Commentary

Tort Reform as if Federalism Mattered

Democrats in Congress claim they’re willing to work constructively with President Bush on a second-term agenda, if only he’ll moderate his views on issues like tort reform. Regrettably, the president has decided to feature restrictions on medical malpractice and other lawsuits in his opening legislative package. Bad idea. Lost opportunity.

The president is missing a chance to placate his congressional opponents or, if they won’t work with him, to unmask their offer of cooperation as political posturing. In a nutshell, Bush should abandon his pitch for substantive tort reform — not because he’s wrong to insist that the civil justice system needs an overhaul, but rather because he’s right to argue that federalism matters.

The national government is not empowered to dictate substantive rules of state tort law. And Republicans, who are supposedly devoted to fighting federal bloat, should be on the front line in stopping the central government from worming its way into an area that has been left to the states for two-and-a-quarter centuries.

To be sure, Congress has cited constitutional authority — the Commerce Clause — to justify its ambitious federal designs. But Justice Robert Johnson reminds us that the central purpose of that clause “was to keep the commercial intercourse among the States free from all invidious … restraints.” Today, instead of serving as a shield against interference by the states, the commerce power has become a sword wielded by the federal government in pursuit of a boundless array of regulations.

To justify federal tort reform under the Commerce Clause, Congress must show that the reforms are both “necessary” and “proper” to ensure the free flow of interstate trade. When it comes to tort reform, neither criterion has been met. Substantive federal reforms are not necessary because the states are enacting their own reforms. Substantive federal reforms are not proper because they cannot be harmonized with traditional concepts of federalism.

That does not leave the federal government powerless to affect tort law. Congress can enact “procedural” rules while leaving the substantive provisions of tort law in state hands. Two procedural reforms would be especially helpful.

First, amend the rules that control state exercise of so-called long-arm jurisdiction over out-of-state businesses. Congress could preclude a local court from hearing a case unless the defendant engages directly in business activities within the state. A company’s mere awareness that the stream of commerce could sweep its product into a particular state should not be sufficient to confer jurisdiction. Companies are “aware,” for example, that their products could be re-sold or transported almost anyplace. Instead, jurisdiction should be triggered only if the company purposely directs its product to the state — that is, the company exerts control over the decision to sell in the state.

A sensible rule like that would give firms an exit option: They could withdraw from a state, and thereby avoid the risk of a runaway jury or biased judge, even if a product somehow ends up in-state.

A second procedural reform, compatible with federalist principles, would be to establish a federal rule that dictates which state’s laws control when litigants are from more than one state. That “choice-of-law” rule would apply when a company cannot afford to exit from doing business within a state.

Generally, plaintiffs select the most favorable state in which to litigate, based in part on the state’s tort laws. But suppose a federal rule mandated that the applicable tort law would be based on the state where the manufacturer was located. A manufacturer could decide where to locate, and its decision would determine the substantive law. Consumers, in turn, would evaluate that law when deciding whether to buy a particular manufacturer’s product. If a manufacturer selected a state that didn’t provide adequate legal remedies for defective products, consumers would buy from rival companies.

Would there be a race to the bottom by manufacturers searching for the most defendant-friendly tort law? Maybe. But more likely, states would balance their interest in attracting manufacturers against the interest of in-state consumers, who want tougher product liability laws. In effect, healthy competition among the states would enlist federalism as part of the solution rather than raise federalism as an excuse for failing to arrive at a solution.

When a state exercises jurisdiction beyond its borders, discriminates against out-of-state businesses, or imposes a tort system so egregious that it denies defendants due process, the federal government should intervene. Otherwise, our national legislature should honor the federalist notion that the states serve as 50 experimental laboratories. The resultant system won’t be perfect. Still, competing tort law in 50 states is surely preferable to monopolistic, national rules established by Congress without constitutional authority.

Robert A. Levy is senior fellow in constitutional studies at the Cato Institute and author of Shakedown: How Corporations, Government, and Trial Lawyers Abuse the Judicial Process (2004).