American laws and statutes are extraordinarily complicated; the US tax code is a prime example. And in contemporary lawmaking, nearly every new piece of legislation is similarly complex—even those with the best of intentions.
Not only can overly complex regulations introduce unexpected costs, they often unintentionally create opportunities for nuisance lawsuits that can destroy small businesses by creating financial, operational, and emotional stresses. Complex regulation can also inhibit innovation and discourage productive risk-taking even at large companies when plaintiffs troll for dubious patent infringement action.
Jim Edwards, general counsel at Cubic Corporation, has seen such civil justice abuse firsthand. In one instance, a customer believed they had been overcharged by $2 and filed a federal class action lawsuit claiming fraud and other allegations. From the start, such cases cost hundreds of thousand dollars in legal fees. “Time and money that go into addressing such lawsuits are resources that aren’t available for research and development, expansion, earnings per share, productive business deals, or other highly strategic business issues,” Edwards says.
He points out that because regulation—or, more precisely, the degree of regulation—varies by jurisdiction, certain areas actually end up losing business opportunities and resources. “We have locations outside of California, which is a very highly regulated environment,” Edwards says. “We see huge differences in the costs of doing business in states like Texas, Georgia, and Tennessee, where regulation is more reasonable. So it’s not surprising when you see companies relocating or deciding to expand elsewhere—even to other countries, where taxation or the regulatory environment are more favorable.”
Consider the Dodd-Frank Wall Street Reform and Consumer Protection Act as another well-intentioned example of complex legislation. In the wake of the recession, it made sense to enact legislation to improve accountability and transparency in the American financial system and, in the bill’s own language, “protect consumers from abusive financial services practices.”
“It’s not surprising when you see companies relocating or deciding to expand elsewhere—even to other countries, where taxation or the regulatory environment are more favorable.”
However, the very transparency that defines the act can be problematic. Dodd-Frank runs well longer than 800 pages, including hundreds of pages of clarifications about specific details and scenarios.
Another example of well-intentioned but ultimately lengthy and convoluted policy is the Americans With Disabilities Act (ADA). Its complexity has unintentionally facilitated frivolous lawsuits. An acquaintance of Edwards ran a restaurant, and an ADA lawsuit alleged that the tables and chairs were too close together. Rather than being able to simply rearrange the furniture, he was forced to pay $5,000 to settle. At the beginning of 2015, it was discovered that just two Pennsylvania law firms and eight plaintiffs had filed 61 percent of the state’s nonemployment ADA lawsuits in an 18-month period. In California, one attorney filed more than 2,000 ADA accessibility lawsuits.
Corporate attorneys like Edwards often push for arbitration, mediation, and litigation alternatives whenever possible, which can result in faster, private resolution. But smaller firms may not be able to withstand the process of getting to that point—specifically the demands of discovery, which can cost millions of dollars. This can effectively force them into unwarranted settlements with aggressive plaintiffs. “The first time a business owner becomes aware of a problem shouldn’t be when a lawsuit is filed,” Edwards says. “It should be by written notification of the problem with a reasonable time period to correct.”
There have been efforts at civil justice reform that would reduce defendants’ burdens. One was the Innovation Act, which focused on regulations related to patent infringement, but it died in the US Senate after passing a House of Representatives vote in 2013. Eric Goldman, a professor at the Santa Clara University School of Law, has proposed “lawsuit-free zones” that would completely eliminate litigation under certain circumstances. Such scenarios already exist through immunities for certain business models. Websites, for example, cannot be held liable for user-generated content. Safe harbor laws protect websites from copyright infringement carried out by their users. Goldman believes these zones would stop nuisance settlements and the devastating effects meritless actions have on many businesses.
Goldman suggests common-sense steps for drafting legislation. He believes simple, all-inclusive factors will facilitate much faster resolutions and limit the time and money defendants spend defending themselves. “I think these recommendations would go a very long way to improve our justice system,” Edwards agrees. “We need to be sure a fast, effective civil justice system is available to handle legitimate disputes.”
Edwards adds, “When you have a malfunctioning civil justice system, new, sensible reforms and regulation are essential. As it is, overregulation makes it more difficult for businesses to be successful and simply adds to the problems.”