Unmeritorious Lawsuits Identified As Deterrents To Foreign Investment - How DRI Works To Reduce Such Litigation

The Committee of Corporate General Counsel ("Committee") of the ABA Business Law Section presented a program on March 16 that included a panel entitled " New Commissions, New Recommendations: U.S. Capital Markets and Corporate Reforms." The panel discussed three reports ("the Reports") containing recommendations to improve the competitiveness of U.S. capital markets and the institutions that use them. These reports are (1) Report and Recommendations of the Commission on the Regulation of U.S. Capital Markets in the 21st Century established by the U.S. Chamber of Commerce ("Chamber Report"), (2) Interim Report of the Committee on Capital Markets Regulation ("CCMR Report") and (3) Sustaining New York's and the U.S.' Global Financial Services Leadership ("Bloomberg/Schumer Report").

Editor: John, what is DRI?

Martin: DRI - The Voice of the Defense Bar - is the national organization of more than 22,000 defense trial lawyers and corporate counsel. DRI provides numerous educational and informational resources to DRI members and offers many opportunities for liaison among defense trial lawyers, corporations, and state and local defense organizations. DRI also has an international presence, seeking to enhance understanding of the law among members of the defense community who have reason to be concerned with the expanding globalization of litigation defense. DRI is committed to: enhancing the skills, effectiveness, and professionalism of defense lawyers; anticipating and addressing issues germane to defense lawyers and the civil justice system; promoting appreciation of the role of the defense lawyer; and improving the civil justice system and preserving the civil jury.

Editor: What is your role in DRI?

Martin: I will become President of DRI at our Annual Meeting this fall in Washington DC. It will take place from October 10 to 14, 2007 at the Marriott Wardman Park Hotel. One of the main goals for my term of office is to increase the visibility of DRI as "The Voice of the Defense Bar." We have used that tag line for a number of years, but I would like to see us step up and comment on more issues related to the civil justice system.

Editor: Does DRI include lawyers for foreign companies?

Martin: DRI's members recognize that foreign-based companies will inevitably face litigation in the U.S. and that many of our U.S.-based clients will face litigation in Europe. DRI's membership includes foreign companies with headquarters outside the U.S. and lawyers from foreign countries who attend our programs and participate in our other activities. Our international focus is illustrated by the Joint International Conference which took place in London in May which was sponsored by DRI and three other defense counsel organizations: the Association of Defense Trial Attorneys, Federation of Defense & Corporate Counsel, and the International Association of Defense Counsel. The conference included American and European defense lawyers and representatives of European and U.S. corporations. DRI also has an international law committee that focuses on issues related to all aspects of international law. Its membership is largely made up of lawyers who represent foreign companies that sell products in the U.S. or conduct other businesses here.

Other DRI substantive law committees, for example our drug and device committee, product liability committee, and others, regularly deal with issues involving foreign companies doing business in the U.S. Today, many products are sold in the U.S. that are manufactured in other countries or include components manufactured abroad. There are difficult indemnification issues when the U.S. manufacturer is sued for selling a product that was initially or partially manufactured in a foreign country. Sometimes there are treaties governing those issues or contracts. This is an emerging area of the law that DRI is examining carefully.

Editor: The Bloomberg/Schumer Report states that respondents to its survey said that a fair and predictable legal environment was the second most important criterion determining a financial center's competitiveness. In this regard, they felt that the United States was at a competitive disadvantage to the United Kingdom. They attribute this U.S. disadvantage to a propensity toward litigation and concerns that the U.S. legal environment is less fair and less predictable than the UK environment. Only about 15 percent of the senior executives surveyed felt that the U.S. system was better than the UK's in terms of predictability and fairness, while over 40 percent favored the UK in both these regards. The CEOs interviewed also shared this sentiment, although they felt that London's advantage was particularly strong in terms of predictability. What is DRI doing to improve this situation?

Martin: By helping defense counsel improve their skills through its committee activities, seminars, conferences and publications, DRI makes it less likely that unmeritorious cases will succeed. DRI also participates in litigation as amicus curiae in matters selected in accordance with specific guidelines from the Board of Directors. The guidelines for DRI participation as amicus curiae specify that the case must present an opportunity for DRI to make meaningful and original arguments that could result in a contribution to jurisprudence.

