[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON LIABILITY
REFORM AND SMALL BUSINESS
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 17, 2007
__________
Serial Number 110-23
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Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
WILLIAM JEFFERSON, Louisiana STEVE CHABOT, Ohio, Ranking Member
HEATH SHULER, North Carolina ROSCOE BARTLETT, Maryland
CHARLIE GONZALEZ, Texas SAM GRAVES, Missouri
RICK LARSEN, Washington TODD AKIN, Missouri
RAUL GRIJALVA, Arizona BILL SHUSTER, Pennsylvania
MICHAEL MICHAUD, Maine MARILYN MUSGRAVE, Colorado
MELISSA BEAN, Illinois STEVE KING, Iowa
HENRY CUELLAR, Texas JEFF FORTENBERRY, Nebraska
DAN LIPINSKI, Illinois LYNN WESTMORELAND, Georgia
GWEN MOORE, Wisconsin LOUIE GOHMERT, Texas
JASON ALTMIRE, Pennsylvania DEAN HELLER, Nevada
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia JIM JORDAN, Ohio
JOE SESTAK, Pennsylvania
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania JIM JORDAN, Ohio
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
WILLIAM JEFFERSON, Louisiana DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin SAM GRAVES, Missouri
YVETTE CLARKE, New York TODD AKIN, Missouri
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
.........................................................
(ii)
?
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
WILLIAM JEFFERSON, Louisiana LYNN WESTMORELAND, Georgia,
RICK LARSEN, Washington Ranking
DAN LIPINSKI, Illinois BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois STEVE KING, Iowa
GWEN MOORE, Wisconsin MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania VERN BUCHANAN, Florida
JIM JORDAN, Ohio
______
Subcommittee on Urban and Rural Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DEAN HELLER, Nevada
HANK JOHNSON, Georgia DAVID DAVIS, Tennessee
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLIE GONZALEZ, Texas LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
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C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
Braley, Hon. Bruce............................................... 3
WITNESSES
PANEL
Rickard, Lisa A., U.S. Chamber of Commerce....................... 6
Harned, Karen R., National Federation of Independent Business
Legal Foundation............................................... 7
Kelly, Steve, National Lumber and Building Material Dealers
Association.................................................... 9
Freedenberg, Dr. Paul, Association for Manufacturing Technology.. 12
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 33
Chabot, Hon. Steve............................................... 35
Altmire, Hon. Jason.............................................. 37
Braley, Hon. Bruce............................................... 38
Rickard, Lisa A., U.S. Chamber of Commerce....................... 40
Harned, Karen R., National Federation of Independent Business
Legal Foundation............................................... 52
Kelly, Steve, National Lumber and Building Material Dealers
Association.................................................... 65
Freedenberg, Dr. Paul, Association for Manufacturing Technology.. 68
Statements for the Record:
U.S. Chamber Supplements - NEERA and Harris Studies.............. 76
American Bar Association......................................... 107
AFL-CIO Correspondence........................................... 124
American Tort Reform Association................................. 126
(v)
FULL COMMITTEE HEARING ON
LIABILITY REFORM
AND SMALL BUSINESS
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THURSDAY, MAY 17, 2007
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:30 a.m., in Room
2360 Rayburn House Office Building, Hon. Nydia Velazquez
[Chairwoman of the Committee] presiding.
Present: Representatives Velazquez, Gonzalez, Grijalva,
Cuellar, Braley, Ellsworth, Johnson, Sestak, Chabot, Akin,
Musgrave, Westmoreland, Heller, Davis, Fallin, Buchanan and
Jordan.
OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ
Chairwoman Velazquez. Good morning. I call this hearing to
order on the issue of liability reform and small businesses.
I would like to thank Ranking Member Chabot for bringing
this issue to the Committee and arranging for the witnesses to
testify. The issue of civil liability is clearly something that
impacts small businesses in a variety of ways. I think we can
all agree that frivolous lawsuits harm small businesses and our
economy. No one will ever defend that practice.
However, in order to have a discussion about liability
reform, we must consider whether changes in federal law could
have an impact on legitimate rights of action in addition to
stopping frivolous suits.
For today's hearing, the issue of liability reform must be
considered in light of the many roles that small businesses
play. Not only they are manufacturers, but small firms are
oftentimes the consumers and sellers of products. Our legal
system must ensure that the rights of entrepreneurs are
protected, both as the plaintiff or defendants in lawsuits.
The economy depends on the ability of companies to protect
their contractual rights, including their relationships and
transactions with other businesses. I do understand, however,
that we will hear about how our current legal system has its
shortcomings. If our tort system is not used properly, it can
and does impose costs on businesses, many times unfairly.
Determining the extent of these costs is difficult and
figures are often disputed. My hope is that we can open up the
debate today beyond litigation costs and examine the different
factors that may be driving up overall liability insurance
premiums. According to a study by the National Federation of
Independent Business, small business owners rank liability
insurance as one of their top concerns. Lawsuit abuse is near
the bottom of that list.
These findings suggest there are a number of factors
contributing to liability costs, including insurance company
practices. As such, I believe that any approach to addressing
liability issues must be multi-pronged and go beyond simply
limiting the ability to sue. The states that have successfully
handled overall insurance costs have enacted both tort reform
and insurance reform.
A number of years ago, California addressed soaring
insurance costs by passing Proposition 103. Proposition 103
required that insurance companies roll back rates and file an
application with the Insurance Commissioner to increase rates.
Companies were also required to hold public forums before
raising premiums. Studies show that this was a primary driver
in reducing insurance costs in the State.
A similar approach is needed to help small businesses with
rising liability insurance costs. To truly get at the major
problems behind these prices, there must be greater
transparency in insurance markets. While I know many of the
witnesses have focused their testimony on litigation, I will be
interested in hearing about their experience with insurance
companies when it comes to overall liability coverage.
While not always perfect, our nation's justice system is
the best in the world. There is room for improvement, but we
need to keep in mind that lawsuits can serve to protect honest
small business owners who are doing the right thing. A working
legal system will ensure that the products that companies
manufacture are safe, yet affordable to produce. A functioning
system fosters competition in terms of safety by rewarding
company for manufacturing safe products while penalizing those
who cut corners.
I look forward to today's testimony, and I thank the
witnesses for their participation.
I now recognize Ranking Member, Mr. Chabot, and, yes, for
the purpose of his opening statement.
OPENING STATEMENT OF MR. CHABOT
Mr. Chabot. Thank you, Madam Chairwoman, and I want to
sincerely thank you for holding this important hearing in which
we will look at how the tort system is impacting our nation's
small businesses. We will also review some liability reform
measures that would allow small business owners to focus their
energies on growing their businesses and creating jobs, rather
than worrying so much about fighting frivolous lawsuits.
I also want to thank our panel of witnesses for being here
today. It is a very accomplished panel of experts who have been
dealing with this issue for a long time. I am sure everyone up
here will benefit from your testimony today, so thanks again
for coming.
Small businesses are the backbone of our nation's economy,
yet small businesses are bearing the brunt of the increasingly
litigious nature of our nation. Small businesses pay 69 percent
of all business tort liability costs--that comes to about $100
billion annually--but take in only 19 percent of all business
revenues. Think about that.
Small businesses are responsible for less than one-fifth of
the business revenues but pay more than two-thirds of the
liability costs. That is unfair. It is not good for the
economy, and it is not good for consumers either, who have to
pay more for goods and services as a result of frivolous
litigation.
Let me mention here a few pieces of legislation that I
think that we are now looking into and should in the near
future. Mr. Boren, a Democrat of Oklahoma, and I have
introduced the Innocent Sellers Act. The Innocent Sellers Act
would simply change the law so that sellers do not take on
liability for a product merely by selling the product.
If sellers are negligent with respect to certain specific
non-sale activities, they would be responsible for the harm
that their negligence causes, but nothing more. Another area of
product liability reform where small businesses need some
relief is in the area of durable goods manufacturing.
Unfortunately, previous Congresses have failed to deliver a
much needed product liability reform bill.
During the last few sessions of Congress, I have introduced
legislation, The Workplace Goods Product, Job Growth, and
Competitiveness Act, that would benefit small businesses,
consumers, and workers by creating a nationwide 12-year statute
of repose for durable goods. This would simply recognize that
durable goods that have performed capably in the workplace for
12 years or more work. After that point in time, manufacturers
should not be held liable for an obsolete or modified machine
tool. It is an issue of fairness, and it is an issue of common
sense.
Next week I plan to reintroduce the Small Business
Liability Reform Act that NFIB, among others, has worked so
diligently on. This bill would strengthen the evidentiary
standard on claims made against small businesses, providing
some much needed reform to our nation's tort laws.
Common sense liability reform is important for small
businesses who make and sell products, as well as to consumers
who end up paying higher prices as a result of frivolous
lawsuits.
Let us see here. I want to thank, again, the panel, and I
especially want to thank you, Madam Chair, for holding this
hearing today, and our other colleagues that will be working on
this in the future.
I yield back.
Chairwoman Velazquez. Thank you. And now I recognize Mr.
Chabot for the purpose of introducing the witnesses.
Mr. Braley. Excuse me, Madam Speaker, point of order, or
Madam Chairwoman.
Chairwoman Velazquez. Yes?
Mr. Braley. Will there be other opening statements
permitted at the hearing?
Chairwoman Velazquez. Oh, definitely. Do you want to make
an opening statement? The gentleman is recognized.
OPENING STATEMENT OF MR. BRALEY
Mr. Braley. Madam Speaker, for over 20 years, powerful
special interests have attempted to restrict or rescind the
constitutional rights of workers and consumers injured by
unreasonably dangerous and defective products, often through
well financed campaigns of half-truths and misinformation.
Today's hearing is just another sad example of attempts to
trample the Constitutional rights of American citizens under
the guise of shifting the human cost for these dangerous and
defective products from the insurers of the sellers to the
injured or deceased consumer and the taxpayers of this country.
