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American Business Conference 4/7/92 [OA 7571] [1]
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American Business Conference 4/7/92 [OA 7571] [1]
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Speech Backup Chronological Files
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Folder Title:
American Business Conference 4/7/92 [OA 7571] [1]
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26
22
4
3
Barry K. Rogstad
President
American
Business
Conference
1730 K Street, NW Suite 1200, Washington, DC 20006
(202) 822-9300 FAX (202) 467-4070
DANIEL A. NERSESIAN
Photo Copy Preservat
PRESIDENTIAL COMMUNICATIONS
IF
WHITE HOUSE COMMUNICATIONS AGENCY
(202) 757-5000
Smilly
X5178
LORI L.S. COLODNEY
PRESIDENTIAL COMMUNICATIONS
-
WHITE HOUSE COMMUNICATIONS AGENCY
Cover Story
GU
eing a lawyer at Motorola Inc. is
tough these days. While attor-
neys at other companies might
churn out lawsuits against customers or
suppliers with the push of a button,
Motorola's 100 in-house lawyers must
seek all possible alternatives to landing
in court: arbitration, mediation, even pri-
vate judges who settle disputes for a
fee. After all this, Motorola lawyers who
still want to go to trial must fill out a
form estimating legal costs, likely dam-
ages, and chances of victory. "The form
is so onerous that they gladly work out
an alternative settlement rather than
screw around with that form," says Gen-
eral Counsel Richard H. Weise, the ar-
chitect of Motorola's resolution program.
If that sounds like an unproductive
use of an attorney's time, think again.
Since starting the program in 1984, alter-
native dispute-resolution techniques
have slashed Motorola's litigation costs
by as much as 75%. "It's that dramatic
an impact," Weise says.
'LOST opportunity.' Motorola's obses-
sion with finding new ways to settle dis-
putes isn't typical. But it is rapidly be-
coming so. After years of mounting
frustration, disdain for the U.S. legal
system is now so intense that corpora-
tions are taking the law into their own
hands. From General Mills to General
Motors, companies are fighting their
battles privately, through such innova-
tive techniques as rent-a-judge services
and minitrials. Pacific Gas & Electric Co.
even pays for its opponents to sit down
with a mediator. "What's worse than the
money wasted on the court system is the
lost opportunity to find solutions," says
Howard V. Golub, PG&E's general coun-
sel. "Our energies should not be spent
on recreational litigation."
The legal revolt among corporations is
only one facet in an unprecedented re-
thinking of the U.S. civil justice system.
Every branch of government is pushing
some package of legal reform. Congress
is overseeing "advisory committees" in
every federal court to try to speed up
TOM CURRY
cases and cut costs. Judges are over-
hauling the federal rules of civil proce-
60 BUSINESS WEEK/APRIL 13, 1992
COVER STORY
companies spend on their own legal de-
partments-and what they must pay to
resolve suits. Since 1971, the number of
attorneys has almost tripled, to
TOO MANY LAWYERS
780,000-far more per capita than in
Britain or Japan (table). "The prime ben-
eficiaries of the legal system are law-
AND TOO MUCH
yers, not victims and not society as a
whole," says Ralph Warner, co-founder
of Nolo Press Inc., a Berkeley (Calif.)
LITIGATION. HERE'S
publisher of legal self-help books.
The overloaded courts are only mak-
ing matters worse. Since 1960, the num-
A BETTER WAY
ber of civil suits in federal courts has
soared 300%, even after dropping from a
dure. Even the White House is respond-
vidual liberties. "A broad statement that
peak in 1985. In the state courts, civil
ing to the business backlash. Through
going to court is evil is very destructive
suits have jumped by more than 4 mil-
the President's Council on Competitive-
to our democratic process," says Pamela
lion in the past six years (table). And
ness, the Bush Administration is promot-
Gilbert, legislative director for Ralph
that's on top of an exploding backlog of
ing an array of probusiness reforms, in-
Nader's Congress Watch. "We should
criminal actions that push business cases
cluding such controversial measures as
take pride in our legal system."
to the back of the line. "You can't di-
forcing losers to pay the victors' legal
But even Gilbert agrees that parts of
vorce the civil courts from the criminal
bills. The debate has inflamed the
the system are breaking down. Ameri-
courts," says Sol Wachtler, chief judge
passions of everyone from defense law-
ca's legal bills are
of the State of New York. "There are
yer Alan Dershowitz to legal scholars
going through the
delays because of the clog in criminal
such as RAND researcher Deborah
courthouse roof.
cases."
Hensler to lawyer
Last year, law
DRAINING. Executives fear the U.S. le-
and best-selling au-
THE U.S. LAWYERS... LOADED
firms grossed
gal system is crippling America's ability
thor Scott Turow.
more than $100
to compete in the global marketplace. A
Even the tort sys-
LAWYERS WITH PER. BRITAIN?
billion, estimates
BUSINESS WEEK/Harris Poll of top exec-
tem, where injured
a
Commerce
utives at corporations drawn from the
parties sue for dam-
Dept. report.
BUSINESS WEEK 1000 (page 66), found
ages, stands a better
That doesn't
that 62% of those surveyed believe the
chance of being
1027
include what
U.S. civil justice system significantly
reined in. Congress is
307
hampers the ability of American compa-
again mulling a uni-
JAPAN
nies to compete with Japanese and Euro-
form product-liability
law to replace the patch-
GERMANY
pean rivals. A striking 83% of those
polled say the fear of lawsuits has more
work of state laws and
82
impact on decision-making within their
make it tougher for plain-
company today than it did 10 years ago.
tiffs to win damages. States
GERMANY
CONTINUE TO
"The American economy can no longer
are tightening up on punitive
damages and pain-and-suffer-
ing awards. And they're finding
LAWYERS RANKS SWELL...
afford this process," says Ronald L. Da-
vis, assistant general counsel at Dow
Chemical Co. "The system's inefficien-
faster and cheaper ways to resolve medi-
cies are eating away at our industrial
cal malpractice suits, such as by compen-
base." He says Dow Chemical spends
sating injured patients regardless of
1980
"in excess" of $100 million a year on
whether the doctor is at fault. "There's
a very strong popular revolt over exces-
542,205
legal services and liability insurance.
1990
Just how much litigation drains the
sive lawyering, excessive delays, and
excessive costs," says Martin F. Con-
750,000
2000
economy is a matter of fierce debate.
Vice-President Dan Quayle claims that
nor, president of the American Tort
MILLION
Americans spend more than $80 billion a
Reform Assn. "When you add it all
ESTIMATE
year on direct litigation costs and
up, it's impressive."
higher insurance premiums. Indirect
OVERBALANCED SCALES? Yet many wor-
ry that a headlong rush for legal reform
AND SO DOES THE
costs, including the expense of avoid-
could do more harm than good. Some of
NUMBER OF LAWSUITS
ing liability, he says, reach $300 bil-
lion annually-about 1.8% of the na-
the proposals threaten the cornerstones
STATE COURT FILINGS
tion's $5.7 trillion gross domestic
of the U.S. legal system: an abundance
MILLIONS
product. But legal scholars such as
of individual rights and open access to
1986
Marc S. Galanter, a professor at
courts. Critics fear that by making it
1984
the University of Wisconsin's
tougher to sue, limiting access to evi-
15.5
school of law, attack those fig-
dence before trial, and even penalizing
14
ures as "the product of casual
those who lose, reformers may be push-
1990
speculation." Instead, he cites a
ing the pendulum too far in the other
1988
1986 study by RAND's Institute
direction. The critical question is how to
make the legal system more efficient
16.6
8.4
for Civil Justice. It put the
cost of the U.S. tort sys-
and less costly while safeguarding indi-
DATA AMERICAN 2554 NATIONAL CENTER STATE COURTS, BW
tem-including court ex-
COVER STORY
BUSINESS WEEK/APRIL 13, 1992 61
Cover Story
penses, legal fees, and the value of lost
work-at between $51 billion and $58
sue" mentality. Dow Chemical gets hit
billion.
with some 2,000 new product-liability
Whatever the tab, America's compa-
claims in the U.S. every year, but only
about 20 such claims are filed against it
nies are fed up with watching their legal
bills erode profits. Some are locked in
in the rest of the world, says Davis. He
unproductive court brawls with rivals.
notes that while many European coun-
Four-year-old Cyrix Corp., a Richardson
tries have adopted broad U. S.-style
(Tex.) semiconductor maker, has been
product-liability laws, many lack such
battling Intel Corp. In December, 1990,
things as contingency fees, discovery,
Cyrix filed an antitrust suit accusing
and jury trials. The Midland (Mich.)
Intel of an anticompetitive campaign to
chemical maker spends an average of
keep Cyrix co-processors out of the mar-
"If American businesses
$250,000 just to get to trial. Says Davis:
"Even when we win, we don't win."
ket. A month later, Intel sued Cyrix for
are concerned about the
Many executives say they settle even
patent infringement. While the judge
has yet to rule in that case, Intel just
burdens of legal expense,
frivolous suits to avoid the legal fees.
filed another patent-infringement suit
Others settle, they say, to escape the
they could control their
against Cyrix in response to reports that
long-shot risk of punitive damages. The
Cyrix was about to introduce a chip that
own lawyers better"
claims are "used to extort money," says
mimics Intel's top-of-the-line 486
Robert W. Pommerville, general counsel
microprocessor. The Cyrix chip was in-
DEBORAH HENSLER
of Beverly Enterprises Inc., a leader in
troduced on Mar. 30 (page 95).
RAND researcher who
the nursing home industry. Pommerville
sue CITY. Other companies, meantime,
studies civil-litigation trends
says it takes "a real gutsy individual" to
are shunning domestic markets out of
go to trial on punitive-damages claims,
fear of product-liability suits. Biomet
because juries are so unpredictable.
its own legal costs, regardless of the
Inc. sells spinal implants for back prob-
But settling can bring its own head-
outcome. But Britain and other countries
lems virtually all over the world-with
aches. In 1984, Alan F. Shugart, CEO of
force losers to pay the winners' fees as a
one glaring exception. "We don't feel
Seagate Technology, was accused in a
way to discourage frivolous suits. Amer-
confident in the U.S. with such a prod-
class action of artificially inflating the
ican companies spend as much as 80% of
uct," says Dane A. Miller, CEO of the
stock price. Attorneys for the Scotts
their legal bills on discovery, which lets
Warsaw (Ind.) orthopedics company.
Valley (Calif.) disk-drive maker persuad-
parties review an opponent's evidence
"Our legal system in America is totally
ed him to settle in 1991, for $9 million,
before trial. In Japan, discovery doesn't
out of control."
he says. Two subsequent suits were
exist (page 64).
Countries such as Britain and Japan
filed in 1988 and 1991, which copied the
The hallmarks of the U.S. legal sys-
hold down costs by making it more diffi-
class action verbatim-from the wording
tem-jury trials, contingency fees, and
cult to sue and harder to win. In the
of the charges to the misspellings. Both
punitive damages-encourage the "I'll
U.S., each side in a lawsuit usually pays
IEUTRAL
EVALUATION
COURT-ANNEXED
ARBITRATION
After a suit is filed,
a private attorney
Parties must present
THE COURTHOUSE
meets with the parties.
OF THE FUTURE
The attorney hears
their cases to experts
or retired judges.
both sides and Las do
assesses the merits
The parties can
promote fast
accept the decision
efflements
or seek
a trial
RENT-A-JUDGE
SUMMARY
Parties hire private
PHOTOGRAPH BY EDUARDO CITRINBLUM; ILLUSTRATION BY RAY VELLA/BW
Parties headed
decision makers;
Parties sum up their
to court are now choosing
often refired judges,
cases before a judge,
from an array of public and private
o settle their cases.
jurors, and others,
alternatives for resolving disputes, By the year
The parties pay
The jurors give an
2000, parties may be greeted in courtiby a
hourly rates up to
advisory verdict to
clerk who directs them to the appropriate
$350 The judge's
start settlement talks.
procedure. Here's a sampling of
decision may be
If there's no deal, the
what's available
appealed
parties go to trial
lozal
Unw
DATA: CENTER FOR
PUBLIC RESOURCES, BW
62 BUSINESS WEEK/APRIL 13, 1992
COVER STORY
suits are still pending in the courts.
tives within the company on avoiding
Now, Shugart goes on the offensive at
counsel. "Our goal is to reduce the
conflicts by focusing on better contracts,
any hint of a lawsuit. Last year, for
'dispute cycle'-the time between the
improved product quality, and truthful
example, the company laid off an undis-
event that causes the dispute and the
salesmanship. The law department also
resolution."
closed number of employees. When a
follows Motorola's total quality manage-
group of them joined with a coalition of
There's more to Motorola's legal pro-
ment program to eliminate wasteful la-
labor unions and sued for insufficient
gram than just staying out of court The
bor and expensive errors. "Cutting legal
notice, Seagate publicly threatened to
company rides herd on its outside law-
costs is like reducing the cycle time in
countersue, clearly stating it would fight
yers to deliver quality service at the low-
manufacturing," says Weise, the general
est possible cost. In a radical break with
to recover court costs as well as punitive
damages on the grounds that the labor
unions' suit was frivolous. The coalition
later withdrew the case.
HUGE SAVINGS. Rather than get caught
COMING 0 TERMS
up in the system, corporations are drop-
ping out. Already, some 600 top corpora-
WITHOUT BRINGING .AWYERS
tions have signed a pledge drafted by
awyers TOP Pacific Gas & Electri
New York's Center for Public Re-
case the typical JAMS case can be re-
Union hermal Power
sources, a nonprofit group that pro-
solved in hours or days. 'Alternative
were preparing to fight one of the
dispute resolution is like the hula
motes alternatives to litigation. The
largest filed in Sonoma
pledge states that the signers will con-
hoop why didn someone else think
County (Calif Superior Court, when
sider negotiation and other forms of "al-
of this before?' says JAMS CEO John K
the three 200 executives decided that
ternative dispute resolution" before run-
Trotter. a retired state appellate judge.
there had to better way Rather
ning to court against other signers. Last
Critics say problems arise when
than spendica year afighrial the execu-
year, for the first time, law firms nation-
JAMS judges go beyond simple media
tives resolved most of the issues prt
wide made a similar pledge, and almost
tion and render decisions that can be
vately without them lawyers To do
800 firms have signed on. The Center
appealed in the courts. Such private
the rest, they called in an outfit based
found that avoiding court saved 142
judging accounts for 1% of JAMS cases
in Orange known as Judicial Ar
but this tactic could soar in California
companies more than $100 million in le-
bitration 25 Mediation Services Inc.
gal costs for disputes concluded in 1990.
where parties leapfrog the 002
3 the is meniator met
General Mills Inc. has long required a
Lotten THE Cormerpals
commitment to alternative dispute reso-
even going nia belicop
lution on all contracts it signs-cutting
ter to survey the field at
legal costs for contract disputes to a
the heart of their.contract
bare minimum, says General Counsel
dispute. The settled
Clifford L. Whitehill. Now, the Minne-
last month with JAB bill
apolis food company is moving toward
less than
requiring a similar commitment from
Tapping into the fervor
employees. But the company's best sin-
to cut litigation JAMS
gle experience with such techniques oc-
is a part of the fast
curred in 1987. On the verge of going to
est growing sectors of the
court with a supplier, Whitehill says,
law business: alternative
both sides agreed to argue their case
dispute resolution, Started
before the CEOs of both companies. Af-
an 1979, it the sdead-
ter six days of arguments, the parties
mg for profit resolution
agreed that General Mills would get a
company This year." exe
$45 million settlement.
pects to hearth 0002 cases
Other companies are devising formal
and see sales grow to $30
systems to settle routine disputes. In
million no 25% from:19914
mid-1990, General Motors Corp. hired
JAMS has 18 offices in four
Endispute Inc., based in Washington,
states and a nanel it 175
D. C., to set up systems in each of its
former judges With $15
divisions for resolving dealer disputes.
million from E War
SALES AT TROTTER'S
The systems range from nonbinding,
burg, Pineus JAMS
RESOLUTION SERVICE
voluntary mediation at Cadillac to bind-
ARE SOARING
plans to keep manding
ing arbitration at Chevrolet, Pontiac,
alone Washington based
Oldsmobile, and GMC Trucks, and were
court Times by getting a private ruling
dispute the X expanding its dis
written into the dealers' five-year fran-
and appealing
pute resolution services And Philadel
chise agreement. William Coulter of
To head of government regulat
phia based Junicate: the boasts more
Phoenix' Coulter Cadillac just mediated
AMS developing guidelines for dis
than 600 former Gudges of fering arbi-
a dispute with GM auditors over a war-
closing conflicts of interests, includ
tration and mediation? It's easy to see
ranty issue. Both sides argued their case
prior. contacts with parties It's also
the appeal Alternative resolution tech
before a GM executive, a dealer, and an
vising a procedure for speedy handling
moues save on and provide
Endispute staffer. They settled in a day,
of complaints, Given the need for fast
privacy and thilty m scheduling
at a cost of $3,000 to GM and about
en and cheaper alternatives to the grid
But the Idrivance force as the cost
$1,500 to Coulter. Says Coulter: "The
locked courts JAMS may soon be look
HAMS charges $300 and $350
process was fair."
mg more and more like the Federal
Statemy from the $300 an
For Motorola, the process of staying
Express of the dispute business
hour yers might each
out of court starts early. Its lawyers
By Jane Birnbount in Los Angeles,
beharge liticants. Lunhken litigated
worldwide learn how to counsel execu-
sinth Mor D Sorland in Phaladelphy
MICHAEL GRECCO/OUTLINE
COVER STORY
BUSINESS WEEK/APRIL 13, 1992 63
Cover Story
tradition, Motorola also refuses to pay
for lawyers' travel, meals, and other
Many courts are offering alternatives
incidentals. Instead, the law firms must
to trials right in the courthouse or other
neutral sites. The federal court for the
figure such expenses into their hourly
Northern District of California in San
billing rate. Motorola forces the lawyers
to follow a strict script that outlines a
Francisco sends up to 300 cases a year
step-by-step procedure for resolving dis-
through a settlement program known as
putes. "They really bristle, because
"early neutral evaluation." Under it, the
they're not used to that kind of partici-
parties meet with a volunteer attorney
pation by a client," Weise says. "Some
who is an expert in the disputed subject
outside counsel just can't do it."
matter. He sizes up the cases, gives his
Yet even companies that support such
opinion, and then asks whether the par-
"Lawyers get too much.
techniques remain skeptical that the new
ties want to work out a deal. An early
procedures will make a dent in the
I would cap fees and take
study found up to 40% of these cases
amount of litigation. Alternative dispute
settled on the spot. Such programs are
resolution works only when both parties
some of what lawyers get
redefining the role of courts. "In the
agree to it, they say. A small company
and give that to elementary
future, instead of walking into a build-
may be muscled into court by a larger
ing called a courthouse, you might walk
rival with more resources. Other compa-
school teachers, nurses,
into the Dispute Resolution Center,"
says Scott H. Bice, Dean of the Universi-
nies insist on trials to achieve public vin-
health workers, people
ty of Southern California's Law Center.
dication. And individuals and their law-
yers may be unwilling to step outside
who really do good for
LOSERS WEEPERS. The debate over legal
the system. Abandoning a trial "would
reform in Washington can only speed up
do away with punitive and compensatory
society"
these changes. Last year, President
Bush signed an executive order to rein
damages," says FMC Corp. General
ALAN DERSHOWITZ
Counsel Patrick J. Head. "That's where
in the vast swarm of government law-
Hurvard Law professor
the big scores have been."
criminal defense lawyer
yers-the largest group of lawyers liti-
It may not be that way for very much
gating in the federal courts. And Vice-
longer. More than 1,200 courts across
President Quayle delivered a scathing,
be disciplined for breaching their ethical
the country are offering various alterna-
widely publicized speech to the Ameri-
duties. And in California, some over-
tives to trials. In Texas, a court can or-
can Bar Assn., blasting lawyers for the
worked judges refer cases to a private
der a case to mediation. In Colorado,
nation's lack of competitiveness. In Feb-
settlement company, Judicial Arbitration
lawyers who fail to tell clients about
ruary, the White House unveiled a bill
& Mediation Services Inc., based in Or-
alternative dispute resolution now can
that draws from Quayle's 50-point agen-
ange County (page 63).
da. The bill promotes such things as al-
most insurance refund
that
THE JAPANESE SOLUTION: KILLALL THE LAWSUITS
W
hen IBM sued Hitachi Ltd. for
tute. But the government run school ad-
industrial spying in 1982, the
front fee to their lawyers of up to 8%
mits 2% of its 35,000 applicants annually.
