ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed

City Journal

search
Close Nav

Limited Liability, Unlimited Growth

eye on the news

Limited Liability, Unlimited Growth

How tort reform helped ignite the Texas boom. January 11, 2017
Texas
Economy, finance, and budgets
Politics and law

A combination of low taxes, light regulation, and responsible levels of government spending define the Texas model. Though the model is sometimes honored in the breach, it is generally credited with playing a significant role in the state’s striking economic vitality. No state has created more jobs over the last 15 years. As residents of high-tax, high-spending regions continue to relocate to the Lone Star State, the virtues of the Texas approach seem self-evident.

One crucial component is often overlooked in discussion about the Texas model, however: tort reform. Over the last two decades, Texas engaged in a conversation as to the purpose and role of its civil courts. When that conversation began, the state’s courts had become virtual fiefdoms of trial lawyers. Texas recognized few limits on damages claims and imposed minimal accountability on plaintiffs. The state’s litigation environment was, unsurprisingly, toxic for business. The pushback came in the early 1980s. Lawmakers started to ask whether the Texas constitution’s commitment, spelled out in Article 1, Section 13, that “all courts shall be open, and every person for an injury done him . . . shall have remedy by due course of law” precludes putting reasonable limits on liability. The state legislature’s decision to strike a balance and roll back tort excesses marked a turning point in the state’s economic rise. Together with competitive tax and regulatory policies, tort reform sowed the field so that Texas’s pro-growth policies could take root.

In his only full-length book, Thomas Jefferson wrote that “in every government on earth,” there is “some germ of corruption and degeneracy, which cunning will discover, and wickedness insensibly open, cultivate and improve.” In our own time, special interests all too often wrap themselves around public institutions until the objectives of the government are indistinguishable from their own. From 1984 to 2003, at the height of the Texas litigation explosion, the state’s civil court system, instead of providing a neutral body in which parties could fairly resolve their disputes, became a virtual instrument of the plaintiffs’ bar.

Texas is one of only seven states that holds elections for judges to its highest court—and it was the election system that trial attorneys exploited. A generation ago, they realized that they could take advantage of these races—which usually aroused little public interest—to get sympathetic candidates elected and, over time, swing the state supreme court in the direction of the plaintiffs’ bar. The watershed moment came in 1976, when an obscure attorney, Don Yarbrough, defeated a respected judge in the Democratic primary and went on to win a seat on the Texas Supreme Court. Yarbrough was hardly the typical high-court candidate. Not only was he a virtual unknown, but he also faced various allegations that soon led to his resignation from the court and convictions for forgery and perjury. Commentators attributed his victory to voter confusion, seeing how he shared a similar first and last name with a well-known politician who had twice run for governor.

Yarbrough’s victory signaled that most anyone could be elected with enough name recognition. As a consequence, trial attorneys began pouring money into high-court campaigns, seeking to re-create Yarbrough’s feat. It worked: justices backed by the plaintiffs’ bar secured a majority by 1983 and then proceeded to reorient Texas law to their own agenda.

In the ensuing years, the Texas Supreme Court tore down many of the precedents that counseled delay before bringing the coercive power of the state to bear on litigants. It eliminated, for example, the requirement that claimants demonstrate proof of mental anguish, and it waived traditional doctrines, such as caveat emptor and contributory negligence, which held plaintiffs accountable for the role that they may have played in their own injury. The requirements that litigants needed to meet in order to bring a class action suit were weakened. And the court was quick to employ Article 1, Section 13’s guarantee of an “open court” as a countermeasure against legislative attempts to dam the new flood of litigation. In Lucas v. United States, the court struck down as unconstitutional the state’s cap on noneconomic damages, asserting that it was “unreasonable and arbitrary” for the legislature to limit the recovery of injured claimants in an effort to control liability-insurance costs. The Texas Constitution, the court argued, “guarantees meaningful access to the courts whether or not liability rates are high.” Noneconomic damages refer to the pain and emotional suffering caused by the defendant.

The trial lawyers’ court-packing ability was documented in a 1987 60 Minutes exposé. Mike Wallace chronicled a closed circle of influence and money within Texas’s legal system. Wallace recounted events that typified the worst of the courts’ close relationship with the plaintiffs’ bar. Joe Jamail, a plaintiff’s lawyer and generous contributor to the Texas judicial bench, was the lead attorney for Pennzoil in its suit against Texaco. During those proceedings, it became known that Jamail had donated $10,000 to the trial judge’s campaign—just weeks after the judge was assigned to the case. Jamail’s financial assistance didn’t stop there. On the judge’s request, Jamail solicited his friends in the legal profession to gift the judge’s campaign at least $1,000 apiece. Pennzoil emerged victorious, with a $10.53 billion jury award plus interest—the largest such award at the time. The trial lawyer–dominated court subsequently upheld the decision.

