Loser-pays Can Win in America?
June 24, 2011
Today I read that under Governor Rick Perry, Texas has adopted a loser-pays system!
In America, if someone sues you, you pay for a lawyer. Even if you ultimately win the lawsuit and aren’t held liable for any damages at all, you’ve still lost thousands of dollars in attorneys’ fees (not to mention the time taken out of your life, which you can never get back). A lot of the theory behind tort law revolves around making people “whole” for the wrongs they’ve suffered. Who will make you whole?
Globally speaking, this is an unusual system. In England and many other countries, if someone sues you and loses, he has to pay your attorneys’ fees. In fact, one writer says that “America differs from all other Western democracies (indeed, from virtually all nations of any sort) in its refusal to recognize the principle that the losing side in litigation should contribute toward ‘making whole’ its prevailing opponent.”
Our system may be bad not only in terms of abstract theory about justice but also in economic terms. In what sounds like an excellent study by the Manhattan Institute (I read only the executive summary), the author says (with appropriate footnotes),
The United States struggles with a uniquely costly civil justice system. The direct costs of tort litigation, in particular, reached $247 billion in 2006, or $825 per person in the United States. Moreover, tort costs in the U.S. as a percentage of gross domestic product are far higher than those in the rest of the developed world—double the cost in Germany and more than three times the cost in France or the United Kingdom.
The author also notes,
Almost every economist who has studied loser pays predicts that it would, if adopted, reduce the number of low-merit lawsuits.
and
In Alaska, which has always had a loser-pays rule, tort suits constitute only 5 percent of all civil legal matters—half the national average.
Yet I thought that the United States was unlikely ever to change its system—it’s costlier for all the rest of us, perhaps, but better for the lawyers, who have a strong vested interest in maintaining the status quo. (Fewer lawsuits would mean less work for lawyers.)
So I’m pleased and surprised to learn that I was wrong; Texas adopted a loser-pays system earlier this year. I can’t tell you how encouraging I think this is. According to that item in the Corner, at least five other current governors “ran and won while proposing similar legal-reform ideas”, which is also encouraging.
Other than Alaska, Governor Rick Perry’s Texas is basically the first state ever to do this. Get this man a nomination!
Update (July 22nd, 2011): For a little more information on the Texas law in particular, see also “More on Texas’s New Loser-pays Law”.
Enjoyment and Contemplation 
June 24, 2011 at 5:37 PM
I agree that the loser-pays system makes sense when applied to lawsuits without merit. The system is problematic, however, when applied to meritorious lawsuits; lawsuits that are either close calls or where the plaintiff should win but a renegage jury finds in favor of the defendant, the latter of which happens all the time. In those cases, the plaintiff would not only remain uncompensated for his injuries, he would then have to pay the defendant’s attorney’s fees as well. That is precisely the opposite of a true make-whole system. So while I agree that loser-pays sounds nice in the abstract, I am not sure how well it would work in practice.
June 24, 2011 at 6:29 PM
Snoodickle, I think you raise a valid point. However, I recall hearing or reading that the vast majority of non-dismissed claims are settled (I can’t recall the actual numbers). I’m not going to attempt a thorough microeconomic analysis of the effects of a loser-pays system on the economics of settlement, except to say that it would increase plaintiffs’ incentive to settle at any given amount. Defendants, knowing that their legal costs would be compensated in the event of a judgment in their favor, would have less incentive to settle. (I can’t say whether this change would result in more or less out-of-court settlement, but I’m pretty sure it would reduce average settlement amounts.) “Loser-pays” would not apply to settled cases. I think the prevalence of settlement works to mitigate the concern you raised.
June 24, 2011 at 10:53 PM
But if a vast majority of cases are settled, then the economic impact of switching our attorney’s fees system would be minimal. Thus, we should use the more fair system. One could argue that loser pays is more fair, but as I pointed out, it could have a devastating effect on plaintiffs who actually have valid claims.
June 24, 2011 at 11:20 PM
“But if a vast majority of cases are settled, then the economic impact of switching our attorney’s fees system would be minimal.”
No, I think the impact would be huge. A big part of what happens under the current system is that a defendent is sued, and even if he’s 100% sure he wouldn’t be held liable for anything he’s done, it’s rational for him to weigh the cost of hiring an attorney and fighting the case all the way to trial and through verdict (and appeal?) against the cost of settling. If settling is less, he may well settle.