Japanese company got a
the damages sought in liability suit
So Japan's exclusive legal club has just
shocking introduction to legal battles,
plus a nonrefundable filing fee to th
14,336 lawyers- and grows by only 400
American Hitachi's first bill from
courts of one half of 1% of the damage
bengoshi per year. There are 780,000 laws
its U.S. law firm exceeded its total pay
In 1991, a small Seattle-based log-hon
yers in the U.S. which has twice Japan's
ments for legal services in Japan since
maker provided a Japanese custome
population.
the company was founded in 1920.
with $240,000 worth of materials and 1.
COSTLY RECOURSE. Those who can find
No wonder legal reformers in the U.S.
bor for which the company claims it WE
lawyer to take their case encounter other
look wistfully at Japan. Its courts aren't
never paid. To file a $240,000 suit, it mus
roadblocks. Critics of the legal Sys
cluttered with liability suits, and lawyers
pay its lawyers $20,204, including the f
tem complain that parties abuse discov
are about as scarce as American cars.
ing fee of $1,200. "It's too expensive fc
ery, which grants access before trial to
While the U.S. prides itself on individual
us to pursue that course," sighs a to
potential evidence held by an opponent
rights and equal access to the courts,
manager at the company "We ve alread
Japan is at the other extreme: It has no
crities charge that the Japanese legal
lost a lot of money 300
discovery at all And the difficulty of
system discourages litigation. Perhaps.
Damage awards in Japan don't com
obtaining evidence makes it especially
But the culture's distaste for direct con-
close to the estimated average of $1.
tough for consumers to Win product-Fi-
frontation helps ensure that most legal
million per case paid last year in U. S
ability suits 9) I have often.
disputes are resolved privately and more
product-liability suits in state courts. 0
said to clients that E am 100% certain
efficiently than in the U.S. "In Japan, a
Feb. 7, the Tokyo District Court ordere
that they would WILL their case but
litigious person is not welcome," says To-
Chisso Corp a chemical company It
where's the evidence!",psays Nishimn
shiro Nishimura, senior partner at Nishi-
sponsible for one of Japan's best-know
ra. "You can't force the other side to
mura & Sanada, a top international law
industrial poisoning cases, to compensat
disclose
firm in Tokyo.
42 victims. The award: $1.3 million, 0
Plaintiffs also must have deep pockets.
Barriers to litigation in Japan start
$31,000 per victim
NAILAH FEANNY/SABA
Japan bars two key methods of sharing
with legal education (table) To become a
When disputes arise between compa
the cost of litigation: class: actions and
bengoshi, or lawyer, one must win a spot
nies, attorneys often are the last to ge
contingency fee arrangements. At the
in the Legal Training & Research Insti-
involved. Salesmen and front-line manag
same time, plaintiffs must pay an up-
ers are the chief problem solvers. In part
64 BUSINESS WEEK/APRIL 13, 1992
COVER STORY
ternatives to litigation and the English
dockets without also quickly filling judi-
Rule, which forces losers to pay the win-
cial vacancies. As of Mar. 31, there were
ners' legal fees.
120 vacant federal judgeships, or about
While the bar blasted Quayle's law-
14% of the federal bench.
yer-bashing rhetoric, it's taking his pro-
CHEAP AND DIRTY? Alternatives to trials
posals seriously. "We ought to be ex-
such as arbitration and mediation should
tremely grateful to Dan Quayle for just
help lighten the courts' burdens, but cer-
getting this issue on the table," says
tain safeguards are needed. Now, pro-
Talbot S. D'Alemberte, president of the
ceedings are held in private without re-
ABA. In February, it released a report
gard to whether a public interest or
supporting many of Quayle's proposals
important legal question is at stake. And
but criticizing him for ignoring the
the resolution business is largely unreg-
"broader and more significant problems
ulated: Anyone with a business card or
of our justice system"-judicial funding
"It's a system run amok.
stationery can set up shop.
and inadequate access for the poor.
Instead, standards must be estab-
Others have their own visions for the
I would cut out discovery,
lished so that mediators are qualified.
future. HALT, An Organization of Ameri-
The proceedings must also be open to
cut out motions, put
cans for Legal Reform, is pushing out-
the public-and the press. Alternative
of-court alternatives to tort litigation,
everybody to trial. And I
justice shouldn't become just another
such as no-fault auto insurance and
way to avoid disclosure of health and
would think real, real
workers' compensation. Its aim is to en-
safety dangers. And some disputes 'in-
sure fair and prompt compensation for
seriously about adopting
volving novel or constitutional issues
victims and more predictabilty for defen-
must remain in the public courts. Private
dants. Advisory committees in each of
the English Rule.
dispute resolution can only follow the
the 94 federal courts, meantime, are ex-
You lose, you pay"
law, not set new precedents.
perimenting with improving the litiga-
What's good in the legal system must
tion process, including making discovery
SCOTT TUROW
be protected. As lawmakers, attorneys,
voluntary. They're also forcing judges to
Lawyer and best-selling author
and executives wrestle with legal re-
be managers as well as decision-makers.
form, they must ensure that individual
"The greatest single forward step would
rights are not sacrificed in pursuit of
be to have district court judges set
fighting until the end. But that's only
swifter and more economical justice.
schedules and require lawyers to live up
the beginning. More attention must also
By Michele Galen in New York, with
to them," says former Supreme Court
be paid to state and federal courts so
Alice Cuneo in San Francisco, David
Justice Lewis F. Powell Jr.
that they can run more efficiently. And
Greising in Chicago, and bureau reports
Companies and judges are wise to put
Congress cannot continue to pass feder-
a premium on negotiation rather than on
al criminal laws that inundate court
BW/Harris Poll appears on page 66.
that's to avoid spoiling a long-term rela-
down. Most of Nissan's legal expenses
for example. Japan also has about 50,000
tionship. "We may lose $1 million," says
go not for pricey outside legal help but
licensed tax practitioners who offer ser-
NEC Corp. legal chief Satoshi Nakaichi,
for a modestly paid staff of a dozen tax
vices similar to those of U.S. tax law-
"but the idea is to coexist and win that
sleuths, 50 patent experts, and 30 legal
yers. About the same number of scriven-
money back on the future deals."
specialists. Lower bills free up cash for
ers draft court papers and give legal
NEVER SUE.' Rarely do companies battle
research and other areas, and enable
advice, while 5,000 non-bengoshi patent
in court. Nissan Motor Co. is involved in
more competitive pricing than U.S. com-
specialists perform services similar to
10 cases in Japan, only one of which in-
panies can afford.
those of U.S. patent attorneys. Add
volves another company. The rest con-
Suits are few, but some experts argue
them all up, and Japan has more legal
cern labor and consumer disputes, which
that Japan has more legal practitioners
practitioners per capita than the U.S., or
make up most of the suits against com-
than the statistics reveal. Japan's corpo-
42 per 10,000 people VS. 29, says Ray-
panies in Japan. "We would never sue a
rate halls are stocked with non-bengoshi
mond August, assistant professor at
company like our own," says Nissan le-
legal experts. Sony Corp. employs 120,
Washington State University.
gal department manager Kenji
Some Japanese argue that
Toriumi. Only when a case
JAPAN'S APPROACH
Japan should have more law-
seems headed for court will
yers and that certain laws
companies call in a bengoshi.
Limits the number of attorneys passing the bar exam to
should be rewritten to favor
But to keep matters quiet,
consumers. Critics also say it
2% of 35,000 applicants
some companies may opt for
should be easier for the Japa-
arbitrated settlements, where
Forces would-be plaintiffs to pay an up-front fee to
nese to redress clear wrongdo-
three bengoshi arbitrators
their lawyers of up to 8% of damages sought
ing. Still, the bias against
courtroom solutions remains
weigh the case privately and is-
sue a binding decision. Nissan
Bars contingency fees, class actions, and other
strong. "I work in the legal de-
recently insisted on a 15% dis-
fee-sharing devices that make it easier to sue
partment," says Nissan's Tor-
count on faulty factory equip-
iumi, "but I would never ask a
ment supplied by an affiliate.
Lets judges, not juries, set damage awards, which rarely
lawyer to resolve a problem in
Rather than sue, Nissan settled
exceed $150,000, even when the victim has been killed
my own life." The belief that
for half that. "It was an amica-
disputes should be settled ami-
ble agreement," says Toriumi,
Bans discovery so that plaintiffs are denied access
eably is something American le-
"and it saved us time, money,
before trial to an opponent's potential evidence
gal reformers only now are be-
and the relationship."
ginning to embrace.
That attitude keeps costs
Nurtures a strong cultural attitude that confrontration is
By Ted Holden in Tokyo
to be avoided and looks down upon those who sue
T.
DATA: BW
BUSINESS WEEK/APRIL 13, 1992 65
COVER STORY
Cover Story
Business Week/Harris Executive Poll
THE VERDICT FROM THE CORNER OFFICE
orporate executives
contingency-fee system, and
c
think the high cost of
generous juries. They are
civil justice is a drag on
also quite firm about the so-
U.S. business and the econ-
lutions. An overwhelming
omy. Fully 83% say their
97% favor much more use
decisions are increasingly
of alternative methods to re-
affected by the fear of lawsuits, and a 62% majority say the
solve disputes, and 91% want judicial screening of cases. But
legal system significantly hampers U.S. competitiveness. Execu-
most oppose restrictions on expert witnesses and don't want to
tives know whom they blame for the problem: plaintiffs, the
see more government spending on the courts.
HIGH COURT COSTS
Requiring the loser in civil suits to
routinely pay the winner's legal costs
83%
17%
0%
Here are some possible reasons for the high cost of litigation
and civil justice. For each one, please say whether you think it is a
Restricting the pre-trial discovery
major reason, a minor reason, or not a reason for the high cost.
process
49%
43%
8%
Major
Minor
Not
a
Not
Restricting the use of expert witnesses
28%
66%
6%
reason reason reason sure
Increasing federal and state spending
The knowledge that major corpo-
on the courts
28%
69%
3%
rate defendants and their insur-
ance companies have deep
LITIGATION'S IMPACT
pockets
92%
8%
0%
0%
In your company, would you say that the following have a major
Contingency fees that enable
impact, a minor impact, or almost no impact on your business?
people to sue without any finan-
Major
Minor
Almost
Not
cial risk
85%
13%
1%
1%
Impact impact no impact
sure
Juries that hand out awards that
The high cost of defending
are too high
79%
17%
3%
1%
and protecting the company
Laws or regulations that make it
from litigation
40%
49%
11%
0%
too easy to sue
64%
29%
6%
1%
Fear of litigation that hampers
Outside corporate lawyers who
the introduction of valuable
drag out cases to jack up their
new products or entry into
hourly fees
47%
45%
7%
1%
new markets
10%
47%
42%
1%
Large corporate litigants that
Legal issues that divert
drag the process out in an effort
valuable management time
to outlast opponents with fewer
and energy from running the
resources
34%
55%
9%
2%
business
44%
50%
6%
0%
Companies that compete in
the courtroom instead of in the
AND HOW IT'S GROWING
marketplace
13%
60%
26%
1%
Would you say that the fear of
More impact
83%
Companies that rush potentially
lawsuits has more or less impact
Less impact
5%
dangerous products to market,
on decision-making within your
No difference
11%
opening themselves to subse-
company today than it did 10
Not sure
1%
quent lawsuits
9%
70%
19%
2%
years ago?
POSSIBLE REFORMS
COMPETITIVE BURDEN
Here are several proposals now under consideration to rein in
Do you feel that the U.S. civil
Does hamper
62%
frivollous litigation and cut legal costs and delays in the civil justice
justice system significantly ham-
Does not
32%
system. Please tell me whether you favor or oppose each of the
pers the ability of U.S. compa-
Not sure
6%
following:
nies to compete with Japanese
Favor
Oppose
Not
and European companies, or
sure
don't you feel that way?
Making much greater use of alternative
dispute resolution methods, such as ar-
Edited by Mark N. Vamos
bitrattion, mediation, and private judges
97%
2%
1%
The judicial screening of cases to elimi-
Survey of 400 senior executives at corporations drawn from the
TOM CURRY
nate apparently frivolous or very weak
BUSINESS WEEK Top 1000. Interviews were conducted Jan. 27-Feb.
claims
91%
9%
0%
11, 1992, for BUSINESS WEEK by Louis Harris & Associates Inc.
66 BUSINESS WEEK/APRIL 13, 1992
COVER STOP
AMERICAN BUSINESS CONFERENCE
WILLARD HOTEL
347-9564
TUESDAY, APRIL 7, 1992
2:00 PM
500
reporters outmulered andience!
THANK YOU, JIM JONES. ((SOME PEOPLE SAY I'VE BEEN
TRAVELING TOO MUCH. so TODAY IS AN EXAMPLE OF MY NEW
POLICY: NO TRIPS FARTHER THAN ONE BLOCK.)) 2<
IT IS ALWAYS A PLEASURE TO SPEAK WITH MEMBERS OF
Notre Dune
THE AMERICAN BUSINESS CONFERENCE, BECAUSE IT IS ALWAYS
SMU
A PLEASURE TO SPEAK WITH THE BEST.
Fla, International
I WOULD LIKE TO TALK TO YOU TODAY ABOUT THE FUTURE
-- THE FUTURE OF OUR COUNTRY GENERALLY, AND MORE
PARTICULARLY THE FUTURE OF OUR COUNTRY'S BUSINESS
ENVIRONMENT. IN FACT, WE CANNOT SEPARATE THE TWO. THE
AMERICA OF THE 21ST CENTURY -- ITS ABILITY TO MAKE
PEACE IN THE WORLD, TO FOSTER STRONG FAMILIES, TO
CREATE REWARDING JOBS -- WILL BE SHAPED TODAY, IN LARGE
PART BY HOW HOSPITABLE WE MAKE AMERICA FOR BUSINESS.
- 2 -
WE CAN LEARN FROM YOUR ACHIEVEMENT. THE KEY TO THE
SUCCESS OF ANY HIGH-GROWTH COMPANY IS THE WISE
DEPLOYMENT OF RESOURCES. THE SUCCESSFUL COMPANY
CHANNELS LABOR AND INVESTMENT INTO THOSE AREAS WITH THE
POTENTIAL FOR THE GREATEST EXPANSION AND THE HIGHEST
RETURN. YOU TAKE THE RISK; YOU REAP THE REWARD;
EVERYONE, MEANWHILE, BENEFITS FROM THE WEALTH YOU
CREATE.
THAT, IN BRIEF, IS THE GENIUS OF ENTREPRENEURIAL
CAPITALISM, A SYSTEM THAT HAS MADE AMERICA THE ENVY OF
THE WORLD. FOR 200 YEARS OUR PROSPERITY HAS SPRUNG
FROM OUR ABILITY TO INNOVATE, TO CHANGE AS THE WORLD
CHANGES. BUT AMERICA'S WORLD LEADERSHIP IS NOT
AUTOMATIC; IT IS NOT A BIRTHRIGHT. WE MUST CONTINUE TO
EARN IT, DAY BY DAY, QUARTER BY QUARTER, YEAR BY YEAR.
THE WORLD NOW IS CHANGING AT A PACE NO ONE COULD HAVE
DREAMED OF A GENERATION AGO. AND AMERICA, WHICH HAS
LED THE WORLD'S TRANSFORMATION, MUST CHANGE WITH IT.
- 3 -
OVER THE LAST SEVERAL YEARS DEADWEIGHTS HAVE BEGUN
TO SLOW THE ENGINE OF GROWTH -- INEFFICIENCIES A
COMPETITIVE ECONOMY CANNOT TOLERATE. TODAY I WANT TO
DISCUSS FIVE AREAS OF REFORM, FIVE CRITICAL WAYS IN
WHICH AMERICA MUST CHANGE IF WE ARE TO CONTINUE TO LEAD
THE WORLD. YOU UNDERSTAND THE URGENCY, FOR EACH OF
THESE PROBLEMS PRESENTS ITSELF TO AMERICAN COMPANIES
NOT AS AN ABSTRACTION BUT IN THE MOST IMMEDIATE WAY: AS
A COST OF DOING BUSINESS -- A COST YOU CAN'T CONTROL,
AN EXPENDITURE WITH NO POSSIBLE RETURN.
WHEN OUR LEGAL SYSTEM BECOMES INCAPABLE OF
RESOLVING DISPUTES IN A TIMELY AND CIVIL MANNER,
BUSINESS LOSES THE INCENTIVE TO INNOVATE AND TAKE
RISKS. WHEN HEALTH CARE COSTS ESCALATE, BUSINESS PICKS
UP MUCH OF THE TAB. WHEN GOVERNMENT IMPOSES BARRIERS
TO TRADE, BUSINESS PAYS THE PRICE IN OPPORTUNITIES
LOST. WHEN OUR CHILDREN LEAVE SCHOOL WITHOUT
RUDIMENTARY SKILLS, BUSINESS BEARS THE BURDEN IN
LOWERED PRODUCTIVITY. AND WHEN GOVERNMENT FREEZES IN
GRIDLOCK, BUSINESS CAN NO LONGER PLAN RATIONALLY FOR
THE FUTURE.
- 4 -
LET ME BEGIN WITH THE CRYING NEED TO REFORM OUR
COUNTRY'S CIVIL JUSTICE SYSTEM. EVERY AMERICAN HAS
HEARD THE STORIES OF BIZARRE OR FRIVOLOUS LAWSUITS; BUT
MOST OF YOU HAVE LIVED THEM, TALES THAT COULD HAVE BEEN
TORN FROM THE PAGES OF KAFKA. CONSIDER ONE EXAMPLE,
RELATED BY ONE OF YOUR MEMBERS, ROGER COLEMAN,
PRESIDENT OF RYKOFF-SEXTON, A FOOD MANUFACTURER AND
DISTRIBUTOR.
AFTER RECORD EARNINGS IN 1989, MR. COLEMAN PUBLICLY
EXPRESSED HIS CONFIDENCE THAT 1990 WOULD BE EVEN
BETTER. WHEN EARNINGS FELL SHORT, HIS HOPEFUL
STATEMENT BECAME THE CAUSE OF A SHAREHOLDER CLASS-
ACTION LAWSUIT.
- 5 -
FIRST CAME A MEETING WITH PLAINTIFFS' CONTINGENCY-
FEE LAWYERS, AT WHICH THE MERITS OF THE CASE WERE NEVER
EVEN DISCUSSED. "THE ISSUE," SAYS MR. COLEMAN, "WAS THE
DEPTHS OF OUR POCKETS." NEXT CAME THE NIGHTMARE OF
DISCOVERY: ENDLESSLY EXPENSIVE AND INVASIVE. THE
COMPANY'S MANAGERS, INSTEAD OF MANAGING, SPENT THEIR
TIME PREPARING FOR DEPOSITIONS. THE LAWSUIT, HE SAYS,
"BROUGHT EVERYTHING TO A STOP."
IN THE END, RATHER THAN PERMIT THE TOTAL EXHAUSTION
OF COMPANY RESOURCES, MR. COLEMAN DECIDED TO SETTLE.
THE TAB FOR THIS EXERCISE IN FUTILITY: $8.7 MILLION.
AS MR. COLEMAN SAYS: "THAT'S OVER $8.7 MILLION THAT WAS
DIVERTED FROM NEW INVESTMENTS IN JOBS AND FACILITIES."
- 6 -
THE SCENARIO IS REPEATED DAILY THROUGHOUT AMERICAN
BUSINESS. IT IS NOT REPEATED, LET ME STRESS, AMONG OUR
WORLD COMPETITORS. ONLY THE UNITED STATES HAS SEEN THE
NUMBER OF LAWYERS DOUBLE OVER A 20-YEAR PERIOD. ONLY
THE UNITED STATES SPENDS MORE THAN $80 BILLION ANNUALLY
IN DIRECT LITIGATION COSTS, PERHAPS FOUR TIMES THAT IN
INDIRECT COSTS. ACCORDING TO A RECENT SURVEY, 40
PERCENT OF COMPANIES THAT HAD BEEN THE TARGET OF
PRODUCT LIABILITY SUITS HAVE DISCONTINUED CERTAIN TYPES
OF PRODUCT RESEARCH.
WE MUST REMOVE THIS BALL AND CHAIN FROM OUR
ABILITY TO PRODUCE AND COMPETE WORLDWIDE. MY
COMPETITIVENESS COUNCIL, LED BY VICE PRESIDENT QUAYLE,
HAS OFFERED 50 RECOMMENDATIONS FOR LEGAL REFORM. THEY
WOULD LIMIT DISCOVERY TO REASONABLE PROPORTIONS,
DISCOURAGE SOME FRIVOLOUS SUITS THROUGH A "LOSER-PAYS"
RULE, AND OFFER ALTERNATIVE MEANS OF RESOLVING
DISPUTES.
- 7 -
THIS BROAD LEGAL REFORM WON'T BE EASY -- JUST LOOK
AT THE FIGHT WE'VE HAD ON PRODUCT LIABILITY REFORM. WE
INTRODUCED A REFORM BILL IN 1990, AND AGAIN IN 1991.
