The Fallacy of Loser Pays in Tort Litigation

OverlawyeredLast week at Overlawyered I had a little back and forth with its publisher, Walter Olson, on the concept of a loser-pays system. For those not familiar with the idea, this specifies that the loser of a lawsuit pays the legal fees of the winner. This is in contrast to the “American Rule” that says, generally, each side bears its own costs.

There are exceptions, of course, such as legal fees being part of a sanction for frivolous litigation, but we deal here today with the general rule.

There are two issues regarding the rule: The first is that it effectively closes the courthouse door to much of middle America. On one side in a typical tort case is likely to be a multi-billion dollar insurance company defending an auto collision or medical malpractice case, and on the other a person who may be struggling to work, or incapacitated and trying to figure out how to pay the mortgage or rent.

One side has incentive to run the meter and stall, and can readily afford to do so. If the litigant loses a simple issue of “who had the green light” then financial devastation may follow, but there is no such threat on the other side. The parties are not equal and the scales of justice unbalanced.

But the second issue is more interesting to me here because it deals with even broader public policy issues, and that came up with Olson’s comment responding to me:

A “legal system that only the wealthy can use” is not an accurate description of the pluses and minuses of the legal systems in the great majority of advanced democracies where loser-pays is the norm, such as Canada, the U.K., Scandinavia, the Netherlands, and so forth. It does, unfortunately, accurately describe some sectors of the American legal system (such as small high-merit claims and many injunctive matters) where neither fee shifts nor contingency fees are available. Oppose loser-pays if you like, but enough of the sloganeering.

The U.S. system here is compared to other nations with reputations for significant social service programs (and high taxes to pay for them). Universal health care is the most obvious example. The U.S., by contrast, has far less government involvement with our lives and some of the lowest taxes of any industrialized nation on earth.

If we close the court house door on people by making it more difficult to proceed, then what happens to those already injured? Well, they absorb the costs themselves until they are poor enough for the minimal social service programs that we have and then the taxpayer picks up the tab. And they remain poor, having now been victimized first by the negligence of others and then again by being forced to bear the financial burden.

The American Rule, as it now stands, is consistent with the parties working things out privately in court with minimal government intervention. Sure, verdicts can get tossed out if they are true outliers, but for the most part verdicts are respected.

The interesting part about this political discussion, I think, is that last week Overlawyered became affiliated with the Cato Institute, a libertarian think tank. While I certainly wouldn’t want to speak for them, it seems to me that a loser-pays system (and other tort “reform” measures that give protections and immunities to those who are negligent) garners greater government involvement in the lives of the populace, contrary to its own political philosophy.

If we want to shift the costs of injuries caused by negligence away from the tortfeasors and onto the backs of the taxpayers, then we need those Scandanavian government economies to accommodate that shift and provide the support.

The U.S., I think it’s clear, isn’t going that way.  We are faced with a choice as to whether we let parties duke things out privately or let the government come in with support. A nation can have one or the other. But what we can’t have, is both the stripping away of private rights at the same time that we have limited government support. That is not the model used by any industrialized nation that I know of.

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15 Responses Leave a comment

  • Brett 2013.4.29 at 11:19 | Quote

    Great post! We have fought this battle in the Missouri legislature for years (and this issue just keeps coming back again and again and again).

    Our founding fathers fought the revolutionary war not only for tea and taxes, but to uphold the rule of law and to ensure access to the courts and civil justice. In the Declaration of Independence, the grievance listed right after “For imposing Taxes on us without our Consent” is “For depriving us in many cases, of the benefits of Trial by Jury”.

    The American Rule ensures equal access to the courts and an even(ish) playing field among litigants.

    The British Rule (loser pays) provides substantial disincentives to seek justice for wrongdoing and, for individuals and small businesses, can provide a disincentive to defend a claim.

    The risk to an injured plaintiff, as noted in your post, is obvious. But those advocating the British Rule often fail to acknowledge the risk to a small business or individual – whether as a plaintiff or a defendant.

    The British Rule also forces defendants to consider the attorney’s fees of an injured plaintiff when considering whether to settle and, if so, for how much. A small business facing potential liability might feel compelled to settle a case it would otherwise defend through trial.

    Whether you are a plaintiff or a defendant, the British Rule is a bad idea because it inhibits or outright denies access to justice.

  • Eric Turkewitz 2013.4.29 at 12:06 | Quote

    The one thing that has always perplexed me the most about tort “reform” issues is to see conservatives argue for greater government intervention.

  • Dan 2013.4.29 at 21:27 | Quote

    I don’t follow your logic when you set up a choice between duking it out in private or having the government intervene. Loser pays simply says if you drag another party into court and lose, you pay the costs you imposed on that other party. The costs of litigation are a major source of leverage to obtain settlements, and it is not unreasonable to suggest that cases should be decided on their merits, and not what it costs to make them go away.

  • Richard Hershberger 2013.4.29 at 22:31 | Quote

    Cato adopting tort reform is an excellent illustration of why I hold most self-described libertarians in utter contempt. As usual, “libertarian” is effectively equated with “corporatist”. In fairness, though, “libertarian” is sometimes equated with other aspects of Republican policies. This is why is it also unsurprising to find “libertarians” opposing marriage equality, or supporting outright racism.

  • Eric Turkewitz 2013.4.29 at 22:34 | Quote

    don’t follow your logic when you set up a choice between duking it out in private or having the government intervene.

    OK, let’s try again: There is a fundamental inequality between the person that brings the suit and the insurance company on the other end. The tolerance for risk is different.

    That leverage discourages suits, as the insurance companies have significantly more ability to take gambles than the people that were injured. That inequality acts to prevent the injured person from being made whole.

