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SMALL BUSINESS LIABILITY REFORM (H.R. 2813)

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY REFORM AND 

OVERSIGHT

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC, JULY 22, 2004

Serial No. 108–76

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

BRAD MILLER, North Carolina 

G.K. BUTTERFIELD, North Carolina 

[VACANCY]

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Policy Director/Deputy Chief of Staff 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT 

EDWARD L. SCHROCK, Virginia Chairman 

ROSCOE G. BARTLETT, Maryland 

SUE W. KELLY, New York 

TRENT FRANKS, Arizona 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS G. MCCOTTER, MICHIGAN

G.K. BUTTERFIELD, North Carolina 

Ranking Member 

DONNA M. CHRISTENSEN, Virgin Islands 

ENI F. H. FALEOMAVAEGA, American 

Samoa 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

DENISE L. MAJETTE, Georgia

ROSARIO PALMIERI, Senior Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Chabot, Hon. Steve, U.S. House of Representatives (OH-1) ................................ 4

Rickard, Ms. Lisa A., President, Institute for Legal Reform, U.S. Chamber 

of Commerce ......................................................................................................... 6

Cavey, Mr. Chris, Nationwide Insurance .............................................................. 8

Wagner, Ms. Jo, CTO, Inc. ...................................................................................... 10

Doroshow, Ms. Joanne, Executive Director, Center for Justice & Democracy ... 12

Schwartz, Mr. Victor, General Counsel, American Tort Reform Association ..... 14

APPENDIX

Prepared statements: 

Chabot, Hon. Steve, U.S. House of Representatives (OH-1) ......................... 25

Rickard, Ms. Lisa A., President, Institute for Legal Reform, U.S. Chamber of Commerce ........................................................................................... 28

Cavey, Mr. Chris, Nationwide Insurance ....................................................... 35

Wagner, Ms. Jo, CTO, Inc. ............................................................................... 39

Doroshow, Ms. Joanne, Executive Director, Center for Justice & Democracy ................................................................................................................. 44

Schwartz, Mr. Victor, General Counsel, American Tort Reform Association ................................................................................................................. 59

(III) 

(1)

SMALL BUSINESS LIABILITY REFORM 

THURSDAY, JULY 22, 2004

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON REGULATORY REFORM AND

OVERSIGHT, 

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The Subcommittee met, pursuant to call, at 2:05 p.m. in Room 

311, Cannon House Office Building, Hon. Edward L. Schrock 

[chairman of the Subcommittee] presiding. 

Present: Representatives Schrock, Kelly, Velazquez and 

Christensen.

Chairman SCHROCK. Let us go ahead and begin our hearing. We 

are glad to have Congressman Chabot here. 

Our hearing today addresses the cost of tort liability to the small 

business community. Tort liability has become a cost of doing business in the United States that makes us less competitive. One 

study puts the cost at 4.5 percent of manufacturing output. That 

is four times as much as those in Canada, the United Kingdom and 

Japan. 

It has been as much as eight times as high as those in Mexico, 

Taiwan, South Korea or China. Other nations have far better and 

less costly tort systems. A study sponsored by the U.S. Chamber 

shows the cost of tort liability for small businesses in America is 

$88 billion a year. Small business bear a disproportionate share of 

the total tort liability burden. Although taking in only 25 percent 

of business revenue, they face 68 percent of the tort costs. The average liability cost for small businesses is $15 per $1,000 of revenue, while large corporations average $5.39 per $1,000 of revenue. 

Reducing the cost of tort liability is clearly an issue of great importance to small businesses. The president has made ending lawsuit abuse a cornerstone of his plan for economic recovery. In a 

speech in Mississippi he said, and I quote, ‘‘Junk and frivolous lawsuits can ruin an honest business. Listen,’’ he said, ‘‘small businesses are the backbone of our society. Most new jobs are created 

by small businesses. And when you have junk and frivolous lawsuits that could completely wipe out a small business hanging over 

the heads of small business people it doesn’t help. It hurts economic vitality and economic growth.’’ 

The president clearly sees the threat of frivolous lawsuits and 

our current tort system to the strength of the American economy. 

It is incumbent upon Congress to vigorously reform the system. 

2

We are fortunate today to have Ohio Congressman Steve Chabot 

with us. I can say without question there are few members of this 

chamber, this Congress, who could rival his commitment to restoring common sense to our legal system and protecting small business. We are anxious to hear from him today and lucky that he 

could be here with us. 

It is important to remember that small businesses generate nearly 80 percent of the new jobs each year in this country and account 

for 50 percent of its total payroll—total private payroll, and recently they have been critical to our economy. From 2000 to 2001 

small businesses created 100 percent of the net new jobs. Every effort should be made to protect and encourage small business development. 

I would like to thank the congressman for being here as well as 

those who will follow him. I feel we have two exceptional panels of 

witnesses before us and I look forward to all their testimony. 

Before we go to Congressman Chabot I would like to yield to Ms. 

Velazquez for any comments she might have.

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Today we will examine the liability costs of small businesses. 

Congressman Chabot, I appreciate your taking the time to be here 

to discuss the Small Business Liability Reform Act which you introduced last year. Given that you have taken a lead on this issue I 

look forward to hearing your observations on this matter. 

We have all heared the arguments on the need for tort reform, 

the costs to taxpayers and the costs of rising premiums. We need 

to work in a bipartisan manner to get the heart of this program 

and formulate solutions that meet the needs of our nation’s small 

businesses and consumers. Any wholesale changes to our legal system must be based on independent empirical data, not just the 

emotion of the issue. In my time on the Committee, I have heard 

many compelling stories but have seen little compelling data. In 

fact, my review of the Bureau of Justice statistics and National 

Center for State Courts concerns an across-the-board 10-year decline in tort filings and awards. 

When addressing policy changes, Members of Congress have the 

responsibility to ensure that decisions are based on unbiased information and evidence. I hope today’s hearing will provide an opportunity to separate the hard facts from perceptions. In order to move 

forwards, we must first pinpoint the systematic problems that are 

hurting our nation’s small businesses. Armed with this knowledge 

we can then cross-target solutions and ensure that we do not create 

unintended, long-term consequences that will harm small businesses. 

I am concerned that if we do not have a better handle on what 

our small businesses need, we will end up with policies that offer 

them no help. In the zeal to help our nation’s entrepreneurs, we 

have seen several bills move through this body that were represented as small business relief. In reality the lion’s share of benefits went to large corporations, and small businesses received just 

a fraction. 

The consequences for small businesses and consumers are far too 

serious to repeat this pattern with liability reform. NFIB’s own surVerDate 0ct 09 2002 16:15 Jun 22, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\HEARINGS\97092.TXT MIKE
3

veys and independent polls all show tort reform is not a high priority for small businesses. So let us slow down and figure out what 

is really going on. Once the liability needs of our nation’s small 

businesses are adequately assessed, balanced policy reforms can be 

pursued. 

In the meantime we should focus on health insurance, tax reform, work force issues and regulatory relief. These are the issues 

that consistently rank as the top concerns for U.S. small companies 

and are where we can have the most impact in supporting the 

growth of our nation’s small business owners. 

With that I thank the Chairman and I look forward to the testimony of our witnesses.

Chairman SCHROCK. Thank you, Ms. Velazquez. Would Dr. 

Christensen like to have an opening statement?

