Six months ago the Delaware Supreme Court upheld the right of an enterprise to include a loser-pays provision in its bylaws, specifying that losing shareholder-litigants would have to contribute reasonable legal fees to compensate what would otherwise be loss to other owners. Since then there’s been a concerted campaign to overturn the ruling, either in the Delaware legislature or if necessary elsewhere. But as I argue in a new Cato post, allowing scope for freedom of contract of this sort is one of the best and most promising ways to avert an ever-rising toll of litigation. Contractually specified alternatives to courtroom wrangling have played a vital role, and are under attack for that very reason, in curbing litigation areas like workplace and consumer arbitration, shrinkwrap and click-through disclaimers of liability, and risk disclaimers at ballparks and elsewhere. (& Stephen Bainbridge).
To the extent America has made progress in recent years in rolling back the extreme litigiousness of earlier years, one main reason has been the courts’ increased willingness to respect the libertarian and classical liberal principle of freedom of contract. Most legal disputes arise between parties with prior dealings, and if they have been left free in those dealings to specify who bears the risks when things go wrong, the result will often be to cut off the need for expensive and open-ended litigation afterward.
More on the Delaware bylaw controversy: D & O Diary (scroll), Andrew Trask on state of the merger class action, WSJ Law Blog first and second, Daniel Fisher, and ABA Journal in June, Alison Frankel/Reuters (forum selection bylaws).
“An Alabama man who sued over being hit and kicked by police after leading them on a high-speed chase will get $1,000 in a settlement with the city of Birmingham, while his attorneys will take in $459,000, officials said Wednesday.” [Reuters/Yahoo] Readers may argue about whether this kind of outcome is fair, but note that it seems to happen more often, rather than less, in this country (with its putative “American Rule” that each side pays its own fees) than in other industrialized countries which tend more to follow “loser-pays” or “costs follow the event” fee principles. One reason for that is that the U.S. does not actually hew consistently to the so-called American Rule; across wide areas of litigation, including civil rights suits, it follows “one-way shift” principles in which prevailing plaintiffs but not prevailing defendants are entitled to fees, and whose encouragement to litigation is greater than either the American Rule or the loser-pays principle.
Related: The Pennsylvania legislature is moving to adopt a rule adopting one-way fees for some cases in which municipalities trample rights protected by the Bill of Rights’ Second Amendment, provoking peals of outrage (“dangerous,” “outrageous,” “threatens municipalities’ financial stability,” etc.) from elected officials few of whom seem to be on record objecting to one-way fee shifts when plaintiffs they like better are doing the suing. [Free Beacon]
Ken at Popehat has the story on a court’s ruling for fees and costs in Ergun Caner v. Jonathan Autry, filed by a religious leader who had come under criticism for less-than-forthright descriptions of his own past. “The court ruled that Caner (1) pursued the case after Autry took the videos down, (2) demanded, as a condition of settlement, that Autry’s young children sign a non-disparagement agreement, (3) delayed the case, (4) failed to seek discovery, opposed the motion to dismiss on the grounds that he needed to take discovery, but could not articulate what discovery he needed, (5) contradicted himself, (6) made unreasonable legal arguments without any support (like the ‘you must be qualified to criticize’ argument), and most importantly (7) filed the case to silence criticism.” Under the prevailing “American Rule” on fees it’s extremely hard for the victim of a meritless suit to recover attorney’s costs, but this one was extreme enough to be an exception.
Newegg fights a patent assertion entity:
Most companies choose not to recover their legal fees in patent suits because prevailing defendants are required to demonstrate that a plaintiff acted in bad faith. This is extremely difficult to prove and it’s usually easier to just walk away and count your losses – unless your name is [Newegg chief legal officer] Lee Cheng…
Thanks to the efforts of Lee Cheng and his legal team, the Federal Circuit Court of Appeals ordered a trial court to reconsider its earlier denial of Newegg’s request for attorneys’ fees and costs in the patent infringement lawsuit brought on by SUS. Newegg pursued justice in the matter because it is consistent with our corporate mission of bringing the benefits of technology and technology products to our valued customers. And, when defendants settle these frivolous claims, it’s always the customer that ends up paying. We care too much about our loyal customers to subject them to paying these trolls.
