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Should the losing party pay legal fees?
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The concept of “loser-pays” in civil litigation is intuitively attractive. The defense of lawsuits is time and resource intensive. Even if the defendant wins, there are often substantial costs to process of defense litigation. Advocates of a loser-pays rule suggest if the underlying lawsuit is frivolous and someone is wrongfully accused of having caused injury, then the losing plaintiff should have to pay the costs of litigation. A corollary of this rule is that a meritorious plaintiff who has suffered genuine injury should not have to bear the cost of having to seek legal redress.
The idea of making the losing party to a lawsuit pay legal expenses has historical foundation. Under the Law Code of Hammurabi for example, if Party A accused Party B of a capital crime but failed to prove the case, then Party A would be put to death. In that era, many actions that would be viewed as torts today, such as serving watered-down beer, were a capital crime. Therefore, few parties were attracted to the idea of filing a lawsuit, where the probability of loss meant being put to death.
Lawrence H. Brenner
The concept of loser-pays is especially attractive in the United States because of the perception that too many Americans file frivolous medical malpractice lawsuits against physicians which has note yet been shown in empirical data.
It may cost little to file a lawsuit against a physician, but it is expensive for the law firm to prosecute the lawsuit all the way through a jury trial. And, under the contingency payment system, there is no compensation forthcoming from the defendant unless there is a favorable verdict. Some scholars have argued that there is no need for a loser-pays scheme, since the contingency payment system compels trial lawyers to carefully examine the allegations brought forth by injured patients to identify those cases that truly have merit. That requirement and the information obtained from expert testimony result in a system, according to proponents, that already filters out the truly frivolous cases since they would make no economic sense for law firms.
English System
The loser-pays rule has been used in the English judicial system for centuries. British supermodel Naomi Campbell, for example, was confronted by news reports concerning her alleged substance abuse in 2001. She filed a lawsuit against the English newspaper, the Daily Mirror, which had printed photographs of Campbell leaving a Narcotics Anonymous meeting. After trial, the court awarded her monetary damages, but the judgment was successfully appealed by the Daily Mirror. Later, upon appeal to England’s highest court, Campbell prevailed, and had her judgment reinstated, whereupon her lawyer claimed significant costs related to the litigation, that became a financial liability of the Daily Mirror. The legal fees exceeded the damages awarded by about 10-fold.
The English rule of having the loser pay for the costs of litigation, as illustrated in the case of Naomi Campbell, may not always work in ways that supporters of the rule contend. By insulating litigants such as Campbell to the costs of litigation, the loser-pays rule may in fact encourage more lawsuits by litigants claiming small amounts of damages, without worrying about the expense. A party with a perceived strong case has little incentive to settle the litigation, since loser-pays essentially transfers the costs of litigation to the other side. In contrast, in the United States, each party to a lawsuit constantly evaluates the risk-reward trade-off, such that decisions about whether to proceed are tempered by a realistic, informed appraisal of the economic costs of litigation and attendant probabilities of success. Partly because of this structure, in the U.S. system, a much higher proportion of lawsuits end up with settlement out of court.
Furthermore, the loser-pays system is not as simple as intuition would suggest. In countries such as England and Canada where some variation of this rule is used, there are complex mechanisms in place to establish what can be recovered, with specific judicial officials who determine the amount of legal costs. The system is more complex than simply requiring the winner to pay the loser for legal bills. For example, if there are multiple defendants in a lawsuit, all of whom contributed to varying degrees in causing the injury to the patient, it may be difficult to apportion the legal costs due from each defendant, particularly if each is pointing the finger to the others. The scenario becomes more complex if some defendants are exonerated at trial, while others are held liable. Should the legal costs of the exonerated defendants be paid by the unsuccessful plaintiff, by the defendants who were held liable or by both? At present, the United States has no system of rules or laws that could adjudicate these concerns.