Ms. CHRISTENSEN. Thank you, Chairman Schrock. I am really 

glad that the Subcommittee is holding this hearing to look at the 

merits of H.R. 2813, the Small Business Liability Reform Act. Reportedly, small businesses bear significant share of the costs of 

U.S. tort liability, $88 billion annually. But what I would like to 

also find out is what percentage is that when one considers all 

businesses and how much of that is due to personal injury suits. 

Also, what kinds of businesses are included in that report? 

For example, if health-related businesses are included and we 

consider them small businesses I think that would significantly 

skew the results of the study. But whatever the costs and the 

make-up of the businesses, if small businesses do bear a disproportionate burden of liability costs or if liability costs are significantly 

burdening them, regardless of the proportion of the costs or relationship to the larger corporations, it is something that this Committee needs to look at, examine thoroughly and fashion a remedy 

for. But caps have not proven to be an effective approach. 

I really want to commend Representative Chabot for his effort to 

provide tort reform for small businesses. But the bill does raise 

several concerns, including what is the definition of small business, 

its caps on punitive damages, limits on non-economic awards, and 

preemption in some cases of state law. 

Other portions of the legislation really provide no protection for 

the injured. In fact, the injured party under this bill appears to be 

less protected. 

It in fact reminds me a lot of what we went through on malpractice reform. And I would wonder since there is no clear definition of which small business needs are covered, if this is not another approach to achieving malpractice tort reform without really 

calling it that. But as a physician I do share—I would not want to 

say that malpractice reform is not needed. I think I share the same 

concern in that case that I share, that I have for small business 

where relief is needed. But I really do not think that caps are the 

answer. What we really need to do in both cases is to really take 

a comprehensive approach that includes the assessments of what 

the causes are for the increasing premiums and the increasing 

costs that are incurred by small businesses in this case and really 

4

do a bill that addresses each one of those issues, look at the cause 

and craft some remedies that really get to the bottom of it. 

But I am interested to hear the testimony today and to hear from 

our colleagues and see if this bill can in some fashion address some 

of the issues that small businesses are facing.

Chairman SCHROCK. Thank you, Doctor. 

Congressman Chabot is the chairman of the Subcommittee on 

the Constitution, also a member of the Small Business Committee. 

And as soon as he does his testimony he has to return to the Floor. 

He is speaking on legislation and he has to get back. 

So with that, the floor is yours, Steve. 

STATEMENT OF THE HONORABLE STEVE CHABOT, U.S. HOUSE 

OF REPRESENTATIVES (OH-1)

Mr. CHABOT. Thank you very much, Mr. Chairman. It is certainly a pleasure to be here this afternoon. And as you mentioned, 

I am not going to be able to stick around after my testimony because I am going to have to get to the floor. We are involved in 

fairly non-controversial issues, gay marriage. So obviously it is a 

very involved issue and they are debating it as I speak. So I am 

going to try to keep my testimony fairly concise. And I appreciate 

the members here and I appreciate the remarks that I did hear. 

And thank you for giving me the opportunity to appear before the 

Subcommittee this afternoon on behalf of H.R. 2813, the Small 

Business Liability Reform Act. 

This legislation was first introduced back in the 106th Congress—this, by the way, is the 108th Congress that we are in 

now—by our former colleague, Congressman Jim Rogan of California and was passed in the House on February 16 of the year 

2000 by a 221 to 193 margin. It was not considered in the last Congress, the 107th. I reintroduced the bill in this Congress, the 108th, 

along with my democratic colleague Ken Lucas from across the 

Ohio River. Ken, of course, is Kentucky and I am Ohio. So we introduced this together. So it is a bipartisan piece of legislation. 

The frequency and high cost of litigation is a matter of growing 

concern to small businesses across the country. Today’s civil justice 

system presents a significant disincentive to business start-ups and 

to continued operations of existing businesses already in existence. 

The litigation costs and excessive judgments affecting small businesses have escalated out of control, destroying lives and businesses and affecting communities both in and out-of-state. 

Small business employ after all nearly 60 percent of the American workforce. Further, more than 60 percent of small business 

owners make less than $50,000. A lot of the public thinks that you 

are the owner of a business, you are a wealthy individual. That is 

clearly not the case. It is in some circumstances but in more than 

half it is not. 

Small business owners know that if they are sued they will have 

to choose between a long and costly trial or an oftentimes expensive settlement. Either choice significantly impacts the operations 

of a business and the livelihood of its employees. And I think that 

is something that oftentimes gets lost in these, especially by some 

5

of my, I think some of my folks that may disagree philosophically 

with tort reform and some other things that when a business goes 

down the drain because of a lawsuit it is the employees, the little 

guys and the little gals that are oftentimes hurt the most when 

that business goes under. Most business decisions today are made 

with this new reality in mind. These decisions ultimately affect the 

hiring of new employees, improving existing products or introducing new ones. And they also involve long-term planning. 

H.R. 2813, this bill, helps remedy this situation. It is not the solution to it but it is I think a first step. 

The Small Business Liability Reform Act is after all, as I mentioned, a bipartisan bill that would make the necessary reforms 

that have been at the forefront of the small business community’s 

agenda for a number of years now. 

Under Title I, the bill would limit punitive damages to $250,000, 

a quarter of a million dollars, or three times the amount awarded 

to a claimant for economic and non-economic losses, in other words 

what lawyers refer to as compensatory damages. It would also 

eliminate joint and several liability for non-economic losses, instead 

making defendants responsible for an amount consistent with the 

harm contributed. And it would also preserve a state’s right to legislate intrastate, in other words within the state, disputes by allowing a state to elect out of the statute if all the parties to the lawsuit are citizens of that particular state. 

These changes protect small businesses from being unnecessarily 

punished unless it is established that the conduct that has occurred 

warrants such a penalty. And it protects small businesses and individual defendants from being liable for non-economic damages that 

they did not cause. In addition, this bill would make certain reforms for product sellers and distributors other than manufacturers. The chain of distribution of a product provides plaintiffs with 

wide choice of defendants, including sellers and distributors, who 

may never have physical control over a product from which to join 

in a product liability lawsuit. 

Under Title II, product sellers and distributors would be held liable for injuries caused by defective products only if, number one, 

the seller was negligent; two, the seller breached an express warranty or; three, the manufacturer was judgment proof. These reforms would reduce the exposure that sellers and distributors face 

in the product’s so called ‘‘chain of distribution.’’ 

Mr. Chairman, reform is needed to protect small businesses, promote the flow of goods across state boundaries, and inject fairness 

into a legal system that is escalating out of control. While pursuing 

these reforms, we must be cognizant of and protect the rights of 

those plaintiffs with legitimate claims. And I believe that this bill 

accomplishes both. 

Mr. Chairman, I want to thank you again for holding today’s 

hearing. And I thank my colleagues on the Subcommittee for giving 

me the opportunity to speak on this important issue. And I want 

to once again thank my colleague Ken Lucas for his leadership in 

co-sponsoring this bill along with me. And thank you for your 

time.[Congressman Chabot’s statement may be found in the appendix.] 

6

Chairman SCHROCK. Thank you, Congressman. Thank you very 

much for being here. 

Ms. Kelly has to go to a meeting here shortly. I must vote. I am 

going to put this Subcommittee in recess until 2:45 until I get back. 

I assure you I will run down there and I will run right back. I will 

not dilly-dally, I will be back as quick as I can. The second panel 

could be sitting and getting set up in the meantime. 

So we will recess for a few minutes. 

[Recess.]

Chairman SCHROCK. I will call the hearing back to order. Thank 

you again for your indulgence. 

We are happy to have the second panel with us today. Let me 

first introduce our first witness who is Lisa Rickard who is the 

President of the U.S. Chamber Institute for Legal Reform. Ms. 

