A Modest Proposal for Tort Reform

Michael B. Wallace*

Since the early days of the Reagan Administration, tort reform has been a perennial dispute in each succeeding Congress. Both the Reagan and Bush Administrations sought unsuccessfully to apply substantive changes in product liability law on a nationwide basis, displacing provisions of traditional state tort law. Later, Congress succeeded in adopting reforms of securities litigation over President Clinton's veto, but medical malpractice reform died in the battles over the budget, and efforts for broader tort reform proved equally unavailing.

Cynics may consider this long war of attrition to concern only money, with consumer groups and plaintiffs' lawyers allied against doctors and business interests. Both sides nevertheless present their arguments as matters of deepest constitutional principle. Liberals express unaccustomed fealty to states' rights, arguing that the federal government has no power to interfere in the civil justice systems of the sovereign states. Consumer groups regard tort suits as property rights, which the federal government cannot divest without due process and compensation under the Fifth Amendment. Businesses, on the other hand, complain of the chaotic patchwork of state laws, and argue that one of the chief reasons for adopting the Constitution was to give Congress the power to regulate interstate commerce. Members of the Federalist Society, dedicated to the preservation of constitutional principles, take each of these arguments seriously, and come to sharply different conclusions.

There is, however, one simple tort reform which is unquestionably within the powers granted to Congress by the Framers at Philadelphia. Congress could add an additional subsection to 28 U.S.C. § 1441 so as to provide:

Any civil action where the matter in controversy exceeds the sum or value of $75,000.00, exclusive of interest and costs, brought in a State court may be removed to the district court of the United States for the district and division embracing the place where such action is pending by any defendant who is not a citizen of that State and whose citizenship differs from that of any plaintiff.

Together with a corresponding amendment to the diversity jurisdiction statute, 28 U.S.C. § 1332, this provision would permit any defendant who does not want to proceed in the courts of a state where he is not a citizen instead to defend himself in federal court before a judge appointed by the President and confirmed by the Senate.

Those who learned what they know of the Constitution in high school and college probably think this right is already available. Indeed, the Framers probably assumed it would be available when they defined the judicial power in Article III to extend to controversies "between Citizens of different States." Congress, however, in implementing this provision by statute required complete diversity; if any defendant is a citizen of the same state as any plaintiff, federal jurisdiction does not exist. This requirement of complete diversity was found to be a part of the Judiciary Act of 1789 in Strawbridge v. Curtiss, 2 L.Ed. 435 (1806), and since then Congress has not generally allowed jurisdiction in cases of incomplete diversity, where not all of the defendants have citizenship diverse from that of all plaintiffs. However, in statutory interpleader cases under 28 U.S.C. 1335, Congress has allowed federal jurisdiction in cases of minimal diversity, where any two of the antagonists are diverse, and the Supreme court held such jurisdiction to be constitutionally permissible in State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523 (1967). Congress, then, has clear constitutional authority to broaden the jurisdiction of the federal courts to include all cases of minimal diversity whenever it wants to.

There are two good reasons why Congress should broaden federal jurisdiction to permit out-of-state defendants to remove their cases from state court. First, while most state courts are both fair and competent, plaintiffs are highly experienced at finding those that are neither. Second, litigation will be simplified and accelerated as plaintiffs lose their incentives to sue local defendants for the sole purpose of precluding complete diversity.

There is nothing new about the fear of local bias on the part of out-of-state defendants. Those fears permeated the Constitutional Convention, as Chief Justice Marshall recognized almost two centuries ago:

However true the fact may be, that the tribunals of the states will administer justice as impartially as those of the nation, to parties of every description, it is not less true, that the constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehensions of suitors, that it has established national tribunals for the decision of controversies between aliens and a citizen, and between citizens of different states.

Bank of United States v. Deveaux, 5 Cranch 61, 87 (1809). The "fears and apprehensions" of which Marshall spoke are no less prevalent today, when an automobile manufacturer can face a judgment for $4,000,000 in an Alabama state court over a paint job. This judgment was finally too much for the Supreme Court of the United States, which reversed in BMW of North America, Inc. v. Gore, 116 S.Ct. 1589 (1996), but that Court has neither the time nor the constitutional power to correct every egregious state court decision.

