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Change of Venue
Alison Frankel
The American Lawyer and Corporate Counsel
10-08-2003
No problem has bedeviled the civil justice system over the last 30 years as intractably as asbestos. The stuff hasn't even been used in new construction since the 1970s, yet there are something like 300,000 asbestos personal injury cases pending in state and federal courts, with perhaps millions more (nobody has ever reliably predicted this number) lurking in the future. Cases load the dockets of courts in the states with laws friendly to asbestos claimants, notably Texas, Mississippi, West Virginia, Illinois and New York. The litigation itself, once risky, is now routine; the plaintiffs lawyers who control it are extremely shrewd businessmen who have explored every dark crevice of tort law and tunneled all sorts of new avenues of recovery. They search out victims, even offering free X-rays to find minimally injured former asbestos workers. They lead them through depositions, helping clients unsure of their asbestos exposure. They know all about leverage: They bundle less-valuable cases with multimillion-dollar cancer cases and demand that defendants settle all or none.
As the old asbestos companies, such as Johns-Manville Corp. and Owens Corning, have gone into bankruptcy, plaintiffs lawyers have successfully proffered novel legal theories that have roped ever more tangential defendants -- whose deep pockets are subject to joint and several liability -- into the litigation. (One recent vogue is to sue the makers of non-asbestos-containing components used in products that contained asbestos, such as valves for boilers.) Defendants say asbestos liability has already driven about 70 companies into Chapter 11, costing thousands of workers their jobs.
Insurers have increased their asbestos reserves by billions of dollars, putting even established carriers at risk of insolvency. The direst prognosticators say asbestos litigation has imperiled the entire economy.
The proposed solution with the most currency right now is radical surgery: cutting asbestos out of the civil justice system entirely. It seems as though every alternative to managing the litigation, from mass class action settlements to multidistrict litigation in the federal courts, has already failed. The manufacturing and insurance industries are ready for vivisection. Last spring they united to back a proposal to remove all asbestos litigation from state and federal courts and transfer it to an administrative trust fund to be funded by them. The American Federation of Labor-Congress of Industrial Organizations was concerned enough about inequities in payouts to victims now, as well as the prospect of no money left for undiscovered victims, that its general counsel expressed cautious support for the concept of a private trust fund. And, most crucially, Sen. Orrin Hatch and the Senate Judiciary Committee decided it's time to take asbestos out of the courts.
Last July the judiciary committee passed a bill creating a $108 billion trust fund aimed at fixing the problem for all time. If it were to be enacted by Congress, the fund would provide certainty to businesses and insurers panicked by asbestos liability. It would, theoretically, guarantee future victims some money. It would also, in the incarnation favored by defendants, eliminate asbestos victims' rights under the tort system.
"[Asbestos is] a symbol of the failure of the civil justice system," says Benjamin Heineman Jr., the general counsel of General Electric Co. and a key backer of the asbestos trust fund. "When you have a problem that is this broadly based, and when the courts have such difficulty dealing with it fairly, shouldn't that be resolved through a legislative approach?" Proponents of the asbestos trust fund, for the most part, say asbestos is unique in American litigation, both in the scope of the economic damage that the litigation is wreaking and in the systemic distortions that plaintiffs lawyers have created. Taking asbestos cases out of the courts, they say, doesn't mean Congress will be called upon every time a drug turns out to have dangerous side effects or the trial lawyers target another deep-pocketed industry.
Yet if it can be done with asbestos -- if Heineman is right in that big, expensive problems call for legislative solutions -- it can be done with the next mass tort. Is an administrative trust fund just the end of asbestos litigation -- or is it the beginning of the end of the American tort system?
A year ago a trust fund to end all asbestos litigation was the impossible dream of a few strategic thinkers on the defense side. The trust fund idea was not new -- plenty of old-time asbestos defendants such as Johns-Manville had emerged from bankruptcy years ago with trust funds to pay victims. But a huge, nationwide fund to wipe out the litigation seemed politically and logistically impractical. How would defendants and insurers allocate the money to be paid into such a fund? And how could Congress be persuaded that such a fund was fair to victims as well as defendants?
As an alternative, in 2001 and 2002, a large and broad-based group of insurers and defendants called the Asbestos Alliance focused its efforts on what became known as the "medical criteria" approach to the asbestos problem -- traditional tort reforms to block such problems as forum shopping, combined with federal legislation to limit asbestos claims to only the most seriously injured victims.
At the same time, another, much smaller but equally powerful group of defendants began to explore the trust fund idea. The general counsel of General Electric, Viacom Inc., Pfizer Inc. and a handful of other companies organized themselves as the Asbestos Study Group. They hired Kenneth Feinberg, the special master of the September 11 Victim Compensation Fund of 2001, to advise them on trust fund models, and tapped lobbyists on both sides of the Hill: Barry Direnfeld of Washington, D.C.'s Swidler Berlin Shereff Friedman, who is well connected among Democrats, and Kevin McGuiness, former chief of staff to Sen. Hatch.