Rickard is a graduate of the Lafayette College in Easton, Pennsylvania, and received her law degree from American University. 

Before we begin I would just ask you all if you could help us with 

the five minute rule. On the front of the table is a box that lets 

you know when your time is up. It will turn yellow and then red, 

then the trap door opens and away you go. 

So, Ms. Rickard, the floor is yours. Thank you for being here. 

STATEMENT OF LISA A. RICKARD, INSTITUTE FOR LEGAL 

REFORM, U.S. CHAMBER OF COMMERCE

Ms. RICKARD. Lisa Rickard, President of the U.S. Chamber Institute for Legal Reform. The U.S. Chamber is the world’s largest 

business federation, representing more than three million businesses and professional organizations of every size, in every business sector, and in every region of the country. The U.S. Chamber 

founded the Institute for Legal Reform in 1998 with the mission of 

making America’s legal system simpler, fairer and faster for everyone. On behalf of the Chamber and ILR, I appreciate the opportunity to testify before the Subcommittee today on the effect of lawsuit abuse on small business. I would also request that a copy of 

my testimony and the full ILR study, ‘‘Tort Liability Costs for 

Small Business,’’ be included for the record.

Chairman SCHROCK. Without objection.

Ms. RICKARD. No sector of the economy is hit harder by lawsuit 

abuse than America’s small business owners. In our most recent 

survey of our small business members, over 90 percent of those 

surveys ranked legal reform as a high or extremely high priority. 

Last month ILR released the results of a groundbreaking study 

that shows the devastating effect of litigation on America’s small 

businesses. Last December, world-renowned actuarial firm 

Tillinghast Towers-Perrin released its annual report showing that 

in 2002 the tort system drained our economy to the tune of $233 

billion, or $809 per person. 

We wanted to go a step further, to find out exactly how the tort 

system is threatening American small businesses, which create approximately 75 percent of the new jobs in our country. We conVerDate 0ct 09 2002 16:15 Jun 22, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\HEARINGS\97092.TXT MIKE
7

tracted with NERA Economic Consulting to analyze the numbers. 

NERA is affiliated with Marsh, Inc., one of the largest commercial 

insurance brokers in the world. NERA was able to use data on actual purchases by Marsh customers. NERA also analyzed data from 

A.M. Best, an insurance information service, Market Stance, a 

market research firm in insurance, and U.S. Economic Census. 

What we found in our study is quite troubling. The total cost of 

the tort system to all U.S. businesses, both large and small, is an 

astounding $129 billion. NERA’s study found that small businesses 

with $10 million or less in annual revenue, and one or more employees, bear 68 percent of that cost, paying $88 billion a year. 

That translates into about $150,000 per year, money that could be 

put into much more productive uses. 

Very small businesses, those that we define with less than $1 

million in annual revenues, pay $33 billion of that $88 billion per 

year. What is even more astonishing is that these very small businesses pay $15 billion of their liability costs out of pocket, not 

through insurance coverage. 

What does that all really mean? 

To us it means that America’s small businesses are paying a 

high price for our legal crisis in the form of lost opportunities to 

expand their businesses. 

It means that significant small business capital is being diverted 

to the bank accounts of trial lawyers rather than being invested in 

tens of thousands of new American jobs. 

And it means that American consumers are forced to pay more 

for everything they purchase, including consumer goods and health 

care because businesses are forced to raise prices to stay afloat. 

I.L.R.’s study highlights why we need comprehensive legal reforms at the federal and state levels that will rein in the excessive 

influence of trial lawyers and restore fairness and balance to our 

legal system. 

We strongly urge Congress to enact bills that cut back on frivolous litigation, such as the Class Action Fairness Act and the Fairness in Asbestos Injury Resolution Act. 

We also support the recently introduced Lawsuit Abuse Reduction Act, medical malpractice reform legislation, the Commonsense 

Consumption Act, and the host of pending legislation providing liability protection for manufacturers of lawful goods and services. 

We also support the Small Business Liability Reform Act, which 

would place reasonable limits on punitive damages awarded to 

plaintiffs in liability cases against small businesses, abolish joint liability so that defendants are only liable for their proportionate 

share of damages, and protect innocent product sellers from liability when the manufacturer is directly responsible for the harm. 

Unfortunately, not one of these legal reform bills I just mentioned have been enacted, even as we watch lawsuit abuse stifle 

economic development in America’s states, cities and towns. 

In closing, I would like to make clear that ILR strongly believes 

that those who have been truly injured should receive just compensation through our legal system. That is what America’s civil 

justice system was originally designed to do. It was not, however, 

intended to become a lottery that bestows jackpot awards on behalf 

8

of random plaintiffs at the expense of unsuspecting, hard-working 

small businessmen and women. 

It is time for all of us Americans to jettison our lawsuit-happy 

culture and take some personal responsibility for ending the litigation lottery in this country. 

On behalf of the U.S. Chamber Institute for Legal Reform and 

the U.S. Chamber, thank you for the opportunity to appear before 

you today.[Ms. Rickard’s statement may be found in the appendix.] 

Chairman SCHROCK. Thank you, Ms. Rickard. We appreciate it. 

Next we will hear from Chris who is an insurance agent with 

Nationwide Insurance Company and the owner of Cavey Insurance 

Agency in Hampstead, Maryland. Welcome, Mr. Cavey, and the 

floor is yours. 

STATEMENT OF CHRIS CAVEY, NATIONWIDE INSURANCE

Mr. CAVEY. Thank you, Mr. Chairman and members of the 

Small—

Chairman SCHROCK. Could you please turn on your mike?

Mr. CAVEY. Thank you, Mr. Chairman—

Chairman SCHROCK. Thank you.

Mr. CAVEY. —and members of the Small Business Committee. 

My name is Chris Cavey. I am an insurance agent for Nationwide 

Insurance Company and the owner of Cavey Insurance Agency in 

Hampstead, Maryland. I am here on behalf of the National Federation of Independent Business whose 600,000 members strongly support restoring common sense in our civil justice system. 

The frequency and the high cost of our litigation in the country’s 

current civil justice system is a matter of growing concern to small 

businesses like mine. Liability reform would inject a measure of 

fairness into a legal system that preys on business, often without 

regard to legal merit. Liability reform also would help reduce the 

number of frivolous lawsuits and exorbitant costs of defending a 

frivolous lawsuit that can drive a business into financial ruin. 

The NFIB supports H.R. 2813, the Small Business Liability Reform Act, because it would significantly improve the legal climate 

in which small businesses operate. The bill covers the smallest of 

the nation’s small businesses, like me, with fewer than 25 employees, who operate in fear that they will be put out of business. 

I would like to share with you a couple of examples where my 

clients, who are business owners of small businesses, were nearly 

destroyed by lawsuits. In both cases Nationwide Insurance Company informed the business owner that the amount of the lawsuit 

was greater than the liability limit of their current policy. And that 

is, a very scary letter for a business owner to get. 

In both cases the business owner was covered by a policy in excess of $1 million and in both cases the business owner would have 

been pushed out of business had the full amount of damages in excess of the insurance policy been awarded. 

9

The first example involves the case of a local family that operates 

a grain farm. The current owners are third generation in farming 

and have won numerous agricultural awards for production and 

conservation. In 1997, they were sued for $5 million for incorrectly 

planting their corn. In September of that year a lady approached 

an intersection with a stop sign. She proceeded to ‘‘roll through’’ 

the stop sign, claiming her vision was impaired by corn planted to 

close to the edge of the roadway and was struck by oncoming traffic. 

