verdicts such as the GM verdict and such are that they can weather. And if they can't weather them, the price of the car will go up.

Now, maybe I am not familiar with the automotive industry, and I don't know whether the regulations are as pervasive as they are in the pharmaceutical industry, but I do know that persistently that year-in and year-out, juries second-guess experienced, detached, objective and dedicated regulators. And the only rule you can go by when you put a pharmaceutical out is what the FDA tells you.

So I submit to you that Litigation has very little positive economic effect on the actions of pharmaceutical companies. It encourages timidity. It encourages people to take drugs that aren't very profitable off the market, because the game, frankly, isn't worth the candle. We never had an IUD case at all until the Dalkon Shield came along. We didn't make Dalkon Shield. And then after Dalkon Shield came, we had a whole corps of plaintiffs lawyers who understood the business, and started to file the cases. We pulled the device off the market, period. It wasn't worth it.

You go to your board and you say, hey, how much is this? Well, we sold 13 million last year. Well, we won most of these cases, yeah. If you lose one, what do you think you lose? Well, we will probably lose 4 or 5 million bucks. Fourteen million bucks, pull it. And that is the real world.

And, so, therefore, I take very sharp issue with the idea that the jury system, really is an effective governor of corporate conduct. Thank you.

[Applause.]

MR STOSSEL: Max Boot is Editorial Features Editor of the Wall Street Journal. He has been writing editorials, and specifically about legal issues, for some time. His last book is called "Out of Order: How Judges Subvert America's Rule of Law." I am glad he is here because I think he is a brilliant writer, and because I agree with everything he has written.

[Applause.]

MR. BOOT: There is going to be a lot of agreement in this room, frankly. I am going to have to say, after the last presentation, all I feel like doing is coming up here and saying amen and sitting down. I thought it was more eloquent and more learned thaN I am going to be. And being a journalist, as you might imagine, I have a great weakness for anecdotes, so I am going to share a few anecdotes with you that I have pulled down on my way over here - just a few of the things that have been in the news in the last month or so.

The first story, is from the Wall Street Journal where I happen to work. The first story says policyholders of State Farm Mutual are awarded $730 million in damages. Well, if you read further into the story, you realize that is in punitive damages on top of the $456 million they were awarded in actual damages before. That is $1.2 billion.

Of course, then I have the animating case here, the GM case in L.A. where a woman was stopped at a red light in her GM car, a 1979 Chevy Malibu, and she was rear-ended by a drunk driver going about 70 miles an hour. Of course, as you might imagine, this had some adverse consequences on the passengers in the car that was rear-ended. And, of course, this resulted in an award of $4.9 billion, reduced by the trial judge, so now it is only $1.1 billion, a mere $1.1 billion. And, obviously, GM could avoid all these problems by simply constructing its cars to be crash-proof and having absolutely no vulnerability whatsoever to rear-end collisions at 70 miles per hour. Now, of course, if they did this, their cars would start to resemble A-1 Abrams tanks, and, presumably, the price tag would match, which would be about $70 million a car.

The next case that I happened to notice, I pulled down on the way over here, says American Home Products (AHP) to pay $3.75 billion in diet suits. Now, this, of course, is the famous Phen-fen class action which has resulted in a $3.75 billion settlement, despite the fact that I believe it was last week the latest scientific study came out and said that there was no evidence to prove that Phen-fen actually caused the damage alleged by the plaintiffs in this massive class action.

And, of course, the final story, and I think the most recent one, says Colt cuts role of handguns in revamping. That is one of our very non-sensational headlines in the Wall Street Journal. What this means is Colt is going out of business. The folks who made the Peacemaker, the most famous gun in the West, are largely going out of business, except to sell to specialized markets. Hundreds of people are going to be laid off in West Hartford, and this is because all these cities have ginned up lawsuits against gun makers to hold them liable for people who did things with their guns that were against the law. Now, somehow, this doesn't make complete sense to me, especially in light of John Lott's pretty convincing study showing that legal gun ownership actually reduces crime and, therefore, reduces the cost to society, reduces the cost to these cities that they are claiming.

And, of course, the final, case I would like to mention is the tobacco lawsuits. I mean we have already seen untold hundreds of billions of dollars in settlements reached by the tobacco companies. Now the federal government is getting into the act as well alleging, Civil RICO and alleging all sorts of incredible violations of the law. Each count basically consists of advertisements that were put out by the tobacco companies denying that their products were addictive, or the testimony of tobacco executives denying that their products were addictive.

Now, obviously, everybody knows that tobacco is addictive on some level, but on some level it is not addictive. I mean I smoke maybe one cigar a month or something, I am not addicted to tobacco. There are quite a few people like that. It has different effects on different people. But it is absurd, for every instance of these tobacco executives denying the addictiveness of tobacco, to be grounds for wire fraud.

Well, the question is, what is going on here? I think we are all fairly familiar with what Wally Olsen called "the litigation explosion." It has been going on for quite some time. But I am starting to think that there is something new going on here, something that is taking it to a new level that we don't often notice. All these things are reported in discrete chunks. They are all individual stories, and people tend to miss the larger picture. We are talking billions of dollars here.

I can remember when it used to be exceptional for plaintiffs' lawyers to win millions of dollars. They used to have clubs and slap each other on the back and give each other awards for winning millions of dollars. But now it is commonplace to have billion dollar lawsuits. And we have seen the number of so-called plaintiffs in these cases, the class members, expand exponentially.

I can remember when we were told that the asbestos suits were an aberration. Well, sure, you saw an uptick in litigation when the asbestos cases were going through. But then, like a boa constrictor swallowing a mouse who it has sort of moved into its system, there would be no more of that. It turned out that that was only the first mouse on the plate of the plaintiffs lawyers and they have been feasting ever since. They have found plenty of other mice to go after. First it was asbestos, then it was tobacco, now it is guns, followed, of course, by HMOs. This is becoming a pretty lucrative system.

Now, what is going on at bottom here? Well, it is basically a tax increase. It is a tax increase that we haven't voted for. It is a tax increase that I think would be very hard to get through Congress. Imagine if you were going to tell Congress, that we would like to increase taxes on tobacco so that blue collar smokers are going to start paying more per pack in order that we can provide Learjets and Rolls Royces to about a hundred lawyers in this country. Now, that, to me, would be a hard sell legislatively.

In fact, that is why the proposed tobacco settlement never even made it through Congress. And, yet, this is exactly what is being achieved through the back door of litigation. It is not being voted upon. It is being enacted by what I call in my book "the juristocracy," which are the lawyers and judges who are managing to massively expand the amount of social transfer payments and regulation in our society without a vote from the rest of us.

Now, I am going to conclude in just a second and note one optimistic thing here, which is that, we are more regulated in some areas, but less regulated in others than the rest of the world. We have lower social transfer payments --, in other words, the government takes a lower percentage of GEP in our country than it does in most other countries, certainly in the European Union and a lot of the rest of the world. So by that measure, we are doing better in some ways. The U.S. is still the economic powerhouse. We have been beating the rest of the world in the last several years. Clearly, litigation has not destroyed our economic competitiveness. What it does is it imposes a tax, it takes a few percentage points of GEP and funnels a lot of that money to a handful of lawyers.

Now, like all taxes, this has a cumulative effect. It is not going to destroy the economy anymore than the 1993 Clinton tax increases destroyed the economy. But it is a tax, and I think it is one that we should be cognizant of, one that is being increased without our awareness, and one that I think is harder to justify than most tax increases because the benefits go so disproportionately to a handful of tax farmers who are becoming exceedingly rich as a result of the system. Thank you.