Category: Law

Regulation by Litigation

Elliot Spitzer, New York’s Attorney General, apparently misunderstands so let me make it clear – it’s the rule of law not the rule of lawyers. As I feared, a real but relatively minor scandal in the mutual fund industry, is becoming the excuse for grandstanders promoting their own agendas that have little do with the original issues. Professor Bainbridge lays it out here (I recommend following up on his links but of course ignore any criticism you might find of my arguments! :)).

A Romanian liability crisis?

A Romanian pensioner has lodged a complaint against a TV station claiming their horoscope is unreliable.

The woman, from Maramures, says the horoscope repeatedly predicted she would receive a big sum of money but it never arrived although she waited for three months.

Thanks to cronaca.com for the link to Ananova. Here is the clincher:

Officials said they will analyse the complaint and take a decision.

But they advised the broadcasters to include an announcement that the horoscope may not be 100% accurate and that they cannot warrant for the truth of astral predictions.

Perhaps they will consult their horoscope before rendering a final verdict.

Don’t let the bed bugs bite

…or Judge Posner will punish you. The punitive damages exceeded the compensatory damages in this bed bug case against Motel 6 by some 37 times. The Supreme Court’s recent line of argument in Pacific Mutual v. Haslip, State Farm v. Campbell and BMW v. Gore has suggested that “four times the amount of compensatory damages might be close to the line of constitutional impropriety.”

But the four-times figure is arbitrary. Judge Posner comes to the Supreme Court’s rescue by cogently laying out the theory of punitive damages, gently taking the Court to task in the process. A high multiple may be justified when the action to be punished is unlikely to be discovered or when the actual compensatory damages are low and would not motivate plaintiffs to otherwise bring suit against a legally-aggresive defendant. Both factors play a role in the bed bug case but would not justify absurdities such as the billions of dollars in punitive damages awarded against Exxon in the Exxon Valdez case.

My only worry with Posner’s analysis is that juries and judges may not be able to handle it. Perhaps the Supreme Court knows this and instead promulgates a foolish rule that is nevertheless easier to follow.

Addendum: Posner is the only person alive who deserves both a Nobel Prize and a seat on the U.S. Supreme Court. I put greater odds on the former than the latter but I happen to know that he recently visited the White House. Remember where you read it first.

What is the fair use doctrine?

Wired.com offers this very brief and useful summary, thanks to Geekpress.com for the pointer. This is the best simple statement I have seen of what “fair use” is all about. Note that the fair use doctrine will increase in importance, as companies put up tougher gates around their intellectual property. Bloggers must know about fair use as well, lest they quote too freely from copyrighted material and incur legal penalties.

For this economist, the courts aren’t nearly liberal enough in interpreting fair use. I think, for instance, that rappers should be able to sample songs without clearing copyright, at least provided they are doing more than simply copying large blocks of the song verbatim. Read Robert Christgau’s account of the famous Gilbert O’Sullivan case; O’Sullivan objected when rapper Biz Markie sampled his “Alone Again, Naturally,” a transformative use if I ever heard one. Will more sampling make rap better and cheaper? Yes. Will it diminish the supply of sample-ready material? Unlikely. So why not interpret fair use more liberally in this regard?

Sleazeball lawyer in a low-cut dress

I am speaking of Erin Brockovich. Sure, I liked the movie but the true story on which it was based was a lie. There was no cancer cluster in Hinkley, no scientific theory of harm, no coverup at the water office (see here for links). Having had one success in Hollywood, Brockovich is now after another this time by fanning hysteria that the kids at Beverly Hills High School (yes, 90210) are getting cancer from a nearby oil well. I smell a movie in the works.

Microsoft hires bounty hunters

Microsoft has put up “two $250,000 rewards, a total of $500,000, for information that leads to the arrest of the writers of two nasty computer worms — the Blaster worm and SoBig.” I am all for this as those guys sure wasted some of my time. As regular readers will know, I am also a fan of bounty hunters (see my earlier post; and my econometric paper – finding that bounty hunters reduce failure to appear rates and bring back fugitives much more succesfully than the public police).
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Dalkon Shield, Silicone Breast Implants, Fen-Phen

A bill to move class action lawsuits out of the state courts and into federal courts narrowly failed in the Senate. Senator Tom Daaschle, explained his opposition to the bill this way, “It is the Dalkon shield, it is silicone breast implants, it is fen/phen.”

Good list. Wrong conclusion. The A.H. Robins Co. was driven into bankruptcy and forced to pay 3 billion dollars in damages but the Dalkon shield has been shown to be effective and safe. Silicone breast implants have been reviewed in studies by the AMA, the Institute of Medicine, the Canadians, the French, the British and others. All conclude that there are no unusual problems with the implants (any surgery has risks of course). The FDA will probably soon allow the implants back onto the market but in the meantime Dow-Corning has been driven into bankruptcy and tens of millions of dollars have been spent on lawsuits. Fen/Phen does looks like a serious health risk but tort law had nothing to do with removing the product from the marketplace. (Moreover, the issue is complicated. Only the Fen in Fen/Phen looks dangerous and that was approved in 1973).

