Small businesses increasingly endangered by lawsuits
August 28, 2008 · Updated 1:51 PM
by Don C. Brunell
President, Association of
When a Fortune 500 company is sued, it makes the evening news and the front page of The Wall Street Journal. But people rarely hear about it when the local dry cleaner is slapped with a lawsuit-unless a Washington, D. C., judge is seeking $67 million because the dry cleaners lost his pants.
Seriously. Judge Roy Pearson sued Jin and Soo Chung and their son for $67 million because they lost his pants. Fortunately, he came to his senses. He recently reduced his claim to $54 million.
In 2003, the cost of people suing for damages in the United States either for alleged injuries or wrongful acts, or torts was $246 billion. Thats $845 per person, or $3,380 for every four-person family.
The trend is disturbing. The cost of litigation increased 35.4 percent from 2000 to 2003, and the growth of these lawsuits has exceeded the nations gross domestic product by 2 to 3 percentage points every year for the past 50 years.
Lawsuits are increasingly hard on small businesses. The Institute for Legal Reform at the U.S. Chamber of Commerce found that, while small businesses earn only 19 percent of the business revenue in America, they pay nearly 70 percent of the litigation costs. Those costs jumped 13 percent from 2002 to 2005. In 2005 alone, there were nearly $100 billion worth of lawsuits filed against companies with $10 million in annual revenues and employing one or more people.
There is a mistaken assumption that a small proprietor slapped with a lawsuit simply lets his insurance company handle it. Wrong. Many business owners shoulder the costs themselves out of fear of higher premiums or the risk that their insurance company will cancel their coverage. Some start-up businesses simply cannot afford liability insurance. In fact, the ILR study shows that, in 2005, small business owners paid $20 billion out of their own pockets for court costs and out-of-court settlements.
Finally, the smallest businesses, those with revenues of less than $1 million, paid $31 billion in lawsuit-related costs. Lets put that in perspective. These businesses, which represent just 6 percent of total business revenues, paid more than 20 percent of the national tort tab. These lawsuits really do hit the little guy who struggles to make ends meet.
Small businesses are the lifeblood of America. According to the Small Business Administration, they employ more than half of all private-sector workers. Over the past decade, small businesses have generated 60 to 80 percent of the nations new jobs and employed 41 percent of all high-tech workers, scientists, engineers and computer workers.
Small businesses also inspire a high level of public confidence. A recent Harris Poll of 1,000 adults found that the public has the most confidence in small business leaders, followed by military leaders and educational institutions.
If Americans love small business, why do Congress and state legislatures continue to ignore the risk that runaway litigation represents? It would be different if the victims who are truly harmed received the money. But the American Tort Reform Association estimates our legal system returns less than 50 cents on the dollar to the people filing the claims. The bulk of the rest goes to personal injury attorneys and for court costs.
Its time our political leaders recognize that frivolous lawsuits are clobbering our nations businesses, particularly those who put their life savings on the line to open a shop. They are hurting families as well.
Costs matter to employers and people depending upon them for their jobs. Unnecessary lawsuits endanger job providers, workers and families and are destroying one of the things that makes our nation great people taking risks to start a business.