SENATE DEMOCRATS REFUSE TO BRING IT TO A VOTE; IN THE
HOUSE IT'S STUCK IN TWO COMMITTEES. THE SPECIAL
INTERESTS ARE LINING UP AGAINST LEGAL REFORM, AND WE
CAN USE YOUR HELP IN MOVING IT FORWARD. AA
IF WE'RE SUCCESSFUL, THE EFFECTS WILL BE FAR-
REACHING, EXTENDING INTO ANOTHER AREA CRITICALLY IN
NEED OF CHANGE. MEDICAL MALPRACTICE PREMIUMS ALMOST
DOUBLED IN THE SECOND HALF OF THE 1980S. DOCTORS ARE
PRACTICING "DEFENSIVE" MEDICINE, ORDERING AN ESTIMATED
$20 BILLION A YEAR IN UNNECESSARY TESTS AND PROCEDURES
TO PROTECT AGAINST FRIVOLOUS LITIGATION.
- 8 -
THE TRENDS IN HEALTH CARE COSTS ARE SIMPLY
UNSUSTAINABLE. FROM LESS THAN 6 PERCENT 30 YEARS AGO,
TOTAL HEALTH CARE EXPENDITURES ARE TODAY ABOUT 13
PERCENT OF GDP. SOME MID-RANGE ESTIMATES PUT THAT
FIGURE AT 30 PERCENT BY THE YEAR 2030 -- THAT'S THIRTY
CENTS OF EVERY DOLLAR OF NATIONAL INCOME SPENT ON
HEALTH CARE. RIGHT NOW, ACCORDING TO ONE FEDERAL
STUDY, AMERICAN CORPORATIONS ALREADY SPEND MORE ON
HEALTH CARE EACH YEAR THAN THEY EARN IN AFTER-TAX
PROFITS.
WE MUST REFORM THE SYSTEM -- BUT WE FACE A
CROSSROADS. SOME HAVE ADVOCATED NATIONALIZED CARE;
OTHERS PROPOSE THE SO-CALLED "PAY OR PLAY" APPROACH,
WHICH I AM CONVINCED IS MERELY A STEP ON THE ROAD TO
NATIONALIZED CARE.
- 9 -
NEITHER IS ACCEPTABLE. NEITHER WILL PRESERVE THE
QUALITY OF OUR COUNTRY'S HEALTH CARE, WHICH REMAINS THE
BEST IN THE WORLD. I WILL NOT LET THAT HIGH QUALITY BE
TAKEN AWAY FROM THE AMERICAN PEOPLE THROUGH SOME SCHEME
OF GOVERNMENT CONTROL.
NATIONALIZED CARE MEANS RATIONED CARE; ITS PROMISE
OF COST CONTAINMENT IS A MIRAGE. "PAY OR PLAY" WOULD
DUMP STILL MORE MANDATES ON BUSINESS. FOR EMPLOYERS, A
9 PERCENT PAYROLL TAX WOULD MEAN A 34 PERCENT INCREASE
Huh?
IN HEALTH INSURANCE COSTS. THAT MONEY MUST COME FROM
SOMEWHERE - AND FOR A COMPANY UNABLE TO PASS ALONG THE
ADDED COSTS THROUGH HIGHER PRICES, THAT MEANS DECREASED
INVESTMENT, LOWER WAGES, AND FEWER JOBS.
- 10 -
THERE IS AN ALTERNATIVE. MY PROPOSED HEALTH CARE
REFORM WILL BUILD ON OUR SYSTEM'S STRENGTHS, PRESERVING
THE QUALITY OF CARE. WE WILL INCREASE CONSUMER CHOICE.
THROUGH TRANSFERABLE CREDITS, WE WILL ASSURE ACCESS TO
BASIC HEALTH INSURANCE FOR THE UNINSURED, AND CONTROL
COSTS THROUGH MARKET INCENTIVES. AND WE WILL NOT RAISE
TAXES ON AMERICAN EMPLOYERS.
I HAVE TARGETED A THIRD AREA FOR ATTENTION -- LIKE
THE OTHERS, ABSOLUTELY CRITICAL TO OUR SUCCESS IN THE
COMING DECADES. YOU UNDERSTAND THAT FOR AMERICA TO
SUCCEED ECONOMICALLY AT HOME, WE MUST SUCCEED
ECONOMICALLY ABROAD. THE FASTEST GROWING COMPANIES
AMONG YOUR GROUP -- THE ONES CREATING THE GREATEST
NUMBER OF JOBS HERE AT HOME -- ARE THOSE WITH FAR-
REACHING INVOLVEMENT IN FOREIGN MARKETS.
- 11 -
I AM COMMITTED TO OPENING MARKETS TO AMERICAN GOODS
AND SERVICES, REMOVING THE GOVERNMENT-IMPOSED BARRIERS
THAT ACT AS A HIDDEN TAX ON AMERICAN BUSINESS. EACH
MARKET SHUT OFF BY PROTECTION IS A LOST OPPORTUNITY TO
SELL YOUR PRODUCTS. A SUCCESSFUL CONCLUSION TO THE
CURRENT URUGUAY ROUND OF TRADE NEGOTIATIONS, FOR
INSTANCE, COULD INCREASE WORLD OUTPUT BY $5 TRILLION
OVER THE NEXT DECADE. MORE THAN $1 TRILLION OF THAT
BOOM WILL GO TO THE UNITED STATES -- CREATING A HIGHER
STANDARD OF LIVING AND MORE JOBS FOR AMERICANS.
EVEN CLOSER TO HOME, EXPORTS TO MEXICO HAVE MORE
THAN DOUBLED OVER THE LAST FIVE YEARS -- CREATING MORE
THAN 300,000 AMERICAN JOBS. OUR NORTH AMERICAN FREE
TRADE AGREEMENT WILL LOCK IN AND EVEN MULTIPLY THOSE
GAINS, CREATING A $6 TRILLION MARKET FOR AMERICAN
PRODUCTS IN CANADA, MEXICO, AND THE UNITED STATES.
- 12 -
AS WORLD TRADE EXPANDS, THE NEED FOR A
SOPHISTICATED, WELL-EDUCATED WORKFORCE WILL INTENSIFY.
YET THE FACT IS GRIM AND UNDENIABLE: OUR CURRENT
EDUCATIONAL SYSTEM IS UNABLE TO PRODUCE THE WORKERS THE
HIGHLY COMPETITIVE WORLD MARKET DEMANDS.
OUR EDUCATIONAL FAILURES HAVE HIT AMERICAN
EMPLOYERS HARD. ENGLISH IS NOW THE LANGUAGE OF
INTERNATIONAL BUSINESS; YET ONLY 20 PERCENT OF 17-
YEAR-OLDS CAN WRITE A SIMPLE TWO-PARAGRAPH LETTER
APPLYING FOR A JOB. THE SITUATION IN GEOGRAPHY, MATH
AND SCIENCE IS EQUALLY DIRE. TOO MANY BUSINESSES ARE
FORCED TO PAY TWICE FOR THE EDUCATION OF PROSPECTIVE
EMPLOYEES -- ONCE THROUGH TAXES THAT SUPPORT OUR
SCHOOLS, AND AGAIN THROUGH JOB TRAINING TO REMEDY THE
FAILURES OF THOSE SCHOOLS IN EDUCATING OUR YOUNG.
- 13 -
COMMUNITIES HAVE BEGUN TAKING MATTERS INTO THEIR
OWN HANDS, WITH LOCAL BUSINESSES OFTEN ACTING AS
CATALYSTS. ABC'S VITAL LINK, WHICH WORKS WITH LOCAL
SCHOOLS TO ESTABLISH LEARNING INCENTIVES FOR STUDENTS,
IS A PERFECT EXAMPLE OF THE COMMUNITY-BASED EFFORTS OUR
CHILDREN NEED.
STILL, THERE IS MUCH FOR GOVERNMENT TO DO. THIS
YEAR, SEVEN DIFFERENT FEDERAL AGENCIES WILL SPEND $18
BILLION ON A PATCHWORK OF 60 VOCATIONAL TRAINING
PROGRAMS. IS IT ANY WONDER THAT so MANY AMERICANS WHO
SEEK TRAINING DON'T KNOW HOW TO GET IT? WORKING WITH
STATE AND LOCAL GOVERNMENTS, OUR JOB TRAINING 2000
INITIATIVE WILL BRING COHERENCE TO THESE PROGRAMS AND
OFFER "ONE-STOP SHOPPING" TO ASPIRING WORKERS.
- 14 - -
JOB TRAINING 2000 PERFECTLY COMPLEMENTS THE
REVOLUTION NOW TAKING PLACE IN AMERICAN EDUCATION AS A
WHOLE. THROUGH OUR AMERICA 2000 INITIATIVE, WE WILL
REINVENT OUR SCHOOLS. YOUR CHAIRMAN, JIM JONES, IS A
LEADER IN THE NEW AMERICAN SCHOOLS DEVELOPMENT
CORPORATION, A PRIVATE GROUP CREATED AT MY REQUEST TO
LAUNCH AN ENTIRE GENERATION OF BREAK-THE-MOLD NEW
AMERICAN SCHOOLS.
THIS REVOLUTION IS ESSENTIAL TO CREATING A WORLD-
CLASS WORKFORCE. TO DO THAT, WE NEED TO SET WORLD-
CLASS STANDARDS FOR STUDENTS AND CREATE A SYSTEM OF
VOLUNTARY NATIONAL TESTS TO MEASURE THEIR PROGRESS. WE
MUST REDOUBLE OUR EFFORTS TO RID OUR SCHOOLS OF DRUGS
AND VIOLENCE -- TO CLEANSE AMERICA OF THIS SCOURGE THAT
WASTES so MANY YOUNG LIVES. AND WE MUST MAKE SCHOOLS
MORE ACCOUNTABLE, BY FORCING THEM TO COMPETE. THAT
MEANS GIVING PARENTS THE OPPORTUNITY TO CHOOSE THEIR
CHILDREN'S SCHOOLS - PUBLIC, PRIVATE, OR RELIGIOUS.
A
- 15 -
I AM CONVINCED THAT EACH OF THESE MAJOR REFORMS - --
RESTORING SANITY TO OUR LEGAL SYSTEM, ENSURING QUALITY
HEALTH CARE FOR ALL, EXPANDING WORLD TRADE, AND
REINVENTING AMERICAN EDUCATION - -- IS ESSENTIAL TO THIS
COUNTRY'S FUTURE PRODUCTIVITY.
BUT EACH FACES POWERFUL OPPOSITION FROM SPECIAL
INTERESTS WHO PROFIT FROM THE STATUS QUO. so I HAVE
TARGETED A FINAL REFORM, NO LESS IMPORTANT THAN THE
OTHERS. IF AMERICA IS TO CHANGE, OUR GOVERNMENT MUST
CHANGE.
LAST WEEK IN PHILADELPHIA, I PRESENTED SEVEN
SPECIFIC PROPOSALS TO DEAL WITH THE PARALYSIS THAT
GRIPS THE CONGRESS. THE RESULTS OF THIS GRIDLOCK ARE
DISMALLY PLAIN. CONGRESS WAS INCAPABLE EVEN OF PASSING
MY SHORT-TERM ECONOMIC GROWTH PACKAGE. BUT THEY MUST
UNDERSTAND: I WILL CONTINUE TO FIGHT FOR MEASURES
ESSENTIAL TO ECONOMIC GROWTH - -- INCLUDING A CUT IN THE
TAX ON CAPITAL GAINS. **
stimulation
- 16 -
THE AMERICAN PEOPLE ARE RIGHTLY FED UP WITH
BUSINESS AS USUAL: A DEFICIT THAT IS A FISCAL AND A
MORAL OUTRAGE, A PERMANENT GOVERNING CLASS OBLIVIOUS TO
THE NATIONAL INTEREST, AND HUNDREDS OF SELF-
PERPETUATING PROGRAMS THAT DON'T EVEN AID THE PEOPLE
THEY WERE DESIGNED TO HELP.
I REFUSE TO BELIEVE THAT THIS IS THE LEGACY WE WILL
LEAVE OUR CHILDREN. BUT IT WILL BE -- IF WE DON'T
REFORM THE UNITED STATES CONGRESS.
- 17 -
THE REFORMS I'VE OUTLINED HERE TODAY ARE GROUNDED
IN BASIC PRINCIPLES, A WAY OF LOOKING AT THE WORLD. AS
JEFFERSON SAID: "THE PILLARS OF OUR PROSPERITY ARE THE
MOST THRIVING WHEN LEFT MOST FREE TO INDIVIDUAL
ENTERPRISE." IN PRACTICE, THAT MEANS GOVERNMENT MUST
TRUST THE WISDOM OF MARKETS MORE THAN THE WHIMS OF
BUREAUCRATS. THE FREELY MADE DECISIONS OF BUSINESSMEN
AND WOMEN MUST TAKE PRECEDENCE OVER THE ENGINEERING
SCHEMES OF GOVERNMENT. AND ALL OF OUR INSTITUTIONS --
FROM THE U.S. CONGRESS TO THE LOCAL SCHOOL BOARD --
MUST BE ACCOUNTABLE TO THOSE THEY SERVE.
OVER THE LAST DECADE, AMERICA HAS CHANGED THE
WORLD. TODAY WE ARE BLESSED WITH THE OPPORTUNITY TO
CHANGE AMERICA. WITH THESE PRINCIPLES AS OUR GUIDE, WE
WILL MEET THE CHALLENGES, AND EXPLOIT THE
OPPORTUNITIES, OF THE WORLD THAT IS NOW BEING BORN.
THANK YOU, AND GOD BLESS THE UNITED STATES OF
AMERICA.
#
#
#
#
April 6, 1992
To:
Bob Simon
John Howard
X 2816
From:
Subject: American Business Conference
Tuesday, April 7, 1992
As we discussed, attached is information from the Department of
Justice regarding the "progress" of the product liability and
medical malpractice reform legislation over the past years. Our
civil justice legislation, The Access the Justice Act of 1992,
was introduced on February 4, 1992.
From my experience with ABC, I think that the group would respond
favorably to a direct request for assistance. The following may
be appropriate for inclusion on page 4 at the end of the first
full paragraph (April 3, Draft Three) :
Reforming our legal system will not be easy. But with
your help, it can be done. We need ABC members to help
us fight the unnecessary lawsuits, the high costs and
interminable delays in the system.
As a final comment, the litigation "horror story" that you use is
one which would have been brought under the Securities Exchange
Act of 1934, most likely SEC Rule 10b-5. Last year in Lampf, the
Supreme Court interpreted the 1934 Securities Act to require a 1
year statute of limitations. The Lampf decision resolved years
of uncertainty as to the appropriate statute of limitations (some
Courts of Appeals had held that the statute was 2 years).
Within a matter of months, a legislative initiative was
introduced to reverse Lampf. This proposal, the Bryan Bill,
would extend the statute of limitation, and in general, encourage
litigation of the type detailed in speech. I am also attaching
examples of ABC's efforts to oppose the Bryan bill.
Please let me know if you would like any additional information.
Attachments
FACSIMILE TRANSMISSION
Office of the Assistant Attorney General
Civil Division
U.S. Department of Justice
Washington, D.C. 20530
Fax Number: (202) 514-8071 (Commercial)
368-8071 (FTS)
FROM:
Janice Calabresi
DATE/TIME: 4/6/92
(Print Name)
TELEPHONE NUMBER:
514-3045
TO:
John Howard
(Print Name)
456-7044
DESTINATION'S FAX NUMBER:
456-2816
DESTINATION'S VOICE VERIFICATION NUMBER:
NUMBER OF PAGES (EXCLUDING COVER SHEET) :
5
John-
Message/comments:
By all reports over here neither Medical Malpractice nor
Product Liability are going anywhere on the bill. They are
both stalled. Faith Burton from OLA says no hearings have be
held or scheduled there is substantial resistance from the
plaintiff's lobby -- S. 645 a general aviation bill got some
hearings last fall and then stalled -- S. 640 the Kasten bill
is out of Committee & pending on the Senate Calendar but is
unlikely to see any action. Attached is a memo on product
liability "progress" that I got from Jeffrey. I"let you
know if I learn any more.
-Janice
APR- 6-92 MON 10:24
P.02
CROWELL & MORIN
095:rmg
99280.011
MENORANDUM
TO: Mr. Jeffrey Axelrad, Director - Toxts Branch
FROM: Victor E. Schwartz, Esquire
24
DATE: March 23, 1992
RE: Federal Product Liability Update
Since S.640 was reported out of the Senate Commerce Committee
in mid-October, Federal product liability appears to be at a
stall. This is true because two of the principal Senate
co-sponsors of S.640, Senators Rockefeller and Danforth, have not
agreed on a strategy, Senator Rockefeller would prefer to have
the Bill proceed "in the normal legislative process" and include a
sequential referral to the Judiciary Committee. At one point in
time in early December it appeared that the Judieiary Committee
would be willing to agree :0 a referral date of March 15, 1992.
Senator Danforth's staff did not accept this apparent offer. At
present, Senator Rockefeller has been having discussions with
Senator Biden to see 1£ another date can be agreed upon.
Meanwhile, Senator Denforth wants to move the Bill directly
to the Floor and offer it as an amendment on "an appropriate"
bill. One possibility is the Civil Rights Bill, S.2062. That
legislation would end punitive damages "caps" in civil rights
actions dealing with sexual harassment. It is a bill sought by
consumer groups, women's rights groups, and parts of the liberal
element generally not enamored of the Federal Product Liability
APR- 6-92 MON 10:25
P.03
CROWELL & MORIN
Bill. On the other hand, many believe the Bill will pass and will
be signed by the President. There is business opposition to
S.2062, and the addition of product liability on that legislation
would not necessarily kill that opposition.
The bottom line is that I expect Senator Danforth's strategy
to be the one that will be pursued. It is likely that 5.640 will
be offered as an amendment to some legislation prior to the Easter
recess.
There are now 37 co-sponsors of the Senate Bill. Senator
Pate Domenici (R-NMX) joined as & co-sponsor AR couple of weeks
ago,
THE "SUBROGATION LIEN" PROBLEM.
As you know, both S.640 and H.R. 3030 eliminate the
subrogation lien in workplace product liability cases when an
employer has been at fault. The National Federation of
Independent Business (NFIB), the principal lobbying group for
small business, has opposed that provision in its present form.
NFIB has indicated it will move to strike this provision of the
Bill if it goes to the Floor and, if they are unsuccessful in that
effort, they will oppose the measure as a whole. We have been
conducting negotiations to try to bring about & reconciliation
within the business community about this particular provision of
the Bill. An approach that appears to be acceptable to all sides
is to modify the Bill às it now stands. Currently, the Bill
requires an employer to prove that he was innocent of fault if he
is to retain a subrogation lien. Under the new approach, the
APR- 6-92 MON 10:26
P.04
employer would be presumed to be "not at fault," and the
CROWELL & MOR
manufacturer of the capital good or chemical would have to show
that the accident occurred, at least in part, because of employer
fault. The product manufacturer would have to bring the employer
into the product liability action in order to prove this, although
the employer could have the option of saying, "No contest." If
the product manufacturer chooses to bring the employer in and
fails to show employer fault, under the new approach, the
manufacturer would have to pay the employers' reasonable
attorneys' fees. Drafts are being exchanged within the business
community at this time in regard to this compromise. The NFIB has
indicated that 1f 1: decides that the new language is to its
liking, it will put its full lobbying force behind Federal product
liability. NFIB has never done this in the past ten years. In my
judgment, NFIS's support could make a significant and favorable
difference with respect to the Senate vote on product liability
and the possibility of creating some medningful action in the
House.
THE HOUSE,
There has been virtually no movement of the companion bill in
the House. There are approximately 150 co-sponsors and that drive
has not flourished of late. We are still in & "chicken and egg"
situation in the House. Mr. Dingell, a co-sponsor, continues to
stress that he is for the legislation and points to the fact that
his Committee, Energy and Commerce, approved a more "pro-defense"
measure in the 100th Congress by a 30 to 12 vote. Nevertheless,
- 3 -
APR- 6-92 MON 10:27
P.05
CROWELL & MORI
he does not want to put his "Committee through the ringer again"
unless there are signs of life for the Bill in the House Judiciary
Committee. As you will recall, the House Product Liability Bill,
H.R. 3030, was jointly referred to both the Energy and Commerce
and Judiciary Committees. It must be reported out by both
Committees if it is to come up for 4 vote on the Floor. The
Danforth Senate strategy cannot work in the House because there
are "relevancy rules," and a Member simply cannot tack H.R. 3030
onto other legislation.
