We're coming to see how a nation's legal system helps shape its economic success. Back in 2000, "The Mystery of Capital" by Hernando De Soto documented the link between laws recognizing and protecting private property and thriving forms of Western capitalism. Since then, a UN report on developing nations confirmed De Soto's findings.
Now, as globalization makes for a dog fight among competing economic powers, we in the U.S. are comparing our own legal system with those of the EU, UK and Far East. Unfortunately, we have been discovering that our litigous approach to resolving disputes and remedying wrongs puts us at a global competitive disadvantage.
"What keeps General Counsels of U.S. companies up at night is litigation," asserts defense attorney Joseph K. Hetrick, partner with Dechert, headquartered in Philadelphia. Hetrick spends extensive time outside the U.S. counseling clients, lecturing, and studying global legal trends in law. In September he will deliver a major address in the UK on federal pre-emption. His special areas of litigation expertise include pharamaceutical and biotechnology.
Here Hetrick provides us with an exclusive interview on how different most of the rest of the world's approach to law is from that of the U.S. Earlier, Hetrick gave this blog exclusive interviews on Central Europe as the new Silicon Valley and how to manage risk at the front-end in biotechnology.
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Joseph K. Hetrick of Dechert on legal systems and global competitiveness:
JG: Can you give us the big picture on how the U.S. legal system is different from most of our competitors and the implications of that.
JH: Essentially, there are three key differences.
One, is that the U.S. believes that the people are entitled to a risk-free life. There should be zero exposure to risk. That's now embedded in our national ethos.
But that wasn't always how it was. It became a fixed idea when strict liability decisions were being made.
And, this is certainly not the way most other nations think. Maybe other nations such as Europe had been through too many brutal wars and revolutions on their own land to ever embrace the idea that risk can be prevented from a life. In Japany, if you state that zero risk is your goal, they would laugh out loud.
Therefore, in the U.S. - a nation which believes in litigation not regulation or codes - we are willing to see as individuals or in a class-action format for every risk that wasn't labeled as such and explicitly warned against.
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"In Japan, if you state that zero risk is your goal, they would laugh out loud," Joseph Hetrick
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That imposes layers and layers of new kinds of oversight on designers, developers, manufacturers, marketers and retailers. Just think of pharmaceuticals. Because U.S. courts have taken this as far as they can under the Constitution, we could soon witness whole industries just not engaging in any innovative risk-taking, not entering certain markets, and pulling out of others.
Clearly, the implication of that is that our competitors have the innovation advantage. They also have free choice of markets. For example, in Europe certain European companies sell medical devices that they wouldn't in the U.S. because of liability fears.
But let me clarify something, Jane. It's not that other nations are naive or believe all businesses do their ethical and legal best. Not so. In fact, most causes of action begin in those countries as criminal matters. And in the Far East the owners of businesses found negligent or unethical lose face. That can be much worse than losing money or even their whole business. It's that other nations do not have the utopian goal of a risk-free or perfect-product society like the U.S. does.
JG: Okay. Now for the second difference.
JH: The second difference is that other nations are more comfortable with fault than the U.S. is. Actually, Europe is a negligence-based system.
JG: Could you say that much of the rest of the world recognizes: Stuff happens.
JH: Yes. If a worker in Holland is injured, there is no great shock. As you say, stuff happens. That worker will be taken care of in two ways.
One, most of the infrastructure of those societies contains government funded and administered services ranging from complete medical care to workers compensation. Therefore, the worker doesn't have to fight to have medical treatment, financial support when off the job, and longer-term rehab.
Two, that worker will appear before an administrative board operated by the government for anything else that isn't already being addressed by government policies and procedures in-place. The situation is not blame-based, so is not adversarial. As I indicated in a previous interview, Europeans trust their government. Trust itself makes for a form of competitive advantage.
In the U.S., if there is an injury, there will be a cause of action. And that lawsuit, as filed, could allege multiple parties responsible, including the product designer, material vendor, manufacturer and marketing chain all the way to the retailer.
But, the liability status quo is changing some in other countries. Some. Not a lot. A consumer movement, for instance, is being introduced into Europe. You can see the beginnings of that especially in Germany. We could see some forms of class-action lawsuits there.
JG: But, from what you say, the class-action litigation in Europe will never mutate into anything like ours which came up with the novel theory of public nuisance and applied it to a legal product like lead paint which hadn't been manufacturered for more than a quarter of a century.
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"Europeans trust their government. Trust itself makes for a form of competitive advantage," Joseph Hedrick
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JH: No, lead paint public nuisance litigation won't happen in Europe.
JG: The third difference.
JH: In Europe, there are no special damages, Jane. People go to court mostly for the principle of "justice" or for some moral cause, not primarily to seek a financial remedy.
That's why in the UK and Europe there is no discovery, no parade of expert witnesses, no jury and loser pays. If there is need for expertise, the barrister has both parties agree on who that expert will be.
With loser pays, there is a powerful deterrent not to file causes of action with little merit. In the UK, for instance, legal services just as here are expensive. The losing party could wind up being responsible for millions in pounds for fees.
JG: So, outside the U.S. you probably won't find "Jackpot Justice."
JH: No. Most nations are conservative about what law should be used for. It should not be a tool to transfer wealth. Of course, that conservative stance prevents business from being burdened with undue concern about going bankrupt in a lawsuit. Business can attend to business.
Here too, though, there could be some change. But not much. The subprime crisis has also hit Europe. There could be angry class-action suits there as a result of that. But I don't anticipate the level of aggressiveness that is part of our approach to class-action suits. You have to remember: Most suits in Europe begin as a criminal matter.
Jane, you have to realize that Europe is concerned, given all the wars there and the former Nazi menace, about maintaining a moral code. We in the U.S. have no such collective memory. So, our system is money-oriented. We often read headlines in the U.S. of astounding jury verdicts of multi-millions awarded to plaintiffs.
As a result, here in the U.S. businesses play on the defense. That can make their competitive offense rusty or non-existent.
JG: Let's fast-forward to next January. If the Democrats take the White House and the majority in both houses, will the U.S. shift to more regulation and less litigation - like its competitors?
JH: No. Americans believe in litigation. Not regulation. I don't see that changing for a long time, if ever.
JG: So, perhaps our focus should be on reforms within the legal system. Maybe we should push to introduce loser pays in all civil litigation, eliminate contingency fees in suits brought by government entities as we have with the lead paint public nuisance lawsuits, allow expert testimony from parties both sides agree on, and work towards a less utopian mindset on risk.
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Joseph K. Hetrick, partner with Dechert, was selected among THE BEST LAWYERS IN AMERICA for product liability in the 2007 edition.
He has headed or participated in defense teams for litigation involving Merck & Company, GlaxoSmithKline, West Pharmaceuticals, York International, Stryker, and Airgas.
In the fall he will be delivering a major address in the UK related to federal pre-emption.
You can reach Joseph K. Hetrick at Joseph.hetrick@dechert.com, 215-994-2250.