    In places that have a loser pays system, and therefore fewer suits, they also have far greater social services compared to the U.S. The inequality in the courtroom, therefore, is balanced elsewhere, with the taxpayers paying the bill.

    If we want minimal government, relative to other industrialized nations, then we want tortfeasors to pick up the tab for their own negligence. Creating a loser pays system does the opposite.

  • S. Rabaa 2013.4.30 at 06:23 | Quote

    Great post, Eric.

  • Mike 2013.4.30 at 09:53 | Quote

    Neither system eliminates all inequities. But what about a hybrid system? Loser pays for claims under a certain amount, say $50,000, and both parties pay above that. The key here is finding a point where attorneys are more likely to pick up a contingency case.

  • Eric Turkewitz 2013.4.30 at 10:00 | Quote

    But what about a hybrid system? Loser pays for claims under a certain amount, say $50,000, and both parties pay above that.

    The same problem results, in that tortfeasors will receive effective immunity in close cases, and giving tortfeasors immunity is not an effective system of justice.

  • dan 2013.4.30 at 10:39 | Quote

    @Eric Turkewitz – All of your arguments start with the idea that there is a “tortfeasor” in court. But isn’t the purpose of litigation to determine whether a tort occurred? And if most small cases settle for less than the cost of defending them, I’d think the leverage goes the other way. Plaintiffs can impose costs knowing they can settle for an amount that is meaningful for them, but less than the costs they can impose on the other side. (Again, I respect this site and appreciate your spirited defense of the plaintiffs bar.)

  • Eric Turkewitz 2013.4.30 at 10:56 | Quote

    All of your arguments start with the idea that there is a “tortfeasor” in court.

    Absolutely. If there is no tort, there is no reason to consider taking the case. Since the only ones affected are those where you believe a tort was committed, those are the only ones to use in analysis.

    if most small cases settle for less than the cost of defending them, I’d think the leverage goes the other way.

    I never said most cases settle for the cost of defending them, and I wouldn’t be a very good judge in that department as I don’t think they are cost-effective to bring and therefore avoid them.

    And make no mistake about it, the leverage doesn’t belong to a person working minimum wage, or even those in the middle class. Large insurance companies hold a vast amount of power and often delay things in the hopes that desperate litigants will take pennies on the dollar to save a home or feed the family.

  • betty 2013.4.30 at 11:56 | Quote

    The American Rule seems more fair in personal injury and malpractice cases where the plaintiff has fewer resources than the defendant. It doesn’t seem so fair when the plaintiff is a large corporation going after a small business or individual. The best example I can think of is the abundance of lawsuits brought by Monsanto against organic farmers with crops contaminated by Round-up copatible genetically modified seeds or pollen. Or is that not really part of Tort law?

  • Eric Turkewitz 2013.4.30 at 12:28 | Quote

    When you have two corps you are usually dealing with contracts. The line can blur — in law school we had a class in ConTorts for just that reason.

    I’ve restricted myself in this post to the usual consumer torts, since that is the area I’m most knowledgeable about.

  • Gerry Oginski 2013.4.30 at 21:13 | Quote

    An injured victim who believes that he suffered wrongdoing at the hands of careless individual, whether it is a driver, manufacturer of a defective product, a careless doctor or healthcare provider has an absolute right to seek compensation in a court of law here in New York.

    In a medical malpractice case in New York, we are required to have a medical expert confirm that there was wrongdoing, that the wrongdoing caused injury and that the injury is significant and/or permanent.

    If a jury ultimately decides that the injured victim has failed to prove his case, then an injured victim goes home without having obtained a single dime of compensation.

    In addition, the attorney who represented the injured victim for years and paid out of his own pocket significant amounts of money to prosecute the case, known as disbursements, also walks away without recouping any of his investment despite the fact that he proceeded forward in good faith with a medical expert to support this case.

    In case you didn’t know, contingency fees were designed to allow people who could not afford to pay hourly fees to an attorney the ability to bring in and hire the best trial lawyer they could find. The expectation was that if they were successful, the attorney would then receive a percentage of what they were able to recoup for the injured victim.

    The tort reformers who scream about the “loser pays” argument humiliate an injured victim even further by trying to force him to pay for the defenses costs and lawyers fees.

    The majority of injured victims who bring suit seeking compensation certainly do not have the resources to hire an attorney on an hourly fee and certainly do not have the resources to pay the defense lawyers fees and costs.

    As an attorney who represents only injured victims in the state of New York, we might encourage the argument that if the defense raises frivolous defenses, and they are found to be untrue, the defense should be required to pay extra, over and above what the jury has determined the injured victim is entitled to receive as compensation.

    There are many instances where the defense attorneys raise what is known as “affirmative defenses” in an attempt to minimize their responsibility or point the finger elsewhere. Many of these defenses have no merit whatsoever.

    In the spirit of “loser pays,” the tort reformers should gleefully agree to have their defense colleagues pay up every single time the court rules against them in a motion, in an objection at trial and on post trial motions. Just a thought…

    What do you think?

  • Khoukharev 2013.5.24 at 05:49 | Quote

    As someone from loser pays system country it seems that it’s American rule which is prohibitive.
    ==
    One side has incentive to run the meter and stall, and can readily afford to do so. If the litigant loses a simple issue of “who had the green light” then financial devastation may follow, but there is no such threat on the other side. The parties are not equal and the scales of justice unbalanced.
    ==
    Isn’t it EXACTLY right about American rule? In my jurisdiction it simply won’t work. Citizens tend to contract lawyers so that payment is after the trial. Stall all you want, you wouldn’t scare anyone. Moreover, this possibility to make opponent pay make it possible to sue when you have no money at all. Is that even possible in USA? As far as I know – not at all.
    That’s why in my opinion it’s American rule that closes the court’s doors, not visa versa.

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