HOUSE BILL NO. 42 An Act relating to civil liability for certain false or improper allegations in a civil pleading or for certain improper acts relating to a civil action; amending Rule 82(b), Alaska Rules of Civil Procedure; and providing for an effective date. ROBERT MINTZ, SELF, ANCHORAGE, stated that HB 42 would prevent frivolous lawsuits by requiring parties to a lawsuit and their attorneys to be truthful and responsible in their pleadings. The bill discourages false statements and claims in litigation and encourages responsibility by all parties and their attorneys. He added that it would require more careful and focused preparation of pleadings. This bill creates an obligation, in statute, for litigants and attorneys to make reasonable efforts to assure those claims have a reasonable basis in fact and are valid under existing law. If the claim is intentionally false, both the attorney and the party can be assessed damages. Currently, there is no effective way of holding parties responsible for frivolous pleadings or claims. Frivolous pleadings and claims increase the costs of litigation for all the parties involved in addition to escalating the cost of the judicial system. Mr. Mintz commented that HB 42 would require attorneys, as well as their clients, to research their claims to assure they are factually supported before filing a lawsuit. The bill will eliminate "boiler plate" pleadings in lawsuits and encourages responsible and focused pleadings. "Boiler plate" pleadings include everything that "anyone could ever imagine could have happened" rather than focusing on specific issues that actually did occur. Those extraneous pleadings are expensive for innocent parties to litigate and most often are thrown out. They cause one party, and the court system, to expend significant dollars to pare down to real issues. Mr. Mintz continued that many suits are often less expensive to settle than to litigate, regardless of their merit. The bill does not affect suits filed in good faith. It would deter those without merit. A system that allows deceit to be rewarded must be changed. Mr. Mintz noted that the bill would assign financial liability to those whom: ? Intentionally advance a civil pleading containing a false allegation of material fact; ? File a lawsuit, first determining that it has a reasonable basis in fact or law; ? Use claims or cross claims to cloud an issue; ? File unsuccessful claims on the hope of finding someone willing to settle rather than spending the money to litigate the suit; and ? Sign a civil pleading before making reasonable inquiry to determine if it is well grounded in fact and warranted by existing law. Mr. Mintz concluded that the basic purpose of HB 42 is to give injured parties effective remedies for bad faith civil litigation. The bill will only apply to the person lying and that if the facts find a party has made an intentional, false statement of material fact. Co-Chair Mulder asked Mr. Mintz to explain the procedure established in HB 42. Mr. Mintz first explained that Civil Rule 11 is the current procedure. These are rules of procedure that are promulgated by the Supreme Court. The focus of HB 42 is different from that. It does not impinge upon the Supreme Court's rule making power. It creates duties that are owed by people who engage in litigation to other people who are engaged in litigation. It will create duties of truthfulness. Civil Rule 11 is discretionary and allows the judge to fashion a remedy in certain circumstances. Co-Chair Mulder asked Mr. Mintz to explain how the process would function. Mr. Mintz replied that the legislation would create two remedies. The first, under Section A, would require the offended party to notify that party that lied. The bill is designed to self correct the system. He hoped that it could be corrected during the course of litigation. If not and person who lied was the successful party in the litigation, then subsequently, the person that prevailed could bring a separate action to recover their full costs. Mr. Mintz explained that in the context of an affirmative lie, it would be one of the two ways in which HB 42 could occur. The other way is during the course of litigation, and there was a jury instruction, and if it was found that someone lied and the lie was material to a particular issue then that person would lose on that issue. There is an exception to that in cases where public policy is involved. There, the judge could use monetary damages against the liar. Representative J. Davies asked if this discussion was aimed at Page 2, Subsection (b), Lines 8-12. Mr. Mintz stated that the reference was to Subsection (c), Lines 15-21, which applied to Subsection (b). Representative J. Davies requested clarification that in the case of someone offering an intentional lie or misstatement of fact, that the underlining claim would get dismissed. He referenced an occurrence in a child support case. Co-Chair Mulder stated that those cases are excluded from these actions. All the excluded type cases are listed on Page 3, Lines 15-20. Representative J. Davies countered that the same principle would apply to other civil cases. A case is decided on whether or not there is an intentional falsehood. He understands that there could be a penalty attached, but to decide the underlining truth of the case on that basis would be an over-reaction. Co-Chair Mulder stated that after 8 years of working this legislation through the House Judiciary Committee, Subsection (C) had been added to address these concerns. Mr. Mintz stated that Subsection (C) addresses situations where more than just liar's interest is at stake. He added that through Subsection (B), the court is only required to dismiss the claim or defense to which the false statement relates and not the entire case. All would not be lost. Representative J. Davies advised that this legislation is an "over reaction". He did not understand why the whole determination would be decided on one