She sued the owner of the property, the local county and state 

jurisdictions, and my client, the farmer, who rented the ground and 

planted the corn. This suit was investigated thoroughly by all parties, however, the corn was harvested prior to the filing of the lawsuit so there were only eyewitness accounts of the manner the corn 

was planted. 

My policyholder received that scary letter from Nationwide stat- ing that they were only insured up to $3 million. This letter was 

devastating to the client. We spoke by phone and in person and 

they were afraid that they would have to liquidate the family farm 

if the trial went against them. The Circuit Court found for all the 

defendants and the charges were dismissed. Within weeks, the 

plaintiff’s attorney filed in the Appellate Court and the farmer had 

to worry again about losing the family farm in court. During the 

preparation work for the Appellate Court, Nationwide Insurance 

Company decided to settle out of court for $600,000. This decision 

was based on the prior opinions of that court and the fact that the 

full settlement would have forced complete liquidation of the farm. 

Another client of mine owns and operates a local farm roadside 

market. He grows a limited amount of his own produce but buys 

thousands of dollars of locally produced grown produce, bedding 

and nursery crops. He has been in business for about 25 years at 

this location. One day in early spring at the farm stand, a woman 

fell in the parking lot. The owner witnessed the accident, gave her 

first aid, which included two band aids to her knee and promoted 

some good will and gave her some freebies to apologize. 

A year later Nationwide Insurance Company notified him that 

the woman and her husband we suing for $1.7 million each. The 

woman involved was claiming soft tissue damage in her back and 

neck from the fall. She even appeared in court for discovery in a 

neck brace. 

However, the insurance company did the proper investigation 

prior to trial, found that the woman making the claim was part of 

a winning foursome at a local golf course and was still maintaining 

her three handicap. She had not missed any of her club tournaments the summer of her alleged injury, nor the following summer while waiting for trial. She was looking for the ‘‘big payoff’’ on 

the back of a kind small business owner, and thankfully she was 

caught. 

The scary part of this ordeal was when the business owner received the notice that he was being sued for $3.4 million. He also 

received a letter from Nationwide which was scary that indicated 

he needed to hire outside counsel. This man has run his small farm 

market for 25 years, but a frivolous lawsuit would have put him 

out of business. 

10

Legitimate claims should be heard. If someone’s behavior is negligent then they should be held responsible. But frivolous lawsuits 

like the ones I have just described serve only to enrich plaintiff’s 

lawyers at the expense of small business who oftentimes lack the 

resource to fight back in court. Without action by Congress, these 

meritless claims will cause small businesses to close their doors forever and their employees will lose their jobs. The Small Business 

Liability Reform Act would help ensure that small business can 

survive in this increasingly litigious environment. I hope H.R. 2813 

will be enacted without delay. 

Thank you very much for this opportunity, Mr. Chairman.[Mr. 

Cavey’s statement may be found in the appendix.]

Chairman SCHROCK. Thank you very much, Mr. Cavey. 

Our next witness this afternoon is the President of CTO, Incorporated, a commercial contractor in Harlingen, Texas. Her firm has 

just celebrated its 31st year of business, completing over 200 various projects over the past decade. Ms. Jo Rae Wagner is also a 

leading member of the Plumbing-Heating-Cooling Contractors National Association. And we are delighted to have you here from 

Texas. The floor is yours. 

STATEMENT OF JO WAGNER, CTO, INC.

Ms. WAGNER. Thank you, Chairman Schrock, Ranking Member 

Gonzalez, and members of the Subcommittee and other distinguished guests. It is a thrill for me to be here in Washington and 

I applaud the Committee’s scheduling of a hearing to discuss tort 

reform, a matter of primary importance to my industry, the plumbing-heating-cooling contractor industry, and my company. 

My name, as you said, is Jo Rae Wagner, President of CTO, Incorporated, a commercial plumbing, heating and cooling contractor 

in Harlingen, Texas. I am a woman in a male-dominated industry, 

so most of my correspondence has a Mr. instead of a Ms. and an 

‘‘E’’ on the end of Jo. My firm is celebrating its 31st year in business, which proves that women can and will continue to be a force 

in the construction industry. Not to toot my own horn, but I have 

worked hard to show that women can also be very good plumbers. 

During 29 of those 31 years my company has pursued the American dream of being a family-owned small business. I have focused 

on growing my business through investment in the real strength of 

my company, its employees, and in developing a skilled workforce 

to ensure increased profitability by professionally and efficiently 

completing over 250 projects over the past decade. We take pride 

in our work; in fact, our association motto is that ‘‘plumbers protect 

the health of the nation.’’ 

However, over the past two years, I find that I am spending more 

time preparing for mediations and court appearances than on exploring new business opportunities to keep my company profitable. 

I wish to return to a time when our industry focused on what we 

do best, build America, without the stress of wondering if we are 

going to get sued on any given project. 

Mr. Chairman, we are in desperate need of tort reform for the 

construction industry. The current system is jeopardizing the secuVerDate 0ct 09 2002 16:15 Jun 22, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\HEARINGS\97092.TXT MIKE
11

rity not only of my company, but it is my opinion that the legal sector is sucking resources out of the construction of schools, hospitals 

and other valuable assets that enrich our nation. We need to put 

an end to the frivolous litigation that pervades the construction 

sector; such litigation is jeopardizing the future of America’s small 

businesses. 

Lawsuits threaten profitability and my company’s ability to compete in this sector. Many of my fellow contractors are responding 

to the potential for legal action by reducing their workforce; simply, 

many firms cannot afford triple-digit increases in their general liability premiums, that is, if they are lucky enough to find coverage. 

Often these increases come to companies that have not had a 

claim; it is simply the nature of the industry. Until we see some 

return to normalcy, our firm has chosen to remove itself from performing work in high risk trades, including air conditioning, as we 

cannot continue to operate under a veil of potential litigation. 

Our industry is highly supportive of H.R. 2813, legislation sponsored by Representatives Steve Chabot from Ohio and Ken Lucas 

from Kentucky. It is a great first start in reversing a trend that 

is tearing away at the very foundation of an industry that is known 

as the finest in the world. Key for our industry are the provisions 

in Section 104 which would limit non-economic liabilities to those 

liable or negligent for the action’s occurrence. An anecdote should 

help explain why it is so essential for those that are negligent to 

be assigned their proportionate share of the damages. 

Several years ago, my company performed work on a large school 

project. Due to some mold and construction defect claims, the 

school board sought legal action against all 26 contractors involved 

in the project. The school board sought $30 million for a project 

that cost $14 million to build. Let me repeat: the cost to build the 

building was $14 million, yet the cost to sue was $30 million. 

Through the process of taking depositions, several contractors were 

told they were not negligent for the mold or construction defect 

claims. I was prepared to rejoice when I learned that my company 

was one of them. 

Meanwhile, as the matter appeared headed toward litigation, a 

construction remediator was hired to remedy the mold and defect 

claims. The court system appointed a mediator to assign liability 

amongst the 26 contractors involved, but instead, the mediator focused on identifying enough insurance to cover the costs for those 

remediating the mold problem, which had nearly approached $20 

million. All 26 of the ‘‘involved’’—and I use that term generously—

were assessed and contributed to cover the costs of the remediator. 

Even though various depositions cleared us of any negligence and 

liability, we were still found ‘‘guilty’’ and were forced, through insurance, to assist in covering the costs. I cannot begin to describe 

the anger and frustration I felt on hearing this news. Of course, it 

made no difference that we performed quality work on this school 

project and never had any call-backs to replace any of the plumbing 

fixtures, appliances or piping. 

