Yesterday’s Wall Street Journal included an editorial by Dan Slater (who runs the WSJ Law Blog) called "The Debate Over Who Pays Fees When Litigants Mount Attacks," suggesting reconsideration of the “English Rule,” in which unsuccessful litigants are required to reimburse their opponent’s legal fees and costs (a/k/a the “loser pays” system), as contrasted to the “American Rule,” in which each party bears their own legal expenses:
Legal experts think a loser-pays system cuts down on frivolous suits. Those clearly hurt the U.S. The nation’s tort system cost $245.7 billion in 2003, amounting to about 2.2% of total gross domestic product, according to a report from professional services firm Towers Perrin. The percentage of GDP spent on litigation was at least twice those in the U.K. and Germany.
At the same time, say experts, the insurance helps mitigate the pitfalls of a loser-pays system. "Insurance does move in to fill the gap for those suits that might not otherwise be brought in a loser-pays system," says Paul Lomas, a London-based litigator at Freshfields Bruckhaus Deringer.
Initially, a few factual corrections are in order.
First, the Towers Perrin study claiming that litigation costs amount to 2.2% of total gross domestic product has been roundly criticized as being baseless and inflated. For example, the study unfairly lumps together actual litigation costs, like attorneys fees, with the routine functioning of our torts and insurance system. As the Wall Street Journal itself noted over two years ago,
But here’s the problem: critics of past years’ studies — and there are many — say the number and the projections that come with it are deeply flawed. For instance, they include payments that don’t involve the legal system at all. Say somebody smashes his car into the back of your new SUV and his insurance company sends you a $5,000 check to fix the damage. That gets counted as a tort cost in Tillinghast’s number. Critics say it’s just a transfer payment from somebody who wasn’t driving carefully to somebody who has been legitimately wronged. How is that evidence of a system run amok?
"It’s just so inflated," J. Robert Hunter, the director of insurance for the Consumer Federation of America and a former Texas insurance commissioner, says of the Tillinghast figure. Critics also argue that other insurance-industry costs that aren’t the fault of a burdensome tort system — such as the salaries of insurance-industry CEOs — show up in its calculations.
"Math Divides Critics As Startling Toll of Torts Is Added Up," By LIAM PLEVEN, March 13, 2006; Page A2.
Second, plaintiff’s lawyers are in no sense “accustomed to being the exclusive financier of litigation.” The primary "financier" of litigation in America is the insurance industry, turning its good hands into boxing gloves when injured parties seek more than nominal compensation. Even in the context Slater is thinking about – the plaintiff’s side of personal injury tort suits – there are hundreds of companies willing to loan money to plaintiff’s firms and/or plaintiffs for a piece of the eventual recovery. Ordinary business banks also loan to firms after performing the same due diligence they would with an company.
All of these companies, however, have the same restriction that would have to be imposed in a loser pays insurance system: the financier has absolutely no say as to whether the case will be settled or not. Such limitation is appropriate to ensure uncompromised decision-making and is analogous to similar barriers on the defense side, in which the defendant, with limited exceptions, retains control over whether to settle and where the defense lawyer nominally represents only the defendant and not the insurance carrier as well, so as not to divide the lawyer’s loyalties and prejudice the defendant.
Third, most states already recognize a form of “loser pays” in the claim for wrongful use of civil proceedings, which permits the victims of frivolous lawsuits to recover damages caused by such frivolous lawsuits. It has bite here in Pennsylvania — the "Dragonetti Act" has resulted in multi-million-dollar outcomes.
There’s also, of course, the "loser pays" already at the heart of contingent fee cases: if I lose a case, I get nothing. No reimbursement for my time. No reimbursement for my expenses. Nothing. A total loss.
Which brings me to my primary objection to the loser pays system. I would not object to receiving a guaranteed income like my brethren of the defense bar instead of bearing the risk that years of effort and tens of thousands – potentially hundreds of thousands – of dollars will be spent in vain, but I would object, on grounds of fairness, to penalizing a party that brought a valid claim merely because they did not meet their burden of proof.
Consider a typical medical malpractice case. Most of the facts are uncontested. The dispute centers on whether the physician-defendant breached the standard of care, whether such breach caused any harm, and what damages resulted.
In all states of which I am aware, the first two elements require expert medical testimony. To even start a lawsuit here in Pennsylvania, I need a certificate of merit from a qualified physician establishing those two elements. To prevail at trial, obviously, I need in-court credible testimony from a qualified physician establishing those elements to a reasonable degree of medical certainty.
No expert testimony, no claim. Period. That is to say, by law the first two elements are matters entirely outside the understanding of any plaintiff except for physicians who happen to be victims of malpractice in the specialty they currently practice or teach.
If, in good faith, my client and I believed our qualified expert’s opinion on matters the law says are beyond our understanding, why should we be punished if a jury accepts the defendant’s version instead of our’s?
Deterrence? Of what? Claims a qualified expert physician thought were valid? Should I be deterred merely because the defense found someone to say otherwise? In medical malpractice, there’s always some doctor somewhere willing to say that my client coincidentally suffered a heart attack or stroke or spontaneous decapitation regardless of the record or the probabilities.
Why would we want to deter valid claims? Isn’t the point of a civil justice system to offer people the opportunity to present their claims in fair and open court?
I’m wary, too, of considering the lower litigation costs in Europe as a positive sign of judicial health (if, indeed, they are lower, given the inflated numbers of the US study). Many European countries routinely apply legal doctrines we consider abhorrent in the United States, such as the onerous standards applied to publishers in libel cases in the United Kingdom, standards incompatible with First Amendment principles of free speech.
When all is said and done, the effective result of loser pays, whether insured or not, is to change the civil system from one in which a plaintiff must convince a jury of the rightness of their cause with the preponderance of the evidence to one in which a potential client must convince a lawyer and/or insurance company of the rightness of their cause beyond a reasonable doubt. The client must convince the lawyer/insurer not only that their case is worth their damages, but that their case is worth well beyond their damages, to mitigate the direct loss the lawyer or insurer will incur if they lose.
The practical effect, then, would be to intimidate plaintiffs’ lawyers like me into rejecting the vast majority of legitimate cases because, even though I may feel they have a strong likelihood of prevailing, I simply can’t afford to test my luck with anything other than the handful of cases I’m sure will win.
UPDATE: Dan Slater got plenty of email, as he relates on the WSJ Law Blog.