What Did Obama Motors Know?

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GM — known derisively as “Obama Motors” because of the crony deal it got from the Obama administration — is once again in the news . . . for a massive corporate screwup.

GM is about to be investigated by Congress in the matter of the company’s recall of 1.6 million vehicles. These vehicles had faulty ignition switches. Their malfunctions apparently led to 13 deaths. GM has lawyered up, for it will surely face many tort lawsuits, as it surely should.  Recalls are not unknown in the auto industry, but what is causing Congress to investigate is that it took GM about ten years to get around to the recall. So GM has hired the big-name lawyer who headed the investigation into the 2008 Lehman Brothers failure to be the conspicuous head of its own internal investigation.

This is called: damage control.

When GM switches fail, drivers report that their vehicles become very hard to steer, and the air bags become disabled. So not only is the likelihood of accidents increased, but the likelihood of extreme injury and death also increases dramatically.

GM employees knew about this problem as early as 2004, when reports about it were discussed in the company’s engineering division. This is according to the timeline that GM itself has released. The company is not saying whether or not its engineers asked for a recall, or when the idea of a recall was first suggested.

In a risible act of hypocrisy, the National Highway Traffic Safety Administration (NHTSA) has presented the company with a list of over 100 questions it wants answered. It now appears that the NHTSA knew of the problem as early as 2007. Its people raised the issue in a meeting. But the NHTSA is refusing to answer any questions about it.

The affair has obviously brought back to the minds of investors the old GM — the one that had to be rescued at the cost of billions of taxpayer dollars.

In a lawsuit, settled last year, brought by the family of a nurse killed in a crash involving one of these faulty switches, the plaintiff’s attorney discovered that GM had an engineering team investigating the problem (found to be prevalent in small GM cars). But this was never publicized, so owners of those cars were never warned that they were at risk.

When it was announced that the US Attorney for the Southern District of New York had begun an investigation, GM shares dropped 5%, because the facts seemed to indicate not just negligence, but outright criminality.

This is just the most publicized of GM’s recent recalls. Current GM CEO Mary Barra has launched several other recalls, including one of 1.7 million higher-end vehicles (SUVs and Cadillacs) troubled by an airbag deployment wiring defect. The total number of GM vehicles recalled has now hit 4.8 million for the first quarter of 2014 — a sixfold increase from the number for all of last year. The company has issued seven major recalls in just the first three months of this year.

GM has put aside $300 million to cover immediate costs, but this is obviously not going to cover all the eventual costs. One critic has called for a fund of $1 billion. Some dealers are already reporting slower traffic in their showrooms. Meanwhile, some experts, such as corporate crisis consultant Larry Kamer, are suggesting that this crisis is a good opportunity for Ms. Barra and the “new” GM to show how much they care for customers. Kamer was a consultant for Toyota during its 2010 recall. Toyota recently settled with the U.S. Justice Department on that recall.

Barra has stepped forward to admit that the recall took too long, to offer her condolences to the families of those killed, and to announce that she has assembled a team to help the company handle and “learn from” the incident. Given that Barra was executive director of GM’s manufacturing engineering division while the deaths occurred, one is entitled to be a little skeptical of her new-found burning desire to enshrine the company as the Quality Queen of automotive technology.

As one report notes, Barra has reason to worry. The affair has obviously brought back to the minds of investors the old GM — the one that had to be rescued at the cost of billions of taxpayer dollars. The article notes that Toyota took a major hit to its image from its recall two years ago. Toyota had to pay the Justice Department $1.2 billion for misleading customers. Attorney General Holder boldly declared that the Toyota deal will “serve as a model for how we treat cases with similarly situated companies,” though he didn’t address how that relates to GM.

Here is where one gets suspicious. The feds went after Toyota with a furry when it had its recalls, although the main accusation against it — that some models had “sticky accelerators” — was never proven. When it was charged that floor mats improperly installed by one Lexus dealer in San Diego led to the death of a family, Holder turned his department loose on Toyota, and Secretary of Transportation Ray LaHood loudly proclaimed that Toyota owners should be afraid for their lives.

Of course, while the feds were going after Toyota so furiously, they owned GM. This stank to heaven. However, it is now clear that even as Holder and LaHood were conducting their Obama-jihad against Toyota, their own Obama Motors was known by their own NHTSA to be killing people. Cover-ups are common in government, I suppose, but a cover-up of this magnitude, of a company that had been socialized by the self-same government, is something rare.

Given Eric Holder’s record as an ideological hack, we can laugh at the idea that his Justice Department will honesty investigate GM.

