Greater Justice, Lower Cost: How a "Loser Pays" Rule Would Improve the American Legal System

Publication Date: December 2008

Publisher: Manhattan Institute for Policy Research. Center for Legal Policy

Author(s): Marie Gryphon

Research Area: Justice; Law and ethics

Keywords: litigation insurance; legal reform; American legal system; loser pays

Type: Report

Coverage: Florida United States Alaska

Abstract:

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 amount that is spent on tort litigation every year is greater than what Americans spend every year on new automobiles.

In addition to being overly expensive, American litigation is all too often inefficient and unfair. The fees and expenses incurred by lawyers on both sides of a lawsuit are almost as costly as transfer payments to plaintiffs claiming injury. Mass tort litigation, for example, over asbestos, has been exposed as rife with fraud. Small businesses are regularly besieged with nuisance suits that they must settle if they hope to avoid crippling legal costs. Last year's $54 million lawsuit against a small Washington-area dry cleaner alleging that it had lost a pair of pants was remarkable not only for the astronomical damages claimed but also the almost $100,000 in legal fees incurred in successfully defending against it. In American law, even when a defendant wins a lawsuit, he loses.

This study explores the likely effects of adopting a "loser pays" rule for attorneys' fees in the United States. Loser pays, sometimes called the "English rule" but actually, in essence, the rule in place in the rest of the world, refers to the policy of reimbursement by the parties who lose in litigation of the winners' legal expenses, including attorneys' fees. This study argues that loser pays could be an important part of a larger effort to reduce litigation costs, better compensate prevailing litigants, and better align tort law with its goal of deterring socially harmful conduct. A loser-pays rule would discourage meritless lawsuits, but because any such rule should also ensure plaintiffs of modest means but strong legal cases access to justice, our proposal calls for:

A robust litigation insurance industry similar to those that now exist in other loser-pays countries; and
A cap on recoverable fees to eliminate the incentive that large litigants might have to attempt to "buy a verdict" under loser pays.
This study explores in depth how a loser-pays rule would change litigation in America. It includes key findings about the likely effects of loser-pays reform and evaluates previous experiments with loser pays in America.

The Status Quo

This study delves into the available evidence about how the legal marketplace works, which lawyers file low-merit lawsuits, and how they stay in business:

The subgroup of lawyers that file most nuisance lawsuits works to obtain settlements in weak legal cases before its members ever see a courtroom.
The American system facilitates nuisance lawsuits, since the high cost of defending against weak cases gives defendants a strong incentive to settle.
In contrast to nuisance suits, low-merit mass torts and class-action suits are able to attract some of the best lawyers in the United States because the potential damages stemming from these suits make them very lucrative, even when they are settled for a small fraction of the amounts demanded.

Effects of Loser Pays

This paper infers from its examination of the scholarly literature how loser pays would affect the American legal system:

Almost every economist who has studied loser pays predicts that it would, if adopted, reduce the number of low-merit lawsuits.
A loser-pays rule would encourage business owners and other potential defendants to try harder to comply with the law. Doing so should produce fewer injuries.
Loser pays would deter ordinary low-merit suits, but it would not discourage low-merit class actions to the same extent because the risk of enormous losses, rather than the costs of legal defense, is the primary source of pressure on defendants to settle.

Experiences with Loser Pays

This paper reviews evidence from Alaska and Florida, two states that have had significant practical experience with loser pays:

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.
Between 1980 and 1985, Florida adopted a loser-pays rule that applied exclusively to medical-malpractice cases. This experiment was imperfect, drew criticism, and was ultimately dropped; but in significant respects, the Florida loser-pays rule seems to have worked to weed out weaker cases and facilitate case disposition: the rate at which medical-malpractice lawsuits were dropped after initial discovery rose from 44 percent to 54 percent of all such filings, and the percentage that proceeded to trial (instead of being dropped or settled) was half of what it had been under the American rule.

Litigation Insurance

This paper provides an overview of how litigation insurance would ensure access to justice for poor and middle-class plaintiffs under an American loser-pays system:

In loser-pays jurisdictions, insurance covering the legal costs of the plaintiff can be purchased at the same time that a lawsuit is filed for a reasonable premium advanced by a plaintiffs' attorney as part of the ordinary costs of litigation.
After recently scaling down its legal aid services, which were funding civil litigation for poor plaintiffs, England witnessed massive growth in its litigation insurance market; the same thing is likely to happen in the United States if it adopts a loser-pays rule.
To be successful in the United States, a loser-pays reform must be designed to reduce the number of nuisance lawsuits, control overall litigation costs, promote settlement, and ensure access to justice for plaintiffs with strong legal claims. To achieve these disparate goals within the existing American legal system, this new Manhattan Institute proposal incorporates a modified offer-of-judgment rule, which ties the amount of any fee award to the size of the parties' settlement offers, and advocates the removal of legal barriers to the establishment of a robust litigation insurance industry in new loser-pays jurisdictions.