American Enterprise Institute

Who is legally responsible for the 1993 World Trade Center bombing?

2008-05-04T09:59:00Z

In the wake of the September 11 bombings, Congress established a Victims Compensation Fund and limited liability for a number of deep-pockets who were also victimized by the attacks. A number of academics questioned that it was even conceivable that innocent third parties could be held liable for a terrorist attack. Anthony J. Sebok, What's Law Got to Do With It? Designing Compensation Schemes in the Shadow of the Tort System, 53 DEPAUL L. REV. 901, 917 (2003); RICHARD A. NAGAREDA, MASS TORTS IN A WORLD OF SETTLEMENT 104 (2007); Peter Schuck, Special Dispensation, AM. LAWYER (June 2004); see also LLOYD DIXON AND RACHEL KAGANOFF STERN, COMPENSATION FOR LOSSES FROM THE 9/11 ATTACKS (RAND Institute for Civil Justice 2004).

But the legislators' fear turned out to be more than hypothetical. When given a chance to allocate responsibility for the earlier 1993 World Trade Center bombing, a jury held the Port Authority 68% responsible for the deliberate bombing of the World Trade Center by terrorists. The Port Authority appealed the absurd ruling, but the Appellate Division has affirmed unanimously since, after all, such absurdities are central to the modern tort regime and it is thus not "legal error" to abandon the centuries-old concept of intervening causation. As I noted in a related Wall Street Journal editorial, contingent-fee attorneys' incentives are not to seek out the truth behind wrongdoing, but to construct a narrative that will hold the deepest pocket the most responsible, regardless of the effect on justice. This distortion has worked its way into popular culture; a survey of family members of September 11 decedents found that the median respondent held the terrorists only 30% responsible for losses. Gillian Hadfield, Framing the Choice between Cash and the Courthouse: Experiences with the 9/11 Victim Compensation Fund, 42 L. & SOC. R. __ (forthcoming 2008).

I discuss the decision in more detail in an op-ed in the New York Sun.

Zombie Litigation

2008-04-04T14:59:00Z

My latest Liability Outlook examines the problems of retroactive lawmaking and litigation, especially reviver statutes:

The controversy over whether and how to seat the Michigan and Florida delegations at the Democratic National Convention shows the danger of changing rules midstream and upsetting settled expectations. Reviver statutes not only obviate statutes of limitations, which are a critical aid to justice, by "reviving" claims that have expired or never existed, but they can also pose the danger of undoing the benefits of future prospective legislation. In evaluating laws, the issue is not merely one of retroactivity, but of the importance of promoting legal certainty. For example, the FISA Amendments Act, S. 2248, while ostensibly acting retroactively to grant immunity to telecommunications companies that cooperated with the Bush administration's antiterror surveillance program, works to protect settled expectations.

Among matters discussed: litigation against the Catholic church over allegations of child abuse and the Michigan legislature's proposed retroactive repeal of pharmaceutical tort reform in H.R. 4045.

Patent Reform in Congress

2008-03-04T14:33:00Z

For more on patent reform, see my February 2008 Liability Outlook, from which this is excerpted.

Despite some in the media calling patent reform dead,[1] on January 24, 2008, the Senate placed S. 1145, the Patent Reform Act of 2007, on the general calendar. The next few weeks will be critical to the legislation, which the House passed in September.[2] Although much of the discussion has focused on the different perspectives and concerns that the high tech and the biotech/pharma industries have about the legislation, the fact remains that the patent litigation system is broken.

Impetus for new patent legislation came in response to the growing problem of "patent trolls"--holders of weak patents, often purchased in the open market and used solely for the purpose of litigation against successful companies. The problem predates the neologism: the notorious Jerome Lemelson made himself a billionaire through "submarine patents." Lemelson would file a vague patent, which would remain secret "underwater" while he navigated decades-long delays in the patent office. Then, as new technology became available, Lemelson would amend claims in the pending patent, have the patent issued, and "surface" to claim that his long-ago filed patent "teaches" the newly invented technology. By threatening suit against hundreds of companies and offering to settle for a fraction of the cost of litigation, Lemelson and his attorney Gerald Hosier obtained over $1.5 billion in royalties[3] before a defendant was willing to stand up and spend the money on the legal expenses to invalidate the patents--well after Lemelson had died.[4]