Add to this the fact that at the time a little-noticed provision of GM’s bankruptcy deal was that the “new” (i.e., socialized) GM would not be liable for the tort claims of the “old” (i.e., pre-bailout) GM. This doesn’t just hint of corruption — it reeks. It isn’t clear to what degree GM will use that shield. Law professor David Skeel thinks that while GM is legally safe in using the bankruptcy shield, it would look bad to do so — hardball to the max. And lawyers are already sidestepping the issue by filing suits alleging that the value of some GM models have been hurt, rather than going directly for personal injury tort.

So not only did the Obama administration orchestrate a crony bankruptcy that handed over assets primarily to the administration’s own financial backers, but it apparently stood by and let innocent people die without ordering appropriate recalls. This, so it could run on the election mantra, “Bin Laden is dead, and GM is alive!” Yes, GM was alive, but a number of its customers were dead.

Given Eric Holder’s record as an ideological hack, we can laugh at the idea that his Justice Department will honesty investigate GM. Perhaps what we need is a special prosecutor — somebody outside the control of Holder’s Justice — backed with enough assets to cleanse the stables of Obama Motors.




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Tort Reform vs. “Loser Pays”

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The concept of reforming the American legal system to adopt the “loser pays” system used in most foreign countries, by which the loser pays the winner’s attorney’s fees, is popular among libertarians. “Loser pays” is proposed as a means of deterring frivolous litigation and solving the problem of excessive lawsuits. When Texas recently adopted the system, it was championed as a victory for small business. I have seen John Stossel advocate it, and in Liberty I have seen Gary Jason endorse it in a comment on one of my essays. “Loser pays” is a policy that might seem reasonable to a non-lawyer layperson. To a lawyer like me, unfortunately, it looks like a policy with unintended and unfavorable consequences — and a policy that has little chance of accomplishing its purpose.

The idea that it will deter frivolous litigation hinges on the idea that the frivolous litigant will lose. Yet if frivolous litigants actually stand a good chance of winning, then “loser pays” deters nothing except poor people, who would find it riskier to access the justice system. In torts lawsuits, the laws are such that bad plaintiffs with bad suits often have a good chance of winning. For instance, Liebeck v.McDonald’s was a lawsuit in which a woman sued McDonald’s because she spilled hot coffee and burned herself, for which McDonald’s was held liable at trial for millions of dollars (mostly punitive damages) and ultimately settled the appeal. This is the quintessential bad lawsuit, and it was held up as a poster child for tort reform. Yet the plaintiff won at trial, on the argument that the coffee was excessively hot and the cup’s warning label was too small.

This lawsuit could have been stopped by reforming the law, that is, by creating a bar to punitive damages whenever there is a warning label. Because the case settled, it would have been unaffected by “loser pays.” Under “loser pays” the risk of having to pay McDonald’s’ legal defense fees if the plaintiff lost might have factored into her calculation of whether or not to sue. But she won the case at trial, and if cases like this happen, then who really expects plaintiffs with bad cases to be excessively afraid of losing? As I will explain below, you don't win a lawsuit because of the rationality of your claim but because of the emotions of the jury. So if a tort plaintiff can reach a jury, the jury trial system will be favorable to stupid lawsuits. The best solution is to reform the tort laws so that plaintiffs with ridiculous cases have no legal way to reach a jury.

You don't win a lawsuit because of the rationality of your claim but because of the emotions of the jury.

Meanwhile, “loser pays” is likely to scare poor people with valid claims away from court, by inspiring the fear not only of losing but also of paying the huge legal fees of a wealthier opponent’s high-powered law firm. The landmark civil rights litigation that helped to end Southern segregation might never have been filed in a “loser pays” system.

As for frivolous suits — There are already legal ethics rules and civil procedural rules that forbid and punish lawyers for bringing “frivolous”, “vexatious”, “abusive” suits, and there are provisions that enable judges quickly to dismiss baseless or groundless claims. “Loser pays” will add little to the tools that are already there to deal with the frivolous. In fact, the only way to prevent bad litigation is to eliminate the bad laws that form the legal basis of bad lawsuits.

Let me clear: I am an advocate of tort reform, just not of “loser pays” in particular. There are many tort reform policies to choose from that would reduce unnecessary or harmful litigation without toxic side effects. We could, for instance:

1. Reduce the percentage of the tort plaintiff’s contingent fees that are considered “reasonable.” Legal ethics rules ban lawyers from charging “unreasonable” fees, but a whopping 30% is considered reasonable, and 30% is the typical rate. I think a cap of 5% as “reasonable” would cut the amount of frivolous litigation in half. In this way, torts plaintiff lawyers would enter their practice with some other goal than becoming multimillionaires by exploiting the tragedies of their poor clients.

