‘Tort Tax’ Costs Illinois Jobs, Economic Growth

Published February 1, 2006

In recent years, reform of tort law has moved to the top of the agenda for many state and national elected officials. Advocates of tort reform cite lost jobs and slower economic growth, declining access to medical care because of skyrocketing malpractice premiums, and a growing cost imposed on consumers by abusive lawsuits. Defenders of the current system say tort reform would deprive real victims of their day in court.

The following is the first article in a multi-part series on how runaway litigation harms consumers and the economy. The state of Illinois is the first to be profiled.

In late 2005, the American Tort Reform Association (ATRA) released its annual “Judicial Hellholes” report, designed to put the spotlight on what ATRA considers to be the worst jurisdictions for defendants seeking a fair trial in civil lawsuits. The report singled out six areas of the country as being havens for lawsuit abuse. Three of the six were in Illinois: Cook County, Madison County, and St. Clair County.

That fact alone highlights what many consider to be a major problem in Illinois: an unfriendly legal climate that imposes costs on business owners and consumers, ultimately harming job growth and investment in the state.

“Being tagged a ‘judicial hellhole’ presents an adverse image that may well discourage some investors or employers from wanting to do business in Illinois,” said Illinois Chamber of Commerce President Doug Whitley.

Negative Image Widespread

ATRA isn’t the only group with a negative view of Illinois’ legal system and its impact on jobs and economic growth. A 2005 survey of corporate legal counsel and senior litigators found corporations across the country believe Illinois is inhospitable to them.

On behalf of the U.S. Chamber Institute for Legal Reform, Harris Interactive asked 1,437 corporate attorneys at public corporations and insurance companies to rank all 50 states based on several factors. Illinois finished 46th, beating only Louisiana, Alabama, West Virginia, and Mississippi.

Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, wrote in a statement accompanying the release of the poll, “an overwhelming 81% of respondents in the poll report that the litigation environment in a state could affect important business decisions, such as where to locate or do business.”

Rickard also noted Illinois has lost almost 200,000 manufacturing jobs over the past five years, and that Illinois’ legal climate “contributes to the ongoing jobs crisis.”

‘Tort Tax’ Rising Rapidly

The actuarial and management consulting firm Towers Perrin Tillinghast (TPT) has conducted an annual report since 1985 assessing tort costs in the United States. Its most recent report, released in 2004, found the total cost of litigation in the United States was $246 billion in 2003, approximately $845 per person. TPT forecasts tort costs in 2006 will rise to $1,000 per person. This cost is often referred to as the “tort tax.”

The tort tax cost is often passed on to consumers and taxpayers. Experts say because of Illinois’ legal climate, the tort tax for each resident is probably higher than the national average.

“I would expect that Illinois’ out-of-control legal system imposes a higher tort tax than most other states,” said Joseph Bast, president of The Heartland Institute and publisher of Budget & Tax News. “The state has a well-earned reputation as a judicial hellhole.”

The study by TPT measured only direct costs of litigation, such as judgments paid or expected to be paid, and costs of defending against tort claims. Not included are the costs to federal and state courts of hearing tort cases or the costs of what TPT refers to as “litigation avoidance.”

The TPT report notes litigation avoidance costs include “unnecessary and duplicative medical tests ordered by doctors as a defense against possible malpractice allegations” and “the disappearance of certain products or whole industries from the marketplace because of high product liability cost.”

Competitive Disadvantage

Many people are concerned about the impact the tort tax has had on the Illinois economy and sluggish job growth. Among other things, they say friendlier legal climates in nearby states put Illinois at a competitive disadvantage.

“Before recent reforms and the decisions in the State Farm and Philip Morris cases [see “Judgments Set Anti-Business Tone,” page 5], Illinois had one of the worst legal climates for companies looking to invest or do business,” said Maureen Martin, senior fellow for legal affairs for The Heartland Institute. “Meanwhile, neighboring Iowa, Indiana, and Minnesota have all been considered to have much fairer court systems.”

While Illinois was ranked 46th by the Harris survey, Iowa was 5th, Indiana was 6th, and Minnesota was 7th. “I can’t imagine that Illinois’ hostile legal climate wasn’t a major consideration for companies looking to do business in the Upper Midwest in recent years,” Martin said.

