Legally Speaking: Faces You Never See -- The Hidden Costs of Litigation

John G. Browning Sep. 26, 2007, 7:18am

We are all familiar with some of the obvious costs of living in a litigious society. We pay higher insurance premiums and higher prices for certain products and services because of the legal costs that a company has had to incur, or believes it might incur, to bring those goods and services to the market.

In some instances, the spectre of litigation has led to certain things being discontinued entirely; look at the changes in playgrounds, as safety concerns and fear of lawsuits have resulted in the disappearance of some types of equipment. We fill out more paperwork than ever, as companies either try to make sure they're not violating privacy laws like HIPAA or issue all types of disclaimers in an effort to shield themselves from lawsuits. Even the advertising that bombards us on a daily basis invariably contains caveats placed there at the insistence of the company lawyers.

But what about the costs of litigation that, while nowhere near as visible, are no less real?

A recent survey commissioned by the National Council for Community Behavioral Healthcare (a nonprofit association of 1,300 behavioral healthcare organizations that provide treatment and rehabilitation for mental illnesses and addiction disorders for nearly 6 million people nationwide) and funded by Eli Lilly and Company, found that product liability litigation and lawyer advertising may be putting many patients at risk for relapse. According to the survey, which was conducted among 402 psychiatrists who treat patients with schizophrenia and bipolar disorder, many patients who were responding well to treatment either stopped taking their medication or requested a medication change because their prescribed drugs are featured in law firm advertisements.

Of the 97 percent of surveyed psychiatrists who had patients who had made such changes (usually without consulting the psychiatrist first), over half (52 percent) reported that their patients took this action in response to lawyer ads about product liability litigation against makers of antipsychotic drugs. Half of the psychiatrists also reported that patient caregivers had requested such switches or halts to medication due to concerns generated by lawsuit advertising

As a result of discontinuing medication, 94 percent of the psychiatrists indicated that their patients had experienced some form of relapse. These relapses had consequences of their own: 93 percent reported recurrence of their patients' symptoms, 75 percent said their patients had to be hospitalized, 40 percent reported the loss of a significant relationship, and 26 percent indicated that patients had made suicide attempts.

Perhaps the saddest thing about this is that the vast majority of the psychiatrists surveyed felt that these patients were responding to treatment before changing or stopping their medication.

"Many of our patients already struggle with accepting their illness and staying on their prescribed treatment; and now they are experiencing new levels of fear due to the increasing incidence of these jarring advertisements," says Dr. Ralph Aquila, assistant clinical professor of psychiatry at New York's Columbia College of Physicians and Surgeons. "This irresponsible advertising is hindering the progress of therapy for many of these patients and disrupting the important relationship between them and their healthcare providers. Plaintiffs attorneys need to consider the consequences that these advertisements may have on patients."

In addition, more than half (55 percent) of the psychiatrists surveyed indicated that due to product liability cases involving antipsychotic drugs, they had changed their prescription practices - even in the absence of any actual side efforts among their patients. The mere fact that litigation had been initiated, it seems, was enough to outweigh actual experience and success with particular drugs. Similarly, a 2003 Harris Interactive poll of physicians revealed a similar impact of pharmaceutical litigation on doctors' prescribing decisions.

Of course, the existence of litigation has other effects besides altering the way a doctor practices medicine or the way a patient follows a regimen.

Lawsuits are no longer tried solely in a courtroom, but in the court of public opinion and on Wall Street as well. Media-savvy plaintiffs' attorneys make no bones about their efforts to spin public opinion their way in order to force corporate defendants to settle litigation at a premium in order to avoid further damage to their stock value and/or reputation.

Prominent personal injury attorney and erstwhile U.S. Senate candidate Mikal Watts once shared his tactics in the Baycol product liability litigation with the Wall Street Journal, admitting "I was feeding a lot of information to European and U.S. papers. It was part of my strategy to affect the stock price, which I was very successful at."

The list of companies that have found themselves in the unenviable position of seeing their stock price driven down by news of a lawsuit is long indeed. A 2007 study by the Pacific Research Institute estimated that the cost of litigation to shareholders every year amounts to a staggering $684 billion (to put this into context, consider that the U.S. devotes about $108 billion annually for the war in Iraq). Among other findings, the study calculated that a company's stock price fell between 2 percent and 3 percent - just on the day that the filing of a lawsuit is announced!

When Wendy's was confronted with the media feeding frenzy generated by a single fraudulent claim of a severed finger found in a bowl of chili, the fast food giant sustained a nearly 3 percent loss in share value for that quarter - and that was for a case in which Wendy's reacted quickly with an investigation that led to the swift arrest and successful prosecution of the claimants.

Some companies have discovered that even when you win, you lose. Arizona-based Taser International, Inc., the leading maker of stun guns, has won all of the product liability lawsuits it has tried - to date, they're 45-0 in the courtroom.

But victory has come with a hefty price tag for the company, which was founded in 1993 and went public in 2001. Putting aside legal fees themselves, lawsuits and reports of safety concerns have jolted Taser like one of their own 50,000-volt barbed darts. From a high of over $33 per share in late 2004, Taser's stock plummeted to under $6 a share by October 2005. Even after its most recent courtroom victory in May 2007, the company's shares were hovering around $9.53 per share.

Litigation exacts a heavy toll. From potentially lifesaving or life-changing drugs that either don't stay on the market very long or never make it there in the first place, to the manipulation of stock prices (even of companies that are vindicated of the claims brought against them), we all feel the effects.

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