While subsequent congressional action closed the specific loophole Lemelson used, others noticed the litigation business model. According to the Wall Street Journal , "lured by the potential returns, hedge funds and other institutional investors now are bankrolling businesses that buy up patent portfolios" and litigate them through contingent-fee attorneys.[5] Affiliates of Erich Spangenberg’s Plutus IP have sued 476 different defendants in 42 lawsuits. The vast majority of those lawsuits allege infringements of patents that Plutus IP purchased for $1,000.[6] The use of invalid patents in litigation is more than theoretical. Philip Jackson sued his attorneys, Chicago plaintiffs firm Niro, Scavone, Haller & Niro, for malpractice after his $12.1 million jury verdict against Glenayre Electronics Inc. was reduced to under $3 million; Niro challenged the malpractice suit by claiming that the patent Jackson had successfully enforced was invalid.[7] In 2006, approximately 6,000 defendants were sued in 2,800 patent cases; in 2007, the six thousand mark was reached in early October, implying a 30 percent increase in patent litigation in a single year. Such litigation stifles substantial technological innovation. Patent trolls claim to block entire fields, and one cannot hope to innovate in these areas without the financial capital to handle the threat of patent litigation. IBM has 370 corporate patent attorneys,[8] not just to avoid the pitfalls of infringement, but to create a patent portfolio that can provide counterclaims (or cross-licensing opportunities) if a commercial entity were to sue them for infringement. Since the late 1990s, patent litigation costs have outstripped patent profits.[9]

One element of reform that is especially important is venue reform.

In 1990, the Federal Circuit held that the definition of "reside" created in 1988 amendments to 28 U.S.C. § 1391, the venue statute for general civil cases, also affected the meaning of the word "reside" in the earlier 28 U.S.C. § 1400(b).[10] While before corporations could only be sued where they had a regular place of business, now corporations could be sued for patent infringement in any district the plaintiff chose, so long as the defendant was subject to personal jurisdiction. Plaintiffs now had their choice of forum.

In 1990, the Eastern District of Texas had exactly one patent suit filed. In 2006, the number had risen to 264 filed against 996 defendants. The first ten months of 2007 surpassed that number: 312 cases filed against 1,253 defendants. And 60 percent of these cases were filed in the federal court in Marshall, Texas (population 25,000)--about a tenth of the entire nationwide patent docket in the improbable center of American patent litigation.

While it is an exaggeration to say that a defendant can never get summary judgment in Marshall,[11] the exaggeration is only slight. Suits can be expected to go to trial, and a trial can be expected to cost $2.5 million on top of the millions of dollars in legal fees for pretrial proceedings.[12] The "rocket docket" gives defendants little opportunity to engage in discovery that might invalidate weak patents. Moreover, the expedited procedural schedule increases the expense of complying with discovery, lest disproportionate sanctions be issued for technical failures to comply.[13]

As one patent attorney argues,

Juries in East Texas, unlike those in Houston, Dallas or Austin, are much less likely to have a member with any technical training or education, which exacerbates the problem from the defense perspective, but makes East Texas federal courts an attractive venue for would-be plaintiffs, who know that the jury will, instead, gravitate toward softer or superficial issues that are difficult to predict.[14]

Defense attorneys complain of the court’s idiosyncratic jury instructions that make invalidating patents unlikely. "[P]atent plaintiffs whose cases go to trial in Marshall win 88 percent of the time, according to research firm Legalmetric, compared with 68 percent nationwide."[15] With all these factors, individual defendants often find it economical to settle, especially if faced with an offer less than the cost of trying a case.[16]

Venue reform is an area in which only Congress can solve the problem. There is little chance the Supreme Court will hear an appeal on the Federal Circuit’s interpretation of the venue rules, and the Federal Circuit has shown no inclination to revisit its earlier decision.

