How to Cripple Small Business With One Easy Law

by Hans Bader: Anti-discrimination legislation under consideration by the Virginia state Senate would shrink the value of the state’s economy and fundamentally alter its business climate.

Senate Bill 868, introduced by Sen. Adam Ebbin, D-Alexandria, would subject even small businesses to unlimited compensatory and punitive damages in discrimination lawsuits and order businesses to pay the lawyers’ bills of the workers, tenants, or customers who sue them. The bill also would let Virginia’s Attorney General sue businesses for a $50,000 fine. But if a business proves itself innocent, it would receive nothing under this bill — no reimbursement of its attorney fees.

The legislation is very one-sided. If it become law, many businesses will have a powerful incentive to pay off people who make even dubious accusations of discrimination. Having to put up with that injustice will discourage people from starting a business in the first place. It will also discourage large companies for expanding into or relocating to Virginia, since plenty of other states don’t impose such onerous damages and fines on companies in discrimination cases.

The Ebbin bill, co-patroned by Senator Jennifer Boysko is more extreme than, but in some ways similar to, California’s Fair Employment and Housing Act (FEHA). That law also provides for unlimited compensatory and punitive damages in discrimination cases, and also forces the business to pay the attorney fees of a person who successfully sues it.

But it is more radical and anti-business. It also imposes civil fines, unlike California employment law. And unlike California’s law, it applies not just to employment and housing, but also public accommodations like restaurants and hotels. (California has a separate, less anti-business law banning discrimination in public accommodations. For example, that law, the Unruh Act, routinely lets an innocent business collect its attorneys fees when it wins).

Comparisons to California are instructive, because the Golden State does not have a very good business climate compared to most states. In its annual ratings, the American Tort Reform Association typically rates California as having the worst or second worst legal climate in America. CNBC ranks it #50 — dead last — in “cost of doing business,” and #32 in overall business climate out of the 50 states. Businesses are more likely to leave California than to move into it, like Northrop Grumman and Nestlé, which moved to Virginia from California a few years ago. Up to 10,000 businesses have left California in recent years.

Legislation like FEHA is a key reason why California has a bad business climate. It creates a constant need for businesses to pay nuisance settlements. I saw this first-hand as a young lawyer in Los Angeles. The law firm I worked at ended up repeatedly paying people discrimination settlements after it terminated them for totally non-discriminatory reasons — such as when their job became obsolete and was eliminated. (For example, computers with word processors made many legal secretaries unnecessary.)

Fighting these lawsuits would have cost the law firm more than it was worth. Years ago, it cost an estimated $25,000 on average for an employer to get a very weak discrimination lawsuit it dismissed at the earliest phase of litigation (“motion to dismiss”), $75,000 to get a fairly weak lawsuit dismissed at a later phrase (“summary judgment”) and $250,000 to defeat a lawsuit that goes all the way to trial.

When a business or institution loses a discrimination lawsuit, it can be ordered to pay huge sums money in attorneys fees to the plaintiff. That’s true even when the jury didn’t award the plaintiff much money because the plaintiff wasn’t really harmed. For example, a court awarded a worker over $40,000 in attorney fees even though the jury awarded her only $1 in damages, in Brandau v. State of Kansas (1999).

So, fighting a discrimination lawsuit can easily cost a business hundreds of thousands of dollars. That expense could bankrupt many small businesses. It reaches any employer with more than 5 workers. When such a small business is threatened with a discrimination lawsuit, it may have little alternative but to pay off the lawyer making the threat. (Most federal discrimination laws, by contrast, cover only employers with 15 or more workers, and limit the amount of damages that can be imposed on covered businesses).

Even worse is the way it awards attorney fees. Under it’s provisions, the court can only “award a prevailing plaintiff reasonable attorney fees and costs.” Not a prevailing defendant — like a business that was found not guilty by a jury. So, if the plaintiff brings a totally groundless lawsuit, and forces an innocent business to spend $250,000 defending itself, the business is not reimbursed a penny for its legal expenses..

By contrast, in California, the defendant business can be awarded its legal expenses if it shows the lawsuit was groundless. That’s because California’s Fair Employment and Housing Act provides that a business is entitled to be compensated for its lawyer bills if “the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” (This is the same standard used by the U.S. Supreme Court in federal civil-rights cases).

That standard isn’t very pro-business, because it only penalizes clearly unreasonable lawsuits. Only a tiny percentage of workers who lose lawsuits are ever ordered to pay their employers’ legal bills under it. But it does discourage at least some unreasonable lawsuits from being filed, and thus makes it harder to extort settlements from innocent businesses.

SB 868 lacks even that minimal safeguard against groundless lawsuits and extortion.

And it is even more extreme compared to the Unruh Act, California’s law against discrimination in public accommodations. Under the Unruh Act, businesses that win a lawsuit are entitled to recover attorneys fees in many cases, even when a lawsuit against them was not frivolous or groundless. That is a more pro-business standard than exists in California employment and housing law, and far more pro-business than what Senators Ebbin and Boysko propose.

In short, SB 868 will make Virginia more anti-business in some ways than California. That is disturbing, because California’s employment laws are anti-business enough to be a drag on its economy. Researchers at the RAND Institute found that employer fears of lawsuits due to California’s anti-employer laws shrank employment in the state by 2-3%. This bill will similarly shrink the size of Virginia’s economy if it becomes law.

It will also cause businesses to leave Virginia. California has a wonderful meteorological climate that limits the number of people who flee the state due to its bad business climate. Virginia doesn’t. It has hot humid summers and cold winters that make it less appealing. And it is much easier to escape. Nothing stops a business from relocating to nearby North Carolina and Tennessee. Virginia is smaller and surrounded by more states than California, making it easier to lose businesses if it adopts a hostile attitude toward businesses. Bristol, Tennessee, already attracts businesses from neighboring Bristol, Virginia, right across the border — due partly to Tennessee having no income tax.

In the last election, many warned that the outcome could “turn Virginia into another California.” SB 868 is proof that the outcome might be even worse.
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Hans Bader, a former Competitive Enterprise Institute scholar, is an attorney living in Northern Virginia and contributor to the Jefferson Policy Journal.

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