At least one insurance carrier was also working on a trust fund model. Meyer Koplow and Jeffrey Wintner of New York's Wachtell, Lipton, Rosen & Katz, counsel to CNA Financial Corp., had persuaded their client that a trust fund that would cap liability was the insurance industry's best way out of the asbestos mess. As the Asbestos Study Group developed its trust fund plan, Wachtell and CNA tried to convince other major insurers of the approach. The two groups began to work together last winter, eventually bringing labor -- represented by Jonathan Hiatt and Damon Silver of the AFL-CIO -- into discussions about a nationwide trust fund. (Hiatt had previously said publicly that he supported the concept of a trust.)
The Senate Judiciary Committee, meanwhile, had been keeping track of the asbestos negotiations. Last March, Hatch held his first hearings on the asbestos crisis in the newly Republican Senate. At those hearings Hatch made it clear that he considered a trust fund the most comprehensive and equitable solution to the asbestos litigation problem. Hatch's push meant the end of the medical criteria approach and gave new impetus to talks of a trust fund.
An alliance between insurers and defendants was crucial to moving any trust fund legislation forward. Insurers and their clients have battled in the courts over asbestos liability for 30 years. Nevertheless, with many large carriers concerned about their ever-expanding asbestos liability, the insurance industry was as interested in finding an end to the litigation as the defendants. Ultimately, after long negotiations, insurers agreed to split the cost of a trust fund with defendants, with each committing to put up $45 billion. (For insurers, that number represented approximately their projected asbestos liability.) Insurers would be assessed a share related to their asbestos exposure. Defendants planned to allocate their shares through a tiered system, based on each company's historic asbestos costs and its annual revenue.
The trust fund bill first introduced by Senator Hatch on May 22 maintained the tiering system and the fifty-fifty split between insurers and defendants, but upped the size of the fund from $90 billion to $108 billion. Four billion dollars would be transferred from existing private asbestos trust funds, but the initial Hatch bill didn't specify where the other $14 billion would come from. Insurers and defendants weren't happy about the inflated size of the fund, but the bill still provided what they most wanted: certainty about long-term asbestos liability.
The Hatch bill also, however, tried to satisfy the plaintiffs on the other side of the asbestos equation with defined benefits to victims, based on the severity of their disease. Mesothelioma victims, suffering from the rare form of lung cancer that is closely associated with asbestos exposure, would receive the highest payments. People with signs of asbestos exposure but no lung impairment -- the cases filed by the thousands in plaintiffs-friendly jurisdictions -- would receive nothing but medical monitoring, though they could apply to the fund if they later got sick.
The issue of compensation to the victims consumed two of last spring's markup sessions, in which Senate Judiciary Committee members debated changes to Hatch's bill. Which victims should qualify for payments? Defendants, for instance, balked at payments to lung cancer patients with a history of smoking and asbestos exposure but no asbestos disease. And how much should qualified claimants receive? In the tort system, payments have varied wildly; juries have been known to award millions even to unimpaired victims whose lawyers successfully evoked the fear of cancer. Under the Hatch bill, mesothelioma victims would receive only about $1 million -- much less than some get in the tort system.
The markups produced some concessions to victims, but not enough to mollify the AFL-CIO, which announced that it didn't support the trust fund as proposed. In the end the amended Hatch bill won over only one Democratic senator on the judiciary committee, Dianne Feinstein, who had worked with Republicans on the payment matrix. The bill squeaked through the judiciary committee on a 10-8 vote with one abstention. Labor spent the summer pressing for higher payments to victims.
But there's a big fundamental problem with the idea of more money for victims: It doesn't work in a fund that purports to seek a defined contribution from insurers and defendants. The money going out to victims has to match the money coming in from insurers and defendants. Designers of the asbestos trust fund calculated that the fund could afford certain payments to victims based on estimates of the number of claims the fund would receive annually. If payments go up, or if those estimates are too low, the fund runs out of money.
During the judiciary committee markups, Feinstein offered amendments to solve the shortfall problem, calling for aggregate contingency contributions of up to $31 billion over the 27-year life of the fund, to be split equally between insurers and defendants; and annual contributions of up to $2 billion thereafter to satisfy remaining claims. An even more drastic amendment from Senator Joseph Biden called for the fund to shut down if in any year it couldn't pay benefits to at least 95 percent of the claimants. Under the Biden amendment, asbestos victims could then return to the tort system. (Hatch bill proponents say the Biden amendment is a deal-breaker; the legislation won't pass the Senate unless that amendment is dropped.)