2. Eliminate class actions. The whole concept of class actions has always bothered me. To say that someone else has the right to litigate my claim without my consent or involvement, just because our claims are identical, is absurd, even if there are requirements of judicial consent and competent representation and the ability to opt out. Judicial efficiency, which is the valid motive of class actions, is not an excuse to let someone else litigate my case. Because class actions have millions of plaintiffs but only one law firm, the lawyers often make millions while the plaintiffs each get a few cents.

Now, there is already a rule in legal ethics codes that bans lawyers from representing multiple clients who have conflicts of interest with one another — something I believe most class action clients have, because each client’s claim is slightly different and might benefit from the case’s being tried differently. The conflict of interest rules are considered to be among the most important, yet class actions have a loophole. So instead of effecting a statutory ban, I propose simply to close the loophole and force class action lawyers to vet every member of the class for conflicts of interest. Any conflict would remove that class member. This would sharply reduce the volume of class action litigation.

3. Change the products liability tort standard from strict liability to negligence. Products liability cases are typically tried under a theory of “strict liability,” which means that fault (i.e. blame) need not be proven. Strict liability is an affront to logic, an abomination. While some see the purpose of tort law as deterrence, I see it as compensatory justice, which means that damages are supposed to restore a victim to the condition he or she would be in, had the defendant not made a bad decision. I view tort law and contract law as twin aspects of free will and personal responsibility, as recognized by law: contract law means that your choices will bind and control you, whereas tort law means that someone else’s choices will not be allowed to ruin you. If defendants have not made bad choices, there is no reason to make them pay.

If a tort plaintiff can reach a jury, the jury trial system will be favorable to stupid lawsuits.

Although a layperson might think of negligence as something that happened to cause an unintended accident, the better understanding is that it consists of the choice to be careless and risk-prone. The strict liability standard has been justified on the grounds that product defects are technologically complicated and it would be too difficult to prove negligence, but this is no excuse for bad law. We should force plaintiffs to prove negligence. Then everyone will benefit from cheaper prices, because manufacturers’ litigation costs will decrease.

4. Reform the standard of negligence for medical malpractice, so as to create a safe harbor. Medical fees skyrocket when doctors are forced to pay huge medical malpractice insurance premiums, and the practice of medicine is compromised when doctors based their decisions on fear of being sued, not the health needs of their patients. My safe harbor proposal is that if a medical practice or hospital had a written policy of procedures designed to prevent the type of malpractice that is at issue in a case, and the policy was implemented and regularly enforced and internally audited for compliance, then negligence cannot be proven. Similarly, if a surgeon or delivery obstetrician had a checklist of risks to prevent, a list that multiple doctors double-checked at the time of the surgery or childbirth, and the negligence at issue was on the list, then the doctor would have entered a safe harbor.

This is simply common sense: if the doctors were taking every possible systematic action to limit risk, then they were not negligent. Such precautionary policies would protect patients from accidents far more effectively than the tort lawsuits that drive up medical costs. Such a negligence test would cut frivolous lawsuits. State legislatures can codify my safe harbor rule, but clever judges could tacitly incorporate it into preexisting common law med mal negligence standards.

5. Put a statutory dollar limit cap on damages. My understanding is that a civil trial is really just a popularity contest in which the jury votes for the lawyer it liked the most. Instead of faithfully interpreting the judge’s instructions to the jury (which are often so technical that only a lawyer could properly apply them), the jury awards lots of money to the party it likes and punishes whichever parties it disliked, by making them pay huge damages. Usually poor old helpless plaintiff Mr. P, the janitor with a wife and five children who is suing because he broke his leg, is more sympathetic than the rich big business defendant Corporation D, especially when Mr. P’s lawyer slyly insinuates that D cut corners on safety in order to make a profit. This is the open secret, the 800-pound gorilla in the room, when people talk about tort lawsuits and tort reform. This is also one reason why “loser pays” is ridiculous: from a practical, pragmatic, no-nonsense point of view there is no reason to believe that the loser is the one who deserved to lose.

The right to a jury trial in cases that are “at law” (i.e. where the plaintiff seeks money) is constitutionally “inviolate,” and I leave for another essay the question of whether jury trials should be comprehensively reformed. However, at a bare minimum justice demands that we solve the problem of headstrong juries by removing jurors' discretion to award damages in excess of what the intent of the law indicates, simply because they happen to feel sympathy for one side or another. Activist judges who do not faithfully apply the law are a problem, but so too are activist juries. A legislative statutory solution to place reasonable, honest dollar value caps on each of the different types of damages, or to lower the caps that already exist, is one feasible fix.

In conclusion: “loser pays” is far inferior to the American Rule, in which each party pays his own attorney’s fees regardless of who wins or loses the trial;but there are tort reform solutions available if voters elect legislators and judges who will use them.




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