Wallace also noted the scandals surrounding the Texas Supreme Court, which had several members under investigation for ethical violations, including favoritism, taking free plane rides, the solicitation of funds, and ex parte communications with litigants. In one memorable incident, a justice invited businessman Henry J. N. Taub to speak with him privately while at a campaign fund-raiser in Houston. Taub had a multimillion-dollar lawsuit pending before the Texas Supreme Court at the time. According to Taub’s testimony before the select committee, the justice “mentioned the fact that the case was a tough, tough one. And that if I didn’t win that one, the next one would be mine.” Taub continued: “And then I got a little perturbed and said I didn’t want any other case. I wouldn’t be before the Supreme Court on any other matter.”

Taub’s words captured a sentiment growing throughout Texas, particularly in the business community. The judicial branch, as students of American government often point out, lacks the coercive power of the sword or the purse. Its authority springs from public trust in the courts’ integrity as a neutral party. By the time 60 Minutes chronicled the story for a national audience, Texans’ trust in their courts had begun to collapse.

Years of metastasizing scandal, combined with national press coverage, finally stirred state leaders to action. In 1995, the Texas legislature enacted the Judicial Campaign Fairness Act (JCFA), which introduced the state’s first limits on how much individuals, law firms, and political action committees could contribute to judicial campaigns. Under these new regulations, individual contributions were capped at $5,000 for candidates to the Texas Supreme Court or the Court of Criminal Appeals, while contribution limits to all other judicial candidates fell to between $1,000 and $5,000, depending on the population of the judicial district. Law firms were limited to $50 if the aggregate contributions of their members exceeded six times the maximum individual contribution for that judicial office.

Advocates for reform disagreed over whether the JCFA went far enough in combating corruption. Texas Supreme Court Chief Justice Tom Phillips called it “an excellent first step in comprehensive campaign finance reform” on the day that Governor George W. Bush, who made tort reform a centerpiece of his election campaign, signed it into law. The bill’s House sponsor, in contrast, reportedly opined that judicial reform had progressed “as far as it needs to go.” Even today, some commentators suggest that the JCFA’s impact was more visual than tangible—that it gave the appearance of restoring integrity to the courts without removing the influences that had led the courts astray in the first place.

Most advocates agree, however, that citizens themselves played a vital role in restoring the courts’ prestige and quality. Judicial misrule had proved so costly that the general electorate finally began taking an interest in judicial elections. Public-interest groups formed to clean up Texas courts; others launched initiatives to oust corrupt players via the ballot box. Judicial integrity became a central campaign issue. Voters assessed candidates based on their relationship with the trial bar as well as their judicial philosophy. Incumbents who failed to pass muster faced challengers. Concerned citizens chipped away at the old order with each election cycle, until the bench was manned by public servants exemplifying the best of their profession. Progress was slow, but the Texas judiciary was soon on its way back to respectability.

Meantime, the legislature worked to fix the statutory errors of the court’s earlier indiscretion. Reform here would bring benefits across the board, but especially in health care, where medical-malpractice litigation in Texas had brought the industry to a crisis point by the early 2000s. The steady climb in the frequency and severity of medical-malpractice claims had driven up insurance premiums, such that a successful medical practice had become almost impossible. Doctors were fleeing the state or retiring early. Counties reported critical shortages not only in the availability of doctors and nurses but also in the number of obstetricians, neurosurgeons, and other high-risk specialists due to disproportionate liability in those fields. Approximately 25 percent of Texas doctors faced claims filed against them when the state’s 78th legislative session began in 2003. Nationally, the rate was closer to 14 percent.

The medical community had had enough. On April 8, 2002, hundreds of doctors in the Rio Grande Valley staged a well-publicized walkout to protest what they viewed as the courts’ interference in their ability to attend their patients. Throughout the region, health offices closed as staff dressed in white lab coats gathered on the steps of the Hidalgo County courthouse. Many carried signs that demanded, in English and Spanish, the right to pursue their profession without the risk of financial ruin.

“Being sued is part of practicing medicine in South Texas,” said Bradley Nordyke, a physician who worked at a clinic in Brownsville. Nordyke worried about his patients and their continued access to health services. That year, the American Tort Reform Association (ATRT) had listed Hidalgo County and Starr County—two of the four counties making up the Rio Grande Valley—as “judicial hellholes.” Surveying 163 doctors in the Valley in 2001, Citizens Against Lawsuit Abuse found that 60 percent had been sued and 76 percent could not recruit new talent because of liability costs. The number of companies offering physicians’ insurance in the state had fallen from 17 in 1999 to just four in 2002. The high liability risk in practicing medicine in Texas, and in the Valley in particular, had made writing these types of insurance lines unprofitable. Hundreds of practitioners—even those, like Nordyke, who had evaded lawsuits—lost coverage.

