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LOSER PAYS
By Walter Olson, 05-21-2004
Adapted from a fuller treatment originally written for overlawyered.com

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. It's long past time this country joined the world in adopting that principle; unfortunately, any steps toward doing so must contend with deeply entrenched resistance from the organized bar, which likes the system the way it is.

Our editor wrote an account in Reason, June 1995, aimed at explaining how loser-pays works in practice and dispelling some of the more common misconceptions about the device. He also testified before Congress when the issue came up that year as part of the "Contract with America". For a more extensive look at an argument for the loser-pays system, see chapter 15 of The Litigation Explosion, "Strict Liability for Lawyering".

As other countries recognize, the arguments in support of the indemnity principle are overwhelming. They include basic fairness, compensation of the victimized opponent, deterrence of tactical or poorly founded claims and legal maneuvers, and the provision of incentives for accepting reasonable settlements. Sad to say, the American bar, though loud in proclaiming that every other industry and profession should be made to pay for its mistakes, changes its mind in this one area, demanding an across-the-board charitable immunity for its own lucrative industry of suing people.

The principle in other countries

The leading British scholar of torts and accident law, the distinguished Patrick Atiyah of Oxford, observes that "the reality is that the accident victim with a reasonable case should be able to find a lawyer with equal ease in England and America." (1987 Duke L.J. 1002, 1017; cited in Olson House testimony above)

In the United Kingdom, as throughout Europe, the general loser-pays principle enjoys strong support among social democrats and conservatives alike. In a 1999 debate in Britain's House of Lords (January 21), in response to an objection that applying loser-pays in cases before employment tribunals might discourage workers from bringing claims against their employers, Lord Irvine, who serves as Lord Chancellor in the Labour government of Prime Minister Tony Blair, responds that "It can be argued... that one should discourage weak cases. Very often applicants bring weak cases before employment tribunals inspired by animus against their employers arising out of their dismissal. If the effect of [a costs] rule were to deter weak claims and prevent employers being vexed by them there is a highly respectable argument in favour of that change."

Sometimes it is argued that loser-pays principles should be suspended in cases in which litigation is claimed to have gone on in the public interest, as a test case, or to procure a change in established law. While some loser-pays jurisdictions suspend the principle for what are viewed as true "cases of first impression" where there is no established law, most are skeptical about applying any exemption more liberally, as one sees in this 1996 case from Alberta, Canada.

Given the pervasive influence of U.S. ways of doing things, and the extraordinary success (by some standards) of the American bar, it is not surprising that a definite though minority bloc of practitioners and academics has arisen outside the U.S., particularly in English-speaking countries, that is favorably disposed toward the American rule on costs. The rationale offered by such advocates can itself be interesting, as when James Eck, an Australian professor who teaches at Washburn University in Kansas, calls for his country to emulate the American fee rule on the grounds that "An Increase in Litigation Would Be Good for Australia." Prof. Eck writes that insurance rates are "artificially low" in Australia and foresees that abandoning loser-pays would engender an increase in litigation that would result in "an increase in the number of persons employed by the insurance industry," which would, he believes, redound to the benefit of that country's economy -- a sentiment many will view as open to doubt.

Some jurisdictions have over the years weakened loser-pays provisions in ways that create important exceptions in a minority of cases. Perhaps the best-known of these rules, in Britain, denies fee recovery to prevailing defendants when they are sued by plaintiffs assisted by official legal-aid funds, a policy that many spokesmen for defendants have bitterly denounced as unfair and inconsistent with national tradition. Even in these cases, it seems, defendants benefit from the distinctive British pay-into-court system (see below). More recently, Britain has excluded an even wider class of injury claims from the rule. Although Ontario has somewhat watered down its loser-pays provisions for class actions, they are still far superior to the American rules in discouraging ill-founded litigation.

Special wrinkles: paying into court, legal expenses insurance

Two institutional features of the landscape in loser-pays countries deserve special mention: the complex of questions surrounding issue-splitting and offers of settlement, and the availability of legal expenses insurance.

It is common for litigation to involve multiple issues, some of which are resolved in favor of one party, others in favor of its opponent, or for a plaintiff to be vindicated as to liability but for his claim of damages to be upheld only in part. Most loser-pays systems explicitly empower the judge or other magistrate to split fees in these cases, usually with the objective of allocating each element of cost to the party whose position was defeated. Thus it is quite conceivable for a plaintiff to establish liability but for the fee award mostly to favor the defendant on the grounds that most of the cost of the litigation was spent arguing over issues on which the defendant prevailed. A different way of approaching the same general problem is practiced in England, where defendants can offer to "pay into court" a proffered settlement and are entitled to fees if a plaintiff turns it down and does less well at trial. Some countries combine elements of the two systems.

Just as liability insurance covers the risks of being a defendant in litigation, so nations with loser-pays have developed markets for what is called legal expenses insurance, which helps manage the financial risks of becoming a plaintiff including the chance of becoming liable for costs in the event of a courtroom loss. (This chance is in fact quite remote, since abroad, as in the United States, well over 90 percent of cases settle out of court before a final legal resolution; the primary influence of loser-pays is in the "shadow" it casts on the size and timing of this settlement.) Legal expenses insurance is typically available at quite modest cost, often as an added rider to homeowners' or automobile policies. Its cost is modest in part because it can benefit from a self-financing fund: if the insurer correctly analyzes which cases brought in by its policyholder plaintiffs are worthy of being pressed, it will benefit from fee shifts paid by the defendants against whom it finances suits.

A series of country-by-country reports from the European Commission indicate that legal expenses insurance is "almost universal in Denmark," "very common in Norway," and "widely available in the Netherlands," while "Germany has the largest LEI market of any EU country".

Loser-pays in this country

The state of Alaska has followed a loser-pays system for decades. Rule 82 of the Alaska Rules of Civil Procedure provides a modest degree of fee-shifting, and operates in tandem with Rule 68, which provides for fee awards hinged on offers of settlement. The Alaska Judicial Council discusses the operation of the rules in this 1995 report.

Many states have also introduced or strengthened offer-of-settlement systems in which at least some costs are available to parties when the other side turns down a proffered settlement and then does worse at trial. Frequently these laws are hampered in their effect because they exclude what are the largest categories of cost, attorneys' and expert witnesses' fees. Attorney Geoffrey L. Bryan picks through some of the complexities and exceptions in Section 998 of California's Code of Civil Procedure, a provision of this sort.

In the mid-1990s, both Oregon and Oklahoma enacted statutes that applied loser-pays principles to significant categories of litigation in their state courts. For further reading: Walter Olson and David Bernstein, "Loser-Pays: Where Next?", Maryland Law Review, 1996 (55 Md. L. Rev. 1161)


 





 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.