A Taxonomy of Methods for Discriminating

Not all procedures for engaging in racial discrimination are equal. They differ in their legal standing, their social meaning, and their “economic” efficiency. The Supreme Court in distinguishing Grutter and Graatz, and the admissions regimes of the various state universities suggest a useful taxonomy.

There are three generic forms of racial discrimination not merely in admissions decisions but in other practices and policies as well: (1) express and objective (i.e., points and quotas); (2) facially neutral and objective (e.g., the top 10% of graduates from each high school); and (3) implied and subjective (“we look at the whole person”). From an efficiency perspective the first form of discrimination is the least harmful. It does not corrupt the measure of merit, it only sets a different standard for “minorities.” Its shortcomings are twofold. First, as the Supreme Court decisions in Grutter and Grattz makes abundantly clear it is the one method most likely to be found illegal. This is implicitly related to its second shortcoming, it is so barefaced. It makes clear to both those favored and those harmed that the favored are otherwise inferior in their qualifications.

The second method, using a facially neutral operational measure to achieve a suspect theoretical goal, now favored by the state universities of California, Texas and Florida, in granting admission to those who finish in the top X% of their high school class and by the United Network for Organ Sharing in granting more “points” in the organ allocation scheme for time on the waiting list, has the virtue of being an objective measure, and the virtue (?) of a disguise that reduces shame. Its shortcoming is that its effectiveness in bringing about the preferred ethnic distribution is tied to its inefficiency. It employs an objective measure of merit that substantially distorts. Thus, the rankings of both the favored and the unfavored groups are mis-aligned.

The third measure, a subjective, ad-hoc eclectic judgment, can in practice be a mimic of the first, the second, or anything else. The process becomes a beclouded mystery. This is both its virtue and its vice. There is no clear trail, evidence or standards that mark the favored as inferior–feelings are spared. On the other hand the absence of an objective measure means that the decisionmakers are effectively unanswerable and may indulge in any form of corruption.

Method (1) is clearly falling by the wayside. Is there likely to be a clear political winner between (2) and (3)?

Bounty Hunters

The “bounty hunter” conference was fascinating. To be precise, I was invited to speak before the California Bail Agents Association which includes bail bond agents who write the bonds, surety/insurance companies who back the bonds as well as bail enforcement agents (aka bounty hunters) who recapture fugitives.

The bounty hunters were generally big guys but not so that you would notice on the street – these were not your Gold’s Gym type. A bounty hunter can always buy muscle but what they really need is smarts. A successful bounty hunter avoids excessive confrontation because every pickup is a lawsuit waiting to happen. One bounty hunter told me a big part of his success has been unfailing politeness.

Another key element is getting family members to cosign the bond – even hardened criminals don’t want to see Momma’s house taken should they fail to appear at trial.

It’s no coincidence that bail agents typically have their annual convention in Reno or Las Vegas but these are poker players not mindless feeders of the slot machine. (The distinction between these forms of gambling strikes me as important but to my knowledge has not been taken up by economists.)

Many of the “bondsmen”, perhaps even a majority, are women. Bondsmen must develop intuition and judgment about who is a flight risk and women may be particularly good at this. Also, although the defendant’s are usually men, its often their wives, girlfriends and mothers who bail them out and dealing empathetically with these women is a big part of the art – alas, repeat business is not uncommon.

As with other insurance industries, you can make a lot of money quickly by writing bail but trouble comes when your charges skip and their bail becomes forfeit. At least that is what is supposed to happen but – and I am surprised to be saying this – lax regulators and high-price lawyers can open a window of opportunity that makes bad bail writing potentially profitable. The problems this creates for the honest players in the industry was a big topic at the conference. I was impressed, however, that there was also a frank discussion about how to distinguish rules meant to weed out the fraudulent from anti-competitive rules. This is a topic I need to think more about.

I was asked to speak at the CBAA because of my paper on bounty hunters with Eric Helland (forthcoming in the Journal of Law and Economics). Here are some key facts and findings:

A whopping one-quarter of all felony defendants fail to appear at trial. Of these some thirty percent can’t be found after a year.

The police are overrun with unserved arrest warrants for failure to appear and typically devote little time to the task.

As a result, FTA appear rates are some 28% lower for those released on commercial bail compared to those released on their own recognizance.

When a defendant does FTA he is about 50% more likely to be caught and is caught much sooner if a bounty hunter is on his trail compared to if only the police are involved. (Both of these effects are after controlling for other relevant factors, of course).

