Civil Rights

Civil Suits

"Loser-pays" makes lawsuits fairer in Europe. It could work here, too.

It's "draconian" and "frightening." Anthony Lewis of The New York Times finds it "extremely intimidating." The Washington Post says it's a "tremendous" barrier to legal action, and the American Bar Association has fits over its "attack on access to the courthouse."

Almost everyone seems to agree that a loser-pays rule for lawsuits, an idea floated in the GOP Contract with America, would be terrifying. Even in the modified form that passed the House of Representatives in March—which would require some federal litigants to pay a portion of legal costs if they turn down a settlement offer and do less well at trial—the idea has been attacked as overly harsh. How could the middle class—not to mention the lower class—use the courts if people who lost on a fluke had to pay their opponents' legal fees? Wouldn't they drop even valid suits?

A closer look shows that the actual practice of loser-pays abroad bears little resemblance to the bogey version used to frighten Americans around campfires. No system is perfect, and all litigation carries risks for the innocent, which is one of many reasons for society to discourage it. But as millions of well-informed Europeans see it, loser-pays isn't nearly as terrifying as the way we sue in this country, where lawyers can lay your life to waste and the system will leave you no recourse at all.

Loser-pays is the standard in England, so it is sometimes known as the "English Rule." It is thus often spoken of as if it were some Beefeaters-and-warm-beer eccentricity of the Sceptered Isle. But it has no special connection with England. It has prevailed for millennia in Europe, developing early in Roman law and spreading from there to the civil law systems that evolved all over the continent and became codified in France, Germany, and elsewhere around the time of Napoleon. It even developed in the church courts. Scandinavia, like England, does not trace its civil procedure to the Romans but nonetheless has loser-pays.

The rule's ubiquitousness should give its critics pause. If loser-pays is impractical, why has it lasted in so many places for so long? If it's rigid and historically contingent, how has it endured as philosophies of governance have come and gone? If it's just a way for the rich to grind down the poor, what is it doing in such social democracies as Sweden, Denmark, and the Netherlands? If it grips the middle class with fear, how do the burghers of Geneva, Sydney, and Toronto stand it?

Balance out the rule's theoretical vices with its virtues. The first is fairness. If someone drags you to court and costs you plenty in legal fees, and you finally show you were right, why should they walk away? If they'd hurt you in any other way, wouldn't they have to compensate you?

The practical case for loser-pays is equally compelling. Litigants naturally think too well of their cases; loser-pays pushes them to size up their prospects more realistically. It also curbs the brand of extortion, so routine in American law as almost to have lost its ethical taint, by which lawyers use the costs of the process itself, or the risk of a fluke outcome found in any trial, to strong-arm their opponents into settlement. Such abuse runs in both directions: Many plaintiffs with shoddy claims get paid off, while many defendants who are liable as charged get off with paying less than full freight by threatening to inflict the cost of trial. Thus valid legal claims are often paid earlier and more fully in Europe than here. Although the ABA calls loser-pays a "tax on the right to litigate," it could just as easily be called a subsidy for litigating in a rightful cause.

Society has good reason to discourage unnecessary litigation. Aside from their appalling expense, lawsuits are acrimonious and divisive, a breach of the social peace. They may be an inevitable part of life, but they needn't cost as much as here, and in fact they cost far less in Europe. Liability insurance also costs less there, as a share of the economy, by a factor of two-and-a-half or three to one, resulting in big savings for drivers, municipal taxpayers, business owners, and so on. Lawyers are far fewer in number and less powerful.

The only other major exception to the general prevalence of loser-pays is famously nonlitigious Japan. Yet Japan curbs suing by even stronger measures. For example, it charges a fee for lawsuit-filing that is proportioned to the claim of damages, so that the more a plaintiff says he deserves, the more he must pay up front. (If the ABA wants a genuine example of a "tax on the right to litigate," there it is.)

Occasionally someone tries to change or get rid of loser-pays abroad, especially in English-speaking countries where American legal academics (and the fabulously successful American bar) are most influential. But thus far such efforts have only pointed up the rule's durability. Scholars in country after country are well aware of the American alternative and consciously reject it. And with reason: Public outcry over litigation rises to the heavens from our side of the Atlantic, not theirs. European parties have not made a stir lately by campaigning on the need to reform civil procedure, as the Republicans did here.