The defenders of state courts are absolutely right when they say that those courts are generally of high quality. The problem is that it is all too easy for plaintiffs to bring their claims in the low quality courts. Walter Olson explained in The Litigation Explosion how the strengthening of long-arm jurisdiction statutes and the weakening of venue requirements in recent decades have permitted plaintiffs to sue almost any defendant in any court. There are state courts which permit free rein to plaintiffs' lawyers and put immense settlement pressures on out-of-state defendants, and plaintiffs know how to find them.

Indeed, wily plaintiffs can go so far as to secure a particular judge within a particular jurisdiction. Not long ago, a plaintiff filed two substantially identical actions against a client of mine in a rural Mississippi county, where the clerk assigns new cases alternately to each of the two judges. As soon as the cases were filed, the plaintiff dismissed the case before the judge he did not want and proceeded with the case assigned to his favorite.

State appellate courts provide some protection against the more outrageous local decisions. After all, the Supreme Court of Alabama did cut the BMW judgment in half, to $2,000,000. However, defendants cannot always afford to take their cases to the appellate court. In Jackson, Mississippi, in 1995 a jury rendered a verdict against a Canadian funeral home chain for $100,000,000 in actual damages, and $400,000,000 in punitive damages. In order to stay enforcement of the judgment, Mississippi law requires a defendant to post a supersedeas bond of 125%. The defendant could not post the bond, and the Supreme Court of Mississippi refused to lower it, forcing the Canadian company to settle at a price reportedly in excess of $130,000,000.

Judgments of these magnitudes simply would not be tolerated in the federal system. State law would still be applied by the federal courts, so the substantive rights of plaintiffs would be carefully protected. However, out-of-state defendants understand that federal judges, appointed for life, are not subject to local pressure, and they trust them to apply local law fairly. Moreover, on the rare occasions when federal judges or juries exceed the bounds of law and reason, federal appellate courts can be trusted to intervene. The Fifth Circuit, for instance, has a well developed standard for determining when damage judgments are excessive and must be corrected. Caldarera v. Eastern Airlines, Inc., 705 F.2d 778, 784-85 (5th Cir. 1983). State appellate courts, on the other hand, are reluctant to intervene in decisions made by local jurors. Perhaps the best evidence that state courts present an unfair advantage to local plaintiffs is the effort those plaintiffs make to get there. Although the clear target of a damage suit is always a wealthy out-of-state corporation, plaintiffs invariably sue a local manager or agent or retailer in order to avoid complete diversity. The asbestos litigation of the past decade in Pascagoula, Mississippi, is instructive. Plaintiffs and their lawyers have collected tens of millions of dollars in judgments and settlements from non-Mississippi companies, but the cases have been kept in state court by the presence of a handful of local dealers, none of whom has ever paid a dime.

Indeed, the routine joinder of local defendants illustrates the second benefit of diversity reform in simplifying the system of justice. As long as plaintiffs can avoid federal court by suing local defendants form whom they never expect to recover damages, the local courts will be clogged with unnecessary parties and unnecessary lawyers. Every one of those local defendants has to hire a lawyers, and every one of those lawyers bills for attendance at hearings and discovery proceedings. The elimination of those unnecessary defendants would go a long way toward rationalizing the tort system.

Although those local defendants are purely nominal as far as payment is concerned, they become a major and expensive focus of every case. Notwithstanding the presence of the local defendant, out-out-state defendants may remove the case to federal court on grounds of fraudulent joinder when they can show that no recovery is possible against the local defendant. Plaintiffs routinely move to remand the case to state court, arguing that they can make out a claim against the local defendant. Lawyers on both sides spend hundreds of hours and thousands of dollars arguing over the purely hypothetical liability of a defendant who everyone knows will never pay a penny.

Such removal battles form a major part of may own practice here in Mississippi. When my phone rings after an out-of-state corporation has been sued here, the first question they invariably ask is whether they can get out of state court. The removal and remand battle, fought over the liability of some token local defendant, is almost always determinative of the liability of the real target. When a case stays in federal court, it is almost always dismissed or settled for a minimal sum. When the case goes back to state court, the cost of settlement or trial goes through the ceiling.

These jurisdictional games are expensive and unnecessary, and they bring the law into ill repute. There is a better solution to the reasonable fears of out-of-state defendants, and the Framers provided it over two centuries ago. They intended to protect all Americans by assuring a trial in a federal court rather than before the judiciary of another state. Through its undisputed power to control the jurisdiction of the federal courts, Congress can implement the solution provided by the Framers. It should do so without delay.

*Michael B. Wallace is a partner in the Jackson, Mississippi office of Phelps, Dunbar.


2001 The Federalist Society