Mr. Chairman, this story is not the exception, it is the daily experience for those participants in the plumbing, heating and cooling industry. 

12

My company has been named in another lawsuit that involves 32 

construction companies. And like before, we have no apparent liability. Counsel informs me we should be able to get out of this one 

for $1.5 million. I already know that my insurance next year will 

be considerably higher. Those are costs that simply cannot be 

passed on to the consumer. 

The court system in south Texas will be considering over $2 billion in construction-related lawsuits. In an effort to cover the costs 

of possible litigation, the bidding for new schools have exceeded estimates by 40 percent. Why should the taxpayer be expected to 

fund such an increase? 

I thank you again, Mr. Chairman, for the opportunity to appear 

before this Committee. In a few short minutes I have tried to address my concerns and capture why our industry so desperately 

needs tort reform legislation. My colleagues and I plead with you 

to start putting an end to this travesty of justice that serves to destroy the fabric of what makes our country great. It has been a 

most gratifying experience for me to be here representing my company, CTO, Inc., and my trade association, the Plumbing-HeatingCooling Contractors National Association. Thank you.[Ms. Wagner’s statement may be found in the appendix.]

Chairman SCHROCK. Thank you, Ms. Wagner. The next time I 

need plumbing or HVAC done I am calling you.

Ms. WAGNER. Thank you very much.

Chairman SCHROCK. Thank you very much. 

Next we will hear from Joanne Doroshow who is the Executive 

Director for the Center for Justice and Democracy. And I hope I did 

not mess your name up too bad.

Ms. DOROSHOW. No. You said it perfectly.

Chairman SCHROCK. Great, thank you. The floor is yours. Thank 

you. 

STATEMENT OF JOANNE DOROSHOW, CENTER FOR JUSTICE 

AND DEMOCRACY

Ms. DOROSHOW. Thank you, Mr. Chairman. I have a fairly extensive written statement which I would like to submit for the record 

and just make a few points to highlight that statement.

Chairman SCHROCK. Without objection.

Ms. DOROSHOW. A few years ago I attended a large conference in 

Albany, New York, my state capital, and it was a small business 

conference. And the governor and all the major political leaders of 

the state spoke to the small business community in New York, including the chairman of the Small Business Committee in New 

York who was the primary sponsor of a very broad tort reform bill. 

And I went there in order to hear the various political leaders talk 

13

about this very important issue supposedly to small business, that 

is tort reform. 

And as I sat there, what struck me as I sat there minutes and 

minutes going by is that not a single mention of this issue was 

made by any of these political leaders. And as a result of that we 

did our—decided to do our own survey of various small business 

trade associations and organizations of their members to see 

whether or not lawsuits and liability issues were really such an incredible concern as we were hearing from the lobbyists in Albany. 

And what we found is that in study after study, survey after survey it wasn’t even mentioned as an issue. Liability and lawsuits if 

they are mentioned at all are very, very far down on the list, 

whereas other issues like workforce and health care costs and traffic and so forth, other kinds of labor issues were much more important. 

And then we saw the NFIB’s most recent poll of small businesses 

and saw that, well, lo and behold, lawsuits and liability ranked 

number 64 out of 75 of a list of issues of concern. Higher than lawsuits were issues like traffic and parking, anti-competitiveness 

practices like price fixing, in other words, which the insurance industry engages in, business growth and labor and so forth. And so 

we really have not seen much change in terms of the importance 

of liability and lawsuits as an issue for small businesses. 

Of course, what we have seen is an increase in concern about insurance premiums. Well, there is no wonder for that, we have been 

in a hard insurance market since 2001, characterized by skyrocketing rates and reduced coverage for many businesses and for 

doctors and for many, many policyholders. The causes of that problem have nothing to do with the legal system, they have to do with 

the investment cycle of the insurance industry. And we are coming 

out of that hard market now. 

In my testimony I indicate new statistics that show that rates 

are actually starting to come down for all businesses, including 

small businesses, as we come out of the hard insurance market. 

But I do want to at least address the issue of tort reform liability 

as it comes up in this particular piece of legislation because it is 

a fairly massive intrusion into state law and into the power and 

authority of juries and judges in this country. And if you are going 

to do something like that you really need to base it on some data. 

So what do the data really say about the liability system? 

Well, they say that lawsuits in this country are actually dropping. They have, tort filings have dropped for the last ten years. 

Jury verdicts are down. Claims are down. But the insurance industry is making a lot of money. In fact, their profits were up almost 

1,000 percent last year from 2002. 

So there is tremendous amount to be concerned about about 

what the insurance industry is doing. However, none of that is 

being driven by the lawsuits or the legal system. 

If you take a look at the Tillinghast study that the Chamber of 

Commerce bases its report on, again the data in that is about liability insurance premiums. There is nothing whatsoever in that 

study that deals with the legal system or the tort system or juries. 

It is not even remotely connected to the legal system. You have expenses in there that concern overhead and salaries by insurance 

14

executives, all kinds of unverifiable statistics. You even have in 

there no fault costs dealing with commercial auto accidents when 

there is no lawsuit involved at all. So that is in terms of a study 

to rely on in order to pursue this massive overhaul of the legal system it is just wrong. 

The specifics of this legislation are also extremely damaging to 

innocent consumers but will also do nothing to even solve this 

problem of frivolous lawsuits. You have a cap on punitive damages 

in this piece of legislation which would only affect the most egregious kinds of cases where clearly the case is not frivolous. 

I will wrap up here because I know I am out of time, but I would 

just caution that there is nothing in this legislation that is going 

to assist small businesses with their insurance problems, with the 

issue of frivolous lawsuits. Half the bill does not even deal with the 

issue of small businesses but deals with product sellers. 

So thank you, Mr. Chairman.[Ms. Doroshow’s statement may be 

found in the appendix.]

Chairman SCHROCK. Our last and most patient witness today is 

Victor Schwartz. Mr. Schwartz has served as both a professor of 

law and the Dean of the University of Cincinnati’s College of Law 

as well as served the U.S. Department of Commerce under both 

Presidents Ford and Carter. 

In addition, he is also the co-author of one of the most widely 

used tort casebooks called Prosser, Wade & Schwartz’s Torts. 

With that you are recognized. Welcome. 

STATEMENT OF VICTOR SCHWARTZ, AMERICAN TORT 

REFORM ASSOCIATION

Mr. SCHWARTZ. Thank you, Mr. Chairman and Ms. Velazquez. I 

appreciate your being here today and discussing a topic that is 

very, very important. I also served as general counsel to the American Tort Reform Association. And at least with our members, they 

feel liability is a very major problem, and our members include 

small businesses, school boards, doctors’ groups, across the board 

really almost all of society. 

The bill that Mr. Chabot discussed is very important. In fact, 

part of it dealing with wholesalers and product sellers I would be 

pleased to take questions on because we helped develop that idea 

in the Commerce Department many years ago. Wholesalers and 

product sellers should not be dragged into every lawsuit, they 

should be there if they have done something wrong. 

But I am going to discuss today what I see from my 50 trips last 

year is the number one problems that small businesses face. Everywhere you go if you ask them, the number one thing they talk 

about is frivolous lawsuits. 

And what do they mean by that? 