For years the most prominent American voices for loser-pays have not been conservatives at all. They include Editor in Chief Charles Peters of the neoliberal Washington Monthly ("extortion suits would be quashed….This would mean less work for lawyers and fewer of them"); commentator Michael Kinsley ("would actually encourage lawsuits that are clearly meritorious"); Steven Brill of The American Lawyer and Court TV ("simple, and overdue"); and James Fallows, writing in January in the not-exactly-Gingrichite New York Review of Books ("overdue").

Loser-pays is often mistaken for a double-or-nothing bet: If a suit wins, goes this reasoning, it must win bigger than it does in the United States, while if it loses it must crash in flames. The actual practice is far subtler. Most cases turn on more than one issue, and European courts commonly split the fee pot according to who prevailed on what. Thus a fee award may consist of the net of various line items, added to or deducted from the plaintiff's award as the case may be.

One crucial result is that the litigant with a genuine case risks an offsetting penalty if (as is common here) he stretches the case out by adding less-tenable theories. Even a litigant who squarely wins on the merits can pay a fee offset if he has filed losing motions or made the opponent go to other sorts of needless trouble. Hence each side is pressed to fold its weaker positions.

European courts also come down hard on the Yankee practice of blowing up routine injuries into whopping cash demands. The litigant who claims a million marks or francs in damages but proves only a hundred thousand is deemed to have lost at least in part, and some lump of fees will be deducted from his award. (Various rules deal with the special cases where damages cannot be precisely calculated.) England's "pay into court" rule serves a similar function: If a plaintiff turns down a settlement offer and does worse at trial, the plaintiff has by definition not prevailed for purposes of fees incurred after the offer.

Thus (a Swiss law professor explained to me) when a Zurich or Frankfurt accident victim walks into the office with a good case, the first order of business after establishing the case's merit is to figure out what is a reasonable amount of money to request, based on what the courts have given for similar injuries. Asking for more could risk a fee penalty. An American lawyer who handled a case that way would probably be sued for malpractice or disbarred on grounds of insanity.

By putting no price tag on the levying of extreme demands, we in this country foster terrorization on matters of substance. Defendants are encouraged to think they're betting the company on every case, though the resulting intense resistance makes it grueling to prosecute claims. Loser-pays would cool overheated demands, get concessions on the table, and curb the purely tactical use of procedural options. The overall terror level in the courts would go down, not up. And a narrowed dispute will normally be more cheaply and speedily resolved than one bounded only by the limits of imagination and ambition.

A common fear about loser-pays is that the side who loses a routine dispute will get handed a bill for 10,000 hours from Cravath, Swaine & Moore. But European courts are well aware of the danger that successful litigants will overinvest in their cases and gold-plate their fee requests. They carefully control the process to prevent that danger, giving the losing side a full chance to dispute a fee award, requiring that work be reasonable and necessary, providing that elite lawyer rates not be paid if a Main Street lawyer could have done the job, and so forth.

Although fee awards are usually set high enough to apply serious incentive pressure, it is notable that no country appears to let winners recoup all the money they have spent on a suit. Some leave a portion of lawyers' hours unreimbursed, while others apply hourly rates that fall below prevailing levels. Some shift expert witness fees, but others do not. (Sweden and Norway require that losers compensate winners for the time and energy spent on forced attendance in court.)

Because winners are reimbursed in meaningful part but not completely, losing European litigants pay less than full value for the damage they've done. Thus they get off easy compared with Americans who've accidentally hurt a fellow citizen to a similar extent in the outside world. After all, European lawsuit losers do not pay for the intangible or future harms their opponent may have suffered, such as emotional distress, professional disruption, and so forth. Middle-class Americans who make a false move and get sued face those kinds of liability exposures every day—sometimes along with punitive and triple damages—and no one in the law schools or the ABA sheds a tear for them. Ranged against the other terrors of litigation, an obligation to pay mere fees is mild stuff indeed.

In practice it seems to be even milder. In Europe, as here, nearly all cases settle short of a final judgment, and the main effect of loser-pays is to influence the nature, level, and timing of the settlement—reducing, perhaps to zero, the value of long shots, while increasing the value of some with a good chance of prevailing. Critics say some English plaintiffs have sweated about the risk of losing their house along with their case. But other reports from England suggest that big institutions that get sued, eager to close the books on their own liability and avoid further legal process, are commonly glad to settle with a losing individual plaintiff for a token fee payment or none, especially if they feel he has litigated in good faith; these defendants nonetheless credit the rule as a strong deterrent to unfounded suits against them.