The walkout was well timed. One week earlier, the Texas state senate’s interim Committee on Prompt Payment of Health Care Providers, more commonly referred to as the Nelson Committee, hosted its third public hearing regarding medical services in Texas. After hearing testimony, lawmakers realized that they could not resolve the problems of Texas’s health-care market without first addressing a more pressing matter: excessive liability. Unless changed, Texas’s draconian liability rules would slowly smother the opportunity for quality health care in Texas. Accordingly, the Nelson Committee expanded its inquiry to include the state’s civil-litigation setup, paying special attention to “the impact of medical malpractice lawsuits and their impact on access to health care.”

First, though, legislators had to struggle with the dilemma that plagues any attempt to restructure a state’s civil-liability system: whether changing the law would undermine the right of citizens to find redress through the courts. Civil lawsuits in the United States have significance beyond the mere resolution of private disputes. Indeed, in many respects, the ability to bring a case before the courts is a core element of democratic self-government. Through the courts, ordinary citizens may assert their rights and find vindication for any harm done to them. Differences in wealth and power fade away, as litigants are bound to the same rules, are entitled to the same consideration, and must abide by the same verdict. American political culture regards the civil courts as a conduit for political equality—and resists reforms that might undermine them. Texas is no exception in this regard.

All this is to say that Texas lawmakers had difficult choices to make in considering comprehensive tort reform. On the one hand, with so many medical professionals being driven from the state, excessive liability posed a real threat to the health and livelihood of residents. On the other hand, citizens have the right to obtain reasonable compensation for injuries. What, then, is the proper balance between preserving citizens’ right to redress and protecting them and their property from opportunistic litigation?

The Nelson Committee’s 13 recommendations ranged from conventional proposals regarding recovery and the types of evidence that should be admissible in court to suggestions on how to improve patient safety outside the litigation process by weeding out reckless practitioners. The committee’s suggested ceiling on the recovery of noneconomic damages was $250,000—half the amount enacted under the Medical Liability and Insurance Improvement Act (MLIIA) of 1977.

The legislature embraced the recommendations. Come the start of the 78th regular session (2003), the chairman of the House Committee on Civil Practice introduced three noteworthy bills: House Bill 4, which addressed general civil-litigation reforms; House Bill 3, concerning medical-malpractice reform; and House Joint Resolution 3, which proposed a constitutional amendment that would limit the recovery of noneconomic damages. This last measure was necessary if lawmakers wished to preempt a challenge under Texas’s open-courts doctrine. The legislators eventually merged much of H.B.3 into H.B.4, creating one far-reaching civil-justice reform bill, a reconciled version of which passed both chambers and was signed into law by Governor Rick Perry. H.J.R.3, proposing the constitutional amendment, also passed both chambers and was submitted to Texas voters. The question: Should Texas’s political branches have the power to limit the recovery of non-pecuniary losses, such as pain and suffering or loss of consortium, notwithstanding the state constitution’s open-access provision? Voters said yes, approving the proposition with 51 percent in favor. In Texas, sensible limits on civil liability were now entrenched beyond judicial interference.

The story of Texas’s tort and medical-malpractice reforms offers several lessons. First, Texas lawmakers did not succumb to the widespread suspicion that tort reform is antithetical to justice. The reforms contained in H.B.4 did not close the courts to appellants looking for relief. Rather, they acknowledged the reality that civil litigation implicates individual rights on both sides of the dispute. With limited exceptions, H.B.4 left statutory and common-law causes of actions alone. H.B.4’s changes were designed to ensure a process that would force a defendant into court and demand that a defendant make compensation for a plaintiff’s injury only when circumstances gave a reasonable indication that he or she was at fault.

Second, the changes were comprehensive. In his analysis of H.B.4, Michael S. Hull, longtime outside counsel for Texans for Lawsuit Reform, described the law as “the most far-reaching changes to the Texas civil justice system since the creation of the Texas Constitution in 1865.” On the law’s ten-year anniversary, Joseph Nixon, former chairman of the House Committee on Civil Practice, explained that H.B.4 “contained nothing particularly new or innovative to American jurisprudence”; what made it groundbreaking was that “so many reforms were contained in one bill.” The statute not only capped noneconomic damages at $250,000; it reined in liability further by limiting the recovery of medical or health-care expenses to “the amount actually paid or incurred by or on behalf of the claimant.” Each enumerated provision, on its own, would have soothed the anxiety of medical professionals that a single lapse or misfortune could spiral into untamed liability. The combination, though, made clear that Texas would now treat each claim as a plea to remedy a single wrong, not an occasion to spread the costs of hard luck onto those allegedly in a better position to shoulder it. The health-care community could then gain a better grasp of its exposure in the short run and regain its trust in the system.