issue. He believed that information would presumably come out in trial. Co-Chair Mulder responded from the extent that it is material fact, is the center point from which the case was determined, and that those persons must be held responsible for their actions. Representative J. Davies interjected that Civil Rule 11 does address that point. Co-Chair Mulder commented that it does not do it effectively. He indicated that this is a policy statement. Co-Chair Mulder emphasized that the legislation would elevate the level of conduct expected when going to court. He questioned if that would be justified. Mr. Mintz enumerated his personal experience in a case. He stated that many of the claims made against him were frivolous during a time that he was Chairman of Alaska Housing Finance Corporation (AHFC). The defense case cost the State over $200 thousand dollars. He emphasized that it was a grievous waste of money and there was no way there could be any recourse. HB 42 resulted from that experience. Co-Chair Mulder made a change to the work draft, 1-LS0246\K, Ford, 3/21/00,[Copy on File], Page 2, Line 17, after "another" insert "person or" and make the same change to Line 18. Vice Chair Bunde MOVED to adopt the work draft version K with the above mentioned changes, as the version of the bill before the Committee. There being NO OBJECTION, it was adopted. Vice Chair Bunde asked what would happen if someone lied and prevailed. He inquired how the statutes on perjury would interrelate with this legislation. Mr. Mintz replied that perjury is criminal. The bill only applies to a civil context. He agreed that a criminal case is held to a higher standard than a civil case. Mr. Mintz stated that the bill is a "step in the right direction, but does not fix all the problems out there". Representative Williams asked if the legislation applied to lying under oath. Mr. Mintz explained that the bill addresses more than lying under oath. It applies to statements which you know are false. It also applies to motions and affidavits that are filed in court. Representative J. Davies asked if the legislation would apply to cases where a statement had been omitted intentionally. Mr. Mintz replied that it would apply equally to denials, which are known to be false, and is meant to apply to both sides. Representative J. Davies pointed out that the party would have to lose the case. Co-Chair Mulder interjected that "this is a two edge sword". It should focus the discussion more on the points of difference. Representative J. Davies inquired where that reference was indicated in the legislation. Mr. Mintz commented that if what you claim is true and it is denied, it would be covered in this legislation. Representative Phillips added that making a false statement could encompass an omission of fact because not including all the facts is in of itself, a false statement. KAREN COWERT, (TESTIFIED VIA TELECONFERENCE), GENERAL MANAGER, ALASKA SUPPORT INDUSTRY ALLIANCE (THE ALLIANCE), ANCHORAGE, stated that the Alliance has served as the statewide non-profit trade organization for businesses which provide products and services to the oil and gas industry. Ms. Cowert noted that House Bill 42 would require litigating parties to research their claims to assure accuracy, or pay the consequence of suing without just cause. The Alliance supports such measures. She commented that Alaska has suffered significant economic losses as a few individuals successfully circumvent public processes through litigation. It seems that nearly every proposal or plan to develop the State's natural resources or to enhance its infrastructure is met with a lawsuit, regardless of whether there are reasonable grounds to sue. She noted that the Alliance believes that many such legal actions only serve to delay developments that are important to Alaskans' quality of life and economic well being. Ms. Cowart pointed out that HB 42 would create an obligation, in statute, for litigants and attorneys to make reasonable efforts to ensure their claims have a factual bearing before filing a lawsuit. The bill would also make those that filed a frivolous suit responsible for assessed damages. Furthermore, the bill will assign financial liability to those who cloud the issue with false or misleading claims, in hopes of finding a party willing to settle rather than spend dollars to litigate. She noted that the Alliance believes that each party in a lawsuit has a responsibility to present factual and legitimate information. A system that allows deceit to be awarded is not right. PAMELA LABOLLE, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE, JUNEAU, testified in support of the proposed legislation. She stated that the legislation proposes a basic premise needed to address that intentional lying should not prevail. She concurred that there needs to be a way to punish people who base a case on an intentional lie. Representative Grussendorf observed that in many situations, the truth is a "fine line". Co-Chair Mulder pointed out that there is a standard established in the legislation emphasizing "reasonable" and that it would address that concern. MICHAEL LESSMIER, ATTORNEY, STATE FARM INSURANCE, JUNEAU, stated that State Farm Insurance supports the proposed legislation as it sets forth a minimal standard that people need to go through before they undertake a lawsuit. It clarifies that one makes sure that the case has a reasonable basis in fact and in law. If it does not, the bill states that you can not continue. He clarified that those are protections which have not been present. Additionally, the bill establishes a "truth provision", which applies only to a party that intentionally makes a false statement of material fact. Nothing in the bill is intended to address the situation where witnesses have a ligitiment difference of opinion. It is designed to address conduct by a party which does not meet a reasonable standard of investigation. He stated that the proposed legislation is "preventative and curative" in the sense that it will cure a wrong that has been done. In response to Co-Chair Mulder, Mr. Lessmier explained that contained in Section (A), Subsection 2, clarifies that as long as there is a reasonable inquiry, and you form a reasonable belief in the existence of facts from which the claim or defense is made you are protected. You could be sued only if you don't meet this minimal standard and you fail to respond to the notice and correct your action in 21 days, and then you lost the case. On the issue in question, the notice provision is designed to be self-corrective. As long as there is a reasonable basis in law and fact, the legislation will not hurt you. The legislation is not designed to second- guess anything. Representative J. Davies stated that if it were an obvious case where someone was lying and it was obvious that it was done intentionally, then everyone would agree that person should be punished. He added, however, that he had problems with the logic. "Life is often messy" and there will always be "gray" areas where it is difficult to tell the intent of a person and where the law applies. It is not always easy to read the statutes to determine if the law applies. That is why cases go to court so to determine if the law applies. He believed that the legislation could prevent cases from forming because of "fear" or "worry" that their view in relation to how the law applies might be determined to be incorrect and they then they would be stuck. Representative J. Davies voiced additional concern with the penalty, which would dismiss the claim because someone might have intentionally lied about it. Mr. Lessmier asked the Committee to consider who are we really trying to protect. Is it the person who makes a false statement of fact for purposes of material gain. He believed that should be discouraged and that the victim should be protected. He emphasized that was the fundamental issue of the provision, as it applies only to a party who intentionally makes false statements of fact. The people that need to be protected are the ones that are innocent victims of that conduct. Representative J. Davies stated that if nine out of ten facts were true, and that the person was guilty under nine assertions but under the tenth one they were not guilty, what would happen. He stressed that it would not be about protecting some innocent victim, but rather, they were guilty but allowed to "skate" because someone lied under one assertion. Mr. Lessmier stated that in a real life situation, the jury would probably not find that the one fact would be sufficiently "material" in terms of the context of the claim. That one fact would probably be viewed as insignificant. The legislation requires that it be intentional, false and material. He emphasized that is important. The message that the legislation is sending is that people found to fit this conduct are going to be few because the standard is high. Mr. Lessmier expressed that nothing in the bill is designed for a situation where someone takes a position based on research and thought which is wrong. All that it states is that you have a "reasonable basis in law". It does not say you have to win. Representative J. Davies asked that cite. Mr. Lessmier referenced two provisions, 2(a)(b), which indicates "reasonable inquiry and forming a reasonable belief". The next provision that is important stipulates that nothing is designed from preventing someone from arguing in good faith that the law should be changed or extended. This would not apply to someone using the minimal standard with some research and thought. Co-Chair Mulder asked who the bill designed to protect. If a person tells the truth, the bill would protect them. He stressed that it would be difficult to argue on behalf of someone that is not telling the truth. Representative J. Davies reiterated that if the world was black and white, he would agree with Co-Chair Mulder. However, it is not so. The proposed legislation could have a "chilling effect" on those people who do not have a lot of resources and are up against corporations that do and are sophisticated. Co-Chair Mulder asserted that the world is black and white in relationship to truth and fact. The truth is not gray. If you were the one being taken to court, you would have to prove why the other person believed that what you said was untrue. He emphasized that this is a balancing act. (TAPE CHANGE, HFC 00 - 75, Side 2) Representative Grussendorf asked how the Department of Law would operate under the proposed legislation. SUSAN COX, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, stated that the Department recognizes that "things are not always black and white". While the bill is not directed at addressing the legitimate differences of opinions between opponents in civil litigation, it does raise the possibility that if parties do not agree, in either case, the loser looses, and that if the winner does not recover their full compensation, they will then take the next step of pursuing the second loss against that party for whatever they did not get the first time around. She pointed out the focus on the aspect of "intentional lying" addressed in (A)-2 of the bill. However, (A)-3 provides that a cause of action will arise if a person participates in a continuation of claim after a person discovers that the claim or defensive is not supported by a reasonable basis or valid under applicable law. Ms. Cox could foresee situations, in which, after the "dust settles", the argument is made that the looser has lost. The law did not apply or the facts did not appear as they were portrayed to be. They would loose. She foresaw the provision of (A)-3 to be more of an "open door" than the intentional lying. Ms. Cox added that is why the Department has submitted a fiscal note. Representative Grussendorf voiced concern that the issue does not get in the way of the defense of the original case. He looked at the amount of time that