There will be showcase hearings on product liability before
the Exports, Tax Policy and Special Problems Subcommittee of the
House Small Business Committee on April 7. The Chairman of the
Full Committee, John LaFalce, has indicated he will attend those
hearings. It 18 also likely that showcase hearings will be held
before the Technology and Competitiveness Subcommittee of the
Science, Space and Technology Committee of the House.
(Representative Valentine, Chair).
The business community has organized a very strong grassroots
effort under the aegis of a firm called Direct Impact. They are
working to assure that if 6.640 hits the Floor, parliamentary
devices will be beaten back, and the Bill will receive d favorable
vote. It is the view of the various product liability coalitions,
and mine also, that 11 the Bill passes the Senate, very strong
pressure will be placed on Mr. Brooks, Chair of the House
Judiciary Committee, to hold hearings. Nevertheless, I take very
seriously the message given to me by the plaintiffs' bar sometime
ago -- that they have Mr. Brooks "locked."
- 4 -
APR- 6-92 MON 10:27
P.06
The Administration continues to support Federal product
CROWELL & MOR
liability reform, and the general issue of liability and judicial
process reform has been moved up to one of the key five points of
the President's Domestic Policy Program.
If you have any questions, please call.
- 5 -
10-3
Breeden Defends Quayle's Preview Request
rights of defrauded investors, and he
would find itself in a situation where
By David S. Hilzenrath
disagreed with arguments that the bill
what it has to say had to be cleared in
Washington Post Staff Writer
would encourage costly, frivolous law
advance by any other part of the gov-
Securities and Exchange Commis
suits. A broad array of business groups
ernment," Banking Committee Chair-
sion Chairman Richard C Breeden
opposes the bill/on those grounds.
man Donald W. Riegle Jr. (D-Mich.)
said yesterday it was perfectly appro-
Quayle stepped into the fray over
said at the hearing
priate for Vice President Quayle to
the bill Tuesday when he was asked a
Breeden said that he did not recall
request a preview of Breeden's con-
question about it in an appearance be-
the vice president's office ever asking
gressional testimony in favor of a bill
fore a group of business executives. "I
for an advance copy of his testimony
to give shareholders more time to sue
can assure you that the testimony of
before. But he said the SEC has sent
corporations for securities fraud.
Mr. Breeden will be obviously very
advance copies of testimony to other
I don't see anything sinister or un-
closely examined and we will make
White House offices and government
usual about their wanting to know
sure that this issue is properly venti-
agencies "on many occasions.
what our views are on this issue,
lated before. he testifies tomorrow,"
Breeden said Quayle's interest in the
Breeden said following his appearance
Quayle told the executives Tuesday.
bill was natural in light of Quayle's
before a Senate subcommittee. Quayle
Quayle's comment attracted atten-
concern that excess litigation threat-
made no effort to change his testimo-
tion because the SEC, an independent
ens U.S. economic competitiveness.
ny, and Breeden "didn't move a com-
agency, does not answer to the White
However, Breeden said the bill "may
ma, Breeden said
House.
well result in less litigation, not more,
Breeden told the Senate Banking
The branches of government do
as investors who may have been
subcommittee on securities that the
need to talk to one another, but I
cheated will not have an incentive to
longer statute of limitations the bill
would hope that there would never be
file a hasty lawsuit due to an extreme-
would provide is needed to protect the
a time in which an independent agency
ly fast shot clock.
Barry K. Rogstad
President
AmericanBusinessConference
1730 K Street, NW Suite 1200
Washington, DC 20006
(202) 822-9300
FAX (202) 467-4070
MEMORANDUM
To:
John Howard & David McIntosh
From: Barry Rogstad
Date: October 17, 1991
During our conversation last week, I promised to send you both the
attached. It was prepared for a business coalition of which ABC is a
member. The purpose of the coalition is to evolve proposals for
combatting unwarranted litigation under SEC Rule 10b-5. Rule 10b-5 covers
rights of action in cases of securities fraud.
If Congress adopts a proposal sponsored by Senator Bryan to broaden the
statute of limitations beyond the standard set by the Supreme Court in the
Lampf decision, it has an equal responsibility to see that such
legislation carries solid reforms to counter the explosion in frivolous
suits brought under 10b-5. This paper offers some suggestions to that
end. Much of it was inspired by the very good work done by the
President's Council on Competitiveness.
Absent a commitment to reform, the Bryan Amendment and similar legislation
in the House, should be defeated.
I am very interested to know your current thinking in this matter. ABC
wants to do more than simply carry water for the coalition: we are with
you for the long-term in reforming the litigation system.
Barry
A Coalition of Growth Companies
Measures To Combat Unwarranted 10b-5 Litigation
There is clear evidence that the implied right of action for
violations of SEC Rule 10b-5 is not functioning as an effective
remedy for securities fraud. The system of litigation spawned by
this provision (which was established piecemeal by the courts and
has never been examined on a comprehensive basis by Congress)
neither channels benefits to investors actually injured by
securities fraud nor focuses the burdens of litigation and
liability for damages upon those who engage in fraudulent
activities. Recent empirical studies of 10b-5 class actions have
shown that virtually all claims meritorious and frivolous are
treated alike. These actions are almost always settled in
contrast to a settlement rate of approximately 60% for civil
actions generally and in amounts bearing no relation to the
merits of the underlying claim but linked only to the amount of
damages sought in the complaint or the extent of the defendants'
insurance coverage. See Alexander, Do the Merits Matter? A Study
of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497
(1991) ; O'Brien, The Class-Action Shakedown Racket, Wall St. J.,
Sept. 10, 1991. Thus, plaintiffs who have suffered genuine injury
are not getting the compensation they deserve while plaintiffs who
have brought unjustified lawsuits are receiving a windfall. And
defendants who have not engaged in any wrongdoing are in effect
forced to bear costs that should be paid by true fraud-doers.
The basic problem with the current system is that it imposes
coercive pressure on defendants to enter into settlements in every
case, even those in which the defendants have a strong defense on
the merits. The system fails to distinguish efficiently between
meritorious and unjustified claims at an early stage of the
litigation, thereby forcing defendants to shoulder enormous costs
in terms of attorneys' fees and disruption of business if they wish
to defend the lawsuit. Even if the defendant ultimately prevails,
he must absorb these costs. For these reasons, plaintiffs (and the
plaintiffs' lawyers who actually control much of this litigation)
have no incentive to focus their efforts on meritorious claims:
they are assured of essentially the same recovery regardless of the
actual strength of their position.
Reform of the 10b-5 system should focus on the foregoing
considerations. Plaintiffs and their lawyers must be provided with
incentives to concentrate their efforts on meritorious claims;
defendants must be given incentives to fight unjustified claims and
settle only meritorious ones; and the litigation system must be
restructured to make possible, at least in some cases, early
termination of unwarranted claims. The following reform measures
will accomplish these goals.
Proportionate Liability
Under the current 10b-5 system, a defendant may be forced to
compensate the plaintiff for all of the damage that the plaintiff
suffered, even where other parties bear the lion's share of the
responsibility for the injury. A proportionate liability standard
would require each defendant to compensate the plaintiff based on
his own responsibility for the plaintiff's injury. That result is
justified by basic fairness: a defendant would be liable for his
share of the injury and no more. Especially in securities fraud
actions, where some of the parties most frequently named as
defendants such as accountants and underwriters typically are
alleged to be liable not because they committed the basic fraud but
only because they failed to uncover wrongdoing by others, it is
grossly unfair to require comparatively nonculpable parties to
shoulder the burden of the entire liability.
A proportionate liability rule would be a large step toward
righting the skewed incentives in the current system. For example,
in the typical action in which a number of defendants are named in
the complaint, there is now considerable incentive to settle
quickly because a defendant that does not settle may find himself
faced with the possibility that if he loses at trial he will
have to bear much more than his share of the damages. This
potential doubling or tripling (or more) of the stakes in the
litigation which is exploited by plaintiffs' lawyers who play
the defendants off against each other in an effort to obtain quick
settlements is a tremendous deterrent to defending on the merits
even for completely blameless defendants. A proportionate
liability rule would eliminate this means of pressuring defendants
regardless of the merits of the case, and therefore would focus
settlement activity on cases in which the plaintiffs deserve
compensation because they have valid claims.
"Loser Pays" Rule For Attorneys' Fees
Another significant problem with the current system is that
the initiation of a lawsuit is essentially cost free to the
plaintiffs and their attorneys. The most significant burden in
10b-5 actions responding to discovery demands -- falls almost
exclusively on defendants because facts within the knowledge of the
particular plaintiff usually bear little relevance to the issues in
the litigation. (The courts have essentially eliminated the
requirement that plaintiffs prove that they actually relied on the
alleged misrepresentation or omission.) Because he must bear these
tremendous costs, the defendant has an interest in settling the
case regardless of the underlying merits. This, in turn,
eliminates any incentive for plaintiffs' attorneys to carefully
screen the cases that they file.
2
Providing that the party who loses the case must pay the
winner's attorneys' fees will give plaintiffs' attorneys an
incentive to file only those cases in which the claim appears to
have merit. (To ensure that the parties could recover any fees
eventually awarded, the court could require the posting of a bond
(as in Section 11 (e) of the Securities Act, 15 U.S.C. S 77k) or
award fees against both the party and its attorneys.) As the
President's Council on Competitiveness observed in its recent
report, [b] ecause the losing party will be obligated to pay the
winner's fees, this approach will encourage litigants to evaluate
carefully the merits of their cases before initiating a frivolous
claim or adopting a spurious defense." Plaintiffs who institute
meritorious claims will obtain a greater recovery (because they
will be awarded attorneys' fees as well), thereby providing an
additional incentive for such cases to be brought. And defendants
will have an incentive to fight unjustified claims because they
will be able to recover their attorneys' fees.
- Discovery Reform
The President's Council on Competitiveness found that
If [p] retrial discovery is frequently the source of needless delay
and expense. Currently litigants have virtually unlimited ability
to take sworn deposition of witnesses, request documents and submit
written questions to parties." These abuses are particularly
prevalent in 10b-5 litigation. In such cases, unlike most civil
litigation, plaintiffs frequently can interrupt the schedules of
the highest executives in a company, forcing them to spend their
time on wholly unproductive matters. The fishing expeditions
permitted under the present rules often serve as means for
pressuring defendants to enter into settlements and, in addition,
for delaying resolution of the case on the merits. See Blue Chip
Stamps V. Manor Drug Stores, 421 U.S. 723, 741 (1975).
Limitations on discovery along the lines suggested by the
Council on Competitiveness and the Judicial Conference Advisory
Committee on Civil Rules (see 137 F.R.D. 53) would eliminate these
problems. Parties would be required to disclose certain "core"
information regarding locations of relevant documents and
individuals with knowledge of the matters at issue. The amount of
discovery would be subject to presumptive quantitative limits,
which could be exceeded only with approval of the court. In
addition, discovery should be staged to allow defendants to
determine whether the plaintiff has complied with Rule 11 of the
Federal Rules of Civil Procedure (which prohibits the filing of
baseless claims) and to allow plaintiffs to inquire into the
relevant facts on a systematic basis. Regardless of whether these
proposals are later adopted for a wider range of lawsuits, they are
essential now to eliminate the especially coercive effect on
defendants of present-day 10b-5 litigation.
3
Curbs On Litigation Abuses
A number of practices unique to 10b-5 litigation are SO
clearly abusive that correction is plainly warranted. First, the
current system of paying "bounties" to individuals who serve as
"representative plaintiffs" in class actions should be abolished.
Such payments provide a perverse incentive for individuals to
become professional plaintiffs by buying a few shares of stock in
many companies and joining forces with class action attorneys
whenever the stock of one of those companies falls by enough to
make a lawsuit economically worthwhile to the attorneys. See
Coffee, Understanding the Plaintiff's Attorney: The Implications of
Economic Theory for Private Enforcement of Law Through Class and
Derivative Actions, 86 Colum. L. Rev. 669, 682 & n.38 (1986)
Frivolous litigation will be discouraged by prohibiting representa-
tive plaintiffs from receiving more than their pro rata share of
settlements. At the same time, this reform would make more of the
settlement pool or final judgment available for all investors.
Second, Congress should reaffirm that attorneys may not act as
counsel in cases in which they have a financial interest. Some law
firms reportedly invest their own profit-sharing plans broadly in
the stock of numerous companies in order to have an in-house
plaintiff on hand in the event they wish to file a 10b-5 action
against these companies. See Coffee, supra, 86 Colum. L. Rev. at
682. These attorney-class representatives have a built-in conflict
of interest because they have much more to gain from a settlement
(which comes with a guaranteed attorneys' fee) than from taking the
case to trial. This conflict situation should be prohibited.
Third, class action attorneys should not be permitted to pay
stockbrokers "forwarding fees" for referring their customers to
attorneys bringing class action suits. This practice already is
forbidden as a matter of professional ethics, but it apparently
continues nonetheless. See Coffee, supra, 86 Colum. at 682-683.
Prohibiting this practice by statute (and providing for substantial
penalties -- such as disqualification as class counsel -- for
violations) should help reduce the amount of collusive, meritless
litigation.
Fourth, the SEC has authority to obtain disgorgement relief in
the context of administrative actions for violations of Rule 10b-5.
See 15 U.S.C. §§ 78u-2 (e) & 78u-3 (e). These disgorgement funds are
then made available to investors injured by the violations. A
controversy apparently has arisen in connection with two aspects of
the disgorgement process: whether private attorneys may be paid
with the disgorgement funds and whether payments from the
disgorgement funds must be credited against any possible recovery
by the same individual in private litigation under Rule 10b-5 and
other provisions of the securities laws. Congress should preserve
such recoveries for investors and affirm that private lawyers are
not entitled to any of these funds which were recovered solely
4
through the efforts of the SEC. Congress also should protect
defendants against potential double liability by making clear that
any payments to plaintiffs from these funds will offset future
awards in 10b-5 actions growing out of the same alleged misconduct.
- Clear Proof of Violation
The area covered by 10b-5 actions -- identifying and trying to
ensure the accuracy of information disclosed about a company -- is
peculiarly vulnerable to second-guessing. Evaluating and
describing the economic prospects and condition of a company is an
extremely difficult task. With the benefit of hindsight,
plaintiffs usually are able to find some statement that did not
turn out to be correct or some statement that should have been made
to provide full disclosure. Rule 10b-5 is supposed to be an anti-
fraud rule, however, and proof of scienter -- that the defendant
acted with fraudulent intent is the key factor that
distinguishes between investors who are victims of fraud and
investors who are merely disgruntled because their investment did
not turn out as expected.
Because of the inherent danger of second-guessing in this type
of litigation, it is imperative that juries be certain that
defendants in fact engaged in fraud before imposing liability. At
common law, courts required proof of fraud by "clear and convincing
evidence." The same standard should apply to 10b-5 actions.
- Pleading Reform
Rule 9 (b) of the Federal Rules of Civil Procedure states that
88 [i] n all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity.
Malice, intent, knowledge, and other condition of mind of a person
may be averred generally." Several courts have recognized that,
due to the special dangers of unjustified 10b-5 actions, this
standard must be enforced vigorously. Those courts hold that
n [a] Ithough states of mind may be pleaded generally, the
circumstances' must be pleaded in detail"; the plaintiff must
"point to some facts suggesting that" the defendant acted with the
requisite state of mind (which the courts have held to be knowledge
of the falsity of the allegedly deceptive statement or extreme
recklessness with respect to the statement's truth or falsity).
See, e.g., Robin V. Arthur Young & Co., 915 F.2d 1120, 1127 (7th
Cir. 1990) i DiLeo V. Ernst & Young, 901 F.2d 624, 627 (7th Cir.
1990) i Stern V. Leucadia National Corp., 844 F.2d 997, 1004 (2d
Cir.), cert. denied, 109 S. Ct. 137 (1988).
This pleading requirement should be codified for 10b-5
actions. It would prevent plaintiffs from simply pointing to a
downturn in a company's fortunes and contending that the difference
5
between the earlier, favorable performance and the more recent,
less favorable condition is attributable to fraud. "Because only
a fraction of financial deteriorations reflects fraud, plaintiffs
may not proffer the different financial statements and rest.
Investors must point to some facts suggesting that the difference
is attributable to fraud." DiLeo, 910 F.2d at 627. Such a
requirement would discourage unwarranted lawsuits and, in addition,
provide defendants with a means for cutting off such lawsuits at an
early stage in the litigation process.
- Clarify Principles For Aiding And Abetting Liability
Some courts have concluded that defendants may be held liable
under Rule 10b-5 for "aiding and abetting" another defendant's
violation of the provision. The typical scenario involves a claim
against an attorney, accountant, underwriter or other professional
for failure to "blow the whistle" on a misrepresentation made by
another party. The parameters of this form of liability are at
best murky; indeed, the Supreme Court has never even considered
whether aiding and abetting liability is permissible. Plaintiffs'
attorneys frequently try to use this theory to avoid the
requirements that apply to 10b-5 actions generally. The confusion
about the existence and scope of aiding and abetting liability
leads to both unnecessary litigation and settlements by defendants
fearful of unjustified liability.
Congress should affirm that even if a plaintiff proceeds on an
aiding and abetting theory, he must prove that the defendant acted
with scienter -- that he knew of the misrepresentation by the third
party and intended to assist the third party in deceiving the
plaintiff. Rule 10b-5 is a fraud remedy, and proof of fraud should
therefore be required in all circumstances.
6
ANOTHER PROPOSAL TO KILL OFF JOBS
If you wonder why entrepreneurs sometimes feel abandoned by Washington
lawmakers, take a close look at a legislative proposal likely to receive
action very soon.
An amendment to the Senate banking bill (S. 543) would go a long way to
protect the one industry in which America has achieved undisputed world
leadership: the manufacture of lawsuits.
The amendment seeks to legislate a reversal of a recent Supreme Court
ruling concerning private actions under the securities laws.
Although the amendment's author intends to protect investors who are
victims of fraud, the amendment's net effect will be to declare open
season on small companies that can't afford the management time or the
heavy costs of defending predatory or frivolous suits.
Small and medium-sized businesses can literally be ruined by costly and
time-consuming suits that have no merit. They don't ask for protection
against such suits, they only ask for fairness.
If Congress feels compelled to reverse the Supreme Court through new
legislation, at least write the bill so only legitimate victims of
securities fraud will benefit.
Here's all business owners ask:
1.
Limit the incentives for predatory trial lawyers and professional
plaintiffs who might sue in search on an up front settlement
despite the merits of the allegation.
2.
Prohibit attorneys from paying "finders fees" or "bounties" to
induce potential plaintiffs to sue.
3.
Require the loser to pay attorneys' fees.
4.
Place reasonable time and cost limits on pretrial discovery.
5.
Target actual wrongdoers by establishing a proportionate
liability rule.
America's entrepreneurs are not looking for special treatment. They only
ask us not to burden them with counterproductive disincentives that make
it impossible to be competitive in an already difficult economic
environment.
AmericanBusinessConference
1730 K Street, NW Suite 1200
Washington, DC 20006
(202) 822-9300
FAX (202) 467-4070
BACKGROUND: THE BRYAN AMENDMENT TO S. 543
Senator Bryan's amendment to the banking bill proposes to rewrite the Supreme
Court's decision in Lampf et al which established a uniform statute of
limitations for private actions under the Securities Exchange Act of 1934.
Senator Bryan's legislation would loosen the statute of limitations established
by the Court while removing any "due diligence" requirement on the part of
investors.
The American Business Conference vigorously oppose the Bryan Amendment. ABC
firms have long been bedeviled by frivolous suits brought by unscrupulous
lawyers and their professional plaintiffs. High-growth companies are
especially attractive to these modern-day ambulance chasers because their stock
typically sells at a price many times greater than earnings. Obviously these
high P/E multiples are attractive to investors; at the same time such stocks
can be subject to severe fluctuations in price. It is all too easy for lawyers
to convince disappointed investors that they are the victims of fraud rather
than risk. The Dickensian nightmare that is our current civil justice system
allows the lawyers to force target companies to settle regardless of the merits
of the case.
ABC members believe that any changes in the statute of limitations should be
accompanied by reform of the litigation system. Proportionate liability, the
"loser pays" principle for attorney's fees, limits on the time and expense
associated with discovery, requiring "clear and convincing" evidence of fraud,
and limits on abuses like attorney payment of finders fees and bounties to
identify and recruit potential plaintiffs are all steps that can help.
If Congress wants to rewrite the Lampf decision, it should do so only after
careful consideration and only in the context of enacting reforms to eliminate
frivolous suits.
A Coalition of Growth Companies
Technology firms have volatile earnings. Lawyers have
that has been sued by 13 different
plaintiffs. "They know how expensive
figured out how to get fat off this fact of life.
it is for us to take our case to court.
We're supposed to give them a few
Shakedown?
million dollars so they'll go away."
