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Washington Examiner


Small Businesses Need "Loser Pays" in Court

March 17, 2009

By Marie Gryphon

Companies "too big to fail" aren't the only ones caught up in our financial crisis. The Wells Fargo/Gallup Small Business Index—which measures how small-business owners perceive their operating environments—plunged by 90 percent in 2008 and is now at its lowest level since the index was created in 2003.

Hard as they try, policymakers can't make the current crisis disappear. But they can help well-managed small businesses survive this and future downturns by removing other sources of insecurity—like meritless lawsuits.

Plaintiffs file these suits not because the targeted defendant has injured them or refused to honor a contract, but in hopes of extracting a settlement payment or of "hitting the jackpot" with the help of an irrational jury.

While some lawsuits are justified, too many target legally blameless entrepreneurs like Howard Weiss and Kelly Reed, who own a small pool-maintenance business in Maryland. They were sued for $750,000 by a passerby who alleged that she fell on the sidewalk after being startled by a wild goose that happened to be in the store's front yard.

"We really didn't have anything to do with the goose other than it was in front of our store," Weiss told the U.S. Chamber Institute for Legal Reform. Weiss and Reed won their case at trial, but only at the cost of large outlays of money and time.

The Klemm Analysis Group estimates that perhaps as many as 52 percent of all civil lawsuits target small businesses each year. While large corporations can pass their legal costs onto consumers in the form of increased prices, small businesses can suffer debilitating financial shocks from such suits.

Thousands of dollars in legal fees and settlement payouts, for instance, may have been budgeted for meeting the payroll. Even when such suits are merit-less, the wrongly accused still feel the financial pinch: Of the roughly 30,000 small businesses sued in 2002, two-thirds spent more than $10,000 in attorneys' fees on top of any settlement or judgment, regardless of whether they had done anything wrong.

Lawsuits are expensive to win in the United States because our system requires both parties to pay their own lawyers regardless of the outcome. Many dubious legal actions would be deterred if winners were relieved of the payment burden.

In fact, many countries—including Britain, France, Germany and Canada—have just such a "loser pays" rule, under which the losing party, whether plaintiff or defendant, must pay the winner's reasonable attorney's fees.

Evidence suggests that such rules do have a deterrent effect: Germany spends only half as much on litigation as does the U.S., and France and the United Kingdom spend roughly one-third what we do.

Critics of the loser-pays rule worry that it would discourage plaintiffs of modest means from pressing legitimate claims in court, and thus allow scofflaw defendants to escape justice.

But overseas, plaintiffs with good cases are protected against the financial risk of an unexpected loss by legal-expenses insurance. Only plaintiffs that have a reasonably good chance of success can obtain such insurance, thereby creating the added benefit of weeding out baseless claims before they can reach the court system.

And because over 90 percent of lawsuits settle before trial, insurance premiums for plaintiffs are surprisingly affordable and often collected only if a lawsuit is won or settled.

Former New York mayor Rudy Giuliani once observed that in our current system, "someone who is sued loses even if he wins" because defense costs are so high. Under a loser-pays system, small businesses would face fewer lawsuits and be more prepared financially to withstand those that are unavoidable, while courts would finally be free to focus on meritorious legal claims. It's past time for the U.S. to adopt such a system.

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