The defendant in the Duluth doctor-rating defamation case that we recounted here and here “told the Star Tribune he spent the equivalent of two years’ income, some of which he had to borrow from relatives who supplied the money by raiding their retirement funds.” The Minnesota Supreme Court eventually ruled that his comments were protected opinion. The doctor/plaintiff, for his part, spent $60,000 pursuing the suit. [Twin Cities Business]
The same article, a “Lawsuits of the Year 2013″ feature, also recounts how a couple under the influence of “sovereign citizen” teachings “filed more than $250 billion in liens, and other claims, against those they considered the cause of their problems, including [Hennepin County Sheriff Rich] Stanek, county attorneys and other court officials. The liens were filed against vehicles, houses and even mineral rights.” When Stanek went to refinance his property, he discovered he had been hit with $25 million in liens which took “several years” to remove entirely. The husband of the couple was sent to prison.
“Delaware’s Supreme Court has ruled that corporations can adopt bylaws requiring an investor who sues and loses to pay the company’s legal costs, potentially upending the economics of a booming type of shareholder litigation.” [Tom Hals, Reuters via Federalist Society Blog]
A court has awarded costs against a Dublin family that sued a restaurant for not warning that if they allowed their two-year-old to put her finger down the metal lid of a sugar dispenser, she might have trouble pulling it out again. The balky lid had to be cut off at a hospital. [Mirror]
The vote was 325 to 91, with Reps. John Conyers (D-Mich.) and Mel Watt (D-N.C.) leading the opposition. Timothy Lee discusses in the Washington Post. While I haven’t tried to get into the details, the general drift looks quite good to me. One major provision requires those filing suits to plead with some specificity what the infringement is; another provides for losing parties to compensate prevailing parties toward the cost of the litigation in more cases; yet another attempts to forestall expensive discovery in cases destined to fail on other grounds. Readers who recall my first book, The Litigation Explosion, will recall that I recommended procedural reform as the most promising way to address the incentives to overlitigiousness in our legal system and in particular identified lack of fee shifting, anything-goes pleadings, and wide-open discovery as among the system’s key deficits. So, yes, developments like this make me feel I was on the right track.
Equal time dept.: Richard Epstein takes a different view.
Prevailing parties in patent suits can win attorneys’ fees from losing opponents in cases deemed “exceptional.” “Under the test used to identify exceptional cases, cases must be objectively baseless and brought in bad faith.” That is already a painfully narrow exception, allowing for large volumes of poorly founded litigation, but two cases before the Supreme Court this term may provide clarity on when courts can deem cases “exceptional” and suitable for a fee shift. Broader use of fee shifts — presumably by way of deeming at least some swath of losing cases “exceptional” — would be one way of addressing the patent troll problem that would not call for new legislation. [ABA Journal, related, Corporate Counsel (arguments that judiciary can deal with trolls on its own]
In other developments, the Federal Trade Commission has voted to proceed with an inquiry into the patent troll problem [New York Times] and the Government Accountability Office has released a long-awaited report on the issue [Mike Hogan and Gregory Hillyer, Legal Intelligencer]
More coverage for the Frank Buckley-edited new book on overlegalization, The American Disease [Richard Reinsch/Library of Law and Liberty, Alejandro Chafuen/Forbes] Here’s Buckley in the National Post:
If litigation rates are four times smaller in Canada than the United States, this should not occasion surprise: Subsidize something and you get more of it; penalize it and you get less of it.
Differences in legal ethics matter, too. In America, more than elsewhere, lawyers are encouraged to advance their client’s interests without regard to the interests of justice in the particular case or broader social concerns. American lawyers’ professional culture is unique in permitting and implicitly encouraging them to assert novel theories of recovery, coach witnesses, and wear down their opponents through burdensome pretrial discovery.
A lawyer who’d been widely and scathingly criticized over his handling of a case — unfairly he thought — proceeded to sue bloggers and journalists for defamation, so many that the total of defendants reached 74. It’s over now, but a New York state judge declined to award sanctions, which may possibly say something about the difficulty of obtaining sanctions under today’s prevailing legal standards, especially in New York. [Tom Crane, San Antonio Employment Law Blog; Popehat ("Our legal system is so broken that it can take years to resolve even the most patently vexatious, harassing, and incompetently prosecuted lawsuits like this one.")]
P.S. “Loser pays would have been valuable here. Costs to each defendant would teach a memorable lesson.” [@erikmagraken]