Tort Reform vs. “Loser Pays”


The concept of reforming the American legal system to adopt the “loser pays” system used in most foreign countries, by which the loser pays the winner’s attorney’s fees, is popular among libertarians. “Loser pays” is proposed as a means of deterring frivolous litigation and solving the problem of excessive lawsuits. When Texas recently adopted the system, it was championed as a victory for small business. I have seen John Stossel advocate it, and in Liberty I have seen Gary Jason endorse it in a comment on one of my essays. “Loser pays” is a policy that might seem reasonable to a non-lawyer layperson. To a lawyer like me, unfortunately, it looks like a policy with unintended and unfavorable consequences — and a policy that has little chance of accomplishing its purpose.

The idea that it will deter frivolous litigation hinges on the idea that the frivolous litigant will lose. Yet if frivolous litigants actually stand a good chance of winning, then “loser pays” deters nothing except poor people, who would find it riskier to access the justice system. In torts lawsuits, the laws are such that bad plaintiffs with bad suits often have a good chance of winning. For instance, Liebeck v.McDonald’s was a lawsuit in which a woman sued McDonald’s because she spilled hot coffee and burned herself, for which McDonald’s was held liable at trial for millions of dollars (mostly punitive damages) and ultimately settled the appeal. This is the quintessential bad lawsuit, and it was held up as a poster child for tort reform. Yet the plaintiff won at trial, on the argument that the coffee was excessively hot and the cup’s warning label was too small.

This lawsuit could have been stopped by reforming the law, that is, by creating a bar to punitive damages whenever there is a warning label. Because the case settled, it would have been unaffected by “loser pays.” Under “loser pays” the risk of having to pay McDonald’s’ legal defense fees if the plaintiff lost might have factored into her calculation of whether or not to sue. But she won the case at trial, and if cases like this happen, then who really expects plaintiffs with bad cases to be excessively afraid of losing? As I will explain below, you don't win a lawsuit because of the rationality of your claim but because of the emotions of the jury. So if a tort plaintiff can reach a jury, the jury trial system will be favorable to stupid lawsuits. The best solution is to reform the tort laws so that plaintiffs with ridiculous cases have no legal way to reach a jury.

You don't win a lawsuit because of the rationality of your claim but because of the emotions of the jury.

Meanwhile, “loser pays” is likely to scare poor people with valid claims away from court, by inspiring the fear not only of losing but also of paying the huge legal fees of a wealthier opponent’s high-powered law firm. The landmark civil rights litigation that helped to end Southern segregation might never have been filed in a “loser pays” system.

As for frivolous suits — There are already legal ethics rules and civil procedural rules that forbid and punish lawyers for bringing “frivolous”, “vexatious”, “abusive” suits, and there are provisions that enable judges quickly to dismiss baseless or groundless claims. “Loser pays” will add little to the tools that are already there to deal with the frivolous. In fact, the only way to prevent bad litigation is to eliminate the bad laws that form the legal basis of bad lawsuits.

Let me clear: I am an advocate of tort reform, just not of “loser pays” in particular. There are many tort reform policies to choose from that would reduce unnecessary or harmful litigation without toxic side effects. We could, for instance:

1. Reduce the percentage of the tort plaintiff’s contingent fees that are considered “reasonable.” Legal ethics rules ban lawyers from charging “unreasonable” fees, but a whopping 30% is considered reasonable, and 30% is the typical rate. I think a cap of 5% as “reasonable” would cut the amount of frivolous litigation in half. In this way, torts plaintiff lawyers would enter their practice with some other goal than becoming multimillionaires by exploiting the tragedies of their poor clients.

2. Eliminate class actions. The whole concept of class actions has always bothered me. To say that someone else has the right to litigate my claim without my consent or involvement, just because our claims are identical, is absurd, even if there are requirements of judicial consent and competent representation and the ability to opt out. Judicial efficiency, which is the valid motive of class actions, is not an excuse to let someone else litigate my case. Because class actions have millions of plaintiffs but only one law firm, the lawyers often make millions while the plaintiffs each get a few cents.

