There’s a great new report from the Manhattan Institute emphasizing the role of tort law as a supplement (and alternative) to regulation. If fishermen in the Gulf coast had a right to be free from pollution, perhaps BP would have invested more in preventing the recent disastrous spill. Unfortunately, as the MI piece points out, trial lawyers have tended to focus not on these genuine – and objectively verifiable – harms but instead on hypothetical and highly subjective concerns. A series of class action suits resulting in essentially arbitrary payouts has enriched the trial lawyers but done little if anything to protect individuals or the environment from harm. Indeed, arguably these suits have been counterproductive as they have often led to the elimination of beneficial substances, while diverting resources to lawyers and plaintiffs and away from more productive uses.

One of the examples given in the MI report is MTBE, an additive used in gasoline to make vehicles run more efficiently (and thereby produce less pollution). Oil companies started adding MTBE to fuel in 1979 but its use was increased after 1990 – as the MI report points out “Congress had reached the policy judgement that adding MTBE to motor fuel produced a net benefit, even though the chemical can affect the taste of drinking water if it enters the water supply.” The EPA also evaluated MTBE and concluded in 1997 that “there is little likelihood that MTBE in drinking water will cause adverse health effects” in the quantities present. Given that the EPA tends to err on the side of caution (demanding very wide margins of safety), it seems fair to conclude that MTBE in drinking water really was most unlikely to pose a danger to health.

If historic tort standards were applied, there would be no case: MTBE might have an impact on taste, but that is of course subjective. It does not – according to the EPA at least – cause an “objective” harm to human health. This distinction is important. For the law to act as a guide to human behaviour, it must be based on objective standards. If judges apply subjective standards after the fact, how are we to know the standard against which we will be judged? Taken to its logical conclusion, we enter the world of Kafka’s Josef K, who is tried with crimes he didn’t even know he had committed.

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When companies are found to have violated regulations that govern their industry, is it right that a jury of non-experts can award damages the amount of which will wipe the company off the face of the earth? That is a question that has been raised in a case recently decided against Skilled Healthcare LLC of California.

A class action lawsuit (lawsuit info here) brought by trial lawyers was filed late last year against Skilled Healthcare of California claiming that the company had violated state regulations that stipulates that nursing homes must maintain 3.2 nursing hours per patient, per day (ppd). The lawsuit claimed that the nursing homes operated by Skilled Healthcare often did not meet the requirement.

Interestingly, there was never any claim from any patient that they’d been harmed or put in danger. Not a single patient claimed personal injury before these lawyers began to file their class action lawsuit.

After a six-month trial the jury decided that the company did violate the rules and awarded the plaintiffs $613 million in statutory damages and $58 million in restitutionary damages.

There is a problem with this award, however. The company only has borrowing credit of $94 million. If the company were to be held to this outrageously high award it would go bankrupt and would be forced to close its doors.

Not only that but some 32,000 people — patients/residents and healthcare workers alike — would lose their heatlhcare facilities and jobs if this award were enforced.

Does this make sense?

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