Greater Justice, Lower Cost: How a "Loser Pays" Rule Would Improve the American Legal System

The United States struggles with a uniquely costly civil justice system. The direct costs of tort litigation, in particular, reached $247 billion in 2006, or $825 per person in the United States. Moreover, tort costs in the U.S. as a percentage of gross domestic product are far higher than those in the rest of the developed world—double the cost in Germany and more than three times the cost in France or the United Kingdom. The amount that is spent on tort litigation every year is greater than what Americans spend every year on new automobiles.

In addition to being overly expensive, American litigation is all too often inefficient and unfair. The fees and expenses incurred by lawyers on both sides of a lawsuit are almost as costly as transfer payments to plaintiffs claiming injury. Mass tort litigation, for example, over asbestos, has been exposed as rife with fraud. Small businesses are regularly besieged with nuisance suits that they must settle if they hope to avoid crippling legal costs. Last year's $54 million lawsuit against a small Washington-area dry cleaner alleging that it had lost a pair of pants was remarkable not only for the astronomical damages claimed but also the almost $100,000 in legal fees incurred in successfully defending against it. In American law, even when a defendant wins a lawsuit, he loses.

This study explores the likely effects of adopting a "loser pays" rule for attorneys' fees in the United States. Loser pays, sometimes called the "English rule" but actually, in essence, the rule in place in the rest of the world, refers to the policy of reimbursement by the parties who lose in litigation of the winners' legal expenses, including attorneys' fees. This study argues that loser pays could be an important part of a larger effort to reduce litigation costs, better compensate prevailing litigants, and better align tort law with its goal of deterring socially harmful conduct. A loser-pays rule would discourage meritless lawsuits, but because any such rule should also ensure plaintiffs of modest means but strong legal cases access to justice, our proposal calls for:

1. A robust litigation insurance industry similar to those that now exist in other loser-pays countries; and
2. A cap on recoverable fees to eliminate the incentive that large litigants might have to attempt to "buy a verdict" under loser pays.

This study explores in depth how a loser-pays rule would change litigation in America. It includes key findings about the likely effects of loser-pays reform and evaluates previous experiments with loser pays in America.

READ FULL REPORT

______________________

Marie Gryphon was a senior fellow with the Manhattan Institute.