1. E.g. , Rita Weeks, Recent Developments in Patent Reform Legislation , MONDAQ BUSINESS BRIEFING, July 12, 2007; Patently-O, Congressional Patent Reform is Dead; Long Live Administrative Reform, Aug. 30, 2007, http://www.patentlyo.com/patent/2007/08/congressional-p.html (last visited Feb. 13, 2008).
2. H.R. 1908, 110th Cong. (2007).
3. Nicholas Varchaver, The Patent King , FORTUNE, May 14, 2001, at 202.
4. Symbol Technologies v. Lemelson Medical, Education & Research Foundation, 301 F. Supp. 2d 1147, No. 01-701 (D. Nev. 2004), aff’d , Symbol Technologies v. Lemelson Medical, Education & Research Foundation, 422 F.3d 1378, No. 04-1451 (Fed. Cir. 2005); Brenda Sandburg, Judge Torpedoes Dead Inventor’s Patent Claims , THE RECORDER, Jan. 27, 2004.
5. William M. Bukeley, Aggressive Patent Litigants Pose Growing Threat to Big Business , WALL ST. J., Sep. 14, 2005, at A1; see also Nathan Vardi, Patent Pirates , FORBES, May 7, 2007.
6. John Letzing, Speculator of mundane patents casts a long shadow , MARKETWATCH, Sep. 7, 2007, http://www.marketwatch.com/News/Story/congress-mulls-patent-reform-holding/story.aspx . The Polaris patents are quite weak; Patent No. 6,411,947, issued in 1997, claims to teach responding automatically to emails, though that functionality has been available in some software since at least the 1990 release of Procmail. See discussion at Slashdot blog, Google and Others Sued for Automating Email, Aug. 28, 2007, http://yro.slashdot.org/yro/07/08/28/2252231.shtml.
7. John Bringardner, A Bounty of $5,000 to Name Troll Tracker , IP LAW & BUSINESS, Dec. 4, 2007. "The case settled in late September [2007] for an undisclosed amount." Niro has been accused of using patent litigation to sue critics on the Internet, bringing a patent infringement suit against Greg Aharonian, the author of the Internet Patent News Service, for criticizing a jpg decompression patent. Id.
8. Michael Fitzgerald, A Patent Is Worth Having, Right? Well, Maybe Not , N.Y. TIMES, Jul. 15, 2007.
9. Id. (citing JAMES BESSEN AND MICHEL J. MEURER, DO PATENTS WORK (forthcoming 2008)).

10. VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).
11. Maurice Mitchell Innovations, L.P. v. Intel Corp., No. 2:04-CV-450 (E.D. Tex Nov. 22, 2006) (invalidating patent), aff’d, No. 2007-1108 (Fed. Cir. Sep. 24, 2007).
12. M. Craig Tyler, Patent Pirates Search for Texas Treasure , TEXAS LAWYER, Sep. 20, 2004.
13. Sam Williams, A Haven for Patent Pirates , TECHNOLOGY REVIEW, Feb. 3, 2006.
14. Tyler, supra note 12.
15. Williams, supra note 13.
16. A complaint in the Eastern District has "has a nuisance value of a few hundred thousand dollars the minute it is filed and served." Id. Even in the Maurice Mitchell case, Intel could not obtain attorneys’ fees, and even its relatively modest bill of costs was rejected. Maurice Mitchell Innovations, L.P. v. Intel Corp., 491 F.Supp.2d 684 (E.D.Tex. 2007).

The Ledbetter case and the Lilly Ledbetter Fair Pay Act

2008-02-04T05:02:00Z

By a 5-4 margin in Ledbetter v. Goodyear Tire and Rubber (PDF), the Supreme Court ruled last May that the 180-day deadline for filing a discrimination lawsuit cannot be stretched to serve as the basis of the filing of suits today based on the lingering effects of employment decisions taken years ago.

This should be noncontroversial. Statutes of limitations are important for justice. Without a statute of limitations, someone can sue for very old alleged injuries, and a defendant would not have a fair chance to defend herself. (Ledbetter sued over her pay after she was retired!) Memories fade, evidentiary documents are discarded, people change employers. If an employee can wait until a middle manager of years ago died before accusing the company of discrimination, justice is impossible. Yet some in Congress, upset at the result in Ledbetter , propose a statute that would entirely abolish the statute of limitations. The House even passed such a law, though the Senate refrained once President Bush threatened to veto the bill.

Ironically, no change in the law was necessary for Ledbetter to recover. As Hans Bader notes , and the five-justice majority stated, there already exists a law that would have permitted Ledbetter to sue. The Equal Pay Act specifically bans sex discrimination in pay and has a longer statute of limitations. But Ledbetter's attorney chose to sue under the more difficult law, Title VII.

Similarly, those victimized by racial discrimination need not rely on the 180-day statute of limitations for Title VII. 42 U.S.C. § 1981 has a four-year statute of limitations for intentional racial discrimination in contracts.

What is really happening is that special interest groups hoping for an unprecedented expansion of liability are misrepresenting the effect of the Ledbetter case to create support for their legislation.

But who does such legislation expanding the right to sue really help? As I note in my most recent law review article , there is an inverse relationship between wages and legal restrictions on employment-at-will. Two economists working for Rand found in 1992 that wrongful termination suits cause a decline in employment about equivalent to a 10% decrease in wages--and that was before the effects of the Civil Rights Act of 1991 were fully measured.

