Tort Reform – Losers Pay

January 9, 2015

Tort Reform “Losers Pay”

In 2010 Towers Watson estimated that tort litigation cost Americans more than $250 billion, or the equivalent to 2.2% of GDP. [i] Attorney fees are the largest expense in litigation with the exception of some adverse judgments. In one example, Peasrson v. Chung, a dry cleaner owner was sued for $54 million, when a pair of pants was lost, for inconvenience, mental anguish and attorney fees—although ultimately victorious, the dry cleaner owners were left with an estimated $100,000 in attorney fees.[ii]

 Most western countries follow what is known as the “English” or “loser pays” rule, which essentially shifts the cost of attorney fees of the victorious party to the loser, thus reducing frivolous litigation that harms innocent business owners and drains the economy. Alternatively, the majority approach in the United States is the “American rule,” which requires parties to pay for their respective attorney fees—regardless of the outcome.  However, in an effort to curtail the negative consequences of the American rule, a number of states have decided to pursue tort reform including the English rule or some variation thereof.

One prominent example of a state that has recently enacted a variation of a loser pays law is Texas. In 2011, Texas enacted H.B. No. 274 which (1) directs the Supreme Court of Texas to develop a system for dismissing claims at an early stage and award costs, and (2) modifies what is known as an “offer of judgment.” An offer of judgment requires a plaintiff to pay certain court costs when they reject a prior settlement offered by a defendant, and a trial ultimately results in a verdict that is substantially less favorable than the original settlement offer.[iii]

Supporters of the law say, among other things, that the bill will “implement solid, fair and necessary reforms to the Texas Civil justice system to lower the costs of litigation. . . and level the playing field between plaintiffs and defendants by repealing certain limits on the recovery of costs.” [iv]

The Texas Trial Lawyers Association, Texas AFL-CIO, and others were opposed to H.B. No. 274, viewing it as needless and detrimental to individual litigants due to the fact that plaintiffs’ attorneys work on a contingency basis and “have a strong incentive to take only cases they feel have merit in order to maximize their chances of winning the case and receiving their commission.”[v] Moreover, critics believe that loser pays will primarily harm those in the middle class because they have modest assets to lose if the winning party seeks attorney fees and court costs, as those with limited incomes do not have little assets worth pursuing.

Alaska state law allows for a winning party to seek a portion of their attorneys’ fee ranging from 1 to 30 percent. Alaska’s court rules sets out the percentage of attorney fees that may be awarded depending on whether the case was resolved with or without trial, contested or uncontested, and on the amount of the judgment.[vi] It is important to note that the law provides judges with 10 factors that may be used to depart from the schedule. At least one factor that a judge may consider to determine that a variation is warranted disfavors awarding fees to businesses who are sued by individual plaintiffs as it allows the judge to consider “the extent to which a given fee award may be so onerous to the non-prevailing party that it would deter similarly situated litigants from the voluntary use of the courts.” Similarly, a second factor counsels against awarding defense attorney fees to a business that has made the strategic decision to fight each case to discourage plaintiffs’ lawyers from frivolous litigation as the judge may consider “the extent to which the fees incurred by the prevailing party suggest that they had been influenced by considerations apart from the case at bar, such as a desire to discourage claims by others against the prevailing party. . . .” Finally, the law allows a judge to consider “other equitable factors deemed relevant,” allowing judges with significant discretion not to award fees on a case-by-case basis. [vii] In 1995, the Alaska Judicial Council published a study that ultimately concluded that the state’s loser pays statute “seldom plays a significant role in civil litigation,” that courts awarded fees in only about 10 percent of cases, and that 75 percent of the fees awarded were for less than $5,000.  [viii]

To avoid the failure of Alaska’s loser pays law, legislatures in Arkansas legislatures should support legislation that requires those who bring frivolous lawsuits to pay the attorneys’ fees and expenses of those who must defend against such lawsuits. Frivolous lawsuits are defined as “lawsuits that have no legal basis, often filed to harass or extort money from the defendant.”[ix] Currently, Arkansas Rule of Civil Procedure 11 requires an attorney or party to a lawsuit to sign every pleading or motion to certify that to the best of their knowledge, information, and belief that the document is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. [x]  If the motion, pleading, or other paper is signed in violation of Rule 11, then the court, upon motion or upon its own initiative, “shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay the other party or parties the amount of reasonable expenses incurred because of the filing of the pleading motion, or other paper, including reasonable attorney’s fees.” However, “a motion for sanctions under the Rule shall be made separately from other motions and shall describe the specific conduct alleged, and may only be filed within 21 days after the service of the motion,”—unless it is withdrawn or corrected. In essence, the current law allows the party bringing the frivolous claim to walk away with no penalty as long as they walk away within 21 days after a motion to dismiss has been made.  To reduce frivolous claims, legislators should eliminate the 21-day safe harbor period and provide for mandatory sanctions if a judge determines a case to be frivolous.

Opponents of tort reforms will likely contend that the underlying purpose of proposed changes to existing law is to shield business from having to pay just compensation to consumers, patients, and clients for damages incurred from fraud, negligence, medical malpractice, and other legitimate tort claims. It is paramount to keep in mind that tort litigation drains billions of dollars from the economy each year and that innocent business owners are often stuck with unrecoverable losses defending frivolous claims. Capping damages, reducing safe harbor periods, and mandating sanctions for frivolous claims are a step in the right direction for Arkansas and will help level the playing field for small business owners and strengthen the economy.

 Sources:

[i] “2011 Update on U.S. Tort Costs Trends – BP Oil Spill Costs – Towers Watson.” Towers Watson. N.p., Jan. 2012. Web. 05 Jan. 2015.

 

[ii] Cauvin, Henri E. “Court Rules for Cleaners In $54 Million Pants Suit.” Washington Post. The Washington Post, 26 June 2007. Web. 05 Jan. 2015.

 

[iii] Schwartz Z, Victor E., and Cary Silverman. “American Legislative Exchange Council – Limited Government · Free Markets · Federalism.” ALEC American Legislative Exchange Council. N.p., Mar. 2012. Web. 06 Jan. 2015.

[iv] Texas Bill Analysis, H.B. 274, May 7, 2011.

 

[v] Rodriguez, Robert C. “Texas Expands Loser Pays Rule.” Texas Expands Loser Pays Rule. American Bar Association, 8 Aug. 2011. Web. 06 Jan. 2015.

 

[vi]  AK R RCP Rule 82.

 

[vii]  See State v. Native Village of Nunapitchuk, 156 P.3d 389, 405 (Alaska 2007.)

 

[viii]  Alaska Judicial Council, Alaska Judicial Council, Alaska’s English Rule: Attorney’s  Fee Shifting in Civil Cases (1995.)

 

[ix] Black’s Law Dictionary (9th ed. 2009.)

 

[x] Ark. R. Civ. P. 11