How Easy is it to Evaluate a Lawyer?

Trying to learn whether a lawyer is a bad apple can be an exercise in futility. The ABA keeps a database of known ethics violators and makes the information available if you call 312-988-5321, but it relies on voluntary reports from state bar counsels. You could call the bar counsel in the appropriate state directly listed at www.nobc.org but that can also be a dead end unless the attorney has been suspended or disbarred. Many states just say he’s “in good standing” even if he has had lots of complaints or worse.

So is it written on one of the leading medical blogs, he is trying to tell you that doctors are not the worst. Rangel offers this further link to make you more suspicious of lawyers.

Here is an interesting fact, though it is to me not so obviously nefarious as the author would make it out to be:

Some 68 percent of malpractice claims from 1996 through 1999 closed without the client receiving payment from the lawyer’s insurance company, and only 6.7 percent netted more than $50,000, according to a 2001 ABA survey. Why is it so hard? For one thing, only an estimated 30 to 50 percent of lawyers even carry insurance, so collecting is a long shot.

Here is his final parting blow, judge it as you wish, noting that a lawyer may know many other lawyers:

Unlike doctors, lawyers in most states are allowed to have sex with clients. And many do. Nearly 20 percent of attorneys surveyed nationwide by the University of Memphis in 1993 admitted they or a lawyer they knew had had an affair with a client.

Torts and Crimes in Mississippi

Tyler noted how the rotten court system in Jefferson County Mississippi is finally being investigated by the FBI. At the heart of the investigation are contributions by lawyers to elected judges. It also doesn’t help that Jefferson has a large and poor minority-population. See the links for why this is important. Email me if you want copies of the papers and don’t have a subscription to the journals.

What goes around, comes around

The FBI is investigating Jefferson County in southwestern Mississippi, a poor area with fewer than 10,000 residents. Apparently the county is known for its very high tort settlments. For instance, when the makers of fen-phen were sued, the five plaintiffs from that county received $150 million. The 800 other fen-phen cases received a total of about $400 million.

One source notes:

Since 1995, lawyers say, Mississippi juries have returned at least 19 verdicts of $9 million or more, including 5 that exceeded $100 million each, although plaintiffs sometimes settle for less as the appeal process proceeds. Lawyers seek clients through aggressive advertising.

Mississippi state now has limited suit rewards by law, but there remain many cases filed before the relevant deadline for this limitation. One settlement recipient remarked that juries “awarded these people this money because they felt as if they were going to get a cut off of it.”

The above link offers this jaw-dropping fact:

Jefferson, with 9,740 residents, is a small county, but litigation there is a big business. An affidavit filed in June by a researcher in one case, who combed the files of the Circuit Court, said that more than 21,000 people were plaintiffs in Jefferson County from 1995 to 2000.

The possible corruption runs deep:

Bankston Drug Store, the only pharmacy in Jefferson County, has been named in hundreds of suits since the fen-phen settlements as a way for mass claims to be filed in the county.

Hilda Bankston, the pharmacy’s former owner, was subpoenaed earlier this year by the same grand jury that indicted…the others.

Bankston was asked to turn over, along with customers’ personal and prescription histories, customer and pharmacy records “that appear to be false or not produced by your company.”

Something is rotten in the state of Denmark, as they say.

The Politician and the Mechanic Conspire to Rip Me Off

Virginia requires yearly “safety” inspections of automobiles. Yesterday, it was my turn – it cost me $15 bucks and an hour of my time. What a pain. Merrell, Poitras and Sutter (MPS) (summary here, reference below) estimate that nationally inspection programs cost in excess of a billion dollars a year (I think this is a serious underestimate – see below). What do we get for our time and effort? Not much. MPS find that mandatory inspections do not reduce highway fatalities or injuries. Not surprising really since there are already good incentives to maintain one’s car and accidents are most often caused by factors, primarily driver behaviour, that are not inspected. (By the way, yes there is an externality but if self-interest alone causes you to replace a broken headlight then on the margin the externality is irrelevant – economists often forget this point.)

MPS arrive at the billion plus figure by summing inspection fees and travel time. But the major cost of the inspection system, in my opinion, is unnecessary repairs. Mechanics have an incentive to indicate a car needs repairs and it is difficult to know when they are speaking the truth. This problem is bad enough when you have brought your car to the mechanic voluntarily – at least then you know the car has a problem. But the potential for opportunistic behaviour is worse when you are required to take your car in for inspection and if you don’t follow the mechanic’s advice you fail. The mechanics know they have you over a barrel and act accordingly.

The citation for the MPS study is Merrell, D. Poitras, M and Daniel Sutter. 1999. The Effectiveness of Vehicle Safety Inspections: An Analysis Using Panel Data,” Southern Economic Journal, Volume 65, pp.571-583.