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March 24, 2011

Implementing "Loser Pays" in Arkansas

Testimony of Marie Gryphon, Adjunct Fellow, Manhattan Institute before the Arkansas House Judiciary Committee

Good morning M_. Chair, and members of the committee.  Thank you so much for inviting me to talk with you about HB 2057.

As Representative Stubblefield pointed out, the Arkansas civil justice system, like those in most of the United States, is unnecessarily costly because it encourages lawyers to file lawsuits that have little legal merit for their settlement value. In addition, the system is unfair to two groups of individuals: innocent defendants and plaintiffs with strong claims. As Representative Stubblefield was saying, a blameless defendant loses even if she wins, because fighting a low-merit lawsuit can cost thousands of dollars, even sometimes tens of thousands of dollars, which the blameless defendant cannot recover. Our system is also unfair to another group of people, whom we hear less about: plaintiffs who have been injured by someone else’s negligence and deserve compensation.  Plaintiffs with strong cases are terribly penalized by our current system because they must pay over 30 to 40 percent of their recoveries – which are supposed to be compensation for their injuries – to their lawyers.

The bill before you today will make the Arkansas civil justice system fairer for these individuals and less expensive for Arkansas taxpayers by making losers of civil suits for monetary damages liable for winners’ attorney’s fees.  Almost every other country in the world has a so-called “loser-pays” rule along the lines of the one proposed in this bill.  In a loser-pays system, no one has an incentive to file a very low-merit lawsuit, because defendants will no longer feel that they have to pay good money to settle bad claims.  This is something that pretty much every economist who has studied this issue agrees on: loser pays reduces the number of very low-quality lawsuits in the system, saving taxpayer dollars and freeing up state courts to speed meritorious cases through the system more quickly.

The bill before you today will also promote settlement by limiting each party’s liability for attorneys’ fees to the extent that they make reasonable pre-trial settlement offers.  The more reasonable each party is willing to be at the settlement stage of a lawsuit, the lower their exposure to a possible award of attorneys’ fees under the new rule, because the attorneys’ fee award can never be larger than the difference between the actual judgment amount and the unsuccessful party’s last settlement offer.  This limit will also prevent parties from spending more on legal fees than they should, just because they think that the other party may wind up footing the bill.

Now I want to touch on a very important question that people always ask me about loser pays:  what about access to justice?  If we have a loser-pays system, won’t regular, middle-class people be afraid to file even a very strong suit because of the possibility that they might lose and be hit with a ruinous fee award?  I will tell you something now:  if that were how loser pays actually worked in all those other countries that have it, I would oppose loser pays.  That would be a terrible system!  I’m sure that none of us in this room want to live in a world where ordinary people who have been injured by someone else’s negligence are afraid to seek justice.

But that is not how loser pays works in all of those other countries, from England, to Italy, to Canada, to New Zealand.  In all of these countries, ordinary, middle class people have access to the court system because they or their lawyers purchase legal expenses insurance, which covers the cost of any fee award in the event that a decent case proceeds to trial and it lost.  There are two kinds of legal expenses insurance.  One is the kind you are probably thinking of, called “traditional legal expenses insurance.”  That kind is often bundled with an individual’s homeowner’s or auto insurance policy, and it indemnifies the insured person for any award of attorney’s fees in litigation. 

Now you may be thinking, that kind of insurance may solve the problem for responsible individuals with assets to protect, who are already buying other kinds of insurance, but what about the less fortunate folks, who are barely scraping by and can’t afford a home or any more than the minimum amount of auto insurance?  We can’t necessarily expect people in those situations to pay monthly premiums (even though they are very small) just in case they need to file a lawsuit?  That is a good point, and that’s why I am especially enthusiastic about a second kind of legal expenses insurance, called “after the event” insurance, that is especially popular in England.  A plaintiff can purchase an “after the event” policy at the same time that she files a lawsuit, usually for about 100 to 200 British pounds, or very roughly 150 to 300 American dollars.  Better still, plaintiffs’ lawyers in England routinely advance the cost of an “after the event” insurance policy on the plaintiffs behalf, just like plaintiffs’ lawyers here routinely advance the cost of filing fees and court reporters to their clients.  And just like plaintiffs’ lawyers here in the U.S. don’t bill their clients for these expenses if they lose the case, British lawyers don’t bill their clients for the cost of litigation insurance unless they win or settle the case.  Because of insurance and because of financing by plaintiffs’ lawyers an ordinary person with a good legal case can access the justice system in England with nothing but lint in her pockets.  This can work here in Arkansas as well.  We just need to create a market for this kind of insurance by adopting the sensible rule on attorneys fees proposed as HB 2057.



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