In 1988, after a jury ruled for de-
fendants in a case against Nucorp
Energy Inc., Silicon Valley executives
were beginning to think they might
By William Tucker
not have to make such payoffs in the
future. But on May 30 a San Jose
WHEN Silicon Valley company issues
More than 98% of the suits are
Federal jury returned a $100 million
an unexpected change in earnings,
settled without trial, according to
verdict against A.C. (Mike) Mark-
the race is on to the San Jose or San
Newman. The officers and directors
kula, a cofounder and vice chairman
Francisco Federal Court House.
agree to pay money to the class of
of Apple, and John Vennard, a former
Earnings less than anticipated? The
disaffected shareholders the attorneys
vice president. Markkula and Ven-
company is served with a class suit for
represent. The lawyers typically get
nard had been responsible for opti-
failing to tell shareholders the bad
30% of the settlement. The insurance
mistic statements in the fall of 1982
news. Earnings better than expected?
company pays, but the cost of insur-
about Apple's Twiggy disk drive at a
A company may be sued for withhold-
ance is just one more burden on the
time when corporate records showed
ing the good news that would have
sometimes struggling businesses. If a
Twiggy mechanisms to be failing.
prevented impatient shareholders
firm has gone bankrupt, the plaintiffs
When Apple finally abandoned Twig-
from unloading.
are still eligible to collect from the
gy in September 1983, its stock
opened down $8 a share the next day.
Melvyn Weiss,
The jury attributed $2.90 of this loss
suppunes a
dean of the
to misrepresentation on the part of
plaintiff's bar
the officers.
"We're doing
Melvyn I. Weiss, founding partner
what the SEC
of Milberg Weiss, argues that his firm
doesn't have
and others like it are helping keep
time to do."
business honest: "We're doing the
job that the SEC doesn't have the time
or the resources to do."
Weiss says his firm has recovered
$2.5 billion for aggrieved sharehold-
ers. But Joseph Grundfest, former
Securities & Exchange Commission-
er and now a Stanford Law School
professor, takes issue with the notion
that these victories amount to a great
public service. Grundfest says: "There
is no question that there are instances
of outright fraud and that directors
"Shareholders" suits have become a
insurance company, and they also
and officers should be made to pay
sport in Silicon Valley," says Melvin
pursue claims against the accoun-
compensation in some cases. But in
Goldman, a San Francisco attorney
tants, lawyers and underwriters who
many cases, perfectly honest people
who represents corporate defendants.
worked with the defendant.
are being forced to pay outrageous
"They take every unexpected move-
Typical case: Lawyers sue Verbatim
sums, simply because they didn't have
ment of a stock and try to call it fraud:
Corp., a floppy disk manufacturer,
perfect foresight.
High-tech companies are volatile, so
when its stock drops more than $2 a
"These cases fail to make clear that,
they're easy game."
share at the end of 1983. Six years
while some buyers and sellers lost
At any one moment, there are
later, after the defendants have spent
money through market movements,
about 500 to 700 shareholder suits
almost $2 million on legal fees, the
the winners are other buyers and sell-
outstanding across the country, ac-
case is settled: a $4.3 million recovery
ers, not necessarily the corporation or
cording to James Newman, editor of
for investors who bought the stock
its current shareholders."
Securities Class Action Alert in Cress-
between June 1983 and January 1984
Actually, you can make a case that
kill, N.J. Milberg Weiss Bershad
of which plaintiff lawyers pocket $1.5
the losers are the American people,
Specthrie & Lerach, of New York and
million in fees and costs.
since these suits and settlements be-
San Diego, is the most active firm in
"It's legalized extortion," com-
come a kind of tax on American busi-
this bustling industry. Milberg Weiss
plains Alan Shugart, chief executive of
nesses trying to survive in a tough
has over 150 active suits all by itself.
Seagate Technology, a disk drive firm
industry and a tough world.
98
Forbes
August 19, 1991
MAJOR BUSH ADMINISTRATION TRADE INITIATIVES
The Bush Administration has for the past three years
deployed a three-prong strategy to open markets and expand trade
throughout the world for U.S. goods, services, and agriculture:
First, we are working to achieve a successful
conclusion of the Uruguay Round of global
trade talks, held under the auspices of the
General Agreement on Tariffs and Trade
(GATT) ;
Second, we are launching broad-based, market-
opening negotiations with our key trading
partners; and
Third, we are using the strength of our
domestic market to open specific sectors in
foreign markets.
The Uruguay Round
The Uruguay Round of global trade talks is being held under
the auspices of the General Agreement on Tariffs and Trade in
Geneva. 108 countries, representing more than 90 percent of
world trade, are working to:
Reduce tariffs and non-tariff barriers by a
third, thereby pumping $5 trillion into the
global economy over the next decade. The
U.S. share of this increased output would be
well over $1 trillion, which would be like
writing a check for $17,000 to every American
family of four, payable over 10 years;
Cut the $60 billion lost annually through
theft and counterfeiting of America's
patents, copyrights, and trade marks -- our
best ideas;
Create new export opportunities for America's
service industries -- like construction,
accounting, and insurance -- which export
$115 billion annually and create 9-out-of-10
new jobs;
Increase opportunities for international
investment, which generates more than $240
billion of U.S. exports, or two-thirds of
total U.S. exports in goods;
O
Expand trade for U.S. farmers, already the
world's most productive with more than $40
billion in annual exports.
Ensure the full participation of developing
countries in the global trading system, which
could increase U.S. exports by half between
now and the year 2000.
North American Free Trade Agreement (NAFTA)
The reasons for our interest in a North American Free Trade
Agreement are plain: Canada is our largest trading partner;
Mexico is our third largest trading partner. Linking our
complementary economies through free trade will strengthen these
economic bonds and increase regional political stability.
The North American Free Trade Agreement will create one of
the world's largest markets with 360 million producers and
consumers and $6 trillion in annual output and so generate new
opportunities and new jobs for America.
O
Already we have seen the benefits of
liberalizing trade with Mexico. Since 1986,
when Mexico joined the General Agreement on
Tariffs and Trade, and reduced its tariff
protections from 100 percent to a high of 20
percent, U.S. exports to Mexico have more
than doubled, rising from $12 4 billion to an
annualized rate of $28.4 billion in 1990.
This doubling of U.S. exports created 264,000
U.S. jobs.
O
Today, our exports to Mexico are growing
twice as fast as compared with our exports to
the rest of the world. Mexico buys a full 35
percent more from us per person than does the
far more affluent European Community.
O
A free trade agreement in North America would
not only lock in these gains, but also create
new openings for U.S. industry. The
agreement will improve access for U.S.
exports to a market which is expected to have
100 million Mexican consumers by the year
2000.
The Enterprise for the Americas Initiative
The Bush Administration has been more active and successful
than any previous Administration in opening markets for U.S.
goods, services, investment, and encourage market-oriented
economic reform in Latin America and the Caribbean. Our major
economic policy effort is the President's Enterprise for the
Americas Initiative (EAI) launched in June 1990. The EAI
contains three elements, investment, debt, and trade.
The trade element of the EAI envisions a hemispheric zone of
free trade stretching from Alaska to Argentina that would
generate new economic activity and increased prosperity
throughout the hemisphere and at home.
The groundwork for this hemispheric free
trade area has been laid by 15 trade and
investment framework agreements designed to
encourage additional market opening for U.S.
firms have been negotiated with all but 3
Latin American and Caribbean countries (a
total of 30 countries, excluding Mexico).
These agreements contain a declaration of
sound trade and investment principles, a
commitment to consult on a regular basis, and
an initial agenda for our consultations.
The EAI is designed to encourage the dramatic transformation
ongoing in Latin America and Caribbean towards open economies,
free trade, and a more limited role for government in the
economy. Virtually every significant economy in the region has
reduced barriers to trade and investment, including in some cases
significant reductions in tariffs and previously rigid import
licensing and quantitative restrictions.
Total U.S. exports to Latin America and the Caribbean
(excluding Mexico) have risen from almost $31 billion in 1986 and
have risen to $53 billion in 1990, including an increase of $10
billion from 1988 to 1990 alone.
Trade with Japan
Our negotiations with Japan are designed to open the world's
second largest market economy to U.S. exports. The Bush
Administration is working to open the Japanese market by
eliminating barriers to in specific sectors using our trade laws
and other means, and by lowering structural barriers through the
Structural Impediments Initiative (SII). This policy is
working:
O
Since 1988, U.S. merchandise exports to Japan
have risen by an astounding 30 percent to $49
billion.
Since the Bush Administration took office, U.S.
merchandise exports to Japan have grown 50 percent
faster than U.S. exports to the rest of the world. As
a result, American exports to Japan in 1990 were
greater than our exports to West Germany, France and
Italy combined. In fact, our exports to Japan are
about 35 percent greater on a per capita basis than our
exports to all of Europe.
O
In manufactures, U.S. export growth since
1988 has been particularly strong to Japan:
up 45 percent to $30.1 billion in 1990.
We are encouraged by the fact our exports to Japan are
growing. But there is still much work to be done. The Bush
Administration is working to reinvigorate the SII process and on
a number of bilateral issues.
# # #
APR 6 '92 14:44 FROM US TRADE REP
PAGE. 001
FACSIMILE COVER SHEET
OFFICE OF THE UNITED STATES
TRADE REPRESENTATIVE
CHIEF TEXTILE NEGOTIATOR
Executive Office of the President
Washington, D.C. 20506
Date
4/6/92
Number of Pages Excluding Cover
3
TO:
AGENCY: PHONE #: FAX #:
Andy Feldman
White
( ) 2930
( ) 6218
House
( )
( )
Communication
)
( )
( )
( )
( )
( )
( )
( )
FROM: AMBASSADOR RONALD J. SORINI
PHONE: (202) 395-3026
FAX #: (202) 395-5639
CONTACT: David Walters
SUBJECT: Asper Telcer
APR 6 '92 14:44 FROM US TRADE REP
PAGE. 002
Andy,
Amb. Hills has never used these stats nor
has CEA signedary. That said, this were I
cause out on converting the $1.1 trillion into au
What does the Uruguay Round Mean for U.S. Jobs and Wages: employment
An Extension of the USTR/CEA Analysis on the GNP Gains from effect.
The Uruguay Round
Dourd
walter
Summary
The Uruguay Round is likely to benefit U.S. labor both through
increased average real wages (resulting from higher productivity)
and some increase in U.S. net employment. How the gain would be
divided between higher wages and more jobs is unknown. Using the
USTR/CEA estimates of potential GNP gains from the UR and a
plausible outlook for the growth of the U.S. labor force, it is
possible to deduce the following two limiting cases:
1)
If all the GNP gain is reflected as higher labor
productivity, the average U.S. worker ten years after
the Round would produce annually $1,655 (at 1989
purchasing power) more output if the UR is successful
than if it is unsuccessful.
2)
If, instead, all the GNP gain is reflected as higher
employment (with no productivity gains), 10 years hence
there would be 4 million more Americans employed with a
successful UR than without.
The actual outcome, based on the USTR/CEA trade gain estimates,
will certainly be some combination of higher productivity/wages
and more jobs within the limits for each described above.
The Joint USTR/CEA Estimated of the UR Benefits to U.S. GNP
In the fall of 1990, USTR and CEA jointly developed a scenario
intended to illustrate the type and magnitude of benefit the
United States might expect from the Uruguay Round. The Uruguay
Round was assumed to achieve a one-third reduction in global
barriers to trade.
The Round was assumed to conclude in 1990. The assessment
considered the positive impact on U.S. GNP from both static and
dynamic gains from trade over the 10 years: 1990 to 2000. All
values were calculated in constant 1989 dollars.
The baseline scenario (no Uruguay Round) adopted the then
Administration long-term economic forecast for U.S. GNP growth of
3 percent. Baseline GNP thus rose from $5,356.8 billion in 1990
to $7,199.1 billion in 2000.
With trade gains from the Uruguay Round (described in attachment
dated 10/17/90), the U.S. GNP was estimated to rise to $7,417.7
billion in 2000. Cumulatively over the ten years, the U.S. GNP
APR 6 '92 14:45 FROM US TRADE REP
PAGE. 003
2
gain totalled $1,116.2 billion. In the tenth year of the
analysis (2000), the U.S. GNP with a successful Round was
estimated to be $218.6 billion or 3 percent higher than in the
absence of the Round.
Implications of the UR Estimates for U.S. Labor
With respect to U.S. employment, the additional $218.6 billion in
U.S. output in 2000 would be reflected in some combination of two
effects:
o
an increase in U.S. average labor productivity (output
per hour worked) ; and
o
an increase in total employment.
There are many elements which would have to be taken into
consideration in order to judge how much of the trade gain would
be reflected in higher U.S. productivity and how much in
increased net employment. Either way, however, U.S. labor
benefits - either through higher wages (the counterpart higher
productivity) or more jobs.
The USTR/CEA exercise was intended as no more than a plausible
scenario of the type of gains that could be expected from a one-
third cut in global trade barriers. Attempting to predict the
productivity versus job benefits implicit in the USTR/CEA
scenario is, in fact, not necessary for illustrating the type of
gains to U.S. labor likely to accrue from a successful Round.
Instead, the USTR/CEA scenario can be extended to the labor
market to estimate two limiting cases: 1) all the labor gains
reflected as productivity increase and 2) all the labor gains
reflected as employment increase. The most likely outcome, of
course, would be somewhere between these two extremes.
Employment in the United States totaled 119.55 million in 1990.
The U.S. labor force and employment grew at roughly a 1.7 percent
average annual rate in the 1980s. This rate is widely expected
to slow down in the 1990s. The baseline scenario assumes a 1
percent average annual growth rate in employment from 1990 to
2000 which, together with a 2 percent productivity growth rate,
would achieve the base line forecast of 3 percent average annual
GNP growth. Employment reaches 132.057 million in 2000 for the
baseline scenario.
If all the UR gain is expressed in terms of productivity, U.S.
net employment does not rise, but output per worker (assuming
constant hours worked across the period) rises from $54,515 in
the base line to $56,170 with a successful UR. This is a 3
percent or $1,655 average increase for all U.S. workers in the
year 2000.
. APR 6 '92 14:46 FROM US TRADE REP
PAGE. 004
3
If, on the other hand, gains from the UR were entirely reflected
in increased U.S. employment (with no productivity gain), there
would be nearly 4 million additional persons employed in the U.S.
in the year 2000. Employment would rise to 136.056 million, an
increase of 3 percent or 3.999 million workers.
attachment
THE WHITE HOUSE
WASHINGTON
April 7, 1992
MEMORANDUM FOR DAVID DEMAREST
DAN McGROARTY
SPEECHWRITERS
RESEARCHERS
FROM:
BOB SIMON Rt
SUBJECT:
AMERICAN BUSINESS CONFERENCE SPEECH
This was an odd little event that went surprisingly well.
Eighty CEOs were seated in the Willard's ballroom. Once the pool
arrived, reporters almost had the audience outnumbered.
The President looked great and sounded great, even though he
had to plow through 25 minutes of the Five Pillars for the
umpteenth time. His delivery was quite strong and confident, and
he did not lose interest, even though the small audience only
applauded three times (on legal reform, private school choice,
and that all-time fave -- cap. gains). Furthermore, the
President sounded like he really believed in what he was saying
-- that governmental change is essential for business growth.
All in all, it was a thoughtful address which could get some
favorable press even though there was no news in it.
Since we were just across the street at the Willard, the
President got a big laugh when he announced his new travel
policy: "no trips farther than one block from the White House."
(Well, it was just a medium chuckle, but hey -- I wrote it, OK?)
AMERICAN BUSINESS CONFERENCE
Tuesday, April 7, 1992
Gloria Bohan
President
Omega World Travel, Inc.
Falls Church, Virginia
John S. Chalsty
President & C.E.O.
Donaldson, Lufkin & Jenrette
New York, New York
James R. Jones
Chairman, American Business Conference
Chairman, American Stock Exchange
New York, New York
Kenneth N. Pontikes
Chairman & President
Comdisco, Inc.
Rosemont, Illinois
Michael J. Rogerson
Chairman & President
Rogerson Aircraft Corporation
Irvine, California
Jeffrey S. Silverman
Chairman, President & C.E.O.
PLY GEM Industries, Inc.
New York, New York
Howard Solomon
President & C.E.O.
Forest Laboratories, Inc.
New York, New York
W. Hall Wendell
Chairman & C.E.O.
Polaris Industries, L.P.
Minneapolis, MN
Thomas W. Wathen
Chairman & C.E.O.
Pinkerton Security and Investigation Services
Van Nuys, California
AMERICAN BUSINESS CONFERENCE
Tuesday, April 7, 1992
"Capital Gains, Economic Growth, and Jobs"
J.P. Barger
Chairman & C.E.O.
Dynatech Corporation
Burlington, Massachusetts
W.L. Lyons Brown, Jr.
Chairman & C.E.O.
Brown-Forman Corporation
Louisville, Kentucky
James R. Jones
Chairman, American Business Conference
Chairman, American Stock Exchange
New York, New York
George N. Hatsopoulos
Chairman & President
Thermo Electron Corporation
Waltham, Massachusetts
Barry K. Rogstad
President
American Business Conference
Washington, D.C.
SARAH COOPER
TEL No 202-234-8958
Apr 6,92 12:37 No.003 P.12
APR- 3-92 FRI 15:41 ABC
ABC MEMBERSHIP MEETING ATTENDEES LIST
APRIL 6-8, 1992
Jack Albertine
John Chalsty
Chairman & C.E.O.
President & C.E.O.
Albertine Enterprises, Inc.
Donaldson, Lufkin & Jenrette
Washington, DC
New York, NY
John Ballard
Bob Chilton
President & C.E.O.
Chilton Investments
TCI International
Dallas, TX
Fremont, CA
Dan Colussy
J. P. Barger
Chairman, President & C.E.O.
Chairman & C.E.O.
UNC Incorporated
Dynatech Corporation
Annapolis, MD
Burlington, MA
Barrie Damson
Bim Black
President
Chairman & C.E.O.
Damson Natural Resources, Inc.
Teleflex Incorporated
Damson Investment Group, Inc.
Plymouth Meeting, PA
European American 011 Company
New York, NY
Gloria Bohan
President
Dermot Dunphy
Omega World Travel, Inc.
President & C.E.O.
Falls Church, VA
Sealed Air Corporation
Saddle Brook, NJ
Rollie Boreham
Chairman & C.E.O.
Bill Farley
Baldor Electric Company
Chairman & C.E.O.
Fort Smith, AR
Fruit of the Loom, Inc.
Chicago, IL
Jim Brocksmith
Deputy Chairman
Walter Forbes
KPMG Peat Marwick
chairman, President & C.E.O.
New York, NY
CUC International Inc.
Stamford, CT
John Brown
chairman, President & C.E.O.
Jerry Ford
Stryker Corporation
C.E.O.
Kalamazoo, MI
United New Mexico Financial Corp.
Irving, Texas
Lee Brown
Chairman & C.E.O.
Lynn Fritz
Brown-Forman Corporation
President & C.E.O.
Louisville, KY
Fritz Companies, Inc.
San Francisco, CA
SARAH COOPER
TEL No .202-234-8958
Apr 6,92 12:37 No.003 P.13
P.02
APR- 3-92 FRI 15:42 ABC
Wendy Gamel
Jim Jones
Chairman & President
Chairman
Tech-Sym Corporation
American Stock Exchange
Houston, TX
New York, NY
Fred Gerstell
Kay Koplovitz
Chairman, President, CEO & COO
President & C.E.O.
CalMat Co.
USA Network
Los Angeles, CA
New York, NY
Sheryl L. Handler
Arthur Levitt, Jr.
President
Chairman
Thinking Machines Corporation
Levitt Media Company
Cambridge, MA
New York, NY
Maurice Hardy
Steve Levy
President & C.E.O.
Chairman & C.E.0.
Pall Corporation
Bolt Beranek and Newman Inc.
East Hills, NY
Cambridge, MA
Tom Harrington
Jack Lewis
President & C.E.O.
Chairman & C.E.O.
Spectrum capital, Ltd.
Amdahl Corporation
New York, NY
Sunnyvale, CA
George Hatsopoulos
Bruce Lunsford
Chairman & President
President & C.E.O.
Thermo Electron Corporation
Vencor, Incorporated
Waltham, MA
Louisville, KY
Don Hebb
Jim Macaleer
Managing Director
Chairman & C.E.O.
Alex. Brown Incorporated
SMS
Baltimore, MD
Malvern, PA
Leon Hirsch
Jim Mann
Chairman, President & C.E.O.
Chairman, President & C.E.O.
U.S. Surgical corporation
SunGard Data Systems Inc.
Norwalk, CT
Wayne, PA
Chuck Johnson
Jim Maser
Chairman & C.E.O.