It should come as no surprise to anyone in this room that
the driving force behind this assault on our Constitutional
rights is a coalition made up of the most powerful business
lobbying groups in this country. A quick review of the top
corporate spenders on lobbying from 1998 to 2006 is a veritable
Who's Who of Corporate Tort Reform Advocates? The U.S. Chamber
of Commerce has spent $317 million on lobbying in that period;
the American Medical Association, $156 million; the
Pharmaceutical Research and Manufacturers of America, $104
million; and Philip Morris, $75 million.
At the head of the list, high above the rest of the crowd,
stands the U.S. Chamber of Commerce. According to recent
reports, the U.S. Chamber spent 83 percent more on lobbying in
2006 than in 2005, spending a whopping $72.7 million on federal
lobbying, up from $39.8 million in 2005.
In comparison, the overall spending on lobbying activities
increased by only 1.7 percent in 2006. This startling disparity
should cause this Committee serious concern, particularly when
that advocacy is part of a long and persistent effort to
deprive consumers who have suffered catastrophic injuries or
death from receiving fair compensation.
According to a national journal article published on its
web site, over the past eight years the U.S. Chamber's Legal
Institute has spent over $101.5 million on federal lobbying for
so-called tort reform. Madam Chairwoman, it is time to look
below the surface of the hype and the hyperbole and focus on
facts.
Here are some important facts to consider during today's
hearing. Fact: statutes of repose do nothing to reduce or
eliminate frivolous lawsuits. A frivolous lawsuit is, by
definition, a case without any merit. Statutes of repose put up
an artificial barrier to cases with merit by cutting off valid
claims arising from the sale of defective products that were
unreasonably dangerous at the time they were manufactured.
Fact: many manufacturers and sellers of products represent
to consumers that their products are intended to last for many
years, including years beyond the cutoff date for legitimate
claims contained in the statute of repose. Fact: caps on
damages do nothing to reduce or eliminate frivolous lawsuits.
In fact, caps only punish those individuals with catastrophic
injuries or death claims by depriving them of the full
compensation they should be entitled to under the law.
The net result of caps is to shift the burden of the injury
from the responsible party to the injured or deceased consumer
and their family and to U.S. taxpayers who frequently end up
providing lifetime medical and disability benefits when the
wrongdoer is not held accountable for the damages.
Fact: the best way to protect sellers of defective and
unreasonably dangerous products is to provide clear rights of
indemnification from the manufacturers of those dangerous and
defect products, clear and efficient means of holding the
growing number of foreign manufacturers of defective products
accountable for the harm they cause in this country, and to
make sure that consumers receive adequate warnings about the
risk of using the product and the true intended useful life of
the product.
The truth is that product liability laws have been making
America safer for over 100 years. And making sure that parties
responsible for introducing defective products that are
unreasonably dangerous into the stream of commerce are held
responsible to the people who are seriously injured or killed
by those defective products. That is a good thing that promotes
responsibility and prevents cost-shifting to U.S. taxpayers who
always get stuck with the tab when the responsible party
escapes liability for the full extent of the damages caused.
One final word about tort reform, Madam Chairwoman. Over
100 years ago when defective products were maiming and killing
workers and consumers on a daily basis as part of the
Industrial Revolution, we used the word ``reform'' to reflect
changes that expanded the protection of individual rights and
encouraged greater responsibility on the part of the wrongdoer.
It is a sad comment on our times today that the word
``reform'' is associated with a well-financed movement to strip
away Constitutional rights and immunize corporate wrongdoers
who place unreasonably dangerous and defective products into
the stream of commerce.
I yield back the balance of my time.
Chairwoman Velazquez. Is there any other member who wishes
to make an opening statement?
[No response.]
Okay. So now I recognize Ranking Member Chabot for the
purpose of introducing the witnesses.
Mr. Chabot. Thank you very much, Madam Chair. And I would
just note I appreciate the gentleman's spirited opening
statement there, and I won't respond to everything that he
said, but I would just note if you want to--he started out by
talking about lobbying dollars and campaign dollars, etcetera,
being spent. I can assure you that the trawlers have been no
slackers in that area.
Our first witness that we have is Ms. Lisa Rickard. Am I
pronouncing that right? Excellent. Nobody ever pronounces my
name right, so I am glad I got yours--Rickard. President of the
U.S. Chamber Institute for Legal Reform. Ms. Rickard has been
at this post since March 2003. She spent over 25 years as a
public policy advocate, most recently as Vice President,
Federal and State Government Affairs, for the Dow Chemical
Company. Previously, she was Senior Vice President, Federal and
State Government Relations, for Rider Systems, Inc.
Ms. Rickard was a partner in the Washington, D.C. law firm
of Akin Gump Strauss Howard and Feld, where she represented
corporate and public sector interests before Congress, the
White House, and regulatory agencies. She has also worked in
the offices of former Senators Frank Murkowski and Richard
Stone, and we welcome you here this morning for your testimony.
STATEMENT OF MS. LISA A. RICKARD, PRESIDENT, U.S. CHAMBER
INSTITUTE FOR LEGAL REFORM, U.S. CHAMBER OF COMMERCE
Ms. Rickard. Thank you very much. Good morning. I am
pleased to be here on behalf of the U.S. Chamber Institute for
Legal Reform, and the U.S. Chamber of Commerce, which is the
world's largest business federation representing more than
three million businesses and professional organizations.
The Institute for Legal Reform, or ILR, was formed in 1998
with the mission of making America's legal system simpler,
fairer, and faster for everyone. I would request that a copy of
my full testimony and the attached studies be included for the
record.
ILR released two new studies today examining the impact of
lawsuits on small businesses. First, we asked the non-partisan
market research firm of Harris Interactive to survey the owners
of small businesses, defined as those with less than $10
million in annual revenues, to determine how the lawsuit system
affects their business decision making.
The results are quite startling, particularly when you
consider that they reflect the views of 2.8 million small
business owners with $2.3 trillion of annual output, nearly 20
percent of the nation's GDP. Six in 10 of the qualified
respondents say the threat of unfair lawsuits has caused them
to make decisions to avoid litigation, decisions such as taking
products off the market and cutting employee benefits.
Sixty-two percent also say that they could increase
revenues if they felt that they would be protected from lawsuit
abuse, and they would largely reinvest these additional
revenues in buying new equipment, increasing wages and
benefits, or in hiring new employees. The second study
conducted by NERA Economic Consulting shows that there is no
sector of the economy harder hit by lawsuit abuse than
America's small business owners.
Of the $143 billion U.S. businesses paid in tort costs in
2005, NERA found that small businesses paid an astounding $98
billion. That translates into $200,000 a year for a business
with $10 million in annual revenues. What is even more
astonishing is that many of these small businesses pay a
significant share of their liability costs out of pocket,
rather than through insurance coverage. That drains financial
resources critical to their continued survival and growth.
But behind the statistics are real people and real
businesses suffering because of our lawsuit-happy culture. Some
of these real people are here today. Dennis Harrington joins us
from Springfield, Illinois, where he owns and operates a giant
slide enjoyed by kids of all ages at local fares. He has been
the subject of several lawsuits filed by individuals who have
ridden the slide.
The result: not only have his legal expenses and liability
insurance increased, but he had to purchase video surveillance
equipment to monitor the riders, so he could defend himself
against future lawsuits.
Also joining us today from Los Angeles is Chris Moser,
owner of Network 54, a small Los Angeles based Internet startup
with two employees. The company is among the few Internet
startups to survive the dot-com crash. However, Chris' company
almost didn't survive a frivolous lawsuit. In 2005, Network 54,
together we Deutchebank, Commerzbank, and John Hancock
Insurance was sued for $800 million for allegedly defaming a
former strawberry farmer who makes his living trying to collect
from banks on World War I era German gold bonds.
Incidentally, the plaintiff's lawyer in this case had
earned quite a reputation for launching creative lawsuits. He
sued the U.S. National Oceanic and Atmospheric Administration
for failure to predict the 2004 Indian Ocean tsunami. Network
54 was eventually dropped from the case, and the underlying
claim was ultimately dismissed. Still, this wholly frivolous
lawsuit cost Network 54 legal fees and not to mention the time
and attention it took Chris away from operating his business.
Unfortunately, these stories are not isolated incidents.
Similar stories could be told by tens of thousands of small
business owners who are victimized by lawsuit abuse each year.
The simple fact is this: our lawsuit system is a serious
problem for America's small businesses, costing jobs, and
dampening the spirit of entrepreneurship and innovation at the
very core of America's greatness.
On behalf of the U.S. Chamber Institute for Legal Reform,
and the U.S. Chamber of Commerce, I urge you and your fellow
members of Congress to take action to pass vital legal reforms,
reforms that will safe American jobs and strengthen America's
small businesses, the backbone of the nation's economy.
Thank you.
[The prepared statement of Ms. Rickard may be found in the
Appendix on page 51.]
Chairwoman Velazquez. Thank you.
Now, Mr. Chabot will introduce the next witness.
Mr. Chabot. Thank you, Madam Chair. Our next witness is Ms.
Karen Harned, Executive Director of the NFIB, National
Federation of Independent Business Legal Foundation. Ms. Harned
has strong experience fighting for small business.
As an associate at Olsson, Frank and Weeda, P.C., she
specialized in food and drug law and represented several small
businesses and their trade associations before Congress and
federal agencies. She also worked as an Assistant Press
Secretary for former U.S. Senator Don Nichols.
Ms. Harned received her B.A. from the University of
Oklahoma in 1989, and her J.D. from George Washington
University Law School in 1995. And we welcome you here this
morning, Ms. Harned.
STATEMENT OF MS. KAREN R. HARNED, ESQ., EXECUTIVE DIRECTOR,
NATIONAL FEDERATION OF INDEPENDENT BUSINESS LEGAL FOUNDATION
Ms. Harned. Thank you, Madam Chairwoman, and distinguished
Committee members. My name is Karen Harned, and I serve as
Executive Director of the National Federation of Independent
Business Legal Foundation, the legal arm of NFIB. NFIB is the
nation's leading small business advocacy group, and our typical
member has five employees and gross sales of $350,000 a year.