Now, there is already a rule in legal ethics codes that bans lawyers from representing multiple clients who have conflicts of interest with one another — something I believe most class action clients have, because each client’s claim is slightly different and might benefit from the case’s being tried differently. The conflict of interest rules are considered to be among the most important, yet class actions have a loophole. So instead of effecting a statutory ban, I propose simply to close the loophole and force class action lawyers to vet every member of the class for conflicts of interest. Any conflict would remove that class member. This would sharply reduce the volume of class action litigation.

3. Change the products liability tort standard from strict liability to negligence. Products liability cases are typically tried under a theory of “strict liability,” which means that fault (i.e. blame) need not be proven. Strict liability is an affront to logic, an abomination. While some see the purpose of tort law as deterrence, I see it as compensatory justice, which means that damages are supposed to restore a victim to the condition he or she would be in, had the defendant not made a bad decision. I view tort law and contract law as twin aspects of free will and personal responsibility, as recognized by law: contract law means that your choices will bind and control you, whereas tort law means that someone else’s choices will not be allowed to ruin you. If defendants have not made bad choices, there is no reason to make them pay.

If a tort plaintiff can reach a jury, the jury trial system will be favorable to stupid lawsuits.

Although a layperson might think of negligence as something that happened to cause an unintended accident, the better understanding is that it consists of the choice to be careless and risk-prone. The strict liability standard has been justified on the grounds that product defects are technologically complicated and it would be too difficult to prove negligence, but this is no excuse for bad law. We should force plaintiffs to prove negligence. Then everyone will benefit from cheaper prices, because manufacturers’ litigation costs will decrease.

4. Reform the standard of negligence for medical malpractice, so as to create a safe harbor. Medical fees skyrocket when doctors are forced to pay huge medical malpractice insurance premiums, and the practice of medicine is compromised when doctors based their decisions on fear of being sued, not the health needs of their patients. My safe harbor proposal is that if a medical practice or hospital had a written policy of procedures designed to prevent the type of malpractice that is at issue in a case, and the policy was implemented and regularly enforced and internally audited for compliance, then negligence cannot be proven. Similarly, if a surgeon or delivery obstetrician had a checklist of risks to prevent, a list that multiple doctors double-checked at the time of the surgery or childbirth, and the negligence at issue was on the list, then the doctor would have entered a safe harbor.

This is simply common sense: if the doctors were taking every possible systematic action to limit risk, then they were not negligent. Such precautionary policies would protect patients from accidents far more effectively than the tort lawsuits that drive up medical costs. Such a negligence test would cut frivolous lawsuits. State legislatures can codify my safe harbor rule, but clever judges could tacitly incorporate it into preexisting common law med mal negligence standards.

5. Put a statutory dollar limit cap on damages. My understanding is that a civil trial is really just a popularity contest in which the jury votes for the lawyer it liked the most. Instead of faithfully interpreting the judge’s instructions to the jury (which are often so technical that only a lawyer could properly apply them), the jury awards lots of money to the party it likes and punishes whichever parties it disliked, by making them pay huge damages. Usually poor old helpless plaintiff Mr. P, the janitor with a wife and five children who is suing because he broke his leg, is more sympathetic than the rich big business defendant Corporation D, especially when Mr. P’s lawyer slyly insinuates that D cut corners on safety in order to make a profit. This is the open secret, the 800-pound gorilla in the room, when people talk about tort lawsuits and tort reform. This is also one reason why “loser pays” is ridiculous: from a practical, pragmatic, no-nonsense point of view there is no reason to believe that the loser is the one who deserved to lose.

The right to a jury trial in cases that are “at law” (i.e. where the plaintiff seeks money) is constitutionally “inviolate,” and I leave for another essay the question of whether jury trials should be comprehensively reformed. However, at a bare minimum justice demands that we solve the problem of headstrong juries by removing jurors' discretion to award damages in excess of what the intent of the law indicates, simply because they happen to feel sympathy for one side or another. Activist judges who do not faithfully apply the law are a problem, but so too are activist juries. A legislative statutory solution to place reasonable, honest dollar value caps on each of the different types of damages, or to lower the caps that already exist, is one feasible fix.

In conclusion: “loser pays” is far inferior to the American Rule, in which each party pays his own attorney’s fees regardless of who wins or loses the trial;but there are tort reform solutions available if voters elect legislators and judges who will use them.

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