Although DRI does not engage in lobbying, there is often a need to address concerns about fairness and unpredictability through legislation, involvement in judicial elections or changes in court rules. These activities are the province of Lawyers For Civil Justice, an organization founded by DRI and other defense organizations. Lawyers for Civil Justice is a partnership among DRI, the Federation of Defense & Corporate Counsel, the International Association of Defense Counsel, approximately 25 major corporations, and law firm associate members that examine legislation, involvement in judicial elections, changes in court rules, and other ways to make sure that the litigation field is fair to all litigants. From time to time, LCJ has looked at various aspects of punitive damages issues.

My personal view is that a strong, healthy economy is good for everyone. Having a fair and balanced litigation system is in everyone's best interest and can make America more attractive to those wishing to sell their securities or set up a business here. The Reports emphasize that there is a national interest in civil justice reform. If the U.S. is attractive to foreign businesses, our economy, including the financial sector, will prosper.

Editor: Coupled with concerns about fairness and predictability is concern in the minds of foreign companies about the costs to which foreign companies are exposed. The Bloomberg/Schumer Report found that civil liability has experienced dramatic growth in recent years. Some estimates put the cost of the U.S. tort system in 2004 at $260 billion, approximately double 1990 levels. Why are costs so high and what is DRI doing to contain such costs?

Martin: The statistic you cite does not surprise me. A large portion of the costs referred to in the Reports reflects the intimidating effect of punitive damages - which cause corporations to settle cases at high cost in order to avoid the uncertainties of bet-the-company awards of punitive damages. Although the U.S. Supreme Court has written a number of opinions over the years in an attempt to control those awards, I personally believe that some additional work in that area is necessary.

The biggest problem with punitive damages is that the standard for submitting a punitive damages issue to a jury is applied too loosely by many courts. There are many cases where the punitive damages issue is referred to the jury where there is no egregious conduct that warrants punitive damages. Some judges tend to submit the issue to the jury with the intention of reducing unreasonably high jury awards later, but judges frequently show great reluctance to second guess juries once a matter has been decided by the jury. I believe that judges need to be given clearer instructions as to when they should and should not submit the determination of punitive damages to a jury. The threat of making the submission to a jury can do great harm to corporate defendants who may be forced to settle a case for a significant amount in order to avoid the potential for having to pay much higher punitive damages or the cost of appealing an unjust result.

DRI can help control the situation by training its members to convince judges to refer only cases that warrant punitive damages to the jury and to see that the judge instructs the jury appropriately. It can file amicus briefs in cases of excessively high damages that violate U.S. Supreme Court guidelines. Lawyers for Civil Justice can seek remedies through changes in court rules, advocacy of legislative reforms and seeking well-qualified judges.

Editor: The D&O insurance limits purchased by Fortune 500 companies are about $500 million whereas similar companies in Europe find that insurance plans with limits of $250 million provide adequate protection. D&O insurance premiums for U.S. companies are over six times higher than the premiums paid by European companies. The CCMR Report recommends that the SEC modify its rules so that an outside director's good faith reliance on an audited financial statement, an auditor's SAS 100 review report or the representations of senior officers will be conclusive evidence of due diligence. It also recommends that the SEC reverse its position that indemnification of directors for damages awarded in Section 11 actions is against public policy, at least in so far as the outside directors have acted in good faith. What is DRI doing to help bring down premiums and increase the availability of D&O insurance?

Martin: The increasing amounts that corporations have to pay for D&O coverage insurance is reflective of the litigation climate that was examined in the Reports and that we have discussed earlier. D&O premiums are a function of the number of cases being brought against officers and directors and the size of recoveries. To the extent that defense counsel successfully defend cases brought against directors and officers, premiums will be reduced. Our committees, seminars and publications make defense counsel aware of the best strategies. Although DRI has not taken a position, it is hard for me to understand why a director should be held liable for not figuring out that the CEO was being untruthful or that the auditor's report was wrong. Outside directors do not have the resources to go outside the information they receive from officers unless there are obvious red flags and do not have the resources to go behind the audit to figure out what is going on.

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