We applaud the Committee for holding this hearing on the
negative effects our sue first culture is having on small
business and the need for liability reforms. Small business
ranks the costs and availability of liability insurance as the
number two most important problem facing small business. The
only problem that is ranked higher is the cost of health care.
Many small businesses fear getting sued, even if a suit is
not filed. For the small business with five employees or less,
the problem is the $5- and $10,000 settlements, not the million
dollar verdicts. When you consider that many small businesses
gross $350,000 or less a year, which does not include
additional expenses of running the business, like payroll,
rent, costs of goods sold, and regulatory costs, $5- to $10,000
can significantly impact a small business owner's bottom line.
Recent press attention and public outrage has focused on
the outlandish $65 million lawsuit filed against a District of
Columbia dry cleaner for a missing pair of pants. Plaintiff and
attorney Roy Pearson is suing a family-owned dry cleaner for a
lost and found pair of pants. The owner has attempted to settle
with Pearson. However, he refused, and instead brought a suit
claiming that the shop was in violation of D.C. consumer
protection laws.
He alleges the cleaner's satisfaction guaranteed and same-
day service guarantee were not met, and, therefore, they are
liable for $1,500 per day per violation per person, by using
the owner, his wife, and their son, tacking on $500,000--or, I
am sorry, for suing the owner, his wife, and their son, tacking
on $500,000 for emotional damages, over $540- in legal fees,
although Mr. Pearson is representing himself, and $15,000 for
10 years' worth of weekend car rentals.
Pearson is claiming he is owed over $65 million. As
outrageous as the facts of the suit are, it is not outrageous
that the defendant is a small business. Small business is the
target of lawsuits, because trial lawyers understand that they
are more likely than a large corporation to settle a case
rather than litigate one.
Small businesses do not have in-house counsel to inform
them of their rights, write letters responding to allegations
made against them, or provide legal advice. They do not have
the resources needed to hire an attorney, nor the time to spend
away from their business fighting many of these lawsuits. And
often they do not have the power to decide whether or not to
settle a case; the insurer makes that decision.
I place frivolous lawsuits into four categories--you look
like a good defendant, pay me now or I will see you in court,
somebody has to pay and it might as well be you, and Yellow
Page lawsuits. You look like a good defendant--a prevalent form
of lawsuit abuse--is when plaintiffs or their attorneys are
merely trolling for cases.
The plaintiff or attorney will travel from business to
business looking for violations of a particular law. In such
cases, the plaintiff generally is not as concerned with
correcting the problem as he or she is in extracting a
settlement from the small business owner.
Pay me now or I will see you in court--an increasingly
popular tool is the demand letter. Demand letters allege the
small business violated a federal or state statute and are
replete with legal cites. At some point, the letter says that
the small business has an opportunity to make the whole case go
away by paying a settlement fee up front and provides
timeframes for paying the fee. If these demands are not met,
the letter threatens a lawsuit.
Somebody has to pay and it might as well be you--this is
where the plaintiff may have been harmed but is suing the wrong
person. For example, the plaintiff sues a small business
leasing a strip mall for a personal injury accident that
occurred in the parking lot.
Yellow Page lawsuits--in these cases, hundreds of
defendants are named in a lawsuit, and it is their
responsibility to prove they are not culpable.
Legislation is sorely needed to reform our nation's civil
justice system. Since 1993, Rule 11 has been hamstrung by
changes that diluted its ability to prevent frivolous lawsuits.
In order to help restore fairness to the legal system, Congress
should pass legal reform that makes Rule 11 sanctions mandatory
for frivolous lawsuit filers.
NFIB also supports legislation that would prevent frivolous
food lawsuits, reform our nation's product liability laws,
close the loophole in the Equal Access to Justice Act, curb
excessive punitive damages awards, and abolish joint and
several liability.
Thank you for asking us to testify today.
[The prepared statement of Ms. Harned may be found in the
Appendix on page 63.]
Mr. Chabot. Thank you very much. We appreciate that.
Our next witness will be Mr. Steve Kelly, Chairman of the
National Lumber and Building Material Dealers Association. This
particular association represents 8,000 lumber and building
material dealers, the largest regional chains across the United
States, 20 state and regional associations, and the industry's
leading manufacturers and service providers.
Mr. Kelly is also President and Owner of Kelly Brothers
Lumber Company. They have three locations and are based in
Covington, Kentucky.
And we welcome you here this morning, Mr. Kelly.
STATEMENT OF MR. STEVE KELLY, CHAIR, NATIONAL LUMBER AND
BUILDING MATERIAL DEALERS ASSOCIATION, PRESIDENT, KELLY
BROTHERS LUMBER, COVINGTON, KENTUCKY
Mr. Kelly. I want to begin by thanking Madam Chairwoman, as
well as Ranking Member Chabot, for holding this hearing today
to examine an issue that impacts nearly every small business,
namely the threat of lawsuits. I commend you for exercising
your oversight duties to learn how unfounded lawsuits harm
small businesses and depress our economy.
As he said, I am Steve Kelly. I am Owner and President of
Kelly Brothers Lumber in Covington, Kentucky. It is a family-
owned business and have operated for 60 years. We employ 42
employees and serve homeowners and professional contractors in
Kentucky, Ohio, and Indiana.
As he said, I currently serve as Chairman of the National
Lumber and Building Material Dealers Association. We represent
8,000 lumber and building material dealers, 20 state and
regional associations, and industry leading manufacturers and
service providers.
NLBMDA's members and their 400,000 employees supply the
majority of building products sold in the United States to
professional contractors, home builders, and remodelers. Madam
Chairwoman, I am here today to highlight the impact that
predatory lawsuits have on the building supply industry.
Most lumber yards and building suppliers are small family-
owned businesses which operate in the very communities in which
the esteemed members of this Committee sit and reside. They pay
taxes, sponsor charitable events, and participate in community
activities. Here is the problem: unfounded and unfair lawsuits
are increasing, and they are having a negative affect on the
ability of lumber dealers to operate our businesses.
A 2005 survey of NLBMDA members found that approximately
one in four have been the victim of a product liability lawsuit
within the previous five years. And in almost every one of
those cases, the dealer did not design, manufacture, alter, or
install the product. Our current liability system holds each
party in the product supply chain liable for any defects or
harm caused by the product without any finding of fault.
Liability is not assigned in a fair and consistent way. A
building material dealer who simply sells a product should not
be burdened with 100 percent of the liability when the product
fails. Let me offer a few examples to illustrate how the
current system punishes small business owners like me.
A dealer in Ohio sold slate-style shingles to a customer.
The shingles were shipped directly by the wholesaler to the job
site. The dealer never saw or touched the product. The coating
later wore off some of the shingles, resulting in a spotty
appearance, and they dealer was forced to pay thousands of
dollars in a settlement.
Another dealer sold bricks manufactured independently of
the dealer and delivered directly to the customer. The dealer
was named a co-defendant in a lawsuit claiming manufacturing
defects and encouraged by his insurance company to settle the
case to avoid a court battle. In Texas, a lumber dealer sold a
2x10 24-foot board to a contractor who used it for scaffolding.
While two people were standing on the board, the board
broke. One of the individuals was able to catch himself, but
the other one fell and was hurt. They are suing the lumber
company for selling them a defective board, even though it was
never suitable for scaffolding purposes. The case is still
pending and has already cost the lumber dealer thousands of
dollars to defend.
These are just a few of the lawsuits occurring in our
industry where innocent sellers are forced to spend time and
money defending themselves for actions outside of their
control. Fortunately, there is a solution to this problem.
Ranking Member Chabot, a long with Representative Dan Boren,
has introduced legislation to assign liability on a
proportionate basis.
Innocent Sellers Fairness Act, H.R. 989, would protect
sellers from predatory lawsuits by removing liability if they
merely supplied the product and had no part in the
manufacturing, design, or installation. The bill would hold
sellers responsible only in proportion to their wrongdoing,
freeing them from liability when they have done nothing wrong.
Innocent Sellers Fairness Act is necessary because current
law imposes liability without wrongdoing by sellers, exposing
them to all the damage allegedly suffered by a plaintiff, even
though other defendants may have played a much greater role in
causing the damages. The mistake may have been in the
manufacture or design of the product or even in the customer's
improper use of the product, but somehow the seller is stuck
with some or all of the liability.
Often sellers choose to settle a case to avoid the
uncertainty of trial outcome and the bad press that often
follows. The current system does not do enough to protect the
truly innocent. The Innocent Sellers Fairness Act would restore
common sense to the legal system.
Congressman Chabot, on behalf of the NLBMDA and innocent
sellers around the country, I want to thank you for your
leadership in fighting unfair lawsuits and championing legal
reform. I look forward to working with this Committee to
address these problems and ensure that America's small
businesses operate in a legal environment that is fair for
everyone.
Thank you, Madam Chairwoman, for the opportunity to be here
today.
[The prepared statement of Mr. Kelly may be found in the
Appendix on page 48.]
Mr. Chabot. Thank you, Mr. Kelly. And our last witness, our
final witness this morning, is Dr. Paul Freedenberg, who is
Vice President of Government Relations at AMT, the Association
of Manufacturing Technology.
Dr. Freedenberg has had a long and distinguished career in
both the private and public sector. He began his public service
in the office of former Senator Jay Bennett Johnston, before
moving on to work for the late Senator John Heinz as well as
former Senator Jake Garn.
He also served as Staff Director of the Senate Banking
Committee's Subcommittee on International Finance. Dr.
Freedenberg was then appointed by President Reagan as the first
Undersecretary for Export Administration at the Department of
Commerce. Following his government service, Dr. Freedenberg was
an international trade consultant with the law firm of Baker
and Botts, LLP, in Washington, D.C.
He specialized in general international trade issues, as
well as technology transfer, export licensing, export finance,
export enforcement, and both foreign and domestic banking and
investment issues.
And, Dr. Freedenberg, we welcome you here, and you are
recognized for five minutes.
