|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.
Overlawyered.com's 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". Not online, unfortunately, are most of the relevant
sections from The Litigation Explosion, which argues at length for
the loser-pays idea, especially chapter 15, "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.
Also in 1995, Rep. Chris Cox (R-Calif.) published a succinct defense
of the loser-pays principle, terming it the "full recovery rule" and
pointing out that it would improve the position of a large number of plaintiffs
with meritorious claims who currently go undercompensated because of the
need to pay their lawyers large sums which cannot be recovered from the
Author James Fallows of The Atlantic called
the idea "overdue" and included it in his list of "Ten
New Year's Resolutions for America" (National Public Radio).
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 this debate
excerpt from Britain's House of Lords (January 21, 1999), 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."
In Australia, according to this
official report, "The general rule on costs is that costs follow the
event (i.e. that the party in whose favour the issue is decided normally
has his or her costs met by the unsuccessful party). It should be noted,
however, that an award of costs is at the discretion of the court and in
exercising the discretion the court may take into account the conduct of
the parties and the manner in which the case was litigated."
Sometimes it is argued that loser-pays principles should be suspended
in cases where 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. (Update Nov.
20, 2004: on appeal to the Supreme Court of Canada, the Alberta plaintiff
in 1998 won
his case on the merits (with an award of costs), thus presumably escaping
any need to pay costs arising from his "case of first impression" loss
at the earlier stage).
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
Nebraska, 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 (R.
Bruce Smith of Smith Lyons, link now dead), 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
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".
In Britain, the Blair government has proposed to increase the role played
by legal expense insurance and in particular a variant known as "after-the-event"
insurance (report by Daphne Loebl for solicitors Wilde Sapte, link now
dead). Websites put up by plaintiff's-oriented solicitors' firms
Anglia explain more about how the English system works.
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 (requires scrolling down),
provides a modest degree of fee-shifting, and operates in tandem with Rule
68 (requires scrolling down), which provides for fee awards hinged
on offers of settlement.
In the mid-1990s, both Oregon and Oklahoma enacted statutes that applied
loser-pays principles to significant categories of litigation in their
state courts. These laws are discussed in the Olson/Bernstein Maryland
Law Review article cited below.
Although no national organization has arisen to promote it, loser-pays
continues to be a popular reform idea in many states. In South Carolina,
57 House colleagues joined state representative Gresham Barrett in sponsoring
a loser-pays measure (South
Carolina Policy Council). Loser-pays measures have been introduced
(H.B. 2230), and, with respect to specialized statutory areas, such
states as Colorado (farm
nuisance suits, S.B. 43, Rep. Ken Chlouber).
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.
One particularly promising field for the extension of loser-pays principles
is in the realm of statutes governing disputes between business entities.
For example, the Federal Communications Commission recently suggested a
loser-pays mechanism for disputes between
providers of satellite
service over customers (February 24, 1999 testimony of Deborah Lathen)
Loser-pays is the subject of a large theoretical literature generated
by economists and other model-builders who mostly have found themselves
at a loss to predict from their models whether litigation will be on average
better restrained in the one type of system or in the other. Professors
Thomas D. Rowe, Jr. (Duke) and David A. Anderson (Centre College) ran simulations
of the effect of various offer-of-settlement rules on lawyers' behavior
in settling cases. ("Empirical Research on Offer of Settlement Devices",
1996; reprinted by Texas Association of Mediators, link now dead).
For further reading: Walter Olson and David Bernstein, "Loser-Pays:
Where Next?", Maryland Law Review, 1996 (55 Md. L. Rev. 1161).