Employers are not stupid. To the extent every employee is a potential lawsuit, that is a cost of hiring an employee. As those costs go up, employers will hire fewer employees, and charge "insurance" to the employees they do hire by reducing their wages to account for the possibility of a future lawsuit. If the misnamed "Lilly Ledbetter Fair Pay Act" passes, the vast majority of workers will be worse off, as money that would have gone to pay employees will instead go to pay attorneys. There should be a better reason to pass such harmful legislation than the fact that Ms. Ledbetter's attorney sued under the wrong statute. If Congress really wishes to help workers, they should reject this legislation, and aim a closer eye at the liability system that hurts our economy.

Racially discriminatory lending?

2008-01-14T21:53:00Z

The NAACP and the City of Baltimore have both sued banks, alleging practices of racially discriminatory lending and foreclosures.

Says the NAACP complaint: "In 2004, African-American homeowners who received subprime mortgage loans from Defendants were over 30% more likely to be issued a higher-rate loan than Caucasian borrowers with the same qualifications." (¶ 1.) Thus, it concludes, the disparity "result[s] from a systematic and predatory targeting of African-Americans." (¶ 6.)

Similarly, Baltimore's suit argues that Wells Fargo is more likely to foreclose in African-American neighborhoods—and that suit does not even attempt to adjust for similar qualifications or finances, just alleging racial disparity. Of course, there is a difference between being targeted for a subprime mortgage loan and accepting a subprime mortgage loan. And I don't believe that African-American homeowners were targeted for subprime mortgage loans because they were African-American. They were targeted because they were homeowners.

Between 2001 and 2005, I was working at a law firm, making a lawyer's salary, multiples of what I make today at a thinktank. And, like I am today, I was also white. And the minute my adjustable-rate mortgage was registered in the title books in 2001, I got several solicitations a week in the mail from fly-by-night mortgage brokers offering to refinance my mortgage with ludicrous financial products. (And when I made the mistake of investigating on-line options for switching to a fixed-rate mortgage in 2004, I also got several e-mails a day and phone-calls a month on the same basis to the point that I switched e-mail providers.) Somehow, I resisted refinancing with a mortgage that was not favorable to me in the long run—I took a 5.25% fixed-rate instead. But I sure was targeted with subprime opportunities, especially as the real-estate prices in my neighborhood skyrocketed about 10% a year. And if, with my skin-color, income, education-level, and impeccable credit-score, I was targeted, so was every homeowner and their grandmother.

To the extent a statistical study says minorities were, ceteris paribus, more likely to receive unfavorable mortgages than whites, the study reflects a specification error, perhaps in failing to account for different levels of consumer education. Another possibility: there is a lot of state-by-state regulation of the mortgage industry. Are subprime mortgages more likely in states with high minority populations, for example? Are subprime mortgage brokers more likely to be aggressive in urban areas in states on the coasts where real estate prices were increasing faster than average, and those states correspond to states with high minority populations?

Note that the CRL study that has been driving the debate and is highlighted in the NAACP suit finds that for many types of loans, whites were "disadvantaged" relative to Hispanics, which would seem to count against a racial explanation (unless one believes that bankers hold a racial animus against whites and towards Hispanics) and more towards a geographic explanation.Note also the irony that these same defendants were accused of failing to offer loans to African-Americans just a few years ago. (See also Point of Law Apr. 1.)

Economist Tyler Cowen has noted reports that show that "as much as 70% of early payment default loans contained fraud misrepresentations on the application." Yet politicians seek to blame banks for the recent rise in foreclosures rather than the consumers who made poor choices—even as it is clear that the banks are losing billions of dollars for their failure to ensure the financial soundness of their loan portfolios. Certainly, there were mortgage brokers out there who, because of poor oversight, signed consumers up for loans they could not hope to pay. But the businesses who purchased these loans are hardly profiting from these defaults, and should hardly suffer from additional punishment from government and the courts. In April, I wrote in the Wall Street Journal about the dangers of additional litigation and regulation to those of us who are honest consumers and borrowers and homeowners.

(Disclosure: I own less than $15,000 in stock in Citigroup, one of the many defendants in the Baltimore case. A version of this post appeared on Overlawyered on January 12.)

Tapping the microphone

2008-01-14T21:44:00Z

Greetings. I'm Ted Frank, the director of the AEI Legal Center for the Public Interest and I'll be blogging here at least once a month in addition to my more frequent blogging at the legal weblogs Point of Law and Overlawyered. I look forward to this conversation.