STATEMENT OF DR. PAUL FREEDENBERG, VICE PRESIDENT, GOVERNMENT
RELATIONS, ASSOCIATION FOR MANUFACTURING TECHNOLOGY
Mr. Freedenberg. Thank you very much. Madam Chairwoman, and
members of the Committee, thank you for holding the hearing
today and for giving me the opportunity to participate.
My name is Paul Freedenberg. I am Vice President for
Government Relations at AMT. AMT is a trade association whose
membership represents over 400 manufacturing technology
providers located throughout the United States, almost the
entire universe of machine tool builders who operate in this
country. Most of these companies are small. An estimated 78
percent of them have less than 50 employees, but their
contribution is huge.
They are the ones who build the machines that make things
work. In fact, everything in this hearing room, except the
people of course, was either made by a machine tool or by a
machine made by a machine tool.
AMT has testified many times over the years before this and
other committees on the need for product liability reform, and
that is what I would like to do again today. For most small
American businesses, and specifically for our members, product
liability is not a distant issue but one that can literally
make or break our companies.
Several AMT members have been forced to close their doors
because of product liability lawsuits. Others are in danger of
closing because litigation costs are strangling them. They are
spending money not on hiring more workers or improving
productivity, but rather on defending against lawsuits
involving machines that are often older than anyone in this
room.
AMT estimates that the average age of machine tools has
climbed from 10 years in 1998 to nearly 13 years in 2005. The
reason is largely because when a factory decides to invest in
new capital equipment, the old machinery is usually not
disposed of. When companies can't afford new machines, they
purchase these overage machines, often altering them to fit
their needs.
This process is repeated as newer machines are acquired and
older ones resold. The result is a big overhang of overage
machine tools in the U.S. market, and this exposes the
manufacturers of the old equipment to costly litigation.
One reform that could significantly help to reduce those
crippling costs, Madam Chairwoman, would be the creation of a
statute of repose for workplace durable goods.
In many states today, thanks to product liability law, the
potential liability for my industry's products is endless,
literally forever. Many of these machines are built before OSHA
was created, before Neil Armstrong walked on the moon, indeed
before The Beatles came to America. They are still in use
today.
Although these machines were built decades ago to safety
standards of their day, although they are likely to pass
through several owners each of whom is likely to have made
modifications to accommodate their needs, they are still the
subject of four-fifths of our industry's lawsuits. This kind of
litigation is disproportionately expensive and unproductive. It
is a drain on financial resources, not only from the adverse
verdicts but from the costs of a successful defense.
The reality is that most cases involving overage machines
never go to trial. And if they do, a jury almost always finds
for the defendant. And in those few cases they do go to trial,
and where the jury finds for the claimant, the judgment can
force a company to close its doors.
I was asked for an example. Well, in 1996, a $7.5 million
verdict involving a machine built in 1948, 50 years earlier,
was--the judgment--the verdict was found against Madison
Technologies, a 100-year old Illinois machine tool builder, but
it led to that company's bankruptcy.
However, when these lawsuits are won, the litigation,
nevertheless, results in unnecessarily high legal and
transaction costs. No matter how frivolous the actual facts,
the claimant's pleadings must be answered, the depositions
taken, design experts consulted, historical records unearthed
and evaluated. The result is a substantial expenditure of funds
and additional litigation in our courts.
This kind of open liability can lead to legal extortion, in
which baseless suits are filed by entrepreneurial lawyers who
are banking on the fact that many companies and/or their
insurers will settle out of court.
Madam Chairwoman, our machine tool builders, particularly
our small ones, just can't afford this kind of unfair liability
at a time when they are facing serious and increased
competition from foreign companies whose liability is
relatively small. That is because many of them are--recently
came to the United States.
Enactment of the statute of repose for workplace durable
goods would significantly level the playing field for U.S.
manufacturers and achieve the uniformity and certainty
necessary to produce the state of art products for which we are
noted.
Madam Chairwoman, some years ago, the Reagan
administration, and then the first Bush administration, at the
urging of 250 members of Congress, provided import relief for
our machine tool industry based on the threat to our national
security and defense industrial base from Asian machine tools.
These administrations did so because they recognized that a
strong machine tool industry is vital to America's military and
economic security.
Chairwoman Velazquez. Dr. Freedenberg?
Mr. Freedenberg. Yes.
Chairwoman Velazquez. I would like to call the attention to
the fact that your time expired. If you can--
Mr. Freedenberg. Okay. Fine. I will finish in one
paragraph.
Same is true today, and enactment of meaningful reform,
including a statute of repose, could significantly increase the
competitiveness of U.S. companies, particularly small
companies, and ensure that no injured worker goes
uncompensated. I appreciate the Committee's attention to this
issue.
Thank you.
[The prepared statement of Mr. Freedenberg may be found in
the Appendix on page 40.]
Chairwoman Velazquez. Thank you, sir.
Mr. Kelly, thank you for the witness' testimony, and now we
are going to open up this for the members to be able to ask
questions.
My first question is addressed to Mr. Kelly. Mr. Kelly, it
is important to get to the bottom of what is driving the
increasing costs of liability insurance. While litigation may
be a factor, it seems that there are other factors at play. In
my opening statement, I make reference to the fact that in 1988
California passed Proposition 103.
And Proposition 103 required insurance companies to roll
back rates and file an application within Insurance Commission
whenever they intended to raise them. My question to you is: to
what extent could a similar federal law work to reduce rates?
Mr. Kelly. I am not sure. I am not an insurance agent or in
the insurance business, so I really couldn't answer that. But
we will get back to you with an answer, a written answer, from
the association.
Chairwoman Velazquez. Yes. If there is any other witness
who--so you don't consider that reducing the rate of insurance
cost for small businesses will have anything to do with this,
based on the experience in California?
Ms. Rickard. I do not have experience in this, so I can't--
I am not steeped in insurance law. I can't respond to that. The
one thing I could respond to--
Chairwoman Velazquez. No, no. Okay. That is it, because I
have only five minutes.
Now, yes, Ms. Harned, I was listening to your testimony,
but I don't know if I missed this fact, and I would ask you--in
your testimony you talked about the survey of small businesses
that showed that the problem of costs and availability of
liability insurance has been a top concern. But also, the
problem of cost and frequency of lawsuits is near the bottom of
the list. Did you mention that in your opening statement, since
you represent NFIB?
Ms. Harned. No, because--I see what you are saying, but I
have to tell you that, again, it is really the $5- and $10,000
settlements that are like a death of 1,000 cuts for small
business owners, much like regulatory costs, in that you have
to look at the overall picture on this.
We hear from small business owners often on suits that they
have--
Chairwoman Velazquez. Fine. Fine.
Ms. Harned. --and trial lawyers that are going after--
Chairwoman Velazquez. My question is: you come here to talk
about small businesses. You represent NFIB, and you love to
release surveys on different issues. On this issue, you
conducted a survey that shows that costs and frequency of
lawsuits is near the bottom of the list for small businesses.
So my question is: do you think part of the explanation for
this disconnect is that insurance companies are driving the
increases in liability premiums as opposed to litigation costs?
Ms. Harned. I do think that insurance plays a role in this,
but I also have to tell you that a survey that we did in 2005
shows that now 69 percent of small business owners are
consulting--have consulted an attorney in the past year. They
are having to use--
Chairwoman Velazquez. But those are the same--
Ms. Harned. --attorneys more than ever before.
Chairwoman Velazquez. --those are the same businesses who
you surveyed and say that was not at the bottom of the--that
that was at the bottom of the list.
Ms. Harned. Madam Chairwoman, respectfully, that was a year
later. We do perform the problems and priorities survey every
four years. It will be interesting to see how the next one
turns out, but I have to say our most recent does show an
increased usage of attorneys by small businesses.
Chairwoman Velazquez. I will go to Mr. Chabot, and then I
will come back and ask more questions, but I will allow for
other members to make their questions first. Go ahead.
Mr. Chabot. Thank you, Madam Chair. If you don't mind, I am
going to defer and let Mr. Buchanan ask questions at this time,
if that is appropriate.
Mr. Buchanan. I want to disclose up front I have been in
business 30 years. I was also Chairman of the State Chamber of
Florida. We represent 137,000 businesses.
One thing they talked about on the--and I will say also
lawyers have created a lot of value for me over the years, so I
want to make sure that is up front. But I can tell you, in the
State of Florida, that the trial bar is very organized, much
more than the business community in terms of funding and being
organized, in terms of Tallahassee.
Do you have any sense, Ms. Rickard, what the trial bar
spends? It was represented what the business community spends.
Do you have any idea what the trial bar spends and trial
lawyers and the Federal Government, or in terms of their
lobbying activities, or various states?
Ms. Rickard. I don't have specific statistics, but it is
much more difficult to capture the spending of trial lawyers
because they are individual contributions, Congressman. It is
in the hundreds of millions of dollars. You can't just look at
the contribution from the National Trial Lawyers Association.
You have to look at contributions from individual lawyers,
which are very high, to the degree that we have tracked them,
at the state level as well as at the federal level.
Mr. Buchanan. One other thought that doesn't get talked
about much, but I know in our area a firm in Tampa spends $10
million a year in solicitation. And their ad basically says,
``If you don't get anything, you don't pay anything.'' And that
is widespread with a lot of trial lawyers in the State. And
there are a lot of good trial lawyers, and I believe people
need their day in court, but there are a lot of predatorial
practices.
Has that ever been considered, what the amount trial
lawyers spend on the back of Yellow Pages, TV ads, newspapers?
It is gigantic. Just one law firm spends $10 million. That is
his number--John Morgan for the People. Has anybody looked at
that? Because we have created a sue happy, you know, way to get
rich; try the lottery first, second sue.
Ms. Rickard. What I would say is that, first of all, we do
believe that people need to have their day in court. This is
not an issue of not having people who have valid claims have
access to the courtroom. Second of all, I do think that one of
the most troubling problems is the use of contingency fees.
