A new report by the U.S. Department of Commerce, “The U.S. Litigation Environment And Foreign Direct Investment,” calls for supporting U.S. economic competitiveness by reducing legal costs and uncertainty in the tort system.

The report notes that foreign direct investment plays a major role as a key driver of the U.S. economy and as an important source of innovation, exports, and jobs. Because the U.S. share of global FDI inflows has declined since the late 1980s and the competition to attract FDI has grown more intense, the United States must strive to maintain its ability to attract FDI. Fear of litigation and potential liability under the U.S. legal system are among the more important concerns to those interested in investing in the United States.

There is an international perception that the pervasive nature of litigation in the United States and other related aspects of the legal system increase the costs of doing business and add uncertainty. The United States is increasingly seen from abroad as a nation where lawsuits are too commonplace.

Such perceptions are accurate, Between 1950 and 2006, total U.S. tort costs increased from $13 billion to $247 billion per year (in 2006 dollars), rising from 0.62 percent to 1.87 percent of U.S. GDP. And U.S. tort costs as a percentage of GDP are triple that of France and the United Kingdom and at least double that of Germany, Japan, and Switzerland. Such numbers make this issue an important U.S. competitiveness concern.

Fear of litigation is among the top issues listed by senior executives who manage internationally owned U.S. businesses. Significantly, U.S.–owned companies that operate in other advanced economies do not express a similar concern. Also, there is the perception that, at least in some contexts, other countries’ legal systems are more predictable and that the legal costs of doing business are substantially less.

Certain aspects of the U.S. legal system stand out to foreign investors, including punitive damages, class action litigation, high legal costs, joint and several liability, and contingency fee structures. One major source of consternation, perhaps because it is so unique to the U.S., is the problem with forum shopping. Most tort cases are brought in state courts, and there are specific courts within even well-regarded state legal systems that are seen as being overly favorable to plaintiffs. Such courts have sometimes been described as judicial hellholes or magic or jackpot jurisdictions.

The report calls for more economic research, and, appropriately, tort reform in these important areas.