In defense of lawyers (no joke)

With fewer regulators acting as watchdogs over business, attorneys - love 'em or hate 'em - are everyone's best defense, writes Business 2.0's Jeffrey Pfeffer.

By Jeffrey Pfeffer, Business 2.0 Magazine columnist

(Business 2.0 Magazine) -- Decades after Tylenol bottles were tampered with and Ford Pintos exploded, you'd think that product-safety panics would be nearing extinction.

No such luck. Consider just the past few months: Pet food laced with poison killed more than a dozen dogs and cats. Toothpaste shipped from China to Latin America turned out to be tainted with a potentially fatal thickening agent. And the FDA issued yet another recall for defective defibrillators, bringing the total number of heart devices that need to be replaced to nearly 200,000.

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TORT KING: John Edwards won more than $60 million in personal-injury cases before he entered politics.

Here's another frighteningly persistent trend: The drumbeat for weakening the ability of people to seek redress in court by curtailing product-liability suits continues unabated.

A recent study by the nonprofit Pacific Research Institute estimated that the cost of tort law in the United States had reached $865 billion, equivalent to an 8 percent tax on consumption or a 13 percent tax on wages. But much of that analysis leans on faulty logic, and while most of my friends in business consider lawyers at best a necessary nuisance, for the most part, they're dead wrong.

Let's begin with the obvious: There could be no commerce of any kind unless there were some way to enforce promises and to ensure that businesses were truthful and honored their obligations.

Employees expect to be paid for the work they do, and they know that if they aren't, they have the means of legal redress. Purchasers of securities expect the information in the offering documents to be accurate, and they have recourse if it isn't. And people who buy pet food trust that the food won't contain poison.

Simply put, what makes transactions possible is the knowledge that if trust is abused, the abuser will pay a penalty.

There are two ways to enforce that trust. The first is through an independent or government agency that monitors business behavior and imposes sanctions when companies break the rules.

Yet that's become an increasingly arduous task in the United States, where the staffs of many oversight agencies have either shrunk or barely increased in size while the economy has continued to grow. Between 1998 and 2004, for instance, the staff of the federal agencies charged with overseeing food safety, occupational safety and health, and mine safety all declined slightly in size, and between 1990 and 2005, the agency that enforces fair employment laws shrank almost 16 percent.

The other mechanism for holding companies' feet to the fire is the court system.

Tort-reform advocates love to rail against the skyrocketing costs of litigation and multimillion-dollar damage awards, yet one definitive study from Rand showed no increase in the percentage of tort cases won by plaintiffs and no statistically significant increase in the median award paid by businesses. Comparisons with other countries can also be misleading because they have more stringent regulatory regimes.

True, regulatory agencies cost billions, and so does our legal system. But I would argue it's a pretty good deal -- simply a necessary cost of running an economy in which people rely on the promises and products of strangers.

The alternative is precisely what we see in the case of the pet-food mess: agencies and companies sending people to inspect factories and raw materials more carefully, and increased testing of products coming into the country.

The next time you want to complain about "frivolous" lawsuits, picture doing business in a world where promises can't be relied on and you can only deal with people and organizations you already know well. There are undoubtedly abuses and problems in our current system, but the cost of punishing malfeasance is a necessary and small price to pay for running a modern economy.

Business 2.0 columnist Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.