Go to any sports bar in the country, or any golf course, or just about any competitive venue at all, and the main rule is so simple that it rarely needs mentioning: Loser pays.
The same rule applies in courtrooms, too, in developed nations throughout the world, but not in the United States. Here, uniquely, a winning defendant in a lawsuit is still responsible for paying his own attorney.
So it was in the infamous $54 million lawsuit filed by D.C. administrative judge Roy Pearson over a lost pair of pants. The defendants, the Chung family, easily won the case at trial, but still were forced to pay $100,000 in legal fees (a number that will grow now that Pearson has filed an appeal). That must not seem like much of a victory for a mom-and-pop dry-cleaning business.
To fix inequities like this, and indeed to make the American lawsuit system more rational for defendants and plaintiffs alike, the Manhattan Institute today will release a report proposing that the United States adopt a Loser Pays system for handling attorneys’ fees, for state and federal courts.
In the report, “Greater Justice, Lower Cost,” Manhattan Institute scholar Marie Gryphon explains the multiple ways that the current American system distorts the legal landscape to the benefit of predatory lawyers but to the detriment of defendants and truly aggrieved plaintiffs alike.
Then, drawing on a broad array of source material, she explains how and why Loser Pays is a better alternative, and how to tweak a Loser Pays system to avoid drawbacks noted by its critics. (See: http://www.manhattan-institute.org/html/cjr_11.htm )
Gryphon also explains why this is no mere academic exercise. Citing other widely accepted studies, she notes that the direct costs alone of lawsuits in the United States two years ago reached $247 billion, or $825 per person.
These hidden costs, as a percentage of Gross Domestic Product, are at least twice as high as lawsuit costs in the rest of the developed world, and more than three times higher than in France or Great Britain.
Small businesses bear a large burden of the load: As many as 52 percent of all lawsuits filed against businesses target small ones with lesser ability to fight back, and as many as two-thirds of those small businesses spent more than $10,000 in legal fees alone.
The result, according to Gryphon, is to “raise the cost of goods and services to consumers by forcing businesses that are sued to cover their legal expenses by raising prices.”
Not only that, but Gryphon provides evidence that the American system perversely discourages legitimate but small-money lawsuits in favor of suits with less merit but higher potential payoffs.
A Loser Pays system would discourage frivolous suits by attaching a cost to them – but it would actually encourage meritorious small claims, for a variety of reasons Gryphon explains at some length.
When Florida experimented with a Loser Pays system for medical malpractice suits from 1980-1985, for instance, “the average trial award came close to tripling, from $25,190 to $69,390…. [Researchers concluded that] the higher average was the direct result of the loser-pays rule’s elimination of many weak cases.”
But defendants in Florida benefited as well: The percentage of plaintiffs who voluntarily dropped their (presumably meritless) suits rose significantly, while the share of such lawsuits that actually went to trial dropped from 11 percent to 6 percent.
Nevertheless, critics charge that Loser Pays discourages people of low wealth from filing suits – and if they do file, successful defendants could find little benefit if there is no money with which the loser can pay in the first place.
Gryphon answers those criticisms by proposing any of several systems of insurance for legal expenses. A number of foreign countries – Germany, England and Wales chief among them – have tried such insurance systems and found them quite successful.
Although everything in Gryphon’s report is meticulously documented and illustrated, the bedrock logic of her proposal needs no explanation. If the loser pays, then meritless challenges are discouraged – and challenges with real force become more worthwhile. It certainly works in sports, and it will work with predatory plaintiff lawyers as well.
Quin Hillyer is associate editorial page editor of the Washington Examiner. He can be reached at [email protected].
