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Senate Holds Hearing on Abusive Lawsuits

Senate Hearing on Lawsuit Abuse

On November 8th, the Senate Committee on the Judiciary held a two hour hearing entitled “The Impact of Lawsuit Abuse on American Small Businesses and Job Creators”. Though it at times lacked focus, it was an honest attempt to address the growing issue of frivolous lawsuits flooding the court system. Witnesses made it clear that small businesses are suffering the most from rampant lawsuit abuse.

The hearing began with Chairman Chuck Grassley (R-IA) agreeing that frivolous lawsuits are being directed toward small businesses. He said that they are often ill equipped to finance long drawn-out legal battles to defend their compliance practices. In his view the hearing is “a necessary and overdue checkup of” the civil justice system.

Witnesses at the Hearing:

  • Elizabeth Milito. Senior Executive Counsel at the National Federation Of Independent Business (NFIB), which represents small businesses
  • Professor Myriam Gilles. Former plaintiff’s attorney at Kirkland & Ellis and current professor and vice dean at the Benjamin N. Cardozo School of Law at Yeshiva University
  • John H. Beisner. Partner at Skadden, Arps, Slate, Meagher & Flom LLP on behalf of The U.S. Chamber Of Commerce Institute for Legal Reform

Ms. Milito stated that three-quarters of small business owners are concerned about frivolous or unfair lawsuits which force them to make decisions they would otherwise not make. As a representative for the NFIB, which represents the small business interest of its members who typically employ 10 people and report grosses near $500,000 per year, she is well aware of their growing concerns.

She testified that small businesses are at a disadvantage when lawsuits alleging regulatory violations are brought against them. Not having in-house legal counsel has made small businesses the targets of unwarranted lawsuits. Often the lawsuits target small businesses by filing “cookie cutter” lawsuits in mass with the intent of winning a quick settlement.

Mr. Beisner emphasized the harmful effect demand letters have on small businesses. He said that small businesses are in a poor position to evaluate their likelihood of successfully defending themselves in court. He too agreed that plaintiffs’ attorneys frequently look for large easy payouts and in the process have abused the class action rules for their own financial gain.

At times the meeting shifted to a discussion of the recent arbitration ruling which the President has already signed into legislation. Had the new rule been approved, it would have required banks to remove the forced arbitration clauses from their contracts as the method for resolving issues (see blog article:  CFPB Arbitration Rule Voted Down By Senate).

Senator Al Franken (D-MN), again criticized the Senate’s decision to overturn the proposed arbitration rule. He believes it is wrong to allow financial services companies to ban their customers from bringing class action lawsuits.

Professor Gilles argued that the problem in the civil justice system is not too many frivolous lawsuits, but too many meritorious ones being pursued in arbitration. From there the hearing descended into an argument about an article she wrote for the University of Pennsylvania Law Review which stated . . .

“Class action plaintiffs’ lawyers are indeed independent entrepreneurs driven by the desire to maximize their gain, even at the expense of class members’ compensation.”

Though no decisions of substance came from the hearing, senators are at least listening to the voices of small business owners. For now, small businesses owners are still at a disadvantage in court when faced with allegation of compliance violations. As hearings continue, it is more important than ever for small business owners to confront their elected representatives with their own legal horror stories.

Only by speaking out can the real victims of meritless lawsuits be recognized. For real change in the courts, small business owners need to affect a shift in public opinion by demonstrating that all business are not preying on ill-informed consumers. In some cases it is actually the other way around.