John Steele Gordon in Hillsdale “Imprimis”

by Walter Olson on August 21, 2012

His speech is titled “Economic Lessons from American History,” (printable PDF version) and one of the lessons has to do with loser-pays:

…if Jefferson’s decimal coinage concept was a good idea that quickly spread around the world, another idea that developed here at that time was lousy: the so-called American Rule, whereby each side in a civil legal case pays its own court costs regardless of outcome. This was different from the English system where the loser has to pay the court costs of both sides.

The American Rule came about as what might be called a deadbeat’s relief act. The Treaty of Paris (which ended the American Revolution) stipulated that British creditors could sue in American courts in order to collect debts owed them by people who were now American citizens. To make it less likely that they would do so, state legislatures passed the American Rule. With the British merchant stuck paying his own court costs, he had little incentive to go to court unless the debt was considerable.

The American Rule was a relatively minor anomaly in our legal system until the mid-20th century. But since then, as lawyers’ ethics changed and they became much more active in seeking cases, the American Rule has proved an engine of litigation. For every malpractice case filed in 1960, for instance, 300 are filed today. In practice, the American Rule has become an open invitation, frequently accepted, to legal extortion: “Pay us $25,000 to go away or spend $250,000 to defend yourself successfully in court. Your choice.” …

…policing the marketplace has long been considered a quintessential function of government. The reason for this is that when policing has been in private hands, self-interest and the public interest inevitably conflicted. The private armies of the Middle Ages all too often turned into bands of brigands or rebels. The naval privateers who flourished in the 16th to 18th centuries were also private citizens pursuing private gain while performing a public service by raiding an enemy’s commerce during wartime. In the War of 1812, for instance, American privateers pushed British insurance rates up to 30 percent of the value of ship and cargo. But when a war ended, privateers had a bad habit of turning into pirates or, after the War of 1812, into slavers.

Predictably, the American Rule has spread exactly nowhere since its inception at the same time as the decimal coinage system. There is not another country in the common-law world that uses it. … Few things would help the American economy more than ending the American Rule.

{ 4 comments }

1 DEM 08.21.12 at 12:16 pm

For every malpractice case filed in 1960, for instance, 300 are filed today.

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Very interesting. I thought the point of tort law was to incentivize everyone to be more careful, and thus to avoid causing injuries. The explosion of med mal filings over such a long period can only mean one of two things: tort law is simply ineffective at incentivizing the use of reasonable care, or lawyers are filing scores of claims where there is no negligence. Which is it?

2 Hugo S. Cunningham 08.21.12 at 7:49 pm

If the newly independent United States had kept the English “loser pays” rule, American juries would happily have nullified the claims of British creditors and soaked them with the hometown deadbeat defendant’s legal costs to boot.

“Loser pays” is not a cure for unreasonable expectations of jurors and judges. If drawn up carefully, however, it can encourage both sides to settle, rather than gamble on “outlier” verdicts after expensive trials.

The principal cancer underlying America’s metastasizing lawsuit culture is our lack of universal health insurance. Lawsuits serve as our (inefficient and unfair) substitute. American juries will find against even an obviously innocent defendant, if they believe he has insurance and the needy plaintiff does not. In contrast, European juries and judges know that the plaintiff’s medical bills will be covered in any case.

3 DEM 08.23.12 at 10:34 am

Hugo that is quite a stretch. If you were right, then obviously insured plaintiffs would have a hard time recovering medical bills even in the most obvious cases of negligence. Moreover, your theory cannot account for what is often the largest component of tort damages: pain and suffering.

4 Riiiiight 08.23.12 at 7:58 pm

Nice non sequitur.
I’ll agree that universal health insurance could reduce lawsuits and judgement values, but the seeds for our sue-happy society were sown in the last century when people learned that one could sue and win (or settle) for almost any indignity that life presents.

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