I just finished a series of meetings with a client, a lawyer who no longer practices law but has shrewdly invested in a series of startups. He’s amassed a multi-million dollar fortune – and a collection of frivolous lawsuits.
One such lawsuit came after he decided not to invest in a company because he didn’t think he could trust the company’s owner. The owner then sued him for fraudulent legal representation, even though he’d never hired my client as a lawyer. It took five years and tens of thousands of dollars in legal fees before the case was dismissed.
More than 15 million civil lawsuits are filed annually in the US – that’s more than 40,000 per day. But it should come as no surprise that the US is the world’s lawsuit leader, since 80% of the world’s lawyers practice in the US. President Donald Trump has been involved in a staggering 4,000 lawsuits during his career. At the time of his election, 75 suits were still pending.
One reason that lawsuits are so prevalent in the US is that lawyers in every state can take cases on contingency. The lawyer handling the case receives no fees unless money is recovered from the defendant. As a result, anyone with a chip on their shoulder can sue you and risk nothing more than time and energy.
Another factor encouraging litigation is the growing number of federal and state laws that give a plaintiff (the person suing) grounds to recover damages against employers, landlords, and other businesses. Examples include the Americans with Disabilities Act, the Fair Credit Reporting Act, the Racketeer Influenced and Corrupt Organizations Act, and many others.
The concept of "strict liability" means that even if you're in no way negligent, you can still be liable for damages in a lawsuit. And under the theory of "joint and several liability," you can be held fully financially responsible regardless of your individual share of the liability. If you're 1% responsible for a $10 million loss, you might be required to compensate the successful litigant the full $10 million! Almost every state has some form of joint and several liability law in force.
Most civil lawsuits originate in the concept of tort, a French word meaning wrong. In every state, those who believe they have suffered an injury have the right to sue the person or company they believe caused their injury. The injury can be financial, physical – even emotional.
For instance, in 2014, a baseball fan sued ESPN for $10 million for defamation and intentional infliction of emotional distress. ESPN’s offense? Their announcers made fun of the man after he fell asleep at a game broadcast by the network. The lawsuit was dismissed in 2015, no doubt after ESPN paid thousands of dollars in legal fees.
But my all-time favorite example of a frivolous lawsuit happened in 2005 when a former administrative law judge filed a $67 million lawsuit against a dry cleaning service for losing his favorite pair of pants. After the owners spent more than $100,000 defending themselves, a judge threw the case out. But the damage was done: the business was forced to close.
No more frivolous lawsuits, indeed!
More than a decade ago, a group of legal scholars at the Pacific Research Institute tried to calculate the full socio-economic costs of America’s lawsuit obsession. The results were stunning. In a report published in 2006, the researchers concluded that the then-total cost of the tort system was $865 billion annually – at that time, more than 6% of the total value of the US economy. According to the report, the annual price tag, or “tort tax,” for a family of four in terms of costs and foregone benefits was nearly $10,000.
Tort reform efforts have lowered lawsuit risks in some states. In Texas, for instance, legal reforms enacted in 2003 to limit damages for pain and suffering in medical malpractice claims led to some very desirable results. In 2007, even the liberal-leaning New York Times had to admit:
Four years after Texas voters approved a constitutional amendment limiting awards in medical malpractice lawsuits, doctors are responding as supporters predicted, arriving from all parts of the country to swell the ranks of specialists at Texas hospitals and bring professional healthcare to some long-underserved rural areas.
By the end of 2013, a decade after the reforms were enacted, medical malpractice premiums had fallen 50% in Texas, and the number of physicians practicing medicine in the state had almost doubled.
The process has been less smooth in other states. In 2017, the Florida Supreme Court ruled that tort reform legislation that limited pain and suffering awards violated the state constitution. The Supreme Courts of Illinois and Georgia have rejected pain and suffering caps as well.
One practice that encourages lawsuits has exploded in the last decade: the litigation funding trend. If you search the term "lawsuit funding" on Google, you’ll get back an amazing 130,000 results. The top results on my search:
Litigation funding made the headlines in 2016 when Peter Thiel, a founder of PayPal and advisor to Donald Trump, paid a lawyer more than $10 million to sue Gawker, an online media portal and blogging network. Thiel paid the lawyer on behalf of numerous plaintiffs, although he didn’t sue Gawker himself.
It’s no surprise that Thiel didn’t like Gawker. In 2007, it “outed” him with an article entitled “Peter Thiel Is Totally Gay, People.” But Thiel had the last laugh. In 2016, a Florida jury awarded $140 million to former professional wrestler Hulk Hogan in litigation that Thiel financed against Gawker. Within weeks, the site was forced into bankruptcy and shut down.
Could you be the next defendant forced to fork out hard-earned cash to settle a frivolous lawsuit? If you're wealthy, you're a prime target, especially if you display your wealth openly. Professionals — doctors, lawyers, engineers, etc. — are frequent targets. Disputes among relatives often lead to unwanted litigation, particularly after the death of a wealthy family member.
How can you protect yourself? Liability insurance is a great start, but it’s not always enough. For instance, it’s now routine in professional liability cases for a plaintiff to allege fraud, which liability insurance rarely covers. It’s a good practice to avoid obvious invitations to litigation, such as offering personal guarantees. Try to isolate liabilities by using corporate entities — especially limited liability companies — to operate any businesses you own. And moving assets outside the US is a great strategy to make your wealth less visible and gain greater protection for it.
Better yet, join Nestmann Library. Remember: The moment a court summons arrives on your doorstep, it’s too late.