Vice Chairman
General DataComm Industries, Inc.
Club Corporation International
Middlebury, CT
Dallas, TX
Clark A. Johnson
Ed Meyer
Chairman & C.E.O.
Chairman, President & C.E.O.
Pier 1 Imports, Inc.
Grey Advertising, Inc.
Fort Worth, TX
New York, NY
2
SARAH COOPER
TEL No 202-234-8958
Apr 6,92 12:37 No.003 P.14
APR- 3-92 FRI 15:43 ABC
P.03.
Dane Miller
Erv shames
President & C.E.O.
President & C.E.O.
Biomet, Inc.
The Stride Rite Corporation
Warsaw, IN
Cambridge, MA
Tom Neff
Mayo Shattuck
President
President
SpencerStuart
Alex. Brown Incorporated
New York, NY
Baltimore, MD
Marne Obernauer
Jeffrey Silverman
Chairman & C.E.O.
Chairman, President & C.E.O.
Devon Group, Inc.
PLY GEM Industries, Inc.
New York, NY
New York, NY
Ken Pontikes
Howard Solomon
Chairman & President
President & C.E.O.
comdisco, Inc.
Forest Laboratories, Inc.
Rosemont, IL
New York, NY
Jay Precourt
Michael D. Sullivan
C.E.O.
President & C.E.O.
Tejas Gas Corporation
Merry-Go-Round Enterprises, Inc.
Houston, TX
Joppa, MD
Tom Pyle
Lillian Vernon
Boston, MA
Founder, C.E.O. & Chairman
Lillian Vernon Corporation
Mt. Vernon, NY
Rick Rickenbach
Tom Wathen
Chairman, President and C.E.O.
Chairman & C.E.O.
Government Technology Services
Pinkerton Security & Investigation
Chantilly, VA
Services
Van Nuys, CA
Jim Risher
Larry Weinbach
President and C.E.O.
Managing Partner-Chief Executive
Exide Electronics Corporation
Arthur Andersen & Co.
Raleigh, NC
New York, NY
Michael J. Rogerson
Stanley A. Weiss
Chairman & President
Chairman & C.E.O.
Rogerson Aircraft Corporation
American Premier, Inc.
Irvine, CA
Washington, DC
Phil Rollhaus
Hall Wendel
Chairman, President, & C.E.O.
Chairman & C.E.O.
Quixote Corporation
Polaris Industries, L.P.
Chicago, IL
Minneapolis, MN
3
SARAH COOPER
TEL No .202-234-8958
Apr 6,92 12:37 No.003 P.15
PRI
15:40
Kelley Williams
Chairman & C.E.O.
First Mississippi Corporation
Jackson, MS
Angus Wurtele
Chairman & C.E.O.
The Valspar Corporation
Minneapolis, MN
Phil Zeidman
Brownstein Zeidman and Lore
Washington, DC
4
CAMP DAVID
April 5, 1992
On liability reform
we need to show that we have been trying to bring about the
change by getting legislation passed. Need a couple of sentences
about what we have been trying to get done on the hill. For
example:
On
'90 I send legislation to hill same thing in 91 and again
in 92
Get the facts, show that we've been trying but congress
unwilling to even bring for a vote (if that is correct).
I
Page 5- Health Care
work in some language on the cost of
need
frivolous mal practice suits
( I have used estimates $20-$40
billion. Double check).
ABC's
help.
On trade section (top of p.6) we must mention NAFTA. Mexico by
name.
On Page 7 I have noted a "B". In there insert some language on
drug-free environment. We must mention drugs free schools, or
drug free work place all along the line. We do not have anti
narcotics as one of our five categories and it is essential that
we keep supporting our anti drug programs
On Congress reform refer in one sentence to the number of
X
specific reforms I have proposed for Congress. May not have to
list them all but audience must know that we're not just carping-
rather seriously proposing answers.
FROM THE PRESIDENT
(Ferguson Simon)
April 1992
Draft Three
PRESIDENTIAL REMARKS: AMERICAN BUSINESS CONFERENCE
WILLARD HOTEL
TUESDAY, APRIL 7, 1992
2:00 PM
Thank you, Jim Jones. ((Some people say I've been traveling
too much. So today is an example of my new policy: no trips
farther than one block.))
It is always a pleasure to speak with members of the
American Business Conference, because it is always a pleasure to
speak with the best.
I would like to talk to you today about the future -- the
future of our country generally, and more particularly the future
of our country's business environment. In fact, we cannot
separate the two. The America of the 21st Century -- its ability
to make peace in the world, to foster strong families, to create
rewarding jobs -- will be shaped today, in large part by how
hospitable we make America for business.
We can learn from your achievement. The key to the success
of any high-growth company is the wise deployment of resources.
The successful company channels labor and investment into those
areas with the potential for the greatest expansion and the
highest return. You take the risk; you reap the reward;
everyone, meanwhile, benefits from the wealth you create.
That, in brief, is the genius of entrepreneurial capitalism,
a system that has made America the envy of the world. For 200
years our prosperity has sprung from our ability to innovate, to
change as the world changes. But America's world leadership is
2
not automatic; it is not a birthright. We must continue to earn
it, day by day, quarter by quarter, year by year. The world now
is changing at a pace no one could have dreamed of a generation
ago. And America, which has led the world's transformation, must
change with it.
Over the last several years deadweights have begun to slow
the engine of growth -- inefficiencies a competitive economy
cannot tolerate. Today I want to discuss five areas of reform,
five critical ways in which America must change if we are to
continue to lead the world. You understand the urgency, for each
of these problems presents itself to American companies not as an
abstraction but in the most immediate way: as a cost of doing
business -- a cost you can't control, an expenditure with no
possible return.
When our legal system becomes incapable of resolving
disputes in a timely and civil manner, business loses the
incentive to innovate and take risks. When health care costs
escalate, business picks up much of the tab. When government
imposes barriers to trade, business pays the price in
opportunities lost. When our children leave school without
rudimentary skills, business bears the burden in lowered
productivity. And when government freezes in gridlock, business
can no longer plan rationally for the future.
Let me begin with the crying need to reform our country's
civil justice system. Every American has heard the stories of
bizarre or frivolous lawsuits; but most of you have lived them,
3
tales that could have been torn from the pages of Kafka.
Consider one example, related by one of your members, Roger
Coleman, president of Rykoff-Sexton, a food manufacturer and
distributor.
After record earnings in 1989, Mr. Coleman publicly
expressed his confidence that 1990 would be even better. When
earnings fell short, his hopeful statement became the cause of a
shareholder class-action lawsuit.
First came a meeting with plaintiffs' contingency-fee
lawyers, at which the merits of the case were never even
discussed. "The issue," says Mr. Coleman, "was the depths of our
pockets.' Next came the nightmare of discovery: endlessly
expensive and invasive. The company's managers, instead of
managing, spent their time preparing for depositions. The
lawsuit, he says, "brought everything to a stop."
In the end, rather than permit the total exhaustion of
company resources, Mr. Coleman decided to settle. The tab for
this exercise in futility: $8.7 million. As Mr. Coleman says:
"That's over $8.7 million that was diverted from new investments
in jobs and facilities."
The scenario is repeated daily throughout American business.
It is not repeated, let me stress, among our world competitors.
Only the United States has seen the number of lawyers double
over a 20-year period. Only the United States spends more than
$80 billion annually in direct litigation costs, perhaps four
times that in indirect costs. According to a recent survey, 40
4
percent of companies that had been the target of product
liability suits have discontinued certain types of product
research.
We must remove this ball and chain from our ability to
produce and compete worldwide. My competitiveness council, led
by Vice President Quayle, has offered 50 recommendations for
legal reform. They would limit discovery to reasonable
proportions, discourage some frivolous suits through a "loser-
pays" rule, and offer alternative means of resolving disputes.
This broad legal reform won't be easy -- just look at the
fight we've had on product liability reform. We introduced a
reform bill in 1990, and again in 1991. Senate Democrats refuse
to bring it to a vote; in the House it's stuck in two committees.
The special interests are lining up against legal reform, and we
can use your help in moving it forward.
If we're successful, the effects will be far-reaching,
extending into another area critically in need of change.
Medical malpractice premiums almost doubled in the second half of
the 1980s. Doctors are practicing "defensive" medicine, ordering
an estimated $20 billion a year in unnecessary tests and
procedures to protect against frivolous litigation.
The trends in health care costs are simply unsustainable.
From less than 6 percent 30 years ago, total health care
expenditures are today about 13 percent of GDP. Some mid-range
estimates put that figure at 30 percent by the year 2030 --
that's thirty cents of every dollar of national income spent on
5
health care. Right now, according to one federal study, American
corporations already spend more on health care each year than
they earn in after-tax profits.
We must reform the system -- but we face a crossroads. Some
have advocated nationalized care; others propose the so-called
"pay or play" approach, which I am convinced is merely a step on
the road to nationalized care.
Neither is acceptable. Neither will preserve the quality of
our country's health care, which remains the best in the world.
I will not let that high quality be taken away from the American
people through some scheme of government control.
Nationalized care means rationed care; its promise of cost
containment is a mirage. "Pay or play" would dump still more
mandates on business. For employers, a 9 percent payroll tax
would mean a 34 percent increase in health insurance costs. That
money must come from somewhere -- and for a company unable to
pass along the added costs through higher prices, that means
decreased investment, lower wages, and fewer jobs.
There is an alternative. My proposed health care reform
will build on our system's strengths, preserving the quality of
care. We will increase consumer choice. Through transferable
credits, we will assure access to basic health insurance for the
uninsured, and control costs through market incentives. And we
will not raise taxes on American employers.
I have targeted a third area for attention -- like the
others, absolutely critical to our success in the coming decades.
6
You understand that for America to succeed economically at home,
we must succeed economically abroad. The fastest growing
companies among your group -- the ones creating the greatest
number of jobs here at home -- are those with far-reaching
involvement in foreign markets.
I am committed to opening markets to American goods and
services, removing the government-imposed barriers that act as a
hidden tax on American business. Each market shut off by
protection is a lost opportunity to sell your products. A
successful conclusion to the current Uruguay round of trade
negotiations, for instance, could increase world output by $5
trillion over the next decade. More than $1 trillion of that
boom -- providing as many as two million jobs -- will go to the
United States.
Even closer to home; exports to Mexico have more than
doubled over the last five years -- creating more than 300,000
American jobs. Our North American Free Trade Agreement will lock
in and even multiply those gains, creating with Canada a $6
trillion market for American products.
As world trade expands, the need for a sophisticated, well-
educated workforce will intensify. Yet the fact is grim and
undeniable: our current educational system is unable to produce
the workers the highly competitive world market demands.
Our educational failures have hit American employers hard.
English is now the language of international business; yet only
20 percent of 17-year-olds can write a simple two-paragraph
7
letter applying for a job. The situation in geography, math and
science is equally dire. Too many businesses are forced to pay
twice for the education of prospective employees -- once through
taxes that support our schools, and again through job training to
remedy the failures of those schools in educating our young.
Communities have begun taking matters into their own hands,
with local businesses often acting as catalyst. ABC's Vital
Link, which works with local schools to establish learning
incentives for students, is a perfect example of the community-
based efforts our children need.
Still, there is much for government to do. This year, seven
different federal agencies will spend $18 billion on a patchwork
of 60 vocational training programs. Is it any wonder that so
many Americans who seek training don't know how to get it?
Working with state and local governments, our Job Training 2000
initiative will bring coherence to these programs and offer "one-
stop shopping" to aspiring workers.
Job Training 2000 perfectly complements the revolution now
taking place in American education as a whole. Through our
America 2000 initiative, we will reinvent our schools. Your
chairman, Jim Jones, is a leader in the New American Schools
Development Corporation, a private group created at my request to
launch an entire generation of break-the-mold New American
Schools.
This revolution is essential to creating a world-class
workforce. To do that, we need to set world-class standards for
8
students and create a system of voluntary national tests to
measure their progress. We must redouble our efforts to rid our
schools of drugs and violence -- to cleanse America of this
scourge that wastes so many young lives. And we must make
schools more accountable, by forcing them to compete. That means
giving parents the opportunity to choose their children's schools
public, private, or religious.
I am convinced that each of these major reforms -- restoring
sanity to our legal system, ensuring quality health care for all,
expanding world trade, and reinventing American education -- is
essential to this country's future productivity.
But each faces powerful opposition from special interests
who profit from the status quo. So I have targeted a final
reform, no less important than the others. If America is to
change, our government must change.
Last week in Philadelphia, I presented seven specific
proposals to deal with the paralysis that grips the Congress. The
results of this gridlock are dismally plain. Congress was
incapable even of passing my short-term economic growth package.
But they must understand: I will continue to fight for measures
essential to economic growth -- including a cut in the tax on
capital gains.
The American people are rightly fed up with business as
usual: a deficit that is a fiscal and a moral outrage, a
permanent governing class oblivious to the national interest, and
9
hundreds of self-perpetuating programs that don't even aid the
people they were designed to help.
I refuse to believe that this is the legacy we will leave
our children. But it will be -- if we don't reform the United
States Congress.
The reforms I've outlined here today are grounded in basic
principles, a way of looking at the world. As Jefferson said:
"The pillars of our prosperity are the most thriving when left
most free to individual enterprise." In practice, that means
government must trust the wisdom of markets more than the whims
of bureaucrats. The freely made decisions of businessmen and
women must take precedence over the engineering schemes of
government. And all of our institutions -- from the U.S.
Congress to the local school board -- must be accountable to
those they serve.
Over the last decade, America has changed the world. Today
we are blessed with the opportunity to change America. With
these principles as our guide, we will meet the challenges, and
exploit the opportunities, of the world that is now being born.
Thank you, and God bless the United States of America.
#
#
#
#
(Ferguson/Simon)
April 2, 1992
Draft Two
BUSINESS
PRESIDENTIAL REMARKS: AMERICAN BUSINESS CONFERENCE
WILLARD HOTEL
TUESDAY, APRIL 7, 1992
2:00 PM
[Acknowledgments, joke]
It is always a pleasure to speak with members of the
American Business Conference, because it is always a pleasure to
speak with the best.
I would like to talk to you today about the future -- the
future of our country generally, and more particularly the future
of our country's business environment. In fact, we cannot
separate the two. The America of the 21st century -- its ability
to make peace in the world, to foster strong families, to create
rewarding jobs -- will be shaped today, in large part by how
hospitable we make America for business.
We can learn from your success. The key to the success of
any high-growth company is the wise deployment of resources. The
successful company channels labor and investment into those areas
with the potential for the greatest expansion and the highest
return. You take the risk; you reap the reward; everyone,
meanwhile, benefits from the wealth you create.
That, in brief, is the genius of entrepreneurial capitalism.
Our system has made America the envy of the world, the most
prosperous country on earth, affording the highest standard of
living to the largest number of people in history. With one-
2
twentieth of the world's population, we produce one-fourth of the
world's goods and services.
What accounts for our preeminence? The answer, I believe,
lies in our resiliency, our historic ability to innovate, to
change as the world changes. America's world leadership is not
automatic; it is not a birthright. We must continue to earn it,
day by day, quarter by quarter, year by year. The world now is
changing at a pace no one could have dreamed of a generation ago.
And America, which has led the world's transformation, must
change with it.
Over the last several years deadweights have begun to slow
the engine of growth -- inefficiencies a competitive economy
cannot tolerate. I have isolated five areas for reform, five
critical ways in which America must change if we are to continue
to lead the world. You understand the urgency, for each of these
problems presents itself to American companies not as an
abstraction but in the most immediate way: as a cost of doing
business -- a cost you can't control, an expenditure with no
possible return.
When our legal system becomes incapable of resolving
disputes in a timely and civil manner, business loses the
incentive to innovate and take risks. When health care costs
escalate, business picks up much of the tab. When government
imposes barriers to trade, business pays the price in
opportunities lost. When our children leave school without
rudimentary skills, business bears the burden in lowered
3
productivity. And when government freezes in gridlock, business
can no longer plan rationally for the future.
Each of our system's failings saps your resources, drawing
away your investment and manhours from productive tasks. Allow
me to address them one by one.
I'll start with the crying need to reform our country's
civil justice system. Every American has heard the stories of
bizarre or frivolous lawsuits; but most of you have lived them,
tales that could have been torn from the pages of Kafka.
Consider one example, related by one of your members, Roger
Coleman, president of Rykoff-Sexton, a food manufacturer and
Roger
distributor.
Coleman
After record earnings in 1989, Mr. Coleman publicly
213-
expressed his confidence that 1990 would be even better. When
622-4131
so
earnings fell short by two percent, his hopeful statement became
the cause of a shareholder class-action lawsuit.
First came a meeting with plaintiffs' contingency-fee
Statement
lawyers, at which the merits of the case were never even
discussed. "The issue," says Mr. Coleman, "was the depths of our
by
Roger
pockets." Next came the nightmare of discovery: endlessly
Coleman
expensive and invasive. The company's managers, instead of
see
managing, spent their time preparing for depositions. The
file
lawsuit, he says, "brought everything to a stop."
In the end, rather than permit the total exhaustion of
company resources, Mr. Coleman decided to settle. The tab for
this exercise in futility: $8.7 million. As Mr. Coleman says:
4
"That's over $8.7 million that was diverted from new investments
in jobs and facilities."
The scenario is repeated daily throughout American business.
It is not repeated, let me stress, among our world competitors.
This absurd drain on productivity is a peculiarly American
phenomenon, putting us at an increasing disadvantage in the
international marketplace.
American
Only the United States has seen a 382 percent increase in
Foundation Bar
double
20
the number of lawyers over a twelve year period. Only the United
see file
^
States spends more than $80 billion annually in direct litigation
VP's
costs, perhaps four times that in indirect costs. Fear of
Civil
lawsuits has driven almost half of U.S. manufacturers to withdraw
Justicet
products from world markets. One out of every four American
91
Aug.
companies has discontinued certain types of product research for
the same reason.
the
We must remove this ball and chain from our ability to
produce and compete worldwide. My competitiveness council, led
by Vice President Quayle, has offered 50 recommendations for
legal reform. They would limit discovery to reasonable
proportions, discourage some frivolous suits through a "loser-
pays" rule, and offer alternative means of resolving disputes.
Some of these 50 comprehensive recommendations I have
Wet Fast
instituted by Executive Order; others are contained in our Access
that
to Justice Act; and still others will take place at the state
2-4-92
level, using the model reforms we have proposed.
5
The effects will be far-reaching, extending into another
President
area critically in need of reform. Medical malpractice premiums
Health
Reform
almost doubled in the second half of the 1980s. Doctors have
program
p.
SI
begun practicing "defensive" medicine, ordering unnecessary tests
and procedures to protect against litigation.
This too drives up health care costs. The trends are simply
Ditto
unsustainable. From less than 6 percent 30 years ago, total
P. 31
health care expenditures are today about 13 percent of GDP.
Incredibly, some mid-range estimates put that figure at 30
percent by the year 2030 -- that's thirty cents of every dollar
of national income spent on health care.
Health
It is not hard to imagine what this would mean for American
corporations
care
business. The average American company already spends more on
Financing
health premiums each year than it They earns in after-tax profits. And
care
Review
this trend too is heading upward toward disaster.
Fall 91
Reform of the system is inescapable. But we face a
crossroads. Some have advocated nationalized care; others
propose the so-called "pay or play" approach, which I am
convinced is merely a step on the road to nationalized care.
Neither is acceptable. Neither will preserve the quality of
our country's health care, which remains the best in the world.
I will not let that high quality be taken away from the American
people through some scheme of government control.
Nationalized care means rationed care; its promise of cost
containment is a mirage. "Pay or play" would dump still more
Health
Reform
mandates on business. A 9 percent payroll tax would mean a 34
report
6
percent increase in a company's insurance costs. That money must
come from somewhere -- and for a company unable to pass along the
added costs through higher prices, that means decreased
investment, lower wages, and fewer jobs.
There is an alternative. My proposed health care reform
will build on our system's strengths, preserving the quality of
care. We will increase consumer choice. Through transferable
credits, we will assure access to basic health insurance for the
uninsured, and control costs through market incentives. And we
will not raise taxes on American employers.
I have targeted a third area for attention -- like the
others, absolutely critical to our success in the coming decades.
You understand that for America to succeed economically at home,
we must succeed economically abroad. The fastest growing
ABC Report
companies among your group -- the ones creating the greatest
commitment
to Growkhumber
of jobs here at home -- are those with far-reaching
p.2-3 involvement in foreign markets.
I am committed to opening markets to American products,
removing the government-imposed barriers that act as a hidden tax
on American business. Each market shut off by protection is a
lost opportunity to sell your products. A successful conclusion
USTR
fact
to the current Uruguay round of trade negotiations, for instance,
sheet
could increase world output by $5 trillion over the next decade.
