Working Paper No. 04-14:
Can Tort Reform and Federalism Coexist?

Author(s):

Michael Krauss, Robert Levy

Date Posted: 2004

Availability:
Abstract (below) | Full text (most recent) on SSRN

Abstract:

Critics of federal tort reform have usually come from the political left and its allies among the trial lawyers, who favor a state-based system that can be exploited to redistribute income from deep-pocketed corporations to "deserving" individuals. We offer a totally different criticism—constitutional in origin—that embraces the need for reform but reaffirms this principle: The existence of a problem, however serious, does not justify federal remedies outside the scope of Congress's enumerated powers.

We begin with the Commerce Clause but find that interstate trade does not, by itself, justify federalizing tort law. On the basis of examples involving fast food, guns, and medical malpractice, we argue that substantive federal reforms are neither necessary nor proper. If states persist in imposing unjust rules on out-of-state defendants, federal procedural remedies are available.

Next, we consider the Due Process Clause of the Fourteenth Amendment and dissect the Supreme Court's recent State Farm decision covering punitive damages. We also discuss the controversies over judicial activism and substantive due process. Despite the limitations of substantive due process, we conclude that the Court was correct to rein in punitive awards.

Most important, we recommend reforms that are compatible with the tenets of federalism. Some reforms can be implemented at the state level—including solutions to excessive punitive awards, curbs on joint and several liability, payment of attorneys' fees when government is the losing party in a civil lawsuit, the prohibition of contingency fee contracts between government and private lawyers, and restraints on litigation by government to recover expenditures made on behalf of private parties.

At the federal level, we endorse two procedural reforms. The first involves state "long-arm" jurisdiction, which determines whether an out-of-state entity can be sued in a local court. Currently, out-of- state businesses find it exceedingly difficult to avoid oppressive state tort laws. A second federal reform concerns "choice-of-law" rules that determine which state's laws control a multistate suit. A federal choice-of-law rule would prevent states from exporting discriminatory tort regimes.

Taken together, state substantive reforms and federal procedural reforms can curtail abuses while respecting time-honored notions of dual-sovereignty federalism.