The President just issued an Executive Order yesterday
prohibiting the use of contingency fee lawyers for Federal
Government agencies. It is a problem, and what you do see is
continued advertising for plaintiffs. All you have to do is
turn on the TV around 11:00 at night, and there are a myriad
number of ads out there. So one of the things I think that
could be addressed here is dealing with the use of contingency
fee lawyers.
Mr. Buchanan. But, Ms. Harned, let me ask you--again, 90
percent of the 137,000 people in the Florida Chamber are 15, 20
employees or less. You hear the stories all the time. One
lawsuit, two lawsuits, put a lot of these people out of
business. Has that been your experience?
Ms. Harned. Yes. In the instances where small business
owners are sued, I mean, one lawsuit can kill them, especially,
as I reported, you know, our members typically only gross
$350,000 a year. That is not much money. And, in fact, there is
a gentleman in California that recently was put out of
business--that comes to mind--because of a trial attorney that
had made a cottage industry in trying to enforce one statute
out there. And as a result, he just closed his doors.
Mr. Buchanan. Mr. Kelly, you know, I have been in business,
again, 30 years, and have been a small business person for most
of my time through that period of time. It seems like the first
15 years there wasn't as much litigation. It just seems since
they started advertising, more advertising in the last 15, 20
years, it has just--the proliferation of litigation of
frivolous lawsuits have gone out of control.
Have you found that in your industry, or what is your
thoughts on it?
Mr. Kelly. Yes. It has been very true in our industry. I
give just a few examples today, but it happens constantly. The
results showed one in four in the last five years have been
sued--the lumber dealers--and that is because of the fact of
this advertising. You know, I believe we have become a sue
happy country. Makes it an easy way to get a dollar. If
something goes wrong, it is easier to blame someone else than
to take the blame yourself, even if you--it was your fault.
There is always someone out there who is willing to pay.
Mr. Buchanan. I have no further questions. Thank you.
Chairwoman Velazquez. Thank you. Now I recognize Mr.
Braley.
Mr. Braley. Thank you, Madam Chairwoman.
Ms. Rickard, you attended law school at American
University?
Ms. Rickard. Correct.
Mr. Braley. And did they have the typical law school
curriculum where you studied Constitutional law?
Ms. Rickard. Yes, sir.
Mr. Braley. And do you believe in the Constitution?
Ms. Rickard. Absolutely.
Mr. Braley. Do you believe in the Bill of Rights?
Ms. Rickard. Absolutely.
Mr. Braley. Believe in the First Amendment right to free
speech?
Ms. Rickard. Yes, sir.
Mr. Braley. Believe in the First Amendment right of freedom
of religion?
Ms. Rickard. Absolutely.
Mr. Braley. Believe in the Second Amendment right to bear
arms?
Ms. Rickard. I do. Yes, sir.
Mr. Braley. Then, why does the U.S. Chamber have such a
problem with standing up for the Seventh Amendment?
Ms. Rickard. The right to an attorney?
Mr. Braley. No. The Seventh Amendment says, ``In suits at
common law, where the value and controversy shall exceed $20,
the right to trial by jury shall be preserved, and no fact
tried by a jury shall be otherwise reexamined in any court of
the United States.'' That is in the Bill of Rights, that
juries, not legislators, get to determine questions of fact in
the courtroom.
And one of the most important issues of fact decided in a
civil jury trial is what the appropriate damages are to
compensate someone who has been injured due to the fault of
another. You would agree with that.
Ms. Rickard. I don't disagree with that, no.
Mr. Braley. So why does the U.S. Chamber spend so much
money trying to convince us that we know more about the value
of someone's injury or death than the people who elected us to
Congress, who go into jury boxes all over this country, under
the Seventh Amendment to the Bill of Rights?
Ms. Rickard. I don't believe that we have done--said
anything to the Congress with regard to trying to limit jury
trials. I am not sure I am following your question.
Mr. Braley. Well, when you promote an agenda that says that
it is necessary to put caps on damages that a person who has
been injured can receive, you take away the right of the jury
to determine what is fair compensation for an injury.
Ms. Rickard. I don't agree with that.
Mr. Braley. Well, this is a client of mine injured by a
defective product that was sold by a manufacturer who
represented that the product would be good and that their
products were still on the road and being used 25 years after
they were put in service. This is what her face looked like
after that side saddle fuel tank exploded in the pickup she was
riding in, and she went through hell, and this is what she
looked like the day before the injury occurred.
And I just have a very difficult time when people think
that we, in Congress, should be substituting our judgment for
what people's pain and suffering in cases like this should be,
rather than letting the Constitution do its job and letting
people who hear the facts and are there to decide what is fair.
Now, you also indicated you believe that people need to
have their day in court, correct?
Ms. Rickard. Yes. Yes, sir.
Mr. Braley. Well, if you erect artificial barriers with a
statute of repose, you deny people their day in court, don't
you?
Ms. Rickard. I think you can have rules about when people
can be able to go to court. Those have been in effect for many,
many years. So, yes, people need to have access to the courts,
but you also have to have reasonable rules with regard to when
that access takes place.
Mr. Braley. Right. And one of the rules that governs the
conduct of every attorney who files a case like this in federal
court is Rule 11, which requires them at the time they file the
case to certify under oath that the case is well grounded in
law and fact and is not being filed for any improper purpose,
such as to harass or threaten someone with frivolous
litigation. You were aware of that.
Ms. Rickard. Absolutely. But Rule 11 is not effective, sir.
I--
Mr. Braley. Well, and why is that?
Ms. Rickard. --would argue with that.
Mr. Braley. Isn't it true that a better way to solve this
problem is to put teeth into Rule 11 and give judges the
incentive to penalize people who file frivolous lawsuits, since
we all agree that is a bad thing?
Ms. Rickard. We would absolutely support more teeth in Rule
11. We have been on the record last year on legislation, on the
Lawsuit Abuse Reduction Act, to put more teeth into Rule 11. I
think it is an absolutely great idea, and we would be wholly
supportive of it. And I agree with the NFIB it ought to be
mandatory.
Mr. Braley. Now, Ms. Harned, you indicated that we are in a
sue first culture. Do you remember that?
Ms. Harned. Yes.
Mr. Braley. Then, can you explain to me why statistics, in
state court filings across this country, demonstrate that there
has been a decline in the filing of product liability and
personal injury cases when you and other groups continue to
talk about the sue happy culture that we have?
Ms. Harned. Yes, and I can, because Mr. Kelly and I were
discussing this before. Our guys don't go to court. They don't
go to court. They settle out of court. I think 90 percent of
the litigation that small business--or it is more than 90
percent that small business owners get involved in, it is
settled out of court.
If they can write a check and get rid of the problem, they
are going to do that, because it is good for their bottom line.
Going to court is not. They cannot afford the thousands upon
thousands of dollars it costs to defend themselves.
Mr. Braley. Well, that is completely inconsistent with my
experience, which is that most small businesses, when
confronted with a request to respond to a potential claim,
immediately turn that over to their insurance company because
they are required to, and then that is where the follow-up
comes from, not from the individual small business.
Chairwoman Velazquez. Time has expired.
And now this Committee stands in recess, because we have a
series of votes. And as soon as we are finished voting, we will
come back to continue this hearing.
[Recess.]
Chairwoman Velazquez. The Committee is called back to
order. And I recognize Chairman--Ranking Member Chabot.
Mr. Chabot. I like the former rather than the latter, but
that is quite all right.
Chairwoman Velazquez. Sorry, but it is going to take a long
time for that.
[Laughter.]
At least another year and a half.
But in any event, we, again, appreciate the Chairwoman
holding this hearing, and we apologize to the witnesses getting
interfered with by votes here for kind of an extended period of
time. But we are back.
And, Ms. Rickard, if I could go with you first. You, I
believe in your testimony, mentioned about the two new studies
that were released today examining the impact of lawsuits on
small and mid-sized businesses. And you indicated that one
study showed that more than three-quarters of the small
business owners in this country are concerned that they might
be sued by what they would consider to be an unfair or
frivolous lawsuit.
And many have had to raise their prices or even consider
reducing hiring additional personnel/workers because of that.
And I believe you also indicated that 62 percent say that they
could grow their businesses if they felt that they would be
protected from lawsuit abuse.
Could you perhaps expound upon that a little bit, why the
lawsuit abuse that you have indicated in your testimony, the
impact that it really has had on businesses, whether they hire
more people, and the effect that it has had?
Ms. Rickard. When you are dealing in a small business, you
have a limited number of resources, a limited number of
employees. So if you are slapped with a lawsuit--and, you know,
some lawsuits are valid lawsuits. We should all understand
that. But there are many where they are frivolous or unfair.
And so it saps resources in time and attention in an entity
that doesn't have a lot of resources and needs to be focused
solely on growing their business. What happens is they get hit
with a lawsuit, and then they have to make certain decisions
because, you know, it is difficult to balance the books. Some
are insured, but about 20 percent of the costs that we looked
at were out of pocket.
So in those circumstances, they do have to make decisions
about growth, make decisions about products. Is it worth having
a certain product in the market? Is it worth going into a
certain area to expand your business? Those types of things are
everyday issues that they have to deal with, and so I think the
relevance of the study is how it changes--how a lawsuit impacts
decision making by someone in a small business, which is a much
different thing than with a larger business.
Mr. Chabot. Thank you.
And, Ms. Harned, if I could go to you next, you are the
representative of the National Federation of Independent
Business, which tends to be the smaller businesses in this
country, is that right?
Ms. Harned. Correct.
Mr. Chabot. And in your testimony you indicated that
sometimes you have settlements in the, say, $5- to $10,000
range. Now, one might argue that, well, that is the reason that
businesses carry insurance, and they ought to be fully
protected, so they shouldn't worry about these relatively small
lawsuits. But, in fact, as you indicated in your testimony,
those can mean a great deal, especially if you have a number of
these things, if you're targeted with these what I would term
``frivolous lawsuits'' in many cases.
Could you, again, tell us how that does affect a small
business, even the relatively small to some businesses or small
to some people, how this affects--could affect a business?
