Lance T. Izumi - Contributor
[Courtesty of Pacific Research
Izumi is Director of Education Studies for the Pacific
Research Institute and
Senior Fellow in California Studies. He is a leading expert in
education policy and the author of several major PRI studies.
[go to Izumi index]
Abuse Choking California Economy
Legislating business out of the state...
[Lance T. Izumi] 4/9/04
to Governor Arnold Schwarzenegger, excessive litigation against
businesses has contributed to California's poor business
climate. The governor's argument was recently buttressed by
a U.S. Chamber of Commerce report that ranked California's
legal system 46th out of the 50 states in terms of fairness
The Chamber survey asked corporate lawyers to grade states in
various categories. California ranked last in the area of tort
and contract litigation, last in jury fairness, and next to last
in its treatment of class-action lawsuits and the award of punitive
damages. In addition, Los Angeles was ranked the least fair and
reasonable jurisdiction in the country, with San Francisco tied
Why is California
ranked so low? Bad laws are a big reason. The infamous section
17200 of the state business and professions
code, for example, allows lawyers to file suits against businesses
for unfair or illegal practices even if they don't have an actual
injured client to represent. Law firms have combed state records
for minute regulatory violations by businesses and then threatened
expensive lawsuits if the businesses don't settle out of court.
Democratic Attorney General Bill Lockyer has called 17200 lawsuits "extortionate."
Angelo Mozilo, chairman
and CEO of the mortgage giant Countrywide, cited 17200 lawsuits
as a reason his company decided against
expanding in California. Writing to then-Governor Gray Davis,
Mozilo said, "Nowhere is the state's legal system more dysfunctional
than in the area of so-called 17200 'unfair competition' suits." He
warned that failure to enact real reforms to 17200 "threatens
to permanently consign the state to the bottom rungs of the 50-state
At the other end of
the spectrum, small businesses such as auto shops and nail
salons have been hard hit by 17200 lawsuits. Garage
owner Gary Balikji was sued for paperwork problems and was told
by his attorney that it would cost $10,000 to defend himself
in court. Balikji settled out of court saying: "I gave them
$2,000 just so they would get out of my face. It's complete robbery,
but I don't have the time to deal with it." However, Nhan
T. Vu, a Chapman University law professor, warns businesses: "Any
other groups or attorneys can just find another plaintiff and
sue you again. There are auto shops, for example, that have been
sued five or six times."
Section 17200 isn't the only area of lawsuit abuse. Lawsuits
alleging housing construction defects have mushroomed because
builders often require subcontractors to carry liability insurance,
which makes the subcontractors part of any suit regardless of
whether or not it involves their part of the work. Thus, even
if a suit involves a roofing problem, the plumber and the landscaper
are also sued.
Contractor Jeff Wilson,
whose company has been named in 50 lawsuits in the last two
years, which is typical for the industry, says: "It's
legalized extortion.... They name everyone they can name because
the more insurance carriers, the more money." Unsurprisingly,
contractors' insurance premiums have risen 300 to 500 percent.
These higher costs are passed on to homebuyers.
No one wants to close off the courts to legitimate complaints.
However, California's legal system must strike a fair balance
between the interests of both consumers and businesses. As it
stands now, there is little fairness or balance in that system. CRO
2004 Pacific Research Institute