More than $1 trillion of that boom will go to the United States.
Even closer to home, exports to Mexico have more than
doubled over the five years -- creating more than 260,000
7
American jobs. Our North American Free Trade Agreement will lock
in those gains, creating with Canada a $6 trillion market, the
largest in the world.
As world trade expands, the need for a sophisticated, well-
educated workforce will intensify. Yet the fact is grim and
undeniable: our current educational system is unable to produce
the workers the highly competitive world market demands. And
make no mistake: a failure to produce a world-class workforce
will only provide an incentive to move new jobs overseas.
Our educational failures have hit American employers hard.
English is now the language of international business; yet only
Nelson Rae
4
20 percent of 17-year-olds can write a simple two-paragraph
Ginsberg
letter applying for a job. The situation in geography, math and
Dept. Ed.
science is equally dire. Too many businesses are forced to pay
twice for the education of prospective employees -- once through
taxes that support our schools, and again through job training to
remedy the failures of those schools in educating our young.
Communities have begun taking matters into their own hands,
with local businesses often acting as catalyst. ABC's Vital
see
ABC
Link, which works with local schools to establish learning
fact
incentives for students, is a perfect example of the community-
sheet
based efforts our children need.
Still, there is much for government to do. This year, seven
F493
Budget
different federal agencies will spend $18 billion on a patchwork
pelel
of 60 vocational training programs. Is it any wonder that so
partI
many Americans who seek training don't know how to get it?
8
F493
Working with state and local governments, our Job Training 2000
Budset
initiative will bring coherence to these programs and offer "one-
Part I
stop shopping" to aspiring workers. Private industry councils,
p.62
composed mostly of businessmen, are crucial to our strategy.
They would manage programs tailored to the specific needs of
local labor markets. And they will be accountable for the
quality and efficiency of their programs.
[Placeholder for Labor announcement]
In stressing accountability and local control, Job Training
2000 perfectly complements a revolution now taking place in
American education as a whole -- a revolution essential to
creating a world-class workforce. Our America 2000 initiative
aims to reinvent American schools. We know how to do it. We set
high standards for students. We make teacher training a top
priority. And we make schools more accountable, by forcing them
to compete. That means giving parents the opportunity to choose
their children's schools.
I am convinced that each of these major reforms -- restoring
sanity to our legal system, ensuring quality health care for all,
expanding world trade, and reinventing American education -- is
essential to this country's future productivity. The time for
tinkering is done; we can afford no more half-measures, no more
pondering and chin-pulling. If business is to get on with its
work of creating wealth and jobs for America, we must undertake
real reform -- root-to-branch change -- whereever our system has
failed us.
9
No wonder, then, that each of the reforms I speak of faces
powerful opposition from special interests who profit from the
status quo. So I have targeted a final reform, no less important
than the others. If America is to change, American government
must change. Last week in Philadelphia, I spoke in some detail
on the paralysis that grips the federal government. This
paralysis prevents Washington from making even the most
rudimentary decisions of public policy. The results are plain: a
deficit that is a fiscal and a moral outrage, a permanent
governing class oblivious to the national interest, hundreds of
wasteful programs that live in perpetuity.
The steps I outlined in Philadelphis will restore
accountablity and responsiveness to a system that has been broken
for too long. [Placeholder for economic analysis insert.]
A responsive government will give the reforms I've outlined
today a fair hearing, even though the special interests are
arrayed against them. These approaches are grounded in basic
principles, a way of looking at the world. Government must trust
the wisdom of markets more than the whims of bureaucrats. The
freely made decisions of businessmen and women must take
precedence over the engineering schemes of government. All of
our institutions -- from the U.S. Congress to the local school
board -- must be accountable to those they serve.
Over the last decade, America has changed the world. Today
we are blessed with the opportunity to change America. With
these principles as our guide, we will meet the challenges -- and
10
exploit the opportunities -- of the world that is even now being
born.
God bless you, and God bless the United States of America.
#
#
#
#
OFFICE WTEP THE MANAGE FRESIDENT STATES & UNITED
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
o
February 13, 1992
NOTE FOR JEANNIE BUNTON
FROM:
BERNARD H. MARTIN
Amp
Attached, as you requested, is an illustrative list of
Administration bills transmitted to the 1st Session of the
102nd Congress upon which Congressional action was delayed
or not taken.
Attachments
INDEX
Page
1.
AMERICA 2000 Excellence in Education Act
1
2.
Andean Trade Preference Act of 1990
1
3.
California Public Lands Wilderness Act
1-2
4.
Civil Rights Act of 1991
2
5.
Comprehensive Violent Crime Control Act of 1991
2-3
6.
Enterprise for the Americas Initiative (EAI)
3
7.
Enterprise Zone-Jobs Creation Act of 1991
3
8.
Financial Institutions Safety and Consumer
Choice Act of 1991
3-4
9.
Health Care Liability Reform and Quality of
Care Improvement Act of 1991
4
10. Higher Education Act Amendments of 1991
4-5
11. International Cooperation Act of 1991
5
12. International Monetary Fund (IMF)
6
13. National Energy Strategy (NES) Act
6
14. Resolution Trust Corporation (RTC) Funding
and Restructuring
6-7
15. Surface Transportation Assistance Act of 1991
7
1.
AMERICA 2000 Excellence in Education Act -- Supports the
National Education Goals through activities to promote
education reform and improve educational achievement.
-- Transmitted to Congress by the President on 5/21/91.
-- Introduced as HR 2460 (Michel) on 5/23/91, and as S.
1141 (Kennedy, by request) on 5/23/91. Referred to
House Education and Labor Committee on 5/23/91. No
action on Administration bills.
-- HR 3320 (Kildee) introduced on 9/12/91. Reported by
House Education and Labor Committee on 11/7/91.
Administration position: Governor Sununu sent letter to
Chairman Goodling on 10/16/91 stating that school choice
provision in the bill as introduced was acceptable, but
the Administration has concerns about other provisions.
-- S.2 (Kennedy) introduced on 1/14/91. Passed Senate on
1/28/92. Administration position: Statement of
Administration Policy sent to the Senate on 1/21/92
stating that the President's senior advisors would
recommend that he veto S. 2 because it fails to carry
out the President's AMERICA 2000 program.
2.
Andean Trade Preference Act of 1990 - Authorizes a trade
preference program patterned after the Caribbean Basin
Initiative (CBI) for the four Andean countries of Boliva,
Colombia, Ecuador, and Peru.
-- Transmitted to Congress 10/5/90 by the President.
-- Introduced as H.R. 661 (Crane) on 1/28/91
S. 275 (Dole) on 1/29/91.
-- Administration bill included in H.R. 1724 (Gibbons),
which was signed 12/4/91 as P.L. 102-182.
3.
California Public Lands Wilderness Act - Designates as
wilderness certain California public lands managed by the
Bureau of Land Management.
-- Transmitted to Congress by the President on 7/29/91.
-- Introduced as H.R. 3066 (Rep. Lewis, et. al.) on
7/29/91.
-- Democratic alternative bills introduced as H.R. 2929
(Rep. Levine, et. al.) on 7/17/91 and S. 21 (Cranston,
et. al.) on 1/14/91.
-- Statement of Administration Policy sent to Congress
10/31/91 strongly opposed H.R. 2929, indicating the
Secretaries of Defense and the Interior would recommend
a veto if the bill were presented to the President in
its current form. of particular concern, the bill would
designate an amount of land that far exceeds what is
suitable for protection as wilderness. The bill would
also adversely affect operations at five major military
installations in southern California.
-- H.R. 2929 reported by House Interior Committee on
11/4/91 and passed by the House on 11/26/91 by a vote of
297-136.
4.
Civil Rights Act of 1991 - Strengthens laws against
employment discrimination.
-- Transmitted to Congress on 3/1/91.
-- Introduced as S. 611 (Dole et al.) and H.R. 1375 (Michel
et al.) on 3/12/91.
-- H.R. 1 was the subject of a veto threat in a 6/3/91
Statement of Administration Policy and passed the House
on 6/5/91.
-- S. 1745 was the subject of a veto threat in a 10/23/91
Statement of Administration Policy, passed the Senate
amended on 10/30/91, and passed the House on 11/7/91.
-- S. 1745 was enacted as P.L. 102-166, approved 11/21/91.
The major objectionable provisions were removed or
modified.
5.
Comprehensive Violent Crime Control Act of 1991 - Principal
provisions establish constitutional sound procedures for
applying existing death penalty laws; allow the death
penalty in other cases; limit the use of habeas corpus
petitions; and allow certain evidence found in
unconstitutional searches to be used in court.
-- Transmitted to Congress by the President on 3/11/91.
-- Introduced as H.R. 1400 (Michel et al.) on 3/12/91 and
as S. 635 (Thurmond et al.) on 3/13/91.
-- S. 1241 was the subject of a veto threat in a 6/19/91
Statement of Administration Policy and passed the Senate
on 7/11/91.
-2-
-- H.R. 3371 was the subject of a veto threat in a 10/15/91
Statement of Administration Policy and passed the House
on 10/22/91.
-- The House agreed to the conference report on H.R. 3371,
notwithstanding a Presidential veto threat, on 11/27/91.
The Senate failed to invoke cloture (49-38) on the
conference report on 11/27/91.
6.
Enterprise for the Americas Initiative (EAI) - Restructures
trade, investment, and debt to advance the economies and
environment of certain Latin American and Caribbean
countries.
-- Transmitted to Congress on 2/26/91 by the President.
-- Introduced as S. 553 (Pell) on 4/23/91
H.R. 3267, Title V (Oakar/Leach) on 8/2/91.
-- Administration bill modified by Congress and
incorporated into the International Cooperation Act of
1991 (H.R. 2508) (See above)
-- Conference report, which included EAI, was defeated in
House on 10/30/91.
7.
Enterprise Zone-Jobs Creation Act of 1991 - Authorizes tax
incentives for job creation and entrepreneurial activity in
up to 50 distressed urban and rural communities.
-- Transmitted to Congress on 2/25/91.
-- Introduced as H.R. 23 (Rangel) on 1/3/91 and as S. 1032
(Danforth et al.) on 5/9/91.
-- No action was taken in either House in 1991.
-- Resubmitted by OMB on 1/29/92 as part of the "Economic
Growth Tax Act of 1992."
8.
Financial Institutions Safety and Consumer Choice Act of
1991 - Principal provisions authorize interstate banking and
branching; authorize commercial ownership of financial
services holding companies; and recapitalize the Bank
Insurance Fund.
-- Transmitted to Congress on 3/20/91.
-- Introduced as H.R. 1505 (Gonzalez/Wylie) and S. 713
(Riegle/Garn) on 3/20/91.
-3-
-- H.R. 6 was the subject of a veto threat in a 10/31/91
Statement of Administration Policy and was defeated on
the House floor on 11/4/91.
-- H.R. 2094 was supported in a 11/13/91 Statement of
Administration Policy and was defeated on the House
floor on 11/14/91.
-- H.R. 3768 was supported in a 11/20/91 Statement of
Administration Policy and passed the House on 11/21/91.
-- S. 543 was supported in a 11/13/91 Statement of
Administration Policy and passed the Senate on 11/21/91.
-- The conference report on S. 543 was enacted as P.L. 102-
242, approved 12/19/91. The enacted version
recapitalized the Bank Insurance Fund and contained
other Administration proposals (with modifications), but
did not authorize interstate banking and branching or
commercial ownership of banks.
-- Unenacted portions of the Administration's 1991
proposals were resubmitted in draft by OMB on 1/29/92
and introduced as part of H.R. 4150 (Michel et al.) on
2/4/92.
9.
Health Care Liability Reform and Quality of Care Improvement
Act of 1991 - Provides incentives through the States to
control medical malpractice litigation and improve the
quality of health care.
-- Transmitted to Congress by the President on 5/15/91.
-- Introduced as S. 1123 (Hatch/Danforth) on 5/22/91 and as
H.R. 3037 (Archer et al.) on 7/25/91.
-- No action was taken in either House in 1991.
-- Introduced as part of H.R. 4150 (Michel at al.) on
2/4/92.
10. Higher Education Act Amendments of 1991 -- Reauthorizes the
postsecondary education student aid grant and loan programs
by changing award amounts and eligibility.
-- Transmitted to Congress by the Department of Education
(ED) on 6/5/91.
-- Introduced as S. 1246 (Pell) on 6/6/91, and as HR 2627
(Goodling) on 6/12/91. Referred to Senate Labor and
Human Resources Committee on 6/21/91, and to House
-4-
Education and Labor Committee on 6/12/91. No action on
Administration bills.
-- HR 3553 (Ford) introduced on 10/11/91. Ordered reported
by House Education and Labor Committee on 10/23/91.
Administration position: ED report sent to House
Education and Labor Committee on 10/21/91 stating the
President's senior advisors would recommend that he veto
HR 3553 because it would make Pell grants an entitlement
and establish a direct student loan program, in place of
the guaranteed student loan program.
-- S. 1150 (Pell) introduced on 5/23/91. Reported by
Senate Labor and Human Resources Committee 11/12/91.
Administration position: ED report sent to Senate Labor
and Human Resources Committee on 10/29/91 stating that
the President's senior advisors would recommend that he
veto S. 1150 because it would make Pell grants an
entitlement.
11. International Cooperation Act of 1991 - Revises the Foreign
Aid statutes to update, streamline, and provide greater
flexibility for the administration of international
development and security assistance programs. This proposal
would also authorize special assistance initiatives for
Eastern Europe and the Philippines.
-- Transmitted to Congress on 4/12/91 by Department of
State.
-- Introduced as H.R. 1792 (Fascell/Broomfield) on 4/16/91
S. 956 (Pell) on 4/25/91.
-- Administration bill significantly modified by Congress
and considered in form of H.R. 2508 (Fascell), which
passed both Houses in different form.
-- Administration strongly opposed conference report on
H.R. 2508 because of objectionable abortion-related
provisions, cargo-preference requirements, and other
restrictions which limited Presidential flexibility to
administer foreign aid programs.
-- Conference report on H.R. 2508 passed Senate on 10/8/91
but was defeated in House on 10/30/91.
-- Defeat in House attributed to: (1) member objections to
providing. foreign aid while domestic economy in
recession; and (2) Administration's strong objections.
-5-
12. International Monetary Fund (IMF) - Authorize appropriations
for U.S. participation in an IMF quota increase.
-- Transmitted to Congress on 3/26/91 by Department of the
Treasury.
-- Introduced as S. 819 (Pell) on 4/16/91, H.R. 3267,
Title I (Oakar/Leach) on 8/2/91.
-- Administration bill incorporated into the International
Cooperation Act of 1991 (H.R. 2508). (See above)
-- Conference report, which included IMF, was defeated in
House on 10/30/91.
13. National Energy Strategy (NES) Act - Encourages growth of
future energy supplies of oil, natural gas, nuclear power
and enhanced energy efficiency.
-- Transmitted to Congress by the Secretary of Energy on
3/4/91.
-- Introduced as S. 570 (Johnson/Wallop) and H.R. 1301
(Dingell/et. al.) on 3/6/91.
-- Senate Energy Committee reported S. 1220, a comparable
bill except for inclusion of Corporate Average Fuel
Economy (CAFE) provisions, on 6/2/91.
-- Senate attempt to invoke cloture on S. 1220 failed (50-
44) on 11/11/91.
-- Senate cloture achieved (90-5) on 2/4/92 on S. 2166, a
revised bill which excludes CAFE and Arctic National
Wildlife Refuge provisions.
-- Senate began consideration of S. 2166 the week of
2/3/92.
-- House Energy s/c referred its version of a NES bill,
H.R. 776, for full committee consideration on 10/31/91.
H.R. 776 contains a number of problematic provisions.
14. Resolution Trust Corporation (RTC) Funding and Restructuring
- Provides $80 billion for the RTC and restructures its
management.
-- Transmitted to Congress on 9/27/91.
-- Introduced as H.R. 3435 (Gonzalez et al.) on 9/30/91 and
as S. 1896 (Riegle/Garn) on 10/30/91.
-6-
-- H.R. 3435, as reported amended by the House Banking
Committee, was the subject of a veto threat in a
11/23/91 Statement of Administration Policy, passed the
House with further amendments on 11/27/91, and passed
the Senate on 11/27/91.
-- H.R. 3435 was enacted as P.L. 102-233, approved
12/12/91. It provided $25 billion through 4/1/92, and
restructured the RTC's management.
-- A new bill to provide the remainder of the $80 billion
was transmitted to Congress on 1/22/92.
15. Surface Transportation Assistance Act of 1991 - Provides FY
1992-1996 authorizations for highway and transit programs;
extends highway-related taxes through FY 1998; and
establishes a new Federal-State framework for highway and
transit programs.
-- Transmitted to Congress on 2/12/91.
-- Introduced as S. 610 (Chafee et al.) and H.R. 1351 (Roe
et al.) on 3/7/91.
-- S. 1204 was the subject of a veto threat in a 6/11/91
Statement of Administration Policy, and passed the
Senate on 6/19/91.
-- H.R. 2950 was the subject of a veto threat in a 10/22/91
Statement of Administration Policy and passed the House
on 10/23/91.
-- The conference report on H.R. 2950 was enacted as P.L.
102-240, approved 12/18/91. It provides program
authorizations through FY 1997, extends taxes through FY
1999, and restructures the programs, in part as
recommended by the Administration. The major
objectionable provisions were removed or modified.
-7-
CAPITAL GAINS,
ECONOMIC
GROWTH,
AND JOBS
VIEWS OF LEADING CEOS
an take
anincentive entire to
AmericanBusinessConference
Founded in 1981 the American Business Conference (ABC) is the
only business organization that focuses its attention solely on
midsized, high-growth American companies - the companies that
create jobs and raise, America's standard of living
ABC members - a select group of CEO-entrepreneurs with
outstanding track records of success - represent American business at
its best
ABC supports public policies designed to promote economic growth
and a higher standard of living for all Americans
Printed on Recycled Paper with Soy Ink
PRINTED WITH
SOYINK
CAPITAL GAINS,
ECONOMIC
GROWTH,
AND JOBS
VIEWS OF LEADING CEOS
AmericanBusinessConference
PREFACE
For most Americans, the issue of whether to restore a capital gains
differential to the tax code remains an obscure, if highly-charged, question.
This report tries to dispel at least some of that obscurity. We have asked
four American Business Conference (ABC) chief executives - J.P. Barger,
Lee Brown, George Hatsopoulos, and Roger Johnson - to talk about how
the tax treatment of capital gains influences the ability of their firms to
grow and create jobs. In addition, ABC's Chairman, James R. Jones,
provides a political context for the debate based upon his experience as a
Democratic Congressman and co-sponsor of 1978 legislation to lower the
tax on capital gains. We think the results are enlightening.
Capital gains represent the increase in the value of assets between the time
they are bought and sold. The members of the American Business
Conference, chief executives of fast-growing, midsize companies, support
lowering the tax on capital gains on equities - that is, stock. Reducing the
tax on such gains will encourage people to invest in stock and will lower
the cost of equity capital for our nation's businesses.
In an era of increasing global competition, lowering the cost of equity
capital is essential for all American companies. It is particularly crucial for
those firms that must rely almost exclusively on stock issues to finance
their growth. This latter category includes start-up companies and those
cutting-edge corporations, often in the technology sector, that seek. to
commercialize new ideas and processes.
It cannot be said too often: greater investment means greater growth and
job creation. Enacting a significant capital gains tax differential for equities
is an important means to that end.
To our knowledge this is the first time business leaders have spoken out
with such candor on the impact of capital gains taxation on their business
decision-making. We hope this report will expand the public's
understanding of why a capital gains differential is essential for the
continued vitality of the American economy.
Barry Rogstad, President
John Endean, Vice President, Policy
American Business Conference
Washington, D.C., March 1992
i
TABLE OF CONTENTS
I.
Capital Gains and Entrepreneurship
1
J.P. Barger
II.
Capital Gains, Jobs, and Competitiveness
5
Roger W. Johnson
III.
Capital Gains and the Commercialization of New Technologies
9
Dr. George Hatsopoulos
IV.
Capital Gains and the Mature Corporation
13
W.L. Lyons Brown, Jr.
V.
Capital Gains: The Sequel
17
James R. Jones
VI. Final Thoughts: Capital Gains and Basic Tax Reform
21
Barry K. Rogstad
ii
I.
CAPITAL GAINS AND
ENTREPRENEURSHIP
J.P. BARGER
Chairman & C.E.O.
Dynatech Corporation
Burlington, Massachusetts
1
I ASSOCIATE CAPITAL GAINS WITH BUMPY TRAINS.
In the late 1950's, I was a graduate student at the Massachusetts Institute
of Technology. To supplement my income as a teaching assistant, I went
to work for my adviser, MIT Professor Warren Rohsenow, in his part-time
consulting business.