Ms. Harned. Yes, thank you, Congressman Chabot. For the
small business, that is time away from their business that they
are going to have to take, even if they do have insurance
coverage, dealing with the litigation problem. And I would just
point up in response to earlier questioning, too, that for
small business owners, you know, they are trying to meet
payroll every day.
So maybe in actual lawsuit abuse, going back to our survey,
is not going to be high on their priority list of things that
they are dealing with, but the cost and availability of
liability insurance definitely is, and that is because of the
claims that are--they are having to file and others are filing
because of the lawsuits or the threatened legal action that
they are engaged in, which, as we have mentioned before, often
results in settlements as opposed to actually the small
business owner being able to afford to go to court to set the
record straight if you will in those cases where they were
improperly targeted.
But, yes, the $5- to $10,000 settlements, it is much like
the regulatory cost that small business owners are asked to
bear. It is the death of 1,000 cuts. Enough of those are really
going to cripple a small business, and, of course, a lawsuit
will put them out of business in many instances.
Mr. Chabot. Thank you.
Madam Chair, am I still okay on the time? Okay.
Mr. Kelly, if I could go to you next. You mentioned the act
that a Democratic member, Mr. Boren, and myself have
introduced, the Innocent Sellers Act. Would you tell us again
how that would be helpful to those that don't actually
manufacture a product, so you actually haven't done something,
all you have done is essentially sell it in the condition you
got it to the ultimate consumer without changing it? What would
this do for folks like yourself?
Mr. Kelly. Well, if we didn't manufacture it, alter it,
install it, or design it, all we did was sell the product, we
didn't do anything wrong. So the hope would be that we would no
longer have that liability, that we would have to face these
$5- and $10,000 settlements that you spoke about, or face legal
battle or litigation. This would relieve us from that.
But if we did do something wrong, we would only be liable
for the proportion of what our wrongdoing was. So that is a
great help that we are no longer on the hook for 100 percent of
the loss on a product that all we did was sell it. We did
nothing with manufacturing, designing, or altering, or
installing.
Mr. Chabot. Right. Thank you. In other words, it does away
with something that we referred to as joint and several
liability. But thank you.
And then, finally, Mr. Freedenberg, or Dr. Freedenberg, has
the burdening litigation trend contributed to the decline of
the manufacturing sector in your opinion? And does it--is that
burgeoning lawsuit, has that affected U.S. companies' ability
to effectively compete with foreign manufacturers?
Mr. Freedenberg. The answer is yes. If you add it into
other regulatory costs, I think there was a recent study by
Manufacturers Alliance that shows about a 22 percent extra
burden for U.S. manufacturers versus, say, the European
competitors. But the other thing it does, which is important
and it is important for jobs in the United States, is it
affects decisions on where to invest.
That is, if you have a high--this is part of the overall
overhead cost, you have that high cost, you decide that you are
going to--the next investment you are going to make is perhaps
in China or somewhere offshore rather than in the United
States, then that is a loss for U.S. workers.
Mr. Chabot. Thank you. And in the 12-year statute of repose
that you referred to in your testimony, which is the bill we
are talking about--
Mr. Freedenberg. Right.
Mr. Chabot. --that would also arguably make us more
competitive with the Asian countries.
Mr. Freedenberg. Yes, it would. It would, both in the
United States--well, it would lower costs to us, because it
would reduce both insurance and litigation costs, and it would
help us vis-a-vis the very strong competition we have coming
into the United States, because part of it is the overhang that
we have of older machines.
Mr. Chabot. Thank you. And if I could just conclude, Madam
Chair, by just saying that legislation also--the worker, if
injured by one of those products, is protected, because there
would only be coverage if your--the manufacturer would only be
covered if the employee that was injured is covered by worker's
compensation. So you would never have--
Mr. Freedenberg. Right.
Mr. Chabot. --a worker that wasn't compensated. And I yield
back.
Chairwoman Velazquez. Mr. Gonzalez.
Mr. Gonzalez. Thank you very much, Madam Chairwoman, and I
want to express my sincere thanks to the witnesses for your
patience and your testimony. I am not sure that I am going to
agree with you, but let us have an honest disagreement and let
us have an honest debate.
No one is for frivolous lawsuits, and I am sure there have
been some studies conducted since what I am about to cite, but
let me go over a couple of things, so that--the background for
my questions.
This is from a memo, and it says, ``Conflicting evidence on
tort cases. The United States General Accounting Office, the
GAO,'' which is the gold standard by members of Congress, ``did
a comprehensive study in 1988 on the extent of product
liability litigation growth and concluded that these data seem
inconsistent with the contention that there is a rapidly-
accelerating growth in federal product liability filings across
a wide range of products.'' That was 1988, and I am sure we
have something more recent. I am not sure that the result would
be any different.
Let us go to 2006. A 2006 survey by the Federal Judicial
Center, the research and education agency of the federal court
system, shows more federal judges do not view frivolous
lawsuits as a problem. Seventy percent of the 278 federal court
judges who responded to the survey declared that groundless
litigation is either a small problem or a very small problem,
and 15 percent said it was no problem at all.
That means 85 percent of the federal judges that responded,
nearly 300, said that it was a small problem, very small
problem, or no problem at all. And I think that is where the
reality probably lies.
I also want to look at this as public policy, and we all
have our roles--the business community, the legislators, the
lawyers, everyone. The bottom line is: how is the public best
protected from dangerous products? That should all be our
concern, whether you are the individual selling or
manufacturing the product or you are the legislators
legislating the regulatory scheme.
So you would say, well, government has a responsibility.
Why don't you set up a governmental agency or department, and
we do. We have the Consumer Product Safety Commission that has
jurisdiction over thousands of products, not all of them. Some
that you discussed may not come under their umbrella. I am
going to tell you about a very interesting hearing that Energy
and Commerce just had recently, one of the subcommittees, that
I was able to participate--in which I was able to participate.
And this is some of the information that was provided us.
The Chicago Tribune summed up what many consumer groups have
charged is wrong with our nation's consumer product safety
system. ``A captive of industry, the Consumer Product Safety
Commission lacks the authority and manpower to get dangerous
products off the store shelves.''
So don't count on government doing it. Don't count on a
formal, recognized, regulatory commission or agency of the
Federal Government, or the state government, to do it, because
they are not going to do it. And this is what we found out--
non-rigorous safety standards, that most standards are
voluntary, that the manufacturers of these products volunteer
to abide by those standards, number one, but they also set the
standards. They are voluntary standards.
Limited testing of products, no real live type testing is
really going on appreciably. Recall ineffectiveness--I love
this--the CPSC has limited power to mount effective recall
campaigns. First, because of limitations in the law on the
agency's ability to make negative statements about specific
products, the agency must negotiate with the manufacturer on
the wording of a press release announcing a recall.
Now, you are saying, well, we need to improve on that.
Well, I say we do, too. At the beginning of the Reagan
administration, the CPSC was cut by a third, from 1,000
employees in 1981 to 600 employees two years later. Where are
we today? Four hundred employees.
The President's budget request for the agency for fiscal
year 2008 calls for 401 employees. Government is not going to
do it, so let us go and shift over the big plan that we have
out there to serve society's best interest. What would it be?
What would be our second choice?
I would say it is the civil justice system, and that is all
that people have. And I think that is why Mr. Braley is a
little upset about some things. And we can trade, one for one,
abuses on both sides of the fence. You know that, and the
lawyers that are up there know exactly what I am talking about.
Now, we know government is not going to do it, so what do
you think of doing with the civil justice system? Why do we
have shared liability? This is shared liability, because it
promotes shared responsibility that businesses both small and
large owe to society in its entirety. The real fear I think
that small businesses face and have is being sued by big
businesses--big businesses that can hire the Akin Gumps and the
Baker Botts of this world, because I saw it every day for 25
years, how this game is played out in the courtroom.
It wasn't products liability. It wasn't tort. It wasn't
personal injury, because I think everyone in this room really
knows what is going on out there. No one likes to be sued. I
never had a client that said, ``I deserve to be sued, please.''
No one believes they should be sued.
So if we think in terms of what we are trying to do here,
as I understand, there may be an abuse or two, but we can go
over there and try something that wholesale destroys a true
system, and I know that you pointed out some abuses. You say,
``Why a contingency fee?'' Because not everyone out there can
afford an hourly fee that an Akin Gump or a Baker Botts
charges. It just doesn't work that way. We know that, and I
wish we would get away from that.
I feel for the small businessmen, and they are good people,
that may have that slide. And kids may be injured, and it may
be because of misuse. And they still have to incur the cost of
defending.
But who would be the first person to receive notice that a
product may be defective or cause an injury or subject to
misuse? It is going to be the individual that usually sells it
and supervises its use. Unfortunately, that is the small
businessman, and we hope that you go back up that chain and get
to that manufacturer.
Mr. Kelly, I am going to make an assumption that you know
much more about the product that you sell than the consumer,
and I think that you owe the consumer some duty and
responsibility to know something about the inherent
characteristics of that particular product. I know you share
that with me.
So if you are talking about a law that would totally
relieve you of any responsibility and duty to know more about
the product that you are selling, we have got serious problems,
and especially with as much product that is being imported. And
I know I--
Chairwoman Velazquez. Time has expired.
Mr. Gonzalez. Thank you.
Mr. Chabot. Could I ask unanimous consent that Mr. Gonzalez
be given an additional minute, and ask if he would yield to me
for a minute?
Mr. Gonzalez. Now, that is amazing, when someone is asking
something in your behalf and then they take it.
[Laughter.]
I will tell you, my colleague, my dear, dear colleague, I
will yield in a minute if you don't--and since we are--you have
been so patient, and we do need to have this particular
discussion, but we have to figure out who is--and I will yield
in a particular--in a minute here.
If you want to look at self-regulation, which doesn't
work--and human nature being what it is, and we are all human,
whether you are a businessman or not out there, do you really
believe it was the manufacturer, the distributor of the Pinto
automobile that took care of that gas tank? Do you really
believe that the tobacco industry that lied for all these years
about the inherent characteristics of their product would have
turned themselves in?