Of course if he’s not 100% sure he wouldn’t be held liable, the same effect applies, just to a different degree. (If he thinks the odds are 90% that he wouldn’t be held liable, he has an even greater incentive to agree to an exhorbitant settlement, but we’re more OK with that because he’s more nearly at fault, and so on. It’s a matter of degree.)
As Tevyeh says, I think this reform would reduce some of those settlement amounts, for this reason. Other cases wouldn’t be brought in the first place, because the plaintiff assesses his odds and decides it’s not worth it.
June 24, 2011 at 11:51 PM
I think we’re all missing a key point, though, and I didn’t think of this until now, but a loser pays system would not change anything for plaintiff’s lawyers, who are the people actually assessing the cases. If plaintiff’s lawyers work for a contingency fee, then they only get paid if they win under either system. But even hourly lawyers would still get paid under a loser pays system if their client loses the case! It would be the client that would have to pay the defendant’s fees! So, Chillingworth, when you say less cases would be brought, are you referring to pro se cases? Plaintiff’s lawyers would still bring cases knowing they are going to get paid no matter the result if they are hourly, and nothing would be different if they worked for a contingency fee. The clients, not the lawyers, would be on the hook for the defendant’s fees. This has to change the analysis.
June 24, 2011 at 11:54 PM
A quick question, under a loser pays system, would a defendant have to pay a plaintiff lawyer’s contingency fee? Imagine a defendant having to pay a 100 million dollar judgment and a 40 million dollar fee? What economic impact would this have? Now that I think about it more carefully, the loser pays system is sounding worse and worse.
June 25, 2011 at 10:12 PM
I disagree with you on both points.
For plaintiffs’ attorneys who take a case for a contingency fee, I’m sure (without researching it) that no law anyone has implemented anywhere requires a defendant to pay the plaintiff’s contingency fee like that. I’m also not at all sure that the law in Texas, or any other particular law, ever makes defendants pay plaintiffs’ attorneys’ fees—it may work only in one direction, despite the generic name “loser pays”. (I did wonder whether, say, the Texas law went both ways or only in one direction, before I posted the original entry above, but in what research I did, I was unable to find the answer.) Maybe abstractly it shouldn’t be only one way, but maybe there should also be a cap on recovered fees, as the Manhattan Institute paper discussed, and as Tevyeh discusses below.
As for the suggestion that only pro se cases would be deterred by a loser-pays rule, I think that’s simply wrong. In a discussion of loser-pays on the blog The Volokh Conspiracy, the commenters talk about whether it should be “loser pays” or “loser’s attorney pays”, but I’m not even sure how much difference that makes. If the potential plaintiff is putting himself “on the hook” for attorneys’ fees by bringing suit, he’ll be less likely to bring suit, regardless of whether the attorney would like to pursue the case. Of course it’s not only the attorney’s decision whether to sue. First of all, the attorney has a duty (arguably his first duty) to look out for the best interests of his client, including weighing this potential liability for attorneys’ fees. Second, even if attorneys acted totally self-interestedly and advised clients to take cases for the attorneys’ sake (while telling the client that the case was objectively more likely to prevail than it was), I think you’d be surprised at how fast potential clients would get wise to it and get a lot more cautious about going to an attorney with a potential cause of action.
Loser-pays still sounds like a great idea to me.
June 25, 2011 at 11:38 PM
Of course you disagree with me on both points. Have you ever agreed with me on any point?
June 26, 2011 at 8:54 AM
P.S. If it is only plaintiff pays, then I don’t see how anyone could support that. If the plaintiff is going to risk paying fees, they have to be rewarded by getting fees if they wins.
June 24, 2011 at 6:00 PM
Right, the problem is that there can never be a perfect system that totally makes everyone “whole” (not until heaven). So the question is, for those close-call suits, should the plaintiff have to pay sometimes (either by not suing or by paying the defendant’s attorneys’ fees)? or should the defendant always have to pay for an attorney when he’s sued, as well as having to pay damages when he loses?