Well, there is a rule that defines them. Frivolous lawsuits are 

cases that have no basis in fact or they are not based on existing 

law or any reasonable extension of the law. The law moves forward. And there was weaponry to help businesses against frivolous 

claims, and that weaponry was in Rule 11 of the Federal Rules of 

Civil Procedure. And that said if the judge finds a claim is frivoVerDate 0ct 09 2002 16:15 Jun 22, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\HEARINGS\97092.TXT MIKE
15

lous, the plaintiff who brought that case has to pay the costs of the 

other side. Plain and simple. 

But in 1993 that rule was severely weakened. And as a result 

people—and I think of my smallest client who runs a little restaurant in Atlantic City—they do not have weaponry to fight. She 

had a case where a police report showed that the person was never 

in her restaurant. He named a whole bunch of other places. And 

because the rule is so weak and because it is so ineffective she 

could not recover her legal costs. 

Now, plaintiffs’ lawyers in general do a very good job. But there 

are a few who survive on these suits, and they sue school boards, 

they sue small business, they sue more the defendless type of people. And they know if they make an offer to settle that is under 

the defense costs the insurer is really on the hook. If they do not 

settle the case and they go to court a case could come in above 

claim limits, or they will have to pay more to litigate then to settle. 

And it is a death of a thousand cuts. 

Mr. Smith of the Judiciary Committee has introduced a bill 4571, 

and I hope all of you will consider co-sponsoring his bill because 

it restores the power to Rule 11, which is a federal rule, but states 

tend to follow the federal rules. So if a federal rule is changed state 

rules will change. And it is a good bill, it is solid. In fact, one of 

the most experienced trial lawyers in North Carolina, a very experienced man, said that this is the exact type of reform that is needed. We need mandatory sanctions against frivolous claims. That 

trial lawyer is currently running for vice president of the United 

States, sir. 

So this is not a partisan kind of thing, it is a bipartisan kind of 

thing. And I think it should be supported by every member of this 

Committee. It is small business’s really number one problem. 

I will mention something else that Mr. Smith’s bill does. We have 

a new type of tourist in America, and I call them the litigation 

tourist. The litigation tourist travels around the country to what 

the American Tort Reform Association calls and is defined as ‘‘judicial hellholes.’’ These are places where you just do not want to be 

sued. And I ask our ‘‘Judicial Hellholes’’ report be made part of the 

record, sir.

Chairman SCHROCK. Without objection, it will be.

Mr. SCHWARTZ. Now, common sense says you should be able to 

sue where you live, you should be able to live where you have been 

hurt, you should be able to sue where you work or in the defendant’s principal place of business. And that is what Mr. Smith’s law 

says. It is a problem of interstate commerce that people are suing 

where there is none of these things. That is the litigation tourist. 

They go to a place like Madison County. They have never been 

there before. They did not work there before. They were not hurt 

there. There is only one reason they go there, because it is known 

that the judges will find for plaintiffs. 

Plaintiffs’ lawyers acknowledge this. There are famous plaintiffs’ 

lawyers who say, Victor, I agree with you except for one thing, I 

do not call them ‘‘judicial hellholes,’’ I call them ‘‘magic jurisdicVerDate 0ct 09 2002 16:15 Jun 22, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\HEARINGS\97092.TXT MIKE
16

tions.’’ So we agree really on the nature of the place, we just have 

a difference as to the title. 

So I suggest that this Committee as it approaches a variety of 

remedies that come forward, those are two that are very practical 

embodied in Mr. Smith’s bill, dealing with frivolous claims, putting 

sanctions on those who agree with them—who bring them, excuse 

me—and also clamp down on litigation tourism. We do not need 

that in this country. 

Thank you very much.[Mr. Schwartz’s statement may be found 

in the appendix.]

Chairman SCHROCK. Thank you very much. 

Let me start the questioning. We are going to have votes here 

in a few minutes, so when that happens we will ask a few questions, we will get over there and vote and we will get back as quick 

as we can. 

Mr. Schwartz, I was interested in your comments about the rule, 

the change of Rule 11. Do you have any sort of list of states that 

have altered their own state rules to conform to the national 

model? And I am curious, is my home state of Virginia one of 

them?

Mr. SCHWARTZ. No. But many have and we will submit that information to this Committee.

Chairman SCHROCK. No, Virginia is not?

Mr. SCHWARTZ. Virginia has not. But there is a trip wire in 

many, many states. What happens is the way the rule is set up, 

if the federal rule changes it is automatic. There are not hearings, 

there is no legislative action, it just happened. And there are quite 

a few states that have done that. And we will submit that information to you, sir.

Chairman SCHROCK. Great, thank you. 

Do you think that the Bar will undertake to rewrite or correct 

the problem with Rule 11?

Mr. SCHWARTZ. No. They have shown no inclination to do that. 

And it has been 11 years. We have had over a decade of a weakening of a rule that was the one weapon that a small business 

owner had to stop a frivolous claim. There has been absolutely no 

movement on the part of the Bar. 

I think, you know, the rule applies to frivolous defenses too. And 

so sometimes defense attorneys might not want those sanctions 

brought against them. It cuts both ways. So the Bar has not policed 

its own house on this issue.

Chairman SCHROCK. How do these frivolous lawsuits affect the 

dockets and the case loads of our courts, courts generally?

Mr. SCHWARTZ. Well, they are going to add to it because there 

is not a vacuum cleaner to get rid of them. Most of them I have 

to say are settled, they virtually never go to trial because it is too 

17

expensive for the plaintiff’s lawyer and the defense lawyer to go to 

trial. That is why some of the data about the reduction in the number of lawsuits has some meaning, but it also has to be put in the 

context that more and more cases today are settled.

Chairman SCHROCK. Can you give me or share with us any instance where civil justice reform has made a difference in jobs or 

the economy?

Mr. SCHWARTZ. Sure. In the interest of time I will just mention 

one. This body passed in 1994 the General Aviation Recovery Act. 

It was an 18-year statute of repose for general aviation. And I was 

right at these tables and told the bill would do no good and it 

would produce aircraft that would be falling out of the sky. One 

witness said ‘‘tissue paper’’ airlines or ‘‘balsam wood’’ airplanes. 

That bill, and I will submit to this Committee an article that documents this, has restored an industry. Cessna, Piper are back. 

Twenty-five thousand jobs—and these are not hamburger flipper 

jobs—and the planes are safer than ever. 

And I was with Mr. Glickman the other night, a former member 

of this body, Secretary of Agriculture, and he had the lead on this 

bill. And he took a lot of flack from some of his colleagues about 

it. But the president of the United States signed the bill and it has 

been very effective. 

I can give you other examples. We will submit them to you after 

the hearing.

Chairman SCHROCK. Great. Thank you. 

Ms. Rickard, in your testimony you mentioned that small businesses pay a disproportionate share of the overall costs of tort 

claims. What impact do you think that is having on job creation in 

this country?

Ms. RICKARD. The U.S. Chamber has a small business council. 

The chairwoman of that council, Mora Donahue, runs Fabric Contractors in New Orleans, Louisiana. We convened here when we released this study, the members of that small business council. 

There were over 60 people from small businesses here and the stories from different regions of the country, one after the other, with 

regard to lawsuits being filed against these companies and the 

number of whether it is regular personal injury suits being dragged 

in and joint and several liability cases, they have gone on and on 

about the impact for them and the increase in insurance rates as 

well, which resulted in them having to scale back in jobs. 

There is a woman who runs a home health care agency in Richmond, Virginia who was also up here and talked about the impact 

of her costs and frivolous litigation which has required her to scale 

back on her jobs. So we see this nationwide in both rural and 

urban areas.