One of our contracts obliged us to make frequent trips to Washington. We
would take the evening train from Boston and arrive in Washington for
morning appointments.
In those days the train bed and tracks in the Northeast Corridor were not
nearly so smooth as they are today. To get any sleep back then, you first
had to visit the club car. Over a couple of bourbons, Warren and I would
talk about our work and our future.
During one of those chats, I suggested to Warren that if we were ever
going to make any real money we would have to incorporate and build a
full-time business. He agreed. The reason was obvious: the tax burden on
ordinary income was three times greater than the tax burden on capital
gains.
That substantial differential drove
our decision to start the company
that became Dynatech. Today,
"H
OW can we confront our children
Dynatech, with Warren as its Hon-
with the imperative of building a better
orary Chairman and me as its Chief
country if we do not supply them with the
Executive Officer, is a high-tech-
tools for economic growth?"
nology manufacturing and service
company employing over three
thousand people.
Were Warren and I young again, travelling over smoother tracks, I might
still have a couple of bourbons, but I would not be able to offer the same
advice.
Sadly, entrepreneurship has become much more expensive. Regulatory and
litigation costs have raised the threshold for starting a business. Moreover,
and of paramount importance, the absence of a significant tax break for
capital gains means that there is no offsetting prospect for reward to
compensate for the investment of capital.
That's bad news not just for aspiring entrepreneurs and investors, but for
the entire country. We need new businesses because we need new jobs.
The best of our large corporations are cutting employment to stay
competitive. The creation of new enterprises can take up the slack.
2
That is the context with which I view the current debate over capital
gains. Simply put, do we want young Americans to have opportunities to
become successful entrepreneurs and create new jobs? If so, we must
provide them with sufficient financial incentives to undertake the risk and
effort starting a company demands.
Throughout most of this century - since the establishment of the income
tax - such financial incentives have been available. We owe the next
generation no less: an economic environment in which initiative can
flourish. How can we confront our children with the imperative of
building a better country if we do not supply them with the tools for
economic growth?
I noted with interest the recent remarks of the Japanese Prime Minister to
the effect that talented young Americans are flocking to Wall Street rather
than committing themselves "to producing things and creating value." This
he sees as evidence of societal decline.
I don't believe young Americans today are much different from their
counterparts of three decades ago. Many still dream of starting their own
businesses or expanding existing ones. Our task is to nurture such
ambitions beyond the talking stage. One very good route to that end
would be Congressional enactment of a meaningful capital gains
differential. It worked for me and the many other entrepreneurs of my
generation. It can work again.
3
II.
CAPITAL GAINS, JOBS,
AND COMPETITIVENESS
ROGER W. JOHNSON
Chairman, President, & C.E.O.
Western Digital Corporation
Irvine, California
5
I HAVE LONG ARGUED TO ANYONE WHO WOULD LISTEN THAT A
capital gains differential, by lowering the cost of capital, would encourage
greater domestic job creation and increase the international
competitiveness of American companies.
What precisely do I mean when I say that?
The answer resides in the cost structure faced by companies like my own,
Western Digital. The main components of our total costs are, in
descending order of importance:
1. cost of market access
2. cost of capital
3. cost of customer support
4. cost of labor
For most growth companies, the first two cost components are by far the
most important. Because of the favorable tax treatment of capital gains on
equities in Japan, my Japanese competitors have a clear and compelling
cost advantage over me right off the bat. Their equity capital is cheaper.
Other nations know this. Countries like Northern Ireland, Singapore,
Korea, and Taiwan use favorable tax policies, and sometimes outright
grants, to compete for American manufacturing jobs. Since I cannot afford
the cost differential enjoyed by my Japanese competitors, I must seek
equal treatment and that means, ultimately, locating some new
manufacturing facilities offshore.
Fortunately, this is not quite a zero sum game. Western Digital has been a
net creator of jobs here in the United States. Producing new products
offshore does not take away jobs in the absolute sense because the
alternative is simply not building the product at all.
Nevertheless, the high cost of
equity capital in the United States
B
ecause of the favorable tax treatment
has meant that Western Digital has
not created as many new jobs here
of capital gains on equities in Japan, my
as we would have liked. That's
Japanese competitors have a clear and
what I mean when I say that a
compelling cost advantage over me right off
significant capital gains differential,
the bat. Their equity capital is cheaper."
by lowering the cost of capital,
would create new American jobs.
Now what about the competitiveness angle? Why would a capital gains
differential increase the competitiveness of American companies?
6
The fact is, those nations, particularly in Asia, that offer better capital costs
to American companies usually do
so as part of an overall develop-
ment strategy. The first step is en-
e simply have to recognize that
couraging foreign direct invest-
ment. Once American facilities are
other countries use foreign investment to
in place, the host country usually
bootstrap their own industries and
provides further incentives for ex-
technology base. Why should we make it
pansion and technology transfer.
easier for them by keeping our cost of equity
The next rung on the development
ladder often involves an equity
capital above competitive rates?"
stake in the American operation.
There is nothing nefarious about this. We simply have to recognize that
other countries use foreign investment to bootstrap their own industries
and technology base. Why should we make it easier for them by keeping
our cost of equity capital above competitive rates? The status quo works to
our competitive disadvantage.
We live in a global market and the best companies are the ones that
establish a presence in key areas around the world. This process is an
inevitable part of good business strategy. What is not inevitable, and what
we should therefore change, is the siphoning of American jobs and
competitive technologies away from our shores because of a tax structure
that rewards investments in homes over equity investments in companies.
I simply do not understand why we tolerate this state of affairs.
There are more risk takers today than there ever have been. Fewer of them
are American and fewer of the rewards of entrepreneurship - money and
jobs - are going to the United States. A capital gains differential cannot in
and of itself change that. But it is an indispensable first step toward the
creation of a sensible economic strategy for the nation.
7
III.
CAPITAL GAINS
AND THE
COMMERCIALIZATION
OF NEW TECHNOLOGIES
DR. GEORGE HATSOPOULOS
Chairman & President
Thermo Electron Corporation
Waltham, Massachusetts
9
OVER THE YEARS, I HAVE WRITTEN FREQUENTLY ON TOPICS IN
macroeconomics. I have concerned myself with issues relating to changing
patterns in American savings and consumption, the cost and patience of
capital, and the fiscal and budgetary roots of our competitiveness
problems.
I could easily demonstrate theoretically why Congress should reduce the
tax on capital gains on equity investments. But the debate over capital
gains will not turn on theory. A tax cut on capital gains will happen only
if a sufficient number of legislators understand in real world terms why
entrepreneurs like me support a differential. So I would like to frame my
views from the perspective of my company, Thermo Electron.
Thermo Electron is in the business of commercializing new technologies
based on ideas generated by our ongoing work in energy, the environment,
and biotechnology. We identify major needs that surface in the economy
and ask ourselves if we can address those needs through the appropriate
application of one or another of our technologies.
If so, we create a new public subsidiary to put our ideas into action
Thermo Electron typically holds a controlling stake in the new venture
and provides it with technical, managerial, and financial expertise.
Thus far we have created eight sub-
sidiaries that are world leaders in
businesses as diverse as the manu-
C
hanges in tax policy, beginning in
facture of environmental monitor-
ing and analytic instruments, artifi-
1986, have made it impossible for Thermo
cial hearts, cogeneration and
Electron to fully commercialize all the
alternative fuel power plants, soil
technologies we possess."
remediation equipment, recycling
equipment, and systems to detect
explosives, drugs, and carcinogens. By spinning off our most promising
new ideas into public subsidiaries, we have been able to preserve
entrepreneurial discipline even as Thermo Electron itself has grown large
enough to join the Fortune 500.
High Cap gains tax
Changes in tax policy, beginning in 1986, have made it impossible for
Thermo Electron to fully commercialize all the technologies we possess.
These tax changes have effectively made the taxation of income from
equity investments double that of the taxation of returns from debt-
financed instruments.
Before 1986, interest income was taxed as ordinary income while capital
gains were subject to a differential tax. Thus, before 1986, for the top
income brackets, interest income was subject to a marginal rate of about
50 percent while capital gains were taxed at 20 percent.
10
Tax reform in 1986 changed that. It eliminated the capital gains
differential and lowered the personal tax rates. The result: capital gains
and interest income were taxed at the same rate - 28 percent. It is true
that the budget agreement of 1990 raised the top tax bracket to 31 percent
while keeping the capital gains tax at 28 percent. But this slight differential
has had no measurable influence on investment decisions. Essentially,
from a tax point of view, investors today are indifferent regarding equity
and debt instruments.
Consider these developments from a corporate point of view. When a
corporation issues debt, it can write off its interest payments. On the other
hand, equity is taxed twice: first as corporate income, then as dividend
income. By equalizing the tax treatment of capital gains at the investor
level, we have, from the corporate level, raised the cost of equity relative
to the cost of debt. Investors demand a higher price for their equity
investments because equity income is taxed twice and capital gains receive
no significant tax relief.
At Thermo Electron, we have no choice but to rely on equity to finance
the commercialization of our technologies. You cannot underwrite ideas
with debt - there is no collateral to balance the risk.
Let me try to quantify what this means for Thermo Electron. Because of
the tax changes beginning in 1986, I have been obliged to cultivate
European investors who, because of tax and other reasons, are willing to
take equity stakes in our new companies at a cost of capital lower to that
demanded by American investors. The mix of American and European
investors in our new ventures is now about 50-50. If we did not have
recourse to Europe, Thermo Electron would have had to curtail our new
ventures by a factor of two.
By the same token, if by some sort of magic Thermo Electron were
operating under the capital gains taxes that prevailed in this country in
1979, we would have generated twice the number of ventures we have
created in the current environment. And finally, if Thermo Electron
operated with the capital gains treatment currently afforded to investors in
our Japanese and German competitors, we could have enacted three times
the number of new ventures.
The fact is, Thermo Electron possesses more commercially promising ideas
than we can finance. My friends in Europe know this. They often tell me
that the United States is second to none in entrepreneurial and technical
expertise. They ask me why our government, through appropriate tax
policy, does not cultivate that expertise. Where, they ask, are the tax
incentives to invest in the equities of high technology companies?
I have never found a good answer to their question.
11
IV.
CAPITAL GAINS AND
THE MATURE
CORPORATION
W.L. LYONS BROWN, JR.
Chairman & C.E.O.
Brown-Forman Corporation
Louisville, Kentucky
13
MY COLLEAGUES IN THE HIGH TECHNOLOGY SECTOR DESERVE
considerable credit for advancing the case for a capital gains differential. But
I would hate to think that, as a result of their efforts, the public believes that
capital gains is an issue uniquely tailored to any one industry. You do not
have to run a high-tech company, or a brand-new venture, to recognize the
competitive advantages a significant capital gains differential would spur.
My company is not exactly a start-up; it was founded in 1870. Nor are we
a high-tech company; Brown-Forman is the producer and marketer of
high-quality consumer products. But Brown-Forman would decidedly
benefit from the lower cost of equity capital that a capital gains differential
would bring about.
The price of capital is as much a cost of doing business as are wages,
employee benefits, raw materials, advertising, distribution, taxes, and new
investments in property, plant, and equipment. Under certain
circumstances, the cost of capital can determine whether a given product
is competitive in the marketplace. To illustrate this latter point, let me cite
an example from our Lenox subsidiary.
For over a century, Lenox has been
recognized worldwide as a manu-
"Under certain circumstances, the cost
facturer of fine china and crystal.
Currently, Lenox controls a third
of capital can determine whether a given
of the American market for china.
product is competitive in the marketplace."
Our main competitor, a Japanese
company, also has about a third of
the market. A variety of smaller companies, domestic and foreign, share
the final third.
Several years ago, it came to my attention that our Japanese competitor
was selling its china at a price significantly lower than we were. Although
quality and design are also important in governing a consumer's decision
to purchase fine china, we could not ignore this challenge from our largest
rival.
I asked to see one of our competitor's plates. I placed it on my desk
beside a similar one made by Lenox. The quality of the Japanese china
was not quite up to Lenox's standards, but it was very good. Good enough,
in fact, that its lower price was not the result of a decision to sacrifice
quality or design.
I asked some of my colleagues in corporate development to investigate
further. They did an exhaustive study comparing the way Lenox does
business with what we knew about our Japanese competitor. They looked
14
at labor costs and labor productivity, materials costs, administrative
overhead, plant and equipment efficiency, and every other factor that
contributes to the manufacture and distribution of our products.
They found only one advantage that our Japanese rival had over Lenox:
their cost of capital was about half what we paid. It was that difference
that ultimately got translated into a lower price for their china.
We had to compensate for our competitor's capital advantage. In theory,
we had three choices. First, we could abandon the business in favor of
other ventures. Second, we could manufacture offshore to cut costs. Third,
we could stay in the United States and find alternative ways to economize.
We had no intention of getting out of the business: Lenox is one of the
crown jewels of America's consumer goods industry. Nor did we wish to
move offshore. So, we chose the third and riskier route. We built a new
plant in an area of the country where labor costs were lower and installed
the very finest production and systems equipment available. We got our
costs down without compromising our product standards.
Lenox remains a dominant and growing manufacturer of china because we
found a way to circumvent the problem of higher capital costs. But, while
we did not move offshore, we were obliged to seek labor at a lower cost.
That was the trade-off the current tax regime forced.
I think the problem we faced at Lenox will be one that other American
firms will be obliged to confront. Capital costs will soon be the last
comparative advantage other nations will enjoy over the United States.
Wage rates are converging throughout the developed world. With
instantaneous communication, no one has a monopoly on information or
know-how. And we are all learning to adjust our marketing and
advertising to the peculiarities of various national markets. In short, many
business costs and practices are becoming the same in different countries.
What is not converging is the cost of equity capital. Because Japan and
Germany tax capital gains as well as a number of other capital-related
factors at lower rates than the United States, manufacturers in those two
countries enjoy a cost advantage. In a world in which many other of the
costs of doing business are the same, that edge can only increase in
significance. Indeed, it will become decisive.
That's why I support a significant capital gains differential. Ideally, to be
truly competitive with the Japanese and the Germans, we would not tax
capital gains at all.
15
V.
CAPITAL GAINS:
THE SEQUEL
JAMES R. JONES
Chairman, American Stock Exchange
Chairman, American Business Conference
New York & Washington, D.C.
17
HOLLYWOOD ISN'T THE ONLY PLACE THAT PRODUCES SEQUELS.
Washington is pretty good at it too.
Take the present debate over capital gains. It is very reminiscent of the
controversy surrounding Congress's decision to lower capital gains rates in
1978. As we await the climax of the current version, perhaps we can learn
something from the earlier script.
I had a meaty role in the 1978 production. At the time I was a third-term
Democratic Congressman from Oklahoma. Together with another junior
member of the Ways and Means Committee, Bill Steiger, I sponsored
legislation to establish a differential rate on capital gains. I believed that
cutting the capital gains tax would result in new investment and new jobs.
As they do today, opponents to capital gains reform in 1978 made two
arguments. First, they said capital gains relief would be a drain on the
Treasury.
The revenue projections bandied about back then look pretty crude
compared to today's computer simulations. But taking an erroneous
estimate to a few extra decimal places does not make it any more
accurate.
Those who predicted a fiscal nightmare in 1978 typically ignored the
behavioral changes a lowered rate on capital gains would spark. Their
counterparts in 1992 usually make the same mistake.
The fact is, people do adapt their economic decisions in the face of tax
changes. In 1978, our legislation lowered the maximum tax rate on capital
gains from 49 percent to 28 percent. In the years following, tax revenues
from capital gains realizations increased sharply. In addition, the 1978 tax
cut spurred greater overall growth. When more wealth is created,
government revenues rise. Whatever an estimator's crystal ball may say,
experience shows that cutting taxes on capital gains is a money-generator
for the government.
In their second argument, our opponents claimed that capital gains relief
disproportionately benefitted the idle rich. Our bill was dubbed "The
Millionaire's Relief Act of 1978," by one critic while another told the New
York Times that capital gains was a "fat-cat-versus-the public issue."
Such zingers played just as well in the press fourteen years ago as they do
today. Ultimately, though, they failed to persuade Congress in 1978 and I
think they will fail this year as well.
18
Then as now, the American economy was stagnant. Business confidence
was low. Growth seemed impossibly elusive. The country desperately
needed to channel more money into productive investments. A capital
gains differential provided the incentive to make that happen.
In 1978 just as much as in 1992, American society suffered from severe
social problems. People differed then as they do now on the solutions to
those problems. One thing was -
and remains - clear: whatever the
solutions, they invariably presup-
pose economic growth and job cre-
R
isk is the raw material of growth.
ation. The reason is simple: you
Every job that exists today originated in the
can't redistribute wealth if you
aren't willing to help create it.
willingness of someone at some time to take
Greater economic equity means lit-
a risk with his or her money."
tle unaccompanied by greater eco-
nomic opportunity.
Risk is the raw material of growth. Every job that exists today originated
in the willingness of someone at some time to take a risk with his or her
money. Every new job we create will have a similar origin. At present, the
United States taxes capital gains at a higher rate than any of our major
international competitors. When a high tax rate on capital gains retards
economic risk-taking and therefore job creation, it is the general public,
not the "fatcats," who suffer the most.
We can enact a tax cut on capital gains that does not cut government
revenues but does spur greater economic growth. We can do it because we
did it before - in 1978.
Congress should and I believe Congress will cut the tax rate on capital
gains. Why? To borrow a term from Hollywood, economic growth is
always great political box office.
19
VI.
FINAL THOUGHTS:
CAPITAL GAINS
AND BASIC TAX REFORM
BARRY K. ROGSTAD
President
American Business Conference
Washington, D.C.
21
AS THIS REPORT MAKES CLEAR, ABC BELIEVES THERE ARE SOUND
reasons to support a capital gains tax differential on the sale of equity
securities. Such a differential is a way to mitigate the double taxation on
equity investment.
Unless equity investment is afford-
"
the debate over the revenue effects of a.
ed tax treatment comparable to
debt financing, Americans will not
capital gains differential is beside the point.
direct an adequate amount of new
The tough issue is whether or not a
investment into stock. Yet .it is
differential would positively influence long-
upon such comparatively risky in-
term growth. ABC emphatically believes that
vestments that start-up firms and
it would."
most of our competitive, idea-
driven companies rely.
By lowering the cost of equity capital, a differential can
promote overall economic growth of the American economy
improve the rate of domestic job creation
increase the competitiveness of U.S. companies by lowering their cost
of doing business relative to competitors in Japan and Germany
encourage the commercialization of new technologies
spur entrepreneurship
Critics of a capital gains reform argue that such a tax cut would be too
costly. Proponents argue that the cut would generate greater tax revenues.
The difference between the rèvenue estimates offered by both sides is
quite small and well within normal forecasting margins of error. For that
reason, I would argue that the debate over the revenue effects of a capital
gains differential is beside the point. The tough issue is whether or not a
differential would positively influence long-term growth. ABC emphatically
believes that it would.
Apart from the clashing of revenue estimates, the most startling aspect of
the battle over capital gains has been the very deep rancor it has stirred.
Part of the problem has surely been the tendency to discuss capital gains
in isolation. Opponents argue that a differential would inequitably benefit
the rich. Proponents, for their part, appear to regard the differential as
some sort of universal solvent, that, if enacted, would miraculously
dissolve all of our economic ills. By not seeing capital gains taxation as
part of a larger economic strategy for long-term saving and investment,
both sides have painted themselves into an ideological corner.
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Basic Tax Reform
The best way to think about a capital gains differential on the sale of
equities is to regard it as a milestone on the road toward basic tax reform.
That reform would place the tax burden on activities that extract resources
from the economy - consumption - while encouraging activities that put
resources back into the economy - saving and investment.
There is today a clear trend toward moving tax policy in that direction.
For example, in addition to capital gains, there have been a variety of
proposals, emanating from both political parties, to expand Individual
Retirement Accounts, accelerate depreciation of assets, and integrate the
personal and corporate tax systems. All seek to promote saving and
investment.
Measured against the long-term goal of removing the tax bias against
saving and investment, a capital
gains differential on the sale of eq-
uities is a step in the right direc-
tion. Eventually, we should change
when and how we tax every form
"Income in whatever form should not be
of income - wages, dividends, in-
taxed unless and until it is used for
terest, as well as capital gains. In-
consumption."
come in whatever form should not
be taxed unless and until it is used
for consumption.
We need as a national goal the establishment of a tax system that falls
only on consumption and exempts from taxation all forms of income that
are saved. If we had such a goal, the ideological objections to near-term
initiatives such as a capital gains differential would, I believe, disappear.
Instead, a capital gains differential would be seen for what it is: part of a
larger program for tax reform to build for America's future.
23
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