January 2006

Will the FAIR Act Fix the Asbestos Mess?

The Fairness in Asbestos Injury Recovery (FAIR) Act, S. 852, would establish a $140 billion trust fund to compensate victims of asbestos-related diseases, taking most cases out of the litigation system. Would the establishment of this trust fund solve the threat of unbounded liability for companies that used asbestos, or would it encourage a further multiplication of claims while failing to protect companies from later attacks and overriding state reforms in Texas and Ohio? Does FAIR appropriately distribute the burden of the trust fund across the American economy, or does it formalize previously unjust results or favor large manufacturers to the detriment of smaller enterprises? Is the creation of any sort of trust fund legally, economically, and politically viable? Does FAIR correctly strike the balance between excluding illegitimate claims of injury and meeting the needs of real victims? Are there better alternatives? At a January 19 AEI panel discussion, experts considered these and other questions pertaining to asbestos litigation.

Lester Brickman
Benjamin N. Cardozo School of Law

The asbestos system has been badly abused over the course of several decades. In the mid-1980s, an entrepreneurial approach to asbestos claiming developed that was characterized by aggressive client recruitment through mass screenings; the manufacture of specious medical evidence, recently supported by the conclusions of U.S. District Court Judge Janis Jack; entrepreneurial witness preparation techniques; and mass filings of claims in districts with “special asbestos law.” This technique leads to many distinct cases being aggregated in court or settled en masse, both of which hurt legitimate victims’ due process rights. State asbestos tort reform attempts have had limited effectiveness, and in any case plaintiffs’ lawyers can and do cultivate new jurisdictions. Attempts to deal with the problem at a federal level date back nearly thirty years, with the current bill dating back to 2002. This bill, S. 852, will take asbestos claims out of the courts and substitute an administrative no-fault system. It is one of the most complex pieces of legislation ever drafted. A trust offers significant benefits: uniformity of compensation to similarly situated claimants; certainty of funding for those most adversely affected; the possibility of superior screening keeping out unimpaired claimants; and, perhaps most importantly, a much lower transaction cost resulting in claimants receiving a larger portion of payments. It is often unclear how well the trust created by S. 852 will deliver these benefits. It is also unclear that the $140 billion price tag suggested represents the full costs, which I have estimated as being higher by $37 to $60 billion.

Patrick M. Hanlon
Goodwin Procter, LLP

The subtitle for my presentation could be: “One and a half cheers for the FAIR Act.” There are two questions: should we have a trust fund, and is S. 852 capable of being the trust fund we want? There are certainly significant problems with the bill, some of which will hopefully be resolved before it becomes law. In general, I am optimistic that the necessary changes will get made and this will become a law that presents a solution to this massive problem. In this case, an imperfect solution will be quite preferable to no solution and a continuation of the status quo.

I have been working on the asbestos question since the beginning in the 1970s. Originally, I was a supporter of medical criteria approach as opposed to a trust fund, but in 2003 Senator Orrin Hatch (R-Utah) converted my group, the NAM Asbestos Alliance, to the approach taken by the FAIR Act. In retrospect, we realized that a medical criteria approach failed to do enough to solve the problem.

The basic facts of the FAIR Act are as follows: The future costs of litigation, in the absence of legislation, are estimated at $140 to $195 billion. Since the contributions to the FAIR Act’s fund are $140 billion and the bill should provide significant savings, we feel confident that this is not an under-funded bill. We need this bill because asbestos litigation has pushed the tort system past its limits. All of the major companies most responsible for exposing people to this nasty carcinogen are bankrupt and have left a wholly inadequate supply of money to compensate totally legitimate victims. Our society has decided that worthy claimants should not be left uncompensated simply because the companies responsible are gone, and so through the principles of joint and several liability, a host of other companies find themselves being held responsible in courts. The problem of unimpaired claims is on its way to being solved, but the larger problem of unbounded, uncertain liability for manufacturers needs to be addressed by establishing a rational system--which explains why we need a trust fund.

So what are the virtues of this trust fund? It has strong auditing and anti-fraud characteristics, and will essentially serve as a medical screening system before compensation. Anyone compensated by this fund would get a settlement in the tort system, and this bill should not make people come out of the woodwork. The taxpayer is not asked to foot the bill, and there is a strong chance for future funding holidays and payment step-downs if the fund develops a surplus. The distribution of funding obligations is contentious and imperfect--but it is difficult to imagine a truly fair system. This at least provides a workable solution. The controversial sunset provision, which would provide for a return to the tort system in the event that the trust fails, is not ideal, but there is no way to get around having this and still pass the bill. In the event of a failure, the return to tort would probably be the least worst option. The bill has problems with subrogation issues related to workers’ compensation law, which should be priorities for fixing before passage.

Kevin A. Hassett
AEI

There are specific economic questions that the bill should answer if it is to deserve our support. The present problem can be characterized most simply as too many cases, as Professor Brickman described. Economists explain this phenomenon by saying that the benefits must be too high or the costs must be too low, both of which probably apply in the case of asbestos litigation. The logical policy response is to raise the cost of litigation, and so we need to ask whether the bill raises or lowers the cost of making a claim. If it lowers the cost, we might see a wave of new cases. It is thus vital to figure out whether the medical screening part of the bill would be effective. Another question of concern is whether this trust fund really will save manufacturers much money, especially taking into account the groundbreaking work of Judge Jack. Are we locking in the projected liability of the pre-Judge Jack era? The certainty offered by locking in a liability is not a rationally attractive feature unless it offers some probable relief. Another concern is the manner in which the money for the trust is raised, which seems quite arbitrary at present. We are taking a broken system that unfairly holds some companies responsible and codifying that system in law, whereas it seems like we should be drawing these funds from general tax revenue, where the liability can be spread as evenly as possible.

AEI research assistant Philip Wallach prepared this summary.