Small Business

After the $54M Dry Cleaner Lawsuit


Tort reform advocates cite small-business legal woes in their push to reduce lawsuits. But entrepreneurs aren't worried, research suggests

Advocates for so-called tort reform rejoiced when a Washington, D.C., judge ruled last month in favor of a family-owned dry cleaner fending off a $54 million lawsuit filed by a disgruntled customer who claimed the cleaners lost his Hickey Freeman pants. The U.S. Chamber of Commerce Institute for Legal Reform issued a statement that said the case "proves that the system is truly broken and in bad need of repair." The American Tort Reform Assn. issued another that said the District of Columbia needs to "make it a lot harder for lawsuit extortionists to shake down law-abiding small businesses."

The two groups, who lead the lobbying effort to make the justice system more business-friendly, will host a joint fundraiser on July 24 for the defendants, Soo and Jin Nam Chung, who have suffered lost business on top of their legal bills. It's easy to see why the Chung case has become a cause célèbre: A litigious customer chased a gargantuan claim that jeopardized the livelihood of a hardworking family of South Korean immigrants.

Little Fear of Litigation

Tort reform advocates often cite horror stories like the Chungs' when they call for scaling back lawsuits. There is no question that small businesses have a stake in the discussion, as do consumers, trial lawyers, insurance companies, and large corporations (see BusinessWeek.com, 1/8/07, "How Business Trounced The Trial Lawyers"). But the interests of entrepreneurs don't necessarily always align with those of bigger companies, and some advocates see others trying to co-opt small business to advance a Big Business agenda.

The Chungs, who are accepting money raised by tort reform advocates to defray their legal bills and the toll the case has taken on their business, are staying out of the debate. "They're not interested in making this a partisan issue and they're not taking sides," says their lawyer, Chris Manning.

Still, research by legal reform advocates suggests that most small-business owners don't lose sleep over frivolous lawsuits. A survey released in May by the Institute for Legal Reform found that more than half of small-business owners said they were "not too concerned" or "not at all concerned" about getting sued, and in 2006 members of the National Association of Manufacturers ranked fear of litigation last on a list of 10 factors hurting their businesses.

"It is not as big an issue with our membership" as it is for large corporations, says Robert Staub, founder of the National Small Business Chamber of Commerce, a three-year-old organization based in Tennessee that represents more than 400 businesses, with an average of 12 employees each.

Associated Costs

Plaintiffs running amok may not be as big a concern for small businesses as tort reform advocates make them out to be, but no business owner wants to be in the Chungs' situation. "Small businesses simply can't afford to have the specter of a lawsuit hanging over them," says Gary Palmquist, legislative affairs manager for the National Federation of Independent Business. "Oftentimes even responding to one lawsuit can bankrupt a small business."

According to an independent study commissioned by the Institute for Legal Reform, U.S. firms with less than $10 million in revenue incurred an estimated 69% of liability costs in 2005—including insurance premiums, settlements, and awards. Insurance premiums and payouts by insurers constituted a far greater share of the cost to small businesses—79% compared with 39% for firms with more than $10 million in revenue.

It's clear small businesses could benefit from policy changes that lower the cost of liability insurance. "As an insurer what you're always looking for is predictability," says David Golden, director of commercial lines for the Property Casualty Insurers Association of America. "You have to cover the losses with appropriate premiums. Affordability then comes in to controlling the costs of what's coming out of those lawsuits."

In states such as Texas, which limited medical malpractice awards in 2003, insurance rates for doctors have dropped and more insurers entered the market, boosting competition. But insurers warn that there is no direct relationship between tort reform and the cost of premiums. "Most insurance industry leaders do not make any promises of lower premiums following tort reform," says the American Insurance Assn. on its Web site.

Support Tort Reform?

That may not reassure small-business owners who are being asked to get behind tort reform, particularly because they can find themselves at the plaintiff's table. "Very often it's small companies being harmed by larger corporations and needing to seek redress through the civil justice system," says Jeff Milchen, cofounder of the American Independent Business Alliance.

What reforms could have truly helped the Chungs? "What would benefit small-business owners and the public interest in general is to crack down on attorneys that are filing groundless lawsuits and to have meaningful penalties," Milchen says. His group has no formal position on tort reform. Members have never suggested that it's a priority, and he's skeptical of the groups pushing for broad changes in the name of helping small businesses. "Any time anyone that represents major corporations is trying to advance their agenda, they're not going to come out and say this is what we want as a global corporation," Milchen says. "They're going to try to use independent business owners to try to change policy."

John Tozzi is an intern for BusinessWeek.com.

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