Already a Bloomberg.com user?
Sign in with the same account.
Legal Affairs: TORT REFORM
CLEARING A RUNWAY FOR PLANEMAKERS
North Dakota Governor Edward T. Schafer was encountering a lot of turbulence in the air. On a recent flight across the vast rural state, his pilot, Roger Johnson, was haranguing him about the skyrocketing cost of flying, due largely to liability insurance. "He's a maniac about this," says Schafer, who flies around the state often.
Naturally, Schafer, a Republican, was interested when a group of academics and legislators came up with a scheme to attract airplane manufacturers to the state and mollify his pilot at the same time. But what really excited him was the bait. Instead of offering the typical package of tax breaks and cheap electricity, the North Dakotans proposed luring manufacturers with liability relief. Last month, North Dakota's House passed bills to limit aircraft makers' liability. Now, with approval expected from the Senate, the state is on the brink of enacting some of the most creative tort legislation anywhere. "We're out in front on this one," says Schafer.
Hurtling toward tort reform, North Dakota finds itself in step with the rest of the country. Pushed by business and fueled by public outrage over mega-awards for sprained knees and spilled coffee, tort reform is heating up as never before. In Washington, the House is expected to pass tough anti-litigation measures in mid-March as part of the Republicans' Contract With America. This will include limits on punitive damages and on awards for pain and suffering. But the battle will be pitched in the Senate, where strong opposition from the White House is expected.
The states aren't waiting for Washington. More than 70 tort-reform bills are pending in at least 31 states, from New Jersey to Texas. But nearly all of the bills would merely shift costs in the legal battles from would-be defendants to plaintiffs, while doing little to avoid disputes. Indeed, the battle over tort reform promises to be nearly as nasty as a suit itself, dividing Americans into winners and losers.
The North Dakotans propose something new: an agreement before the accident, rather than a fight after it. The root of the problem, they maintain, is the ascendancy of torts over contract law. In the small-airplane market, for example, the buyer and the seller rarely hammer out their financial risks in a contract. Instead, the manufacturer, fearing suits, buys enormous liability insurance, then charges the buyer for it indirectly by marking up the price of the plane, often doubling it. These high prices, manufacturers say, have driven 20 of 26 small-aircraft manufacturers from the business in the past 20 years.
OUT-OF-STATE TEST. The North Dakota bill, with its "aftermarket risk contract," attempts to bypass torts. Essentially, the state would force buyers and aircraft manufacturers to sign an agreement stating how much liability risk each side will bear. The buyer takes out insurance, similar to an auto policy, and relieves the manufacturer of much of its liability--though the manufacturer remains on the hook for defects or fraud and could face suits from injured third parties. Proponents say self-insuring customers could reduce the liability tab for their planes by two-thirds to three-quarters, lowering the price of a $125,000 plane to $75,000.
The crucial question is whether North Dakota's trailblazing contracts would hold up in other states. The North Dakotans maintain that contracts, from marriage licenses to auto insurance, lose nothing when they cross state lines. But plaintiffs are certain to challenge North Dakota contracts in out-of-state courts. In fact, the North Dakotans don't expect many of the small manufacturers to set up shop in the state until the contracts pass this legal test.
But if the law does hold up, North Dakota will certainly have targeted an industry hungry for legal relief. Shifting markets and soaring legal costs have virtually wiped U.S. companies out of the single-piston plane market. Domestic production of the light planes has plunged from 17,800 to 400 over the past two decades. Industry leader Cessna Aircraft Co. dropped its light-aircraft line altogether, shifting production to faster and pricier corporate jets. Piper Aircraft Corp. was forced into bankruptcy largely because of liability claims. "The light-aircraft industry is sucking air out of a bad hose," says North Dakota Aeronautics Commissioner Gary R. Ness.
The liability costs have left niches where there once was an industry. Kit makers, for example, which skirt liability by building 49% of a plane, are on the rise. Fisher Flying Products, a manufacturer 130 miles southeast of Bismarck, builds 150 airplane kits a year for customers as far-flung as South Korea. CEO Darlene Jackson-Hanson says she would expand Fisher under North Dakota's proposed law. And Alan L. Klapmeier, president of Cirrus Design Corp. in Duluth, Minn., says the bill would make it "much more likely" that Cirrus, now building planes in Israel, would shift work to North Dakota.
HOMEGROWN TALENT. Bismarck's tort reformers didn't choose the aviation industry out of the blue. The University mf North Dakota at Grand Forks is home to the largest civilian flight-training school in the U.S., one of the country's biggest customers for light aircraft. The state also boasts the country's best high school graduation rate. That makes for a high-quality workforce--but only if there are jobs. Proponents say the legislation could lead to 2,000 to 5,000 new jobs--a veritable boom in a state of 650,000.
The promise of economic goodies hasn't won over everyone. Consumer advocates, plaintiff lawyers, and industry watchdogs, citing consumer rights, will likely challenge the law in court. Some industry insiders are also skeptical. Piper Aircraft CEO Charles M. Suma suggests that plaintiffs could simply hunt down out-of-state suppliers to the North Dakota industry as a means to bring a case elsewhere. "What about the guy who built the avionics in Wichita?" he asks.
That hypothetical guy and others like him will surely turn up in early lawsuits after the North Dakota bill passes. But if the law holds up and small manufacturers begin scouting for sites in the Badlands, reformers in Washington and elsewhere are sure to read North Dakota's new contracts very carefully.
A MAGNET FOR INDUSTRY
To attract light-aircraft makers, North Dakota legislators are pushing tort reform that:
OFFERS manufacturers a large measure of protection from
IMPOSES a 10-year statute of limitations. Current federal law is 18 years.
REQUIRES manufacturers and customers to enter a contractual agreement, which, among other things, makes the purchase of liability insurance mandatory.By Stephen Baker in Bismarck, N.D., with Linda Himelstein in New York and Catherine Yang in Washington