Those final amendments led insurers, who had only reluctantly agreed to split the core fund payments with defendants, to bolt the alliance supporting the bill. Insurers say now that the liability cap they thought the fund would offer is no longer certain. The fund, insurers asserted in a letter to Senate majority leader William Frist, "would substitute one unaffordable, deeply flawed compensation system for another." Indeed, since the Hatch bill passed the judiciary committee, some insurance companies have worked actively to defeat it. Industry spokeswoman Julie Rochman of the American Insurance Association attended the last judiciary committee markup session, at which the Biden amendment was adopted. Before the trust fund had gained momentum, insurers had worked on the medical criteria approach to national legislation with a small group of plaintiffs lawyers who represent the most severely sick asbestos victims. "After the markup," Rochman says, "the trial lawyers came up to us and said, 'Isn't it funny? We're all on the same side again.'"
One alternative to the shortfall problem, floated last spring and revived this summer, is a small surcharge on all commercial insurance policies, on the order of half a percent, to fund the asbestos program. Certain insurers opposed the surcharge when it was first proposed in private negotiations, arguing that it was a cost that couldn't be passed on to policyholders. But fund proponents have continued to suggest it, hoping that the surcharge might, in the end, be more palatable to the insurance industry than the contingency payments now in the Hatch bill.
For both labor and the insurance industry, a principal problem with the fund is money: too much of it for the insurers, not enough for labor. For the plaintiffs lawyers who have violently opposed the trust fund since the idea surfaced, money is, of course, one crucial issue. They stand to lose tens, if not hundreds, of millions of dollars in contingency fees if the fund is enacted. They also say the fund is doomed to run out of money. Pending cases would swamp it from the beginning, they say, and fund designers have drastically underestimated the number of future claimants. Victims, they assert, will be waiting longer to collect money from the fund -- if it even has the money -- than many waited in the tort system. "Just try to read the formula [for allocation]," says plaintiffs lawyer Joseph Rice of Motley Rice. "It will be years before this is funded securely. ... This bill is a hodgepodge. There's no logical thought behind it."
But there's also a more fundamental problem, plaintiffs lawyers say, with the whole idea of the trust fund. The plan would immediately remove all pending asbestos cases from the courts and transfer them to the fund. Some plaintiffs who would almost certainly collect some money under the tort system -- notably, people with evidence of asbestos exposure on their lungs, but no significant health impairment -- will likely get nothing from the trust fund. "You can't retroactively take them out of the system," says Perry Weitz of Weitz & Luxenberg. "Right now, this bill is criminal."
Both Weitz and Rice say that if the bill passes, plaintiffs lawyers plan to challenge its constitutionality. There is, in fact, precedent for removing plaintiffs' rights to sue in the courts -- state workers compensation systems, for instance, and the federal black lung and childhood vaccine funds. The asbestos trust fund idea, moreover, has been deemed sound by such constitutional heavy-hitters as Carter Phillips, on behalf of a group of defendants; Seth Waxman, hired by one insurance company; and Laurence Tribe, working without compensation for the judiciary committee. But none of the analogous federal funds involves anywhere near as many people or as much money as the proposed asbestos fund. Says Rice: "This would be the biggest corporate bail-out -- and the biggest voidance of victims' rights -- in American history."
The Senate left for its August recess without the asbestos bill coming to the floor. With 60 senators needed to end debate and bring the bill to a vote, the lobbying this summer was intense, particularly since both supporters and opponents regard the legislation voted out of the judiciary committee as a work in progress. Publicly, insurers urged majority leader Frist to keep the bill in its present form from a vote, while privately some in the industry considered whether a compromise was still possible. Trial lawyers paid a call to Senate minority leader Tom Daschle to seek his help in blocking the bill. Members of the Asbestos Study Group worked with Hatch and like-minded senators to figure out how to make the fund big enough to satisfy labor -- yet small enough to bring insurers back.
The next several weeks will determine whether the Hatch asbestos trust fund lives or dies. Labor and the trial lawyers may have enough Democratic support, for now, to block it, but it's hard to imagine that an idea with so much support on the defense side and so much traction in the Senate -- even Democratic stalwarts have said they support the trust fund idea, if not the specifics of this legislation -- will lay dead for long. And that's what's most intriguing about the asbestos legislation debate. Some of the heartiest of the trust fund's supporters say asbestos is unique in American litigation -- that only a tort so widespread and long-lived calls for such drastic thinking. If the legislation passes, it will be because its supporters have managed to convince Democrats reliant on trial lawyer contributions not only that the trust fund is more equitable for all asbestos victims -- but also that no other group of defendants is plotting a similar Congressional rescue request.
But congressional rescue from liability is no longer impossible. Consider the September 11 victim compensation fund, as well as the prospective immunity granted last year to vaccine manufacturers. If the asbestos legislation passes, then legislative relief from liability will seem like an ever more viable option for defendants seeking a bailout. And if the asbestos fund works, if more victims are compensated in a more rational and timely way than they are in the tort system, with fewer transaction costs, will it make any sense to deny the argument that it's the job of Congress to produce broad-based social justice when the courts can't? The asbestos legislation could change forever how this country responds to people who've been wronged.
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