As a matter of fact, most of these individuals new about
the inherent dangers of the product, kept them secret, and even
lied in legal proceedings. We can go into lawnmowers, we can go
into kitchen ranges, we can go into baby cribs. How about fire
retardant materials? When I started my practice, we had Boy
Scouts that burned in tents, and it was the legal profession
that set those standards.
We had infants who were terribly disfigured because there
weren't any fire retardant standards. Did the manufacturers
know that danger? Did the distributor and seller? Of course
they did. No one moved forward. It was the civil justice
system, and it does have an appropriate role. And I could go on
and on.
Chairwoman Velazquez. Is the gentleman going to yield?
Mr. Gonzalez. I am going to yield to my dear friend Mr.
Chabot.
Mr. Chabot. I will tell you what, Madam Chair, what I will
do is, if he would like to yield back, I will just take our
side--I will only take--I am not going to take five minutes,
but I am--
Chairwoman Velazquez. Go ahead.
Mr. Chabot. --being recognized on my own time. Thank you.
I will never try that again, Charlie. That didn't work so
well.
[Laughter.]
That is quite all right. You were on a roll there.
Just a comment. I don't want to comment on everything that
the gentleman from Texas said, but he did talk about a survey
done by federal judges saying that they didn't consider these
types of lawsuits to be a problem. I would just note a couple
of things.
Number one, they are not the ones being sued. You know, it
is the small business folks that are being sued. And their
employees, as we have said, their very jobs are at risk, and
growing the businesses and hiring more and more people.
And, secondly, the number one thing that is probably on
their list is they want more pay. As you know, we have both
been up here a while, Charlie, I mean, that is the main thing
that they seem to be concerned about. You know, they don't
think they are being paid high enough.
And, thirdly, the judges, all of them at the federal level,
were all lawyers before they became judges, many of those trial
lawyers. And, finally, I would just note that most of the
lawsuits are actually not in the federal courts, they are of
courts and the state courts, and there may well be surveys of
the state court judges that say similar things. I am not aware
of that one way or the other, but I wouldn't necessarily put a
whole lot of stock in what the federal judges are saying in
this respect.
And I yield back the balance of my time.
Chairwoman Velazquez. I recognize Mr. Johnson.
Mr. Johnson. Thank you, Mr. Chabot. Yes, judges certainly
do deserve a higher rate of pay. But I think that most judges
try to be conscientious about the pronouncements that they
make, and most judges--many judges were trial lawyers, but it
seems to me most of them were either prosecutors or civil
defense lawyers from large firms before they became judges.
Most judges are not plaintiff's lawyers, and they were not
public defenders or criminal defense lawyers.
But before I proceed on, I must disclose the fact that I
have practiced law for 27 years, primarily criminal defense,
but I did do a fair amount of plaintiff's injury litigation and
some business tort litigation as well. And so I do have an
abundant respect for my brethren and sistern who practice law
and represent injured people, and also people who have been
accused of crime.
And I believe in the jury system of this country. I believe
in judicial discretion. And I also believe firmly that big-
pocket defendants will do everything that they can do to
immunize themselves from people who would complain about their
actions which led to the aggrieved person being injured.
So that having been said, I want to ask some questions. Ms.
Harned, you previously practiced law at Olsson, Frank and
Weeda, P.C.
Ms. Harned. Correct, yes.
Mr. Johnson. Was that a defense firm or a plaintiff's firm?
Ms. Harned. We did mostly regulatory work and worked--
helped clients navigate through Food and Drug Administration
and USDA and some lobbying as well.
Mr. Johnson. Pretty much large corporate interests that you
represented, is that correct?
Ms. Harned. We had several big clients, but I have to say I
personally worked a lot with some really small clients like I
do now that, you know, have, you know, 25 people or less, some
even five or less employees.
Mr. Johnson. And you stated--was it you that stated that 69
percent of small businesses consulted an attorney during the
last year?
Ms. Harned. Yes, that was according to a use of lawyers
poll that we put out, the NFIB Research Foundation put out in
2005, at the end of 2005.
Mr. Johnson. And that wasn't just for purposes of defending
against lawsuits or potential lawsuits, was it?
Ms. Harned. That is correct, but I will say--
Mr. Johnson. That included consultations for business-
related matters and that kind of thing. So you don't mean to
lead us astray with respect to the 69 percent of small business
owners consulting an attorney about defending themselves from a
litigation claim.
Ms. Harned. No, and thank you for that. But it does show
how much our culture has changed, that this has become integral
for small businesses.
Mr. Johnson. And, of course, we are not here to talk about
putting limits on the amount that an hourly firm, a firm
charging an hourly fee, could put on attorney's fees that they
charge to small businesses. We are not here for that purpose.
We--
Ms. Harned. Well, and we wouldn't advocate that either, I
don't think.
Mr. Johnson. And certainly no one would want to keep a
large corporate law firm from charging, you know, $400 or $500
an hour, but you do see some legitimacy in the claim that we
should limit contingent fees to plaintiff's lawyers. Is that
correct?
Ms. Harned. Correct, yes.
Mr. Johnson. You would limit a person's ability to hire an
attorney on a contingent fee basis.
Ms. Harned. Oh, no. I am sorry. I misunderstood you. I do
not have--as far as I know, NFIB does not have a position on
contingency fees at the federal level.
Mr. Johnson. Well, I would let you know that lawyers who
represent injured people generally work on a contingent fee
basis, and to take a third of a $5,000 settlement or a $10,000
settlement, there is really no money in that for the average
lawyer. It has been my experience that most lawyers take cases
that would result in a higher basis from which they could
recover a contingent fee. So I am going to--for some reason, I
just don't trust your assertion that $5- and $10,000
settlements are killing--are just killing small businesses.
But, Ms. Rickard, you talked about frivolous and unfair
lawsuits. And I don't know what you mean by unfair. Maybe
unfair means by the mere fact that someone would have the gaul
to bring a lawsuit against a large corporate interest for a
product liability or any other claim. And it seems to me that
you have been more--you are fighting more for overall limits on
people being able to bring lawsuits as opposed to just statute
of repose on tort--excuse me, on product liability issues, just
from listening to you today.
But you worked as a Vice President for the Dow Chemical
Corporation, and you all have been the targets of a number of
class action litigations throughout the years. Is that correct?
Ms. Rickard. During my time there, yes, they--
Mr. Johnson. And these had to do with--
Ms. Rickard. --mass actions and--
Mr. Johnson. Yes, but they had to do--
Ms. Rickard. --more mass actions than class actions.
Mr. Johnson. Do you see that there is any social utility in
the ability of those kinds of lawsuits to go forward? Do they
have a positive impact on public policy, in your opinion?
Ms. Rickard. There absolutely is a benefit to having class
action and mass action capabilities. The issues really become--
and, again, this hearing is about small business. But if you
want to talk about larger business, I am happy to do that.
Mr. Johnson. Well, yes, and the reason why I talk about the
larger business, because it seems like they are parading around
or parading behind the issue of small business. But, really,
these changes in the law that you are suggesting and advocating
for would actually help the larger businesses as well.
Ms. Rickard. The issue here is across the board, issues
pertaining to lawsuit abuse across the board, whether you are a
large business or a small business.
Mr. Johnson. Well, tell me--
Ms. Rickard. At the U.S. Chamber, 95 percent of our
membership are small businesses.
Mr. Johnson. Well, you talk about lawsuit abuse. Do you
think it is an abuse for a person who has been injured to be
able to find a lawyer who is willing to take a case because
they think they can make some money out of it, because it is a
legitimate case? Do you think it is wrong for that person to be
able to bring a case to court?
Ms. Rickard. Absolutely not. But I do think--
Mr. Johnson. Well, how do you determine whether or not a
case is--
Ms. Rickard. I believe--
Mr. Johnson. How do you determine whether or not a case is
actually frivolous or not?
Ms. Rickard. Well, if you look--the people I brought to
this hearing--
Mr. Johnson. Can you do that?
Ms. Rickard. --today--yes, Chris Moser, who has an Internet
company with two employees, got socked--he got brought into an
$800 million lawsuit on the basis of--
Mr. Johnson. And an $800 million lawsuit is a frivolous
litigation claim?
Ms. Rickard. Yes. When the person bringing the claim is
trying to collect on gold bonds against banks during--you know,
to collect money from these banks.
Mr. Johnson. Well, now, ma'am, you have been an attorney
for how long?
Ms. Rickard. Over 25 years.
Mr. Johnson. And you think an attorney would get involved
in an $800 million lawsuit that is frivolous?
Ms. Rickard. Absolutely.
Mr. Johnson. And spend--
Ms. Rickard. We see it every day, sir.
Chairwoman Velazquez. Time has expired.
Ms. Rickard. Every day.
Mr. Johnson. I am going to disagree with you on that.
Chairwoman Velazquez. I now recognize Mr. Westmoreland.
Mr. Westmoreland. Thank you, Madam Chairman.
Let me help Ms. Rickard a little bit, not that she needs my
help, but unfounded, unnecessary lawsuits--you know, could that
be considered if somebody like this Internet company was
actually a fourth or fifth party to whatever the problem was?
Does it come into throwing a large net out just to see whoever
they can catch and let everything kind of filter through that
net? And are these lawsuits that would include people that
don't even know the parties involved in it?
Ms. Rickard. Yes. There are--in this instance, in this
Internet case, they did not know the parties. They were hosting
a site for discussion about banking issues, and gets pulled in,
probably for venue purposes, into litigation and has to spend
time and attention away from that, hire a lawyer, have legal
fees.
You know, the problem here is we get--I think we need to
all acknowledge there are valid lawsuits, and there are
frivolous and unfair lawsuits. And you have to have a system
that weeds out the frivolous claims and discourages attorneys
from filing them merely to collect legal fees. And there has to
be a distinction there that we all need to acknowledge.
This isn't one side or the other is completely right here.
We certainly are not espousing that people who are injured
should not have access to the court system. They most certainly
should.
