A friend and colleague—and a very successful trial lawyer—assures me "there are no frivolous lawsuits." I believe him, too, at least with respect to the cases he accepts. Unfortunately, many other lawsuits can only be described as frivolous.
One study estimates that 50,000 new lawsuits are filed every day in U.S. state and federal courts. At that rate, the odds are that every person in the United States will be sued sometime in the next 16 1/2 years!
Why the U.S.A. Leads the World in Lawsuits
There are many reasons why the United States is the world leader when it comes to lawsuits.
In most countries, if someone wants to sue, they have to pay a lawyer to do so. That sounds like a reasonable proposition, but in the United States, lawyers can take cases on "contingency." That means the attorney receives no fee unless money is recovered from the defendant. As a result, there's nothing to prevent persons with a chip on their shoulder from suing you, even if they don't have the money to hire an attorney. It also means trial lawyers constantly search for "deep pocket" defendants.
If that's not bad enough, numerous Web sites promise to make it easier to file lawsuits. For instance, www.sueeasy.com pairs trial lawyers and potential litigants, promising to let you "take the first step towards resolving grievances, ONLINE!" To encourage even more lawsuits, investors have formed companies to finance lawsuits by buying a share of the settlement. When I searched on Google today under the term "lawsuit funding," I received an amazing 159,000 hits.
Another reason lawsuits are so prevalent is an avalanche of laws from Washington, D.C. inviting people to file lawsuits in U.S. courts. For instance, just a few months ago, President Bush signed a bill amending an obscure law called the “Foreign Sovereign Immunities Act. "The bill makes it easier for terrorist victims to recover civil damages. But as I describe here, it's also helped to launch lawsuits against U.S. companies that never had anything to do with terrorism. Other federal laws that encourage individuals to file lawsuits include the Americans with Disabilities Act, the Racketeering in Corrupt Organizations Act (RICO), and many others.
No More Frivolous Lawsuits?
Some people collect stamps, coins, or antique furniture. I collect stories of frivolous lawsuits. Here are a few of the more outrageous examples recently crossing my desk:
- Group claims allergy to wi-fi signals. A group of "electro-sensitive" individuals in Santa Fe, New Mexico, says they're allergic to wireless Internet signals. And they're suing the city for discrimination under the Americans with Disabilities Act. The group wants the city to ban wi-fi devices in all public buildings.
- "Chaperone" sued for wrongful death. Have you ever accompanied your child on a school trip? If you have, and someone else gets hurt, you might be sued for failing to act as a "responsible party." That's what happened to Susanne Sadler, who accompanied her cheerleader daughter on a trip to the 2004 Hula Bowl. Trouble is, another cheerleader on the same trip did a little too much partying and plunged naked to her death from a ninth-floor hotel room. Sadler claims that she never agreed to chaperone anyone. Nonetheless, the parents of the dead cheerleader sued her, and an arbitrator awarded the parents $690,000.
- Packaging company sued for unintended use of product. In 2003, fire raced through the Rhode Island Station nightclub, killing 100 people. A company called Sealed Air that manufactures polyethylene foam is now on the hook for $25 million because the nightclub owner used this product for soundproofing, which allegedly made the fire spread more quickly. There's no evidence that the owner used Sealed Air's polyethylene foam for soundproofing. Nor is there any evidence that Sealed Air ever promoted its foam for this purpose. Nonetheless, under Rhode Island's "joint and several liability" law, if Sealed Air were found to be even 1% liable for the fire, it would have to pay the full amount of a possible multi-billion-dollar claim. To avoid that possibility, Sealed Air will pay $25 million in what amounts to protection money.
- Bar responsible for safety of customers who don't consume alcohol. "Dram shop laws" in all 50 states require bartenders to refrain from serving alcohol to obviously intoxicated patrons. In New Jersey, however, a court has gone even further. It ruled that a bar owner may be sued for negligence because he did not try to protect a patron who purchased only soft drinks at the bar. In this case, the owner was sued for failing to prevent a non-drinking patron from getting into a vehicle driven by another person who was visibly intoxicated. The passenger died in a subsequent accident. There's no reason to believe that a non-drinking guest in your own home wouldn't be covered by the same legal logic.
Could You be Next?
In every one of these cases, trial lawyers sued a "deep pocket" defendant or forced a settlement on the threat of even a larger financial exposure. Could you be next?
It's hard to say. But if you're wealthy, you're a prime target, especially if you display your wealth openly. In addition, professionals—doctors, lawyers, engineers, etc. —are frequent targets. Disputes among relatives also often lead to unwanted litigation, particularly after the death of a wealthy family member.
Six Ways to Protect Your Wealth and Privacy from Stupid Lawsuits
1. Purchase liability insurance for your home, your business, and your vehicles. Don't stop at the minimum limits, either. If you can purchase an "umbrella" policy with limits of US$1 million or more, do so. However, liability insurance won't cover against intentional "torts," such as libel, slander, or harassment. This also doesn't cover punitive damages, or damages or injuries resulting from your violation of any law or regulation.
2. Avoid personal guarantees. Recently, I met someone who signed a personal guarantee for a loan on a "can't miss" investment. The problem was that he signed it a few weeks before the Sept. 11 terrorist attacks. After the attacks, the value of the investment collapsed and he was left holding the bag. Seven years later, he's still on the hook for the loan, to the tune of over $1 million.
3. Max out pension and retirement plans. Federal bankruptcy law prevents creditors from seizing most pensions, retirement plans, Social Security, and other benefits tied to age, illness, or disability. In some cases, this protection exists only if you declare bankruptcy—which you may not want to do. However, there's no limit on the amount that can be protected from bankruptcy in retirement funds, except that amounts accumulated in IRAs are limited to US$1 million.
4. Keep a low profile. Keep your wealth where it's not visible; don't flaunt it. For instance, never drive a trophy car—drive a middle-class vehicle instead. And if you own your own home, make sure it's in a middle-class area, not in the most expensive part of town. If you crave luxury, spend your money on the inside—on furnishings, electronics, etc.—where it's less visible.
5. Use business entities—especially limited liability companies—to hold title to your assets, unless doing so would result in a significantly higher tax bill. LLCs aren't asset protection panaceas, but are far more resilient against lawsuits than holdings in your own name. Single-member LLCs, however, aren't nearly as effective for asset protection as if there are multiple owners.
6. Move "nest egg" assets outside the United States into offshore jurisdictions that are serious about asset protection. The kind of frivolous lawsuits we take for granted in the USA simply aren't tolerated in countries like Switzerland, Nevis, Panama, and many other offshore centers.
Even with these precautions, you may not be immune from attacks by American trial lawyers. But you will have come a long way in the right direction!
Copyright © 2008 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society.)
