Mr. Chairman and members of the Committee, I am honored by and thank you for the opportunity to appear before you today to explain my point of view on the Fairness in Punitive Damages Award Act.

I am the former Senior Vice President of The Irvine Company in Newport Beach, California, owned by Donald L. Bren, and served as its General Counsel for over a decade until 1996. I am also a former Chairman of the 14,000 member American Corporate Counsel Association, the largest bar association representing the interests of in-house, corporate counsel in the United States, with over 4,000 companies represented in its membership. Since 1996, I have been a consultant to leading corporate law departments and law firms across the country in areas that include the cost-effective management of complex litigation. Over the past fifteen years, I have spoken to, moderated panels on and chaired programs for thousands of lawyers across the country on this subject. I am also a Contributing Editor of The American Lawyer magazine, for which I write a periodic column that often addresses the topic of effective management of corporate litigation.

I believe the point of view and experiences I will testify to here today are broadly representative of the experiences and points of view of many corporate executives and lawyers representing and managing the litigation of large and small companies in this country.

The limitation of punitive damages set forth in this bill will not, as touted by its sponsors, improve the efficiency of the American market, decrease the cost of doing business or reduce the amount of litigation in this country. To the contrary, and perhaps counter-intuitively, it will have exactly the opposite effect. As I will illustrate briefly in a moment from my own personal experience managing literally thousands of disputes and litigations, the threat of large punitive damages awards plays an important and effective role in the avoidance, truncation and cost-effective settlement of litigation every day. Punitive damages awards are a free-market, economic force that cause the efficient, voluntary resolution of tens of thousands of disputes. To regulate them will have unintended and deleterious consequences for disputants and the courts.

Providing you with but a few examples of my many personal experiences as a senior corporate executive and general counsel of a large company is perhaps the best way to bring this point home. The first experience I would like to share with you involved a financial claim that The Irvine Company had against an insurance company. The claim was based on a directors and officers liability insurance coverage policy. The Company had expended three million dollars defending a number of its directors against a frivolous claim by one of its shareholders who was well known for obstreperous litigation. At the outset of the defense of the litigation, the Company tendered the defense of the matter to its D &O carrier. The claim was denied. The Company was statutorily obligated to pay for the directors' defense against the litigation and did so, spending three million dollars. It simultaneously pursued a claim for the reimbursement of these defense costs from the insurer.

For three years of litigation, the Company was represented in its claim against the insurer by one of the ten largest law firms in the United States. Despite a strong case on the merits, excellent lawyering and repeated attempts the insurer refused to voluntarily discuss settlement, much less make a settlement offer. The Company had paid ten of thousands of dollars to this law firm to have one of the leading experts in the country render an opinion on its case, which was favorable. The findings of and basis for this opinion were shared with the insurer. Still, there was a flat rejection of any effort to settle.

Out of frustration, the Company switched counsel to one of the country's leading plaintiff's contingent fee lawyers, who immediately raised the specter of a large punitive damage award being rendered by a jury against the insurer. This lawyer had a track record of winning large punitive damages awards. In response to a one-paragraph letter from this lawyer, the insurance company came to a settlement meeting. One more letter and one more meeting later the insurer made a settlement offer that the Company accepted.

The Bill before you would have stripped the Company of the only leverage it had in this litigation. There would have been no incentive for the insurer to settle. They would have known their downside was minimal. The most they could possibly be held liable for in court, after protracted and expensive litigation, was the amount they owed, plus $500,000. They would have used this knowledge shrewdly, arguing that The Irvine Company might as well discount its claim by the amount it would have to expend pursuing it. This argument makes pragmatic sense. Insurance companies use it successfully all the time, using their economic might to protract litigation at great expense to policyholders seeking coverage to make the claims of policyholders economically infeasible to pursue. The litigation would have dragged on out of principle or The Irvine Company would have had to settle for substantially less than it was owed or forego its claim entirely.

This is not an isolated example. This happened repeatedly in insurance claims and it is why major American companies are increasingly turning to the plaintiffs' contingent fee bar to represent them against insurance companies.

The need for punitive damages to ensure the fairness and efficiency of the litigation system in the United States is not just limited to insurance claims. Let me give you another example. During the time I was the General Counsel of The Irvine Company, the Company was the ground lessor of dozens of gas station sites that had leaking underground storage tanks. Major oil companies owned most of these sites. As the landowner, The Irvine Company was obligated to clean these sites up. Yes, we had provisions in our ground leases that passed this obligation onto the gas station owners. But the major oil companies who were our tenants had literally thousands of similarly leaking sites around the country. Sometimes the individual claims were small; in the neighborhood of a million dollars. Without significant leverage, they may not have been worth pursuing. The oil companies knew this. And, if they were forced to pay, the cumulative clean-up costs to them were staggering. They customarily dragged their feet on their clean-up obligations, often exacerbating the damage caused by leaks. They routinely ignored demand letters to perform their clean-up obligations. Acting as a good corporate citizen and also to mitigate damages, the Company expended its own money to clean these sites up and sought reimbursement from the major oil companies. To a company, big oil stonewalled us.

As a former Chairman of the American Corporate Counsel Association, I had made the acquaintance of a number of the general counsels of these major oil companies. It wasn't until I raised the specter of a lawsuit seeking damages solely for a financial loss, but with the specter of a substantial punitive damages award, with some of the highest level executives of these major oil companies, their general counsel, that I was able to resolve these lawsuits short of long and complex litigation.

I might point out, incidentally, that this Bill would likely have another unintended effect. That is, it will encourage the filing of a multiplicity of litigations. Because it limits a claimant in the amount it can collect in each action, whenever possible claimants will divide their claims into multiple actions. Using the leaking underground storage tank claims I mentioned a moment ago as an example, if The Irvine Company had three leaking Mobil oil sites, which it did, it would file three separate litigations to gain greater leverage rather than one, which would be most efficient. Then, the defendant would file a motion to consolidate, and a lot of time and legal fees would be expended on this skirmish. The multiplicity of actions and increased number of hearings resulting from additional motions will further clog the courts and slow dispute resolution.

As General Counsel of The Irvine Company, one of my responsibilities included reviewing and analyzing a vast number of legislative bills for their impact on the Company. Many well-intended bills, after thoughtful review, would have had exactly the opposite of their intended effect. These bills, which often incorporated the desires of special interests like insurance and oil companies, sounded good but turned out to be lousy public policy and against the interests of important sectors of the economy. The Bill before you is just such a bill. Businesses across this country are well served every day in countless disputes by the important deterrent effect of punitive damages on litigation. Yes, we read a lot in the press about large punitive damage awards that sometimes even seem out of whack with the facts of the particular case. We hear a lot from special interests about these awards. What we don't read and hear about is the important public policy they serve by prompting the quick and cost-effective settlement of tens of thousands of claims. The limitation on punitive damages contained in this Bill will not reduce litigation or make the economy more efficient. In fact, it will have exactly the opposite effect.

Let me close by again thanking you, Mr. Chairman, and members of the Committee, for the honor and privilege of appearing here before you today to testify about this Bill.