Whitley also has concerns about the state’s reputation. “The state’s economy will suffer some fallout” from its reputation as having an unfriendly legal climate, he said, adding, “Illinois courts must reassure business interests that they will receive fair and impartial judgments and that Illinois courts are not biased against business.”

Recent Improvements Realized

Both Martin and Whitley are quick to point out, however, that Illinois has recently made significant improvements in its legal climate.

“I think it’s been a dramatic improvement,” said Martin. “The ATRA rankings no longer tell the full story of the legal climate in Illinois for business.” She cites as reasons for optimism the recent reversals by the state supreme court in the State Farm and Philip Morris cases, along with caps on noneconomic damages in medical malpractice cases that were signed into law by Gov. Rod Blagojevich (D) last year.

“I think the circumstances in Illinois have reached a low point and the state is on a path towards recovery,” added Whitley. He referred to the state supreme court’s decision to throw out the judgment against Philip Morris as “another indication the judicial landscape in Illinois is changing for the better. It is a positive sign that the supreme court in particular is making reasonable and rational decisions and recognizes their role as defenders of our state’s reputation.”

Venue-Shopping Remains

Martin and Whitley agree Illinois still needs reform if it is to fully shed its image as a judicial hellhole. Venue reform is at the top of the agenda for both.

“Venue-shopping” is a practice where trial lawyers choose where to file lawsuits with little regard for where the plaintiffs or defendants reside or do business, or where the alleged damage occurred. Lawyers who engage in venue-shopping typically seek to file suits in counties that have a reputation as favoring plaintiffs instead of fairly applying the law.

The three Illinois jurisdictions singled out as the worst judicial hellholes–Cook, Madison, and St. Clair Counties–are all popular venues for class-action suits. A recent study by the Illinois Civil Justice League (ICJL) found a disproportionate number of lawsuits are filed in those three counties. Madison County, for example, had approximately eight lawsuits filed for every 1,000 residents in 2003, a significantly higher number than the statewide average (excluding Cook County) of less than two per 1,000 residents.

More than half of all Madison County lawsuits filed in 2003 were asbestos-related cases or class-actions. The ICJL study cited an estimate from a 2005 issue of Inside Counsel magazine that about 75 percent of all asbestos cases filed in Madison County are from out of state.

Venue-shopping has made Illinois “a haven for class-action lawsuits and big judgments,” according to Whitley. “Venue-shopping must come to an end in Illinois.”

Reform Proposed

State Sen. Kirk Dillard (R-Hinsdale) has introduced legislation that would ban the practice of venue-shopping by limiting places a defendant can be sued to the county where the defendant resides, where his or her primary place of business is, or where the alleged injury occurred.

“Venue reform … would assure that the location of litigation will be in the appropriate setting,” Dillard said. “Importantly, it does not limit access to courts, it only makes sure the venue is correct, not one-sided.

“Illinois has a terrible reputation with respect to the fairness of our courts, and it costs us thousands of jobs annually,” Dillard said. “Venue reform is … [something] Illinois needs to do to retain and attract quality jobs.”

Greg Blankenship, founder and director of the Illinois Policy Institute, agrees venue reform is critical to Illinois’ future.

“Reform will allow Illinois to be more competitive in the marketplace, both with other states and globally,” Blankenship said. “Recent decisions by the Illinois Supreme Court and the establishing of caps for noneconomic damages in medical malpractice are good first steps, but venue reform and other measures are needed to erase this state’s reputation as a judicial hellhole and make Illinois more attractive to employers and investment.”

Sean Parnell ([email protected]) is vice president of The Heartland Institute.

For more information …

The reports cited in this article are available online at the following sites:

American Tort Reform Association’s “Judicial Hellholes” report, http://www.atra.org/reports/hellholes/report.pdf.

Towers Perrin Tillinghast report, http://www.towersperrin.com/tillinghast/publications/reports/Tort_2004/Tort.pdf.

Harris Interactive poll for the U.S. Chamber Institute for Legal Reform, http://www.instituteforlegalreform.com/harris/pdf/HarrisPoll2005_FullReport.pdf.

Illinois Civil Justice League (ICJL) study, http://www.icjl.org/LitigationIndexStudy.pdf.