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THE PEOPLE VS THE USA

Along with creditors and shareholders, a third group is developing significant ownership claims on American companies: litigants. SEALED Air, the manufacturer of Bubble Wrap, should have been protected from a financial collision as well as any product wrapped in the firm’s famous plastic. The corporation’s margins and grow prospects are good, its patent protection is strong. Several years ago, however, Sealed Air made what in retrospect can be seen as a classic American blunder: it thought it was merely acquiring another plastic-packaging company; instead, it was buying a legal nightmare. The problem was the seller, W.R. Grace, a conglomerate that now teeters on the edge of bankruptcy form asbestos litigation. Attorneys pursuing Grace reckoned Sealed Air’s profits could be theirs if a court could be convinced that along with the acquisition of any Grace subsidiary came Grace’s full liabilities – despite the fact that asbestos-related products had never been produced by the firm which was bought by Sealed Air. When word of the litigation spread, Sealed Air’s shares and bonds were both hit hard. Regardless of the outcome of the court case, Sealed Air, as the defendant, is already paying a higher cost for lawyers, and a higher cost for capital. Of the many ways in which companies can end up owing vast sums of money in litigation, six currently stand out. Product-liability cases are the single most common area, followed (in no particular order) by suits concerning antitrust, intellectual property, employee conduct, contractual failure and, increasingly, shareholder actions. There is nothing new about the categories themselves; what has changed is that each has become, in essence, a huge industry in itself, which has been fed by ever larger settlements. Because litigation risk is difficult to analyse, when the financial markets do wake up to these concerns, they often panic. As a result, the indirect costs from higher financing charges can become as important as any potential verdict or settlement. Often, litigation is not the trigger for a company’s share price decline, but rather the result. This is because any company whose share price falls sharply is exposed to legal action. Law firms say these suits prompt much needed change. But it is questionable whether they make economic sense, as they typically end up taking money from films (i.e. shareholders) and returning it to them minus lawyers’ fees – which can one third of the settlement. Regulation through litigation. On the face of it, why shouldn’t a company that does something wrong pay the price? This sense of justice, after all, is why Americans love the novels of John Grisham and movies such as Erin Brokovich, with Julia Roberts. The trouble is, there is no incentive for a plaintiff lawyer, or a jury, to weight up the broader economic consequences of huge awards against companies, especially multi-million-dollar punitive damages. Pushing for reform would no doubt be easier if there were more precise information on the cost of litigation. Remarkably, that information ranges from poor to outright wrong, says Deborah Hensler, a professor at Stanford Law School. State courts often provide no data, while data provided by federal courts can be misleading. Most litigation is threatened and settled, leaving no financial trace. With more effort, these costs could be captured. Federal agencies routinely collect data from companies on employee benefits and pension plans for statistical surveys, notes Ms Hensler. The same methodology could be used to compile information about litigation payouts. Reacting to a sense that verdicts have got out of hand, the Supreme Court has heard a number of appeals and even thrown back a multi-million-dollar verdict which had been trigged by a repair job at a car dealer that was estimated to be worth only $4,000 in compensation. Penalties, the judges ruled, must be tied more most closely to harm. It is not yet clear that anyone is listening.