the case could consume and how discouraging that could become. He recommended more funding for Alaska Legal Services. Ms. Cox noted that because of the procedure in the bill, in order to invoke the cases of action, someone would have to give notice to the opposing party that they should take corrective action. She noted that corrective action could cause liability prospects. Co-Chair Mulder suggested that as a lawyer, it would be prudent to provide reasonable inquiry to establish whether your client is telling the truth. Ms. Cox replied that is true but pointed out to the reference to (A)-3, which states that if the attorney continues to litigate the case, maintaining a claim or defense that is not supported by a reasonable basis applicable by current law, does not mean that the attorney would not get sued. She stressed that there would be another layer of intrigue. If it is a complicated case, it could result in a situation where competing experts and the reasonableness of facts would be an issue. She emphasized that this legislation is going to cost money. Representative Grussendorf stated that the bill would protect the attorney who is supposedly telling the truth. However, the witness would be out of the protection area. Mr. Lessmier explained that Subsection (B)&(C) do not apply to the witness. He objected to the comment that the legislation would create more litigation. He suggested contrasting what is currently in the system. What exists now is "nothing". If someone is faced with an allegation that is frivolous or untrue, there is no protection. The cost can be high. The proposed legislation provides something "in between". It requires a notice to correct the action. If the action is corrected, there will be no opportunity for a second suite. If the party does not win, they do not receive a second chance. Actual attorney fees and cost would have to be paid by the loosing party to any action created by the bill. Mr. Lessmier stated there are incentives for this to be "self curing and protective" to the person that is subject to these claims. Representative J. Davies asked if the statement that "there is nothing to defend against" is a true statement. Ms. Cox responded that could be "called into place". Civil Rule 11 could be used as a possibility for a sanctioning attorney who is involved in failing to make an inquiry. It is not frequently invoked. Ms. Cox noted that Rule 82 provides for partial attorney fee recovery to prevailing parties and actually includes a formula for how much the winner gets. There are eight factors, which allow the Courts to deviate from that formula. Some of the subsections in Rule 86 allow for increasing the fee award for certain stipulations including bad faith conduct. Civil Rule 56 provides for the standard for granting summary judgement in the State and has a penalty in 56(G) which states that if it appears to the satisfaction of the Court, many of the affidavits presented in support of judgement motion are presented in bad faith, for the purpose of delay, the court can then order the party, reasonable expenses and include reasonable fees. There are civil causes of action in common law for abusive process and malicious prosecution, which are more difficult to prove than what currently exists in legislation. Co-Chair Mulder asked what was wrong with the current system. Mr. Lessmier responded that the difficulties with Civil Rule 11 are remedies that are rarely invoked by a judge. Remedy under Rule 82 requires a person to litigate until the end. And then with that, one could only receive a portion of the costs and attorney fees. There is no mechanism for self-correction in the current law. Representative J. Davies asked about the category of perjury. Additionally, if the case is clearly frivolous, and not based in law, he asked if the judge had the right to dismiss the case. Mr. Lessmier commented that even if a perjury case were aggressively prosecuted, it still would not protect the people that are victims of this conduct. It would not apply until after the fact. He did not believe that the Department of Law often uses their resources to prosecute these types of cases. Additionally, there is a standard for judges in ruling on motions for summary and judgement. The work of the court in those situations is to look at the facts in the light most favorably to the other side. The court will not weigh whether one person is telling the truth or not. The court assumes if person signs an affidavit, the case will not be dismissed. He emphasized that it is rare for a court to make a finding that a case if frivolous. Ms. Cox disagreed, noting that if there is a dispute of fact, a summary of judgement will not be granted. If someone is putting forth-false information, the court will not weigh the credibility of the respective witnesses. However, if the case is not founded in the law, it is common to be able to get dismissal, which does occur frequently. Mr. Lessmier agreed that if it is not founded or based in the law, that the courts will dismiss those cases. Representative G. Davis referenced the number of perjury cases that have been tried. He asked if there should have been more. Mr. Lessmier replied that in the 1st Judicial District, he did not know of a perjury case being tried. Representative G. Davis asked if the judge could make that determination and then would it be appealable. Ms. Cox responded that there are two considerations in that. Rule 82, which is the civil rule that allows the winner to recover part of their attorney's fees from the looser is the area which states that "bad faith conduct" on the part of a looser "enhances the award the winner gets". That would be the court's call and it is appealable including the award of fees. Mr. Lessmier clarified that it is appeallable only under an abuse of discretion standard, which is difficult to meet. Representative J. Davies requested that Senator Taylor testify on the proposed legislation. SENATOR ROBIN TAYLOR