Liability Litigation and Entrepreneurship: A Delicate Balance
Jonathan Ortmans, President, Public Forum Institute
Last week, I highlighted the need for a smart regulation framework that doesn’t inhibit entrepreneurship. Today, I would like talk about liability litigation in more specificity. All businesses should be concerned about the inherent risk of bringing a new product or service to the market. However, entrepreneurship can suffer if liability litigation is pursued in ways that create too much uncertainty.
Litigation uncertainties increase the level of risk that entrepreneurs have to take in order to work on their innovative ideas. According to a SBA study, liability litigation affects entrepreneurs’ chances of growing their businesses by imposing costly and time-consuming settlements, legal fees and insurance. All this is reported to cause financial and psychological hardship. Moreover, the majority of U.S. small firms are unincorporated, which means that many entrepreneurs are potentially subjected to personal as well as business financial liability risk.
The problem is real. It is estimated that over 20% of small-business owners spend more time on actual and potential liability problems than on productive business activities, such as introducing new technologies or processes, obtaining or repaying business loans, and evaluating the competition. Small businesses are also often the target of frivolous suits because they are more likely than large corporations to settle a case rather than to litigate. By a 9 to 1 margin, suits against small businesses are settled before trial. Not surprisingly, small-business owners ranked the cost and availability of liability insurance second on a list of 75 concerns.
Although progress has been made in reducing the uncertainties surrounding liability costs, further reforms are needed to strike a balance between incentives for safety and innovation (and all the positive by-products from innovations- jobs, higher quality of life, and more). For example, it is worrying that U.S. liability rules emerge from individual, fact-specific litigated cases randomly filed across the country, creating an uncertain legal climate for entrepreneurial endeavors.
Policymakers should consider a federal product liability law to establish more uniformity to reduce uncertainty in liability rules for products sold in interstate commerce. Or, to deter rent-seeking “sham” litigation, we could adopt the English rule on payment of attorneys’ fees (loser pays) for commercial litigation where there are commercial interests on both sides.
Let’s keep entrepreneurs doing what they do best to create jobs – and try to keep them somewhat protected from too much catastrophic and unpredictable liability.
Jonathan Ortmans is a senior fellow at the Kauffman Foundation where he focuses on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues.