THE AMERICAN JUSTICE PARTNERSHIP was launched in January 2005 under the auspices of the National Association of Manufacturers to stop abuses of the legal system at the state level and to lobby for tort reform. Bernie Marcus, co-founder of Home Depot, helped create the AJP, which is chaired by Steven B. Hantler, assistant general counsel at DaimlerChrysler. Here are highlights of a conversation with Marcus and Hantler:
We can't resist asking you, Mr. Marcus, about your statement that you couldn't create a Home Depot in today's business climate. Why not?
Marcus: It's not only because of our tort system, but also for many other reasons. Congress, state governments and the regulatory system have absolutely turned their backs on the free enterprise system. Sarbanes-Oxley is probably one of the worst laws I've ever seen in my life. It's taken the risk factor out of business. When we started Home Depot years ago, everything we did was a risk. When we doubled in size, it was a major risk. If we had to worry about being sued every inch of the way, or worry about a board that was not willing to back us, we could never have become what we are. But today's boards are risk averse. Why would you want to take a risk when you're putting your own wealth at risk?
And having total outside boards doesn't make a lot of sense to me. When we started Home Depot, our board was made up of shareholders. They contributed. They were involved. Whatever happened to the company had a great effect on their assets. You always knew you got the right information. You always knew you had a board watching you all the time. Having a college professor on the board may look great, but it doesn't help your business too much.
Hasn't there been a slight decline in the number of class actions being filed?
Marcus: I read recently that part of the decline can be attributed to the lawsuits not filed by Milberg Weiss, which is under indictment. However, we still have a lawsuit epidemic in this country. The good news is that more businesses are beginning to recognize that the litigation epidemic is a terrible drag on the economy and their business.
If you are a director on a board, I would like you, at the next board meeting, to ask the CEO, after he or she goes through all the numbers, including profits, return on investment and all that, "What does litigation cost us every year?" It's an enormous number for large and small companies, but it's not on the balance sheet. It's nowhere in the P&L. It's like it doesn't exist.
How much does it cost?
Hantler: It was $246 billion in 2004 and is approaching $264 billion for 2005. What's not reflected in those numbers is the damage to share value and company and product reputation when companies are under the withering assault of the trial bar. The reserves that companies are having to hold have gone up exponentially, and that money is not hitting the bottom line.
In your view, what has to happen?
Marcus: I went to the Securities and Exchange Commission at one point and asked them whether they would insist on every company having that number as part of their balance sheet. Shareholders should know what a threat this is to the system.
What did the SEC tell you?
Marcus: We got no answer from them. I've had private discussions with many CEOs, and they all say that they wish something like that would happen. Until the guys in Washington understand how serious this matter is, they're not going to react. What we have started is a state-by-state program. We've been able to bring together a coalition of about 60 national and state organizations, including the National Association of Manufacturers, the Council of State Chambers, the Council of State Manufacturing Organizations, the American Tort Reform Association, the Manhattan Institute and many other trade and tort reform groups.
There is a common enemy out there. Plaintiffs' lawyers are well-organized. They help elect activist judges at the state level. Most companies don't want to get involved because it doesn't look right. It may not look right but it's having a dramatic impact on their business.
Hasn't one of the big abuses been "jurisdiction shopping," where the class action lawyers simply shop to find a friendly judge?
Marcus: There are many legislatures that have passed tort reform, but it too often gets thrown out by activist state Supreme Courts. For years and years, activist judges have been elected with the support of the plaintiffs' bar. There are people entrenched in all sorts of places. You go to one of the "judicial hellholes"—and the entire state of West Virginia has been designated a hellhole— and you're a dead duck. We've been able to get tort reform in various states by focusing on state races. We've been able to do it in Alabama, Michigan, Texas, Georgia, Illinois and Mississippi, to name just a few states. We don't go near national politics. We're interested in the state battles.
What are the broader economic effects of the lawsuit epidemic?
Marcus: It goes into the price of every product. We all scream about pharmaceutical costs. I just had a prescription filled. It was a lot of money for a 30-day supply of pills. But the truth is, that manufacturer somewhere along the line is going to be sued for $6 billion, $7 billion, $8 billion. The company has to build up its war chest. Every product we sold— for example, lawn mowers, ladders, hammers—there's a dollar amount built into those products from the manufacturers.