State laws
Under Alaska’s legal rules, losers have to pay for a portion of the wining side’s costs in a lawsuit. A review of the data from Alaska showed that this scheme, rather than reduce the incidence of litigation, often increased the amount of settlements since the expenses at stake increased the value of winning a lawsuit. Also, since many Alaskan plaintiffs were poor, they had little incentive not to sue under the loser-pays rules, since they could not in any event pay the legal expenses of a victorious defendant.
B. Sonny Bal
In 2011, the Texas legislature passed a bill after much debate and publicity that contained loser-pays provisions. The outcome of this law has been debated. Some scholars have hailed this move as pro-growth and pro-business. Relevant Texas law allows an impartial judge to determine when a lawsuit has, according to the language of the law, “no basis in law or fact on motion and without evidence,” giving the judge the authority to declare an early dismissal when appropriate, and award legal fees to the defendant. Critics of the Texas law claim that it runs afoul of the U.S. constitutional guarantee that citizens have the right to a jury trial. Critics also claim that poor plaintiffs are not dissuaded by the law since they have nothing to lose, but middle-class victims of torts may be discouraged from filing lawsuits, since they have savings and assets that would be at risk.
Other states, such as California, Wisconsin and Illinois have also adopted statutes that allow, at least under limited circumstances, an award of legal fees to the wining party in a lawsuit. The judicial system has an interest in fairness and judicial economy, and in instances where the legal process of discovery is conducted improperly, or a case proves to be a waste of court resources, or if attorneys improperly appeal a judgment or file a case in the wrong venue in order to seek delay, the court may statutorily award legal fees to the winning party.
Even in the absence of statutory authority, our legal system allows judges to have the discretion to require the losing side to pay attorneys’ fees if they believe it would be unfair not to do so. In law, this is often called an equitable remedy, i.e., the judge can impose a fair solution such as awarding attorney’s fees to the winning side, when not doing so would be manifestly unfair. Such equitable remedies are used in cases where the losing side brought a lawsuit that was truly frivolous, in bad faith, or to oppress and intimidate the defendant, and the defendant wins.
Economics
Loser-pays provisions have particular appeal in the corporate world. According to a 2014 Wall Street Journal article, 612 of approximately 650 mergers and acquisitions valued more than $100 million ended up in litigation. In every year since 2010, shareholders filed lawsuits in more than 90% of such deals, leading to questions about whether the underlying transactions involved fraud or a breach of fiduciary duties in most cases. Of the $73 billion extracted in settlements from U.S. corporations between 1997 and 2012, $17 billion went to pay the expenses of plaintiffs’ attorneys. Many individual shareholders in the litigation never collected the money owed to them, resulting in a burden on capital that may serve little societal benefit. Legislative reforms in securities law have been attempted to force plaintiffs’ attorneys to be more careful about choosing to file a claim, but the issue is far from being definitively resolved.
Intuitive attractiveness aside, the proper model to assess the merits, or lack thereof, of loser-pays is through an economic perspective. If loser-pay became federal law in the United States, for example, how would that affect medical malpractice? For starters, the insurance market would change, by covering the plaintiff’s risk of losing and having to pay the defendant doctor’s legal costs. The experience of England is instructive in this regard. Many British injury victims buffer against the risk of losing a lawsuit by purchasing an after-the-event insurance, the cost of which can be transferred to the defendant if the victim wins the case. As a result, the loser-pays rule has minimal chilling effect on such litigants. If successful patient plaintiffs in the United States could also collect their legal fees from their physician, then the economic value of their lawsuits would rise and offset insurance costs. Lawyers could advance the cost of insurance, for example, and take on legal cases in recognition of the odds of losing the case. As is true of many concepts that appear inherently attractive and simple at face value, there are many complexities and nuances to the loser-pays rule that have, in part, discouraged its widespread adoption in United States jurisprudence.
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B. Sonny Bal, MD, JD, MBA; and Lawrence H. Brenner, JD, are partners in the law firm of BalBrenner/Orthopedic Law Center and are the exclusive providers of loss prevention, risk management and quality improvement services for the Orthopedic Physician’s Insurance Company. Brenner can be reached at lbrenner@balbrenner.com.
Disclosures: Bal and Brenner have no relevant financial disclosures.