Our professors in law school talked a good talk about making everyone whole, but the theory almost never took into account the cost of bringing attorneys into the equation in the first place. Doing so necessarily makes it impossible to balance the equation: Someone has to lose money, because the money for the lawyers has to come from somewhere.
The usual talk about making people whole focuses on the injured plaintiff. What about the defendant? Whom can he sue to get back his money and the months or years of his life taken up by defending himself in court?
Again, I’m not trying to pile everything on plaintiffs or say that plaintiffs never have a good case, by any means; I’m saying that there’s no way to get to a perfect system. Maybe spreading the cost out a little more between plaintiffs and defendants will keep them both out of court more of the time, which, again, is good for everyone except the lawyers.
June 24, 2011 at 6:11 PM
But if it’s a close call suit, the most equitable way to do it is to make both sides pay their own attorney’s fees. The injured plaintiffs are already paying huge if they lose, compared to the relatively small amount the defendants are paying if they win. If you heaped attorney’s fees on the losing plaintiffs, their lives would probably be ruined. So, in the close call cases, the American rule works best.
June 24, 2011 at 11:27 PM
“The injured plaintiffs are already paying huge if they lose, compared to the relatively small amount the defendants are paying if they win.”
But if the plaintiff loses, the court is saying that the defendant didn’t do anything wrong! The plaintiff could have chosen not to sue, but there’s nothing the defendant could have done differently to avoid exposing himself to the risk of this (potentially huge) loss of money and, again, of part of his life—except, as Tevyeh says below, expensive and wasteful defensive measures.
June 25, 2011 at 10:56 AM
I would say in most cases it would be the jury, not the court, who is deciding these cases. I’m referring mostly to cases where a plaintiff should win but doesn’t. In those cases, of course the defendants could have done things differently – don’t act negligently or do whatever you exposed to liability.
June 24, 2011 at 6:48 PM
The more I think about it, the more I like the idea of “loser-pays” (with a few caveats).
In the U.S., an enormous amount of resources are allocated to the avoidance, not just of liability, but of litigation itself. Avoiding liability means being the “reasonable person,” avoiding litigation involves wasteful defensive measures against the litigious “UNreasonable person.” Economically, it makes sense for an individual to allocate resources to avoiding litigation because “even when you win, you lose.” Retaining a lawyer, even just to draft a motion for dismissal, bears significant costs. I think a loser-pays system would eliminate an enormous amount of wasteful butt-covering by realligning incentives.
That being said, I think there needs to be a system to cap the amount of legal fees for which an unsuccessful plaintiff can be liable. Defendants should not be able to intimidate plaintiffs with the threat of liability for the full legal fees of the highest-priced attorney in town.
June 24, 2011 at 11:11 PM
Sure, I’m sure writing a good law is more complicated than just saying “the loser pays the costs”. I’m glad I don’t have to draft the actual legislation for Texas.
By the way, that writer at the Manhattan Institute agrees with you; among her conclusions, “our proposal calls for: . . . A cap on recoverable fees . . . .”
June 24, 2011 at 10:50 PM
Funny story. I’m watching Bill Maher right now, and one of his guests said “there are lot of people sitting on their couch in their underwear right now spouting out their opinions on the internet.” I am literally sitting on my couch in my underwear spouting out my opinions on this blog right now. This is hilarious.
June 24, 2011 at 11:28 PM
That is pretty funny.
June 24, 2011 at 10:57 PM
P.S. New York’s state legislature just approved gay marriage! New York is now the 6th state to allow gay marriage, and the second (Vermont) to do it by legislation. Chillingworth, the tide is turning.
June 24, 2011 at 11:29 PM
But you think everything is a sign that “the tide is turning”!
June 27, 2011 at 8:24 AM
http://www.nytimes.com/2011/06/27/nyregion/for-gay-marriage-movement-momentum-but-challenges.html?_r=1&hp
Among increasing numbers of conservatives and Republicans, he said, there is the conviction “that freedom to marry is consistent with conservative values.”
Chillingworth, it seems that gay marriage is consistent with your values. What a chilling revelation!
July 9, 2011 at 12:13 PM
[…] 9, 2011 A couple of weeks ago, I was surprised and pleased to learn that Texas had adopted a “loser pays” reform of their legal system—surprised because such a reform is basically good for everyone else but […]