Wednesday, February 18, 2015

How Managers Can Reduce Excessive Fear of Litigation in their Organization

Prof. Eric Rasmusen
Kelley Direct Professor Eric Rasmusen’s research on litigation rates in wealthy, democratic societies was recently quoted in an article about the adverse effects of America’s fear of lawsuits. Citing Rasmusen’s research, the author of The Economist article concludes that “Americans are not so much unusually litigious as unusually fearful, and this fearfulness extends to the prospect of lawsuits. The occasional jaw-dropping award in a personal injury or class-action lawsuit creates, like the occasional terrorist attack, a salient sense of pervasive danger.”

Professor Rasmusen shares more insights for managers who have to decide whether to risk potential litigation for their company in this interview:

Do you agree with The Economist’s conclusion that Americans are becoming too risk-averse?

It is certainly my impression that Americans have become more apprehensive about a wide variety of possible dangers over the past thirty years--- worries about the kinds of food they eat, crime, exposure to pollutants,  and such.  The fear of being sued is one of these.  It is not a matter of actual danger increasing, because government regulation is much tighter now than before and crime is lower, but somehow perceptions of risk have increased. The U.S. legal system plays some part in this, particularly in how businesses and other organizations behave.

Is the reputation that Americans have about their eagerness to sue warranted?

That reputation has been gained as a result only of certain kinds of lawsuits, not the most common kinds but often the most public. Americans seem to not be particularly litigious when it comes to the most common kind of lawsuits in any country—things such as disputes over car accidents and contracts. But American courts are unusually receptive to lawsuits over product liability and compliance with government regulations. 

Who should be wary of the rare but disastrous lawsuits you describe in your research?

Almost by definition, one cannot be wary of freakish lawsuits such as the famous McDonald’s coffee lawsuit. This, indeed, is one of management’s hardest tasks: to be willing to run a business without being distracted by irrational fears of being sued. The best preparation is to have a general crisis management plan in place to deal with whatever comes up.

What are your recommended solutions?

It would be helpful if Americans retreated from the idea that the government, including the courts, can solve every problem, and should be blamed if it doesn't solve them all. My own suggestion would be to repeal some of the laws, such as the American with Disabilities Act, that have been expanded by regulation and litigation far beyond their original purpose, and to put sunset provisions in new laws so that if they expand too much in interpretation they can be rewritten more easily to return to their original scope.

How might a management team protect against class-action and securities lawsuits?

Prompt management response and full rather than forced disclosure can limit the damage from a mistake the company has made that might result in a class action suit.  It is better to deal with the customer directly than through a class action lawyer who is trying to maximize his cut of the damages. As for securities lawsuits, the most important thing is to keep managers aware of the rules involving disclosure, and to obey them. That will not stop all lawsuits, but at least it will restrict them to suits that should lose in court.

About Professor Eric Rasmusen

Professor Rasmusen has taught at Kelley since 1992, and has also held positions at Chicago, UCLA, Yale, and Harvard. He is best known for his book Games and Information: An Introduction to Game Theory. He has worked on topics in anti-trust, the Japanese legal system, and the intersection of law and economics. He has taught undergraduates, PhD students, and MBA students over the years. Eric Rasmusen currently holds the Dan R. and Catherine M. Dalton Professorship - and most recently, he started teaching in Kelley Direct three years ago where he enjoys teaching online students around the globe.

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