Chairman SCHROCK. So the very small businesses seem to be 

really hit the hardest because they find it difficult to pass on those 

costs. Can you explain why it is that they do not have access to 

18

insurance companies for these claims as many of the larger businesses have?

Ms. RICKARD. I am sorry, why they?

Chairman SCHROCK. Why they, explain why smaller companies 

do not have access to the insurance coverage for some of these 

things that large businesses seem to have.

Ms. RICKARD. They do have access to insurance in a number of 

circumstances. Some of them choose not to take insurance because 

of the cost. 

However, in our study, because we did rely on insurance coverage, we found that we looked at employers, small businesses that 

have one employee. And there is not a lot of data with regard to 

single proprietorships, and they do not generally take insurance. 

And it is the cost generally.

Chairman SCHROCK. Thank you. 

Ms. Velazquez.

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Ms. Doroshow, there have been discussions that the specter of 

litigations has hindered small business growth. What evidence 

have you seen that indicates that small businesses’ economic 

growth have been hindered by litigation fears?

Ms. DOROSHOW. Well, we have never seen any evidence of that. 

And, in fact, as I have mentioned in my testimony, in survey after 

survey of small businesses that are done internally by trade associations, the NFIB, the Chamber and other state associations as to 

the issues that are most important to them in terms of business 

growth, in terms of where they will locate a business, liability, litigation, lawsuits have absolutely nothing to do with it. These issues 

rank very, very low of issues to concern of small businesses.

Ms. VELAZQUEZ. Thank you. 

Mr. Chairman, I would like to ask unanimous consent to enter 

into the record a survey conducted by the National Small Business 

United in conjunction with Arthur Andersen basically that mentions when asked to name the three most significant challenges to 

the future of growth and survival of their businesses the top three 

factors were finding and retaining qualified employees, state and 

federal regulations and economic uncertainty. Neither lawsuits nor 

liability law made the list.

Chairman SCHROCK. Without objection.

Ms. VELAZQUEZ. Ms. Doroshow, what will H.R. 2813 do with regard to stopping the filing of all frivolous litigation?

Ms. DOROSHOW. This bill has absolutely nothing to do with the 

issue of frivolous litigation. The major provisions are capping punitive damages which are only awarded in a very, very tiny number 

19

of cases, in the most egregious kinds of cases, limiting joint and 

several liability for non-economic damages which are the kinds of 

damages that affect particularly women who do not work outside 

the home, the poor, children and senior citizens. And then the 

other whole half of the bill affects the issue of product sellers. We 

are talking about major retailers like Wal-Mart and Toys-R-Us that 

this bill would change state laws around the country, eliminate the 

ability of states to have strict liability for product sellers, to make 

sure that products that reach the consumer are safe. 

And this part of the bill would do a tremendous amount to encourage putting unsafe products on the market. That is what it 

would do.

Ms. VELAZQUEZ. Thank you. 

Mr. Cavey, NFIB’s 2002 National Small Business poll on liability 

makes the case that there has been no explosion in lawsuits filed 

against small businesses. And I quote from their own survey and 

summary, ‘‘11 percent of small business owners were defendants in 

a liability suit during the past five years. The incidence is virtually 

identical to that reported by a similar sample of owners in 1995. 

There effectively has been no change in the frequency of liability 

suits filed against small businesses at least in the last decade.’’ 

Would you care to comment on that? 

And I would like unanimous consent to enter into the record this 

NFIB National Small Business poll.

Chairman SCHROCK. Without objection.

Mr. CAVEY. The statistics that you have I cannot personally 

verify from sitting where I am. I can, however, verify what has 

passed through my agency and in front of my business association 

at home. And the fact of the matter is perhaps the percentages 

have not increased dramatically one way or the other. Maybe they 

have, maybe they have not. I cannot answer that. But I do know 

that the fear of liability suit is constantly there on the small business owner. 

I also know that the cost of the liability insurance and the cost 

to protect the policy holder who is the small business owner is continually going up.

Ms. VELAZQUEZ. Thank you. 

Mr. Cavey, are you here in what capacity, representing NFIB?

Mr. CAVEY. I am here as a member of NFIB, yes, ma’am.

Ms. VELAZQUEZ. Okay. This is their survey. 

Ms. Wagner, you mentioned in your testimony that you were 

sued by a school board?

Ms. WAGNER. Yes. Actually it is the whole district. The school 

district informs the school board which initiates the lawsuits.

Ms. VELAZQUEZ. Okay. In the case that read about in The Valley 

Star involving faulty prison construction it says that you were sued 

20

by a county. Since H.R. 2813 applies to cases where individuals sue 

businesses it will not impact the type of cases that you have experienced; is that correct?

Ms. WAGNER. In a sense, yes. All we are looking for is some legislation that would draw a line in the sand somewhere to stop the 

rampant and needless lawsuits that attack for no reason at all for 

large groups of contractors.

Ms. VELAZQUEZ. But what I am trying to say is this type of legislation does not apply?

Ms. WAGNER. Well, it will in one sense, in the sense of mold 

damages and construction defects occasionally you have eight to 

nine hundred individuals suing the contractor on an individual 

basis for health reasons. And that would apply.

Ms. VELAZQUEZ. Thank you. 

Okay, Mr. Chairman.

Chairman SCHROCK. Ms. Rickard, let me ask you how important 

is tort reform to small business? I want to ask everybody that.

Ms. RICKARD. In our survey, and I did mention this in my testimony, we do survey our members, small business members. And in 

that survey over 90 percent of those surveyed—and I believe there 

were over 1,000 respondents to that survey representative of small, 

representative of small business across the nation reported that 90 

percent that legal reform was rated important or very important 

among those members. 

Again, our small business council, representative of a large crosssection of small business in this nation, meets two or three times 

a year. They consistently talk with me. I spoke with them last December at their board meeting. And when I got to the issue and 

went on about legal reform they were just rabid about the problem 

and essentially gave me a cheering ovation at the end of my presentation talking about the need for us to really pursue this issue 

for them.

Chairman SCHROCK. Mr. Cavey and Ms. Wager, please.

Mr. CAVEY. Can I answer that question?

Chairman SCHROCK. Absolutely you can.

Mr. CAVEY. Well, I will tell you how the best way to answer that 

question is. And it crosses partisan lines every single way you can 

get it, the fact is that it is needed in small business. I challenge 

the members of this Committee, regardless of their political affiliation, to go home, get out your ‘‘A list’’ of donors to your campaign 

contributions who are small business owners, just call them up and 

ask. Do not take my word for it, pick the people that are putting 

you here to represent them and giving you money to do it.

21

Chairman SCHROCK. Would you believe it if I told you I have?

Mr. CAVEY. God bless you.

Chairman SCHROCK. You are welcome. 

Ms. Wagner?

Ms. WAGNER. Last week when PHCC put a notice out that I 

would be testifying today, when I went home for the weekend I 

never realized what I was going to run into Monday morning. My 

e-mail was totally jammed with people, contractors from California, 

Nevada, Arizona, name it, from everywhere in this nation that actually plugged up my e-mail just to tell me to please get the word 

across today that this was a dire situation in our industry and we 

desperately need some help.

Chairman SCHROCK. Good. Ms. Doroshow, Mr. Schwartz?

Ms. DOROSHOW. Survey after survey for years has shown that it 

is not as high a priority as many, many, many other issues that 

affect small business. In fact, NFIB’s most recent poll it ranked 

64th out of 75 issues. So I am just going by what I see in terms 

of the surveys and the data and the facts. And when you compare 

it to other issues that are affecting small businesses today it ranks 

very, very low if it is mentioned at all. 