Mr. Westmoreland. Well, I am glad Mr. Braley is coming back
into the room, the learned trial attorney he is, and he
certainly did a great job questioning the panel.
But, you know, it is interesting that he brought the
pictures of this young lady, but he didn't bring his billing
sheet where he may have gotten as much as 30 or 40 percent, but
this unfortunate lady--and nobody wants any of us to go through
the unfortunate situation that this lady went through, and it
is very unfortunate what she did go through, but I don't think
anybody meant for her to go through that. I don't think this
was done on purpose by anybody that would cause her or her
family to go through this tragedy that it did.
But, you know, if attorneys want to make this thing fair,
then what we need to do is go to a loser pay situation. That
way, if the case is reversed, and that defendant wins, then the
plaintiff needs to pay all of those legal expenses, because
this is kind of a win-win for these attorneys, because, you
know, they have got defense attorneys and plaintiff's
attorneys, and so, you know, they are all getting part of the
action whether they win or lose.
The trial attorneys probably try a little bit harder,
because theirs is based on people's unfortunate situations, and
a lot of times they, you know, wheel them into the courtroom or
bring them in these tragic situations that they are in to get
the jury to see them, and to understand the tragedy that they
have gone through, and then, you know, who is to say the
insurance company probably doesn't have a face there, or
whoever this defendant is.
So I understand what you are saying on the contingencies.
And my other colleague, Mr. Johnson, talked about these $5- and
$10,000 settlements. That is basically just blood money, just
something not to have to go to court. You know, at some point
in time, you have to make a business decision. And when your
attorney tells you it is going to cost $20,000 to go to court,
or you can pay them off for $10,000, that is easy money for
some of these attorneys. He talked like they wouldn't get
involved for that. I think they would get involved for $1.99,
if you want to know the truth.
So I have made more of a statement than I have anything
else, but I would like to ask each and every one of you a
question. Ms. Rickard, you are not trying to limit anybody's
ability to go to court for any legitimate reason, are you?
Ms. Rickard. No, we are not trying to limit anybody's
ability to go to court for any reason. People who are injured
or aggrieved should be able to have full access to court and to
a jury trial.
Mr. Westmoreland. And, Ms. Harned, you are not trying to
keep anybody from having a legitimate reason to go to court and
to have their cause heard, are you?
Ms. Harned. Absolutely not.
Mr. Westmoreland. And, Mr. Kelly, you are not saying that
you don't want anybody to go to court that has a legitimate
complaint, do you?
Ms. Harned. No, sir.
Mr. Westmoreland. And Dr. Freedenberg?
Mr. Freedenberg. No.
Mr. Westmoreland. Thank you, Madam Chair.
Chairwoman Velazquez. Time has expired.
Is there any other member who wishes to make questions? Mr.
Braley?
Mr. Braley. Thank you, Madam Chairwoman. I would certainly
like the opportunity to correct the state of the record on the
case that I identified. This case was against what at the time
was the largest corporation in the world, and I can assure you
that they had an army of attorneys who have been defending
these cases for a long time.
I represented a woman from Benton County, Iowa, who didn't
have anybody to speak up for her. I took that case on a
contingency fee basis, which meant if I didn't get a recovery
for her, I wouldn't get paid a dime. I worked for three and a
half years on this case, and it wasn't until I knew that I had
a legitimate claim after extensive research that I even
contacted the manufacturer to talk about the merits of the
case.
Mr. Freedenberg, I wanted to ask you a question about the
disclosure in your written statement, because I think it points
out one of the problems that nobody is talking about, that from
the standpoint of consumers there is a huge issue. You noted
that the association you represent had received $225,000 from
the Commerce Department's Market Cooperator Development Program
for a technical center in China. Is that correct?
Mr. Freedenberg. That is correct.
Mr. Braley. One of the main problems that we see in a lot
of these products cases is that, as our trade imbalance with
China skyrockets, and more and more Chinese products flood U.S.
markets, the sellers of those products who provide them to
consumers, then are the only direct person with a business
located in the United States when these claims arise.
I have pursued claims against Chinese manufacturers. And if
you are dealing with getting jurisdiction over a Chinese
manufacturer in Communist China, it is a long and arduous
process to even bring them to the table. And then, if you are
successful in getting a judgment, it is just a piece of paper
that means nothing, because you still, then, have to levy on
that judgment in a foreign country with many obstacles built
in.
So my question for you is: given this trade imbalance, and
given the fact that many of the small businesses are selling
products manufactured in China, what remedy is there if we want
to try to figure out how to pass on the burden of that risk to
the responsible party, the Chinese manufacturer, who puts that
defective, unreasonably dangerous product, into the stream of
commerce in the United States? How are we going to hold those
Chinese corporations responsible when something like this
happens?
Mr. Freedenberg. Well, just to be clear, we were--we are
selling a product for manufacturers in China, not to sell
back--we are not selling a finished product in China. But,
anyway, the main thing is, having been a trade official, you
need to negotiate good trade agreements with provisions in them
that allow for access to Chinese manufacturers.
You need to negotiate what we are doing when we have trade
agreements, if they are signed correctly, is that you get some
access to them, you get some ability to go after them at the
appropriate time.
Mr. Braley. Have you ever had any experience trying to do
that in practical terms?
Mr. Freedenberg. Well, in practical terms, we have great
difficulty, and I recognize we are having difficulty right now
getting the Chinese to live up to the agreements they make. But
that doesn't mean--that really calls for a better set of--
better next round of negotiations on the national level, so
that--or the international level, so that you can have the
individual capability to go after them. It is, I agree, very
much difficult to go after that.
Mr. Braley. You also made the statement that several AMT
members have been forced to close their doors because of
product liability lawsuits. Do you remember that?
Mr. Freedenberg. Yes.
Mr. Braley. Who are they?
Mr. Freedenberg. Well, I cited one in my testimony, which
is Madison. I could get you for the record--I didn't bring
along the list with me, but I can get you for the record others
who have been forced to close their doors for--because of the
lawsuits.
Mr. Braley. Could you agree to provide those names to the
Committee?
Mr. Freedenberg. I would be happy to.
Mr. Braley. And the dates when they went out of business?
Mr. Freedenberg. Definitely.
Mr. Braley. And you mentioned this Madison verdict of $7.5
million that led to a bankruptcy filing.
Mr. Freedenberg. Right.
Mr. Braley. Do you know whether the judgment that was
entered in that case was ever paid?
Mr. Freedenberg. I don't have the information right now,
but I--
Mr. Braley. Do you know whether the company filed a Chapter
7 or a Chapter 13 bankruptcy?
Mr. Freedenberg. No, I don't know.
Mr. Braley. And that would be a big difference, wouldn't
it, into whether that claim was ever paid? Because if it was a
Chapter 7 liquidation, in all likelihood it would mean that the
person who had that judgment would get very little, if
anything.
Mr. Freedenberg. Right.
Mr. Braley. Mr. Kelly, I wanted to follow up on your
presentation, because one of the things that I do have
experience with is working with people in your industry who buy
machines manufactured overseas and then have problems in the
workplace that injure their workers and add to their worker's
compensation liability.
Specifically, I worked with a company called Birch
Manufacturing in Waterloo, Iowa, which has a huge business that
processes wood products into cabinetry for use in bathrooms and
kitchens. And they had purchased a double-edged sander
manufactured by an Italian corporation, put it in place in
their factory, and the very first day that it was started up a
drawer that was being sent through the sander shot through,
knocked one employee unconscious, ricocheted off and hit
another employee, and fractured the orbit of his eye.
It was later determined that the product had been
defectively designed, which the company in Italy acknowledged,
but there was another huge problem of getting jurisdiction over
a foreign manufacturer, and, in fact, worked closely with Birch
Cabinet because they knew if the manufacturer ultimately held
responsible then they would get back money that they had paid
for worker's compensation benefits as an offset.
Have you heard from any of your members about that type of
dynamic and their need to be able to hold manufacturers of
defective products accountable?
Mr. Kelly. No, not to my recollection, but I don't remember
any of those type of situations. Now, we will research that and
be happy to get back to the Committee with some written
examples, if we have some, where this has been true.
Mr. Braley. Do you know, as a general proposition, whether
people who are part of your association use machines in their
businesses that are manufactured overseas?
Mr. Kelly. Not normally. Our business--most of our members
are lumber dealers, so we are buying already manufactured
products that we aren't manufacturing ourselves. So we don't do
any manufacturing unless we do run truss plants, and those type
of things, and those people would be using some of those
machines, or if they do run door assembly plants they may have
some of those.
Mr. Braley. So you are more involved in the chain of
distribution of finished products.
Mr. Kelly. Exactly.
Mr. Braley. All right. Thank you very much for your time.
And thank you, Madam Chairman, and Ranking Member Chabot.
Chairwoman Velazquez. Thank you. Do you wish to make-
Mr. Westmoreland. Can I ask a few follow-up questions?
Chairwoman Velazquez. Sure.
Mr. Westmoreland. This question to anybody on the panel--
does anybody consider General Motors a small business? Ms.
Rickard?
Ms. Rickard. Do I consider General Motors a small business?
No, but they give a lot of business to small--to--
Mr. Westmoreland. But they are not a small business.
Ms. Rickard. No, absolutely not.
Mr. Westmoreland. Does anybody on the panel think that our
small business manufacturers should be used as fodder for trade
agreements? These are two different areas that need to be
addressed. And I agree with the gentlemen--we need to make sure
that in our trade agreements we have a way to get to those
foreign companies that make these defective things. But I think
it stretches a little bit too far that we are going to use our
small businessmen to get to these foreign countries.
Thank you, ma'am. That is all I have. I yield back.
Chairwoman Velazquez. Mr. Chabot, do you have any other
questions?
Mr. Chabot. I don't. I would just like, again, to thank the
witnesses for their testimony, and thank the Chairwoman for
holding this hearing.
Chairwoman Velazquez. I ask unanimous consent that members
have five days to enter statements and supporting materials
into the record.
And this hearing is adjourned.
[Whereupon, at 1:41 p.m., the Committee was adjourned.]