If the goal is to keep unlucky litigants from losing their houses, unfortunately, our current rules fall short. American lawyers really do go after their own clients' houses to collect fee bills, especially in matrimonial cases, just as they really do go after their opponents' houses to collect verdicts, including doctors' houses in malpractice cases where insurance is absent or exhausted. Not long ago, lawyers tried to seize the house of 92-year-old Vermont widow Luella Wilson, whose sin had been to lend her great-nephew the money to buy a car that he later crashed. Litigation is brutal that way, which is a reason to pause before embracing it as a remedy for social ills.

One way Europeans have adapted to the residual risks of loser-pays has been through personal legal expense insurance, which covers a variety of legal risks including that of finding oneself a plaintiff in a lawsuit. The aggrieved party takes his case to his insurer, which, if it finds the case strong, provides a lawyer and absorbs the risk of owing the opponent a fee. Such insurance, which is often made part of homeowners' or renters' policies along with standard liability coverage, reportedly covers more than half the citizenry in some European countries. It is said to be very cheap, no doubt owing in part to its somewhat self-financing quality: If the insurer screens cases carefully, it will collect more in fees for its lawyer than it will pay to winning opponents.

Official legal-aid funds also help would-be litigants abroad. Their success, like the insurers', partly derives from their chance to obtain fees from opponents if they pick cases skillfully. Despite the claims of some American critics of loser-pays, however, these funds are by no means the only way ordinary Europeans can get into court. Recent figures show only 28 percent of English injury plaintiffs receive legal aid, meaning that 72 percent do not.

How does loser-pays affect big companies and other institutional litigants, which may not quake at the fear of paying any one set of fees? Some critics have claimed that such entities might be inert to the rule's incentives: A handout from Ralph Nader's Public Citizen and other anti-loser-pays groups says companies would "simply factor the projected costs of future legal fees into their day-to-day costs of doing business."

Yet Wisconsin political science professor Herbert Kritzer, an opponent of loser-pays who studied the rule's effects on Ontario businesses, found what he called a "striking" linkage between "the quality of a party's case" and its fear of a fee shift. Interviewing Toronto businesspeople and their lawyers, he was told such things as: "Fee shifting is one of the deterrents to pursuing a losing case." "The cost system discourages frivolous litigation….People think out the quality of a case before proceeding." "In many cases, cost factors are decisive in whether you settle, go to trial, or even initiate a matter." "Fee shifting forces people to be more realistic about what they want to accomplish." "Costs have a calming effect."

Few critics of loser-pays really hew to the so-called American Rule. For years Congress has blithely enacted hundreds of laws incorporating one-way fee-shifting: Defendants pay plaintiffs' legal fees when they lose, but they do not collect payment for their legal fees when they win. This heads-I-win, tails-we're-even idea indeed penalizes people for asserting their legal rights even with the utmost good faith in the closest of cases. Yet it has by now been installed in countless laws with a civil rights or environmental label. And you guessed it: With scarcely an exception, the same lawyers, legal academics, and bar officials who profess horror at two-way loser-pays are fans of the one-way version. The inconsistency glares. If the fluke chance of losing will scare middle-class litigants out of a good case and into a bad settlement, then it must do so when they get sued, and not only when they sue.

The American public itself seems not to be as terrified of full loser-pays as its lawyers. Even when U.S. News and World Report asked the question in its more menacing form—"If you sue someone and lose the case, should you pay his costs?"—a far-from-shabby 44 percent of those polled agreed that they should. And with sides reversed, nearly everyone saw the idea's fairness. "If someone sues you and you win the case, should he pay your legal costs?" Eighty-five percent said yes to that one.

Are America's litigators, like Congress, willing to live by the rules they set for everyone else? For years they have relentlessly fought to expand the frontiers of liability, hunting down the members of every other profession and business and asking them to pay for damages they might have prevented. It hasn't seemed to matter how many well-meaning persons have been thereby left in terror of legal jeopardy or how much useful activity has been halted as a result.

Now these litigators' own maxims may be turned against them. If accountability, deterrence, and compensation are such fine things, why shouldn't there be compensation for the people they injure?

You can see why they might find that idea frightening.