Third, the new law did not occur in a vacuum. It represented the culmination of more than a decade and a half’s worth of incremental reform and advocacy. Additionally, it operated as a launch pad for future initiatives that shored up the gaps that the 78th legislature overlooked or simply got wrong.

H.B.4 represented a reconstitution of the Texas civil courts. In its wake, tort-reform advocates secured legislation in four subsequent sessions, often at the urging of then-governor Perry, running the gamut from Texas’s barratry statute and discovery rules to probate hearings and asbestos litigation. More controversially, in 2011, the Texas legislature enacted partial “losers pay”—in which defeated plaintiffs can be forced to pay a defendant’s legal fees. Just as with H.B.4, each new enactment has critics who feel that the changes encroach too much on Texans’ ability to pursue a remedy.

The debate over access and restraint in the courts continues. Texans see tort and medical-malpractice reform as a work in progress, and they are willing to engage in trial and error until they find what works. Hence, the state has laid down strong foundations, which not only bear the weight of multiple generations of reform but also resist the entropy that besets all good laws.

Tort reform in Texas proved wildly successful—far more so than the Nelson Committee had cautiously forecasted. Within a few years of H.B.4’s passage, the frequency of spurious claims against medical providers dropped, and the average payout began to resemble past norms. Citing data from the Texas Department of Insurance, the Austin American-Statesman reported that medical-malpractice claims resolved in a single year had fallen by nearly two-thirds from 2003 to 2011. The average payout waned 22 percent, to approximately $199,000.

Similar outcomes were seen systemwide. The number of new civil lawsuits dropped from 610,355 new filings in 2005 to 505,104 in 2014, according to Texas Lawyer—a decline of 17 percent, despite the state’s significant population growth. The number of tort cases fell by 38 percent. Experts don’t expect that the volume of tort lawsuits will ever again approach pre-reform levels. Some even predict that the volume will not exceed one-half to two-thirds of the earlier era.

Texas’s health-care market has flourished in the wake of reform. The average medical-malpractice premium declined by 46 percent after H.B.4’s passage, according to Jon Opelt, executive director of the Texas Alliance for Patient Access. His findings were echoed by Perry, who, in 2013, noted: “Hospitals are also collectively saving approximately $100 million per year in liability premiums.” The savings, Perry emphasized, would “allow for investments in new technology, patient care and charity care.” Opelt’s analysis also found that between 2006 and 2011, nearly 80 percent of Texas’s 22 trauma-service areas saw a per-capita gain in direct patient-care physicians. The Texas Medical Board has marked the increase in the number of in-state practicing physicians at 31 percent—well ahead of the rate of Texas’s population growth. The state’s per-capita doctor ratio remains somewhat low—213.3 per 100,000, as compared with the national average of 265.5, according to the Association of American Medical Colleges—but overall, the environment is much improved.

Two-plus decades of tort reform have also made Texas’s statutory codes more sensitive to how civil litigation can encroach on the rights of defendants and third parties. As a consequence, Texas law is more hesitant to drag an individual or entity into court and assign a duty to pay. This has removed a great deal of the uncertainty that had once plagued new ventures in businesses and technology.

Before H.B.4, runaway torts imposed an effective “tax” as high as $18 billion, or 2.35 percent of gross state product annually, according to the Public Policy Institute of New York State. Removing this charge helped jump-start the Texas economy after the economic slump of the late 1980s and early 1990s. The Perryman Group found in a 2008 study that tort reform provided a fiscal stimulus to the state of about $2.6 billion per year, which was realized in new jobs, along with added personal income and state revenue. In the context of the so-called Texas Miracle, the Perryman Group credits tort-reform initiatives with 8.5 percent of the growth that Texas has enjoyed since 1995.

The Texas model works because it strives to keep as much capital as possible in the hands of market participants. Texas’s tort and medical-malpractice reform did just that when it curtailed the “tax” that a counterproductive litigation system levied against almost anyone who engaged in the economy. Again and again, time has shown that excessive liability impedes economic activity. By instituting common-sense limits on that liability, Texas gave its current and prospective residents a reason to invest in their future and that of the state. The results speak for themselves.

Photo by Andy/Flickr

Contact

Send a question or comment using the form below. This message may be routed through support staff.

Saved!
Close