Now, the issue of insurance is another thing. It is number two 

for small businesses in the NFIB survey. But as we consumer 

groups have been saying for years over and over again, the causes 

and solutions to these insurance problems lie with the insurance 

industry. We are in a hard insurance market right now. It is ending. The insurance industry has made enormous amounts of money 

off the back of policy holders which has not been driven by any increased losses. The solutions to that problem lie with the insurance 

industry. And what Congress ought to be doing, the first thing they 

should be doing is remove the antitrust exemption that the insurance industry currently enjoys in this country. It allows them to 

price fix, it allows them to burden small businesses and other policy holders with enormous kinds of rate hikes without any accountability.

Chairman SCHROCK. Mr. Schwartz, I think I know what your answer is to that, so let me ask you another question. Ms. Doroshow 

has suggested that product sellers should face liability for products 

they do not manufacture. What do you think about that?

Mr. SCHWARTZ. Well, I think product sellers should be responsible when they have done something wrong. And I agree with the 

concept that Ms. Doroshow has in her testimony, and that is there 

should be pressure on a product seller to deal with responsible 

manufacturers. 

And if you read Mr. Chabot’s bill what it says is that if a manufacturer is not in business or unavailable to be sued, then the product seller has to bear full and complete liability. Now, you are a 

businessman and if you were in business and you knew that if you 

22

did not deal with a responsible manufacturer you would have full 

and complete liability, you would have a motive to do it. 

So I think you get to the goal that you want which is to have 

product sellers act in a responsible way with that provision. 

Right now let us go for very brief with the litigation tourist. 

What happens with the litigation tourist is, and this is where it 

hurts small business, they go into another state and the plaintiff’s 

lawyer when he goes into that state wants to get into the state 

court. That is the hellhole. He does not want to be in a federal 

court. So they will name some local seller, a retailer, a small pharmacy, a little stationery store so that that person is from the same 

state and they will not have the case in federal courts, it will have 

to be in the state court. And that is not good. 

If the law was that the local seller only was liable for fault and 

wrong it would be much harder to drag that innocent seller into a 

case. Again, the consumer is still left with a responsible defendant. 

I was not involved in many of these things, I read them and I 

learn them—learn about them. But we did help develop the product seller provision under President Carter a long time ago. And 

it is law in about 16 states. But people deal in interstate commerce 

and it would be better to have it as a national law.

Chairman SCHROCK. Ms. Velazquez?

Ms. VELAZQUEZ. Mr. Schwartz, I know that you are here representing the American Tort Reform Association.

Mr. SCHWARTZ. That is correct.

Ms. VELAZQUEZ. And given that members of this association are 

predominantly large corporations I really find it interesting that 

you are here testifying on their behalf at a small business hearing. 

Could you please tell me how the American Tort Association Members such as Boeing, Johnson and Johnson, Exxon-Mobil, Chrysler 

will benefit from passage of H.R. 2813? I have the list here of the 

members of the American Tort Reform Association.

Mr. SCHWARTZ. Well, there are many, many small business members. I would invite you to attend one of our meetings. I will extend 

the invitation now that I hope you can accept so you will see our 

small business members. But I also want to address your question.

Ms. VELAZQUEZ. Okay. But excuse me one second. I will strongly 

recommend you to tell them to add all those small businesses that 

are members of the American Tort Association because when you 

go down this list you do not have any small business represented 

in this list. So it is a matter of perception. I am sorry for that.

Mr. SCHWARTZ. Representative, first of all, you made a very, very 

good suggestion. And I will take it back. I always learn something 

from hearings and often it is from folks who are not that comfortable with tort reform. So I appreciate your statement. 

Let me just say in terms of the bill how some of the larger businesses might benefit from this small business bill—and remember, 

23

I was not testifying about that bill but a bill that dealt with frivolous claims. When product sellers are sued and if product sellers 

can be brought into cases even though they are totally innocent it 

allows some plaintiffs’ lawyers, some, to manipulate the system. 

And then the larger businesses find that their cases are in state 

courts and some of these state courts do not have a very fair way 

of handling things. So the provision that deals with product sellers 

avoids needless lawsuits but it also helps a case be in a federal 

court when it should be in a federal court, and that helps some of 

the larger businesses.

Ms. VELAZQUEZ. Ms. Doroshow, would you care to comment as to 

how large corporations will benefit from this bill?

Ms. DOROSHOW. Well, I think half the bill does deal with large 

corporations. We are dealing with large product sellers here, major 

companies. It is not a small business bill at all when you look at 

that part of the bill. So I would say that those that are involved 

in selling consumer products would benefit tremendously from the 

liability restrictions that are in this legislation.

Ms. VELAZQUEZ. Ms. Wagner, how many employees do you have 

in your company?

Ms. WAGNER. I have 65.

Ms. VELAZQUEZ. Sixty-five. So this legislation also defines a 

small business as having 25 or fewer employees?

Ms. WAGNER. Yes. And I would truly hope that when this bill is 

discussed further that that would then be increased to 100 since 

that would be a sensible amount for a small business.

Chairman SCHROCK. We have a vote. Let me ask a couple of 

questions before I leave. 

Mr. Cavey, what is going to happen to your clients or other small 

businesses if we do not pass some sort of tort reform?

Mr. CAVEY. Well, tort reform is definitely needed. My estimation 

based on what I have seen through my agency is that two things 

will happen: number one—well, three really—there will be a lot 

more fear within the—dealing with the public; number two, I see 

that it will inhibit the amount of jobs that are out in the market 

because employers need to feel competent and they need to keep 

their expenses in line; and number three, I think the other thing 

it will do is it will cause consumer prices to go up because the 

small florist who has an increase in liability insurance is not going 

to take it out of the pocket, they are going to pass that right back 

on to the consumer in the neighborhood.

Chairman SCHROCK. Does litigation drive insurance premiums 

obviously?

Mr. CAVEY. Oh definitely.

24

Chairman SCHROCK. Okay.

Mr. CAVEY. Absolutely.

Chairman SCHROCK. Ms. Wagner, I was impressed by your testimony about being forced to settle claims for which your company 

bore absolutely no responsibility. Do you think these kind of claims 

hurt your ability to get other contracts and particularly government contracts? I would think this is not the kind of publicity any 

company would want to get?

Ms. WAGNER. Well, this is true. And truly this has affected the 

way we feel about projects that we should take. First of all, we 

stopped bidding schools entirely because of the litigation in schools. 

But when you are looking at any given project having $100 million 

to $200 million worth of collective insurance you are looking at a 

lot of targets there for any litigation. So frivolous lawsuits on construction projects hurt everybody involved with them. And it certainly does not do reputations any good.

Chairman SCHROCK. So you think the lawsuit culture in the construction industry discourages some people from going into business in your industry?

Ms. WAGNER. Absolutely. And it certainly right now is discouraging growth, which should be a part of the construction industry 

right now.

Chairman SCHROCK. Absolutely. 

Well, we have a vote, folks. And I am not going to hold you here. 

I really do, I really do appreciate your testimony here. I appreciate 

the input you have. It has given me a lot to think about. And I am 

delighted to think that Mr. Schwartz learned something from us. 

That is so unusual here. So I really appreciate that. 

I appreciate your taking the time to come. And I assure you this 

is a subject that will not die. This is a subject we are going to hear 

about for a long time until something is done about it. 

So, again, I thank you all very much. And this hearing is adjourned. 

[Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]

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