The following essay was written circa 1999 by our editor and formerly appeared on the site’s topical page on loser-pays.
* * *
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 opponent.
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 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“.
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 in Nottingham and East 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. The Alaska Judicial Council discusses the operation of the rules in this 1995 report.
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 in Arizona (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).