Authored by Gordon Gray via RealClearPolicy,
On Monday, December 2, Delaware Chancery Court Judge Kathleen McCormick delivered her ruling on Tesla’s proposed $56 billion pay package for CEO Elon Musk, striking it down despite shareholders voting twice to approve the deal.
Let’s unpack the absurdity of this ruling: A Tesla shareholder with just nine shares sued over Musk’s proposed compensation, triggering a six-year legal battle. While Tesla argued the case was flawed, the judge sided with the plaintiff, citing transparency issues.
The plaintiff’s lawyers originally demanded up to $7.74 billion in fees—more than Volvo’s market cap—and ultimately walked away with $345 million in legal fees, one of the largest payouts in securities litigation history.
The only winners here were the trial lawyers. Our legal system is dysfunctional, increasingly weighed down by opportunistic lawsuits and substantial payouts. The Trump Administration has an opportunity to reverse this trend. Runaway litigation hurts our small businesses, burdens consumers with increased costs, and drives up the price of almost everything for everyone.
According to a 2024 Institute for Legal Reform (ILR) study, the costs of lawsuits, settlements, and related legal fees — commonly known as tort costs — totaled $529 billion, amounting to “2.1 percent of the U.S. GDP.” And the costs placed on consumers keep climbing: between 2016 to 2022, “tort costs have grown at an annual rate of 7.1 percent.” If these trends continue, the costs to American businesses will double in eight years, the ILR warns. This is unsustainable.
Families, small businesses, and the private sector aren’t alone in facing this burden. The Congressional Research Service estimates that the federal government paid out $525.35 million to individual claimants in fiscal year 2022 alone. That’s more than half a billion dollars in taxpayer money to settle claims — a staggering figure.
As these costs grow, they become embedded in the prices consumers pay. Even if you don’t own a car, exploding auto insurance premiums get embedded in the cost of transportation, much like the cost of medical liability insurance raises the cost of health care for patients. The cost of doing business in the face of the threat of litigation ultimately comes out of consumers’ pockets. The ILR study found that on average, U.S. households paid a $4,207 “tort tax” in 2022. You don’t pay a “tort tax” directly but it’s built into the price of everything you buy everyday.
The issue of runaway litigation is about much more than Elon Musk – it’s about the broader impact on America’s economy. In the wake of the ruling, market leaders and investors have raised concerns about the chilling message this massive fee sends. Hedge Fund Manager Bill Ackman called the “payola for lawyers absurd” and predicted a “migration of corporate America from Delaware.” Investor Cathie Wood said the ruling makes “a mockery of the sense of fairness essential to our American judicial system.” Florida’s Chief Financial Officer Jimmy Patronis noted that the award is “…like throwing sand in America’s economic engine.”
As the Delaware judgment makes clear, more could be done at the federal level to curb the egregious growth in tort costs. President Trump has vowed to lower costs for American families. One of his first acts as President-elect was to establish “DOGE,” the Department of Government Efficiency, co-led by Elon Musk, to claw back the growth of the administrative state. Tackling these tort taxes should be a key focus of this effort.
By easing costs on families and dismantling America’s runaway legal system, the Trump administration can unleash the full potential of our economy.
Gordon Gray leads Pinpoint Policy Institute as Executive Director. Prior to launching Pinpoint, Gordon served as the Vice President for Economic Policy at the American Action Forum, where his portfolio included the federal budget, taxes, the macroeconomic outlook, and general economic policy matters.