commented that there is "no good side" to the legislation. He noted that in his own experience as a judge and attorney, he has seen as much bad faith claims by people representing insurance carriers. Many more than those people litigating on behalf of victims. "The insurance companies are not victims". They end up paying victims. There is no incentive for a private practitioner that is handling a case on a contingency fee because "all that it will do, is to further delay his case". The faster the case can be gotten to trail is the quicker he will get his own money back because he is the one paying for the cost of the case. Senator Taylor reiterated that there would be no incentive to delay the case. Bringing additional claims to the ability for settlement or leverage could enhance the case. Senator Taylor added that on the defense side, there is no impediment for defense council to throw everything they can at case and make motions on each aspect of it. He emphasized it will happen. On the two sides of litigation, there first is the attorney that will be paid for all their time. Even after they loose the motion, they are still going to get paid. They have no accountability what so ever. On the other side of that issue, there are people who are paying their own money to litigate cases on behalf of injured parties. He questioned how to balance the two. He asked how to put more backbone into the judiciary system. Senator Taylor stated that there are all types of remedies, which a judge has at their disposal to curtain the types of activities that the bill is trying to touch. He added that the bill is well motivated, however, with the "huge, economic disparity" between the benefits flowing from one side to another, the disparity must be first balanced. He agreed that one side would be placed at a disadvantage. Senator Taylor advised that all the testimony in favor of this bill would come from the insurance industry. Co-Chair Mulder disagreed, noting the letters of support contained in member's packets. Senator Taylor countered that he was referring to professionals. Co-Chair Mulder interjected that these are "real people" and he stressed that there is no way that they can be made "whole". Senator Taylor suggested that is why Rule 82 needs to be changed. If that rule was changed, those people could be made whole. When it comes to professionals within the law, the people that will be seen are coming from the insurance industry. He emphasized that private practitioners will not testify in support of this legislation. He stressed that this bill is a lawyer's dream. If you have a client big enough that can afford to litigate on every issue, they not only get to litigate on that case, but with notice they can litigate on many other cases which that attorney prevailed on. He provided a hypothetical situation of going over the speed limit. What is the truth of `over the speed limit". Each person could bring in witnesses regarding that fact and your speed. The jury of twelve people has to determine that information. He reiterated that fact is determined by the jury and determined by the preponderance of the evidence. The evidence could trigger a whole series of additional litigation. Senator Taylor agreed that a way to correct the complication should be attempted. However, he believed that we should do more to strengthen the methods of remedies within law to address the vexatious case. The manner that has been established in the proposed legislation creates an economic distortion that occurs in real life that can not be accounted for in the bill. Co-Chair Mulder disagreed, stating that there is no means for the common person to adequately defend himself when it is cheaper to settle out of court. The insurance company will tell them that. "There is no way to be made whole" with the cost of attorney fees and everything else. Senator Taylor interjected that until Rule 82 is changed; nothing will be made whole. He concluded that the system could use some adjusting and he supported the effort but warned about the consequences. Mr. Mintz responded that the multiplicity of litigation issue has come up a few times. In truth, it will not be known without evidence and without trying something new to see how it works. He believed that HB 42 would work as it changes the paradigm that we are used to living with in connection with litigation. He did not think that after HB 42 passes that someone would be as easy or as quick to file lawsuit to assert a marginal claim. The goal of the legislation is to raise the bar and make it so that the marginal claims fall out of the system and only the substantial claims move forward. Mr. Mintz stated that when HB 42 action is filed, you would have to be clear that there is no basis for the suit that you successfully prevailed in. When filed, you are exposing yourself to the actual costs and attorneys fees. It would not be an action that would be taken lightly or done on a marginal case. He added that the cases where it has cost a lot of money to defend the claim, those are the cases where HB 42 action should be allowed. Co-Chair Mulder asked why not "beef up Rule 82". Mr. Mintz stated that the real reason is that it would take a two- thirds vote of the legislature to change a court rule and it only takes a simple majority to create a new cause of action. Representative Grussendorf commented that by the title of the bill, that would still be required. Mr. Mintz replied that would occur only for the section that provides for actual costs and attorneys fees. All the substantive provisions go into effect for the cause of action. What would be lost without the two-thirds majority would be the actual cost and attorney fees. Vice Chair Bunde MOVED to report CS HB 42 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. CS HB 42 (FIN) was reported out of Committee with a "no recommendation" and with new fiscal notes by the Department of Law and the Alaska Court System. (TAPE CHANGE, HFC 00 - 76, Side 1)