Could the United States Profit from a Loser-Pays-Winner's-Costs Civil Litigation System? An Online Debate Sheds Light on the Subject

Tuesday, Aug. 26, 2008

Last week, I participated in an experiment in online debate sponsored by a site called NewTalk. NewTalk is itself sponsored by Common Good, which bills itself as a “a nonpartisan coalition to restore reliability to America's legal system.” (Full disclosure: I once participated in a conference sponsored by Common Good.) Given that Common Good’s starting point is that the legal system should be reformed, it obviously sits closer to the tort reform movement than to that movement’s opponents. But Common Good’s virtue is not that it is non-partisan, but that it invites participation from partisans from all sides of the debate.

NewTalk is concerned with much more than legal reform, although the debate in which I participated last week was about litigation. It was entitled, “Would loser-pay eliminate frivolous lawsuits and defenses?” “Loser-pay” requires that the loser in a civil lawsuit pays the winner’s expenses.

The debate, which proved to be very interesting, confirmed two points for me: First, the Internet can provide an avenue for public education about public policy that is different from those offered by the mainstream media and academia, and that offers some unique advantages. Second, after years of debate over the civil litigation system, we still lack good empirical research upon which policy decisions can be made.

The Value of Internet Debate: The Possibility of More Honest, Responsive Public Policy Discussion

As to the first point, I will not say much more other than to recommend that readers of Writ visit the NewTalk website and see it for themselves. I have been writing about the civil litigation system in various public venues for years now, and I try to keep up with the writings of others. In the NewTalk discussion, which took place over 48 hours, the group of policy experts with whom I was communicating was able to achieve something which rarely happens in other venues.: Because we all knew we would be subject to the instant response of others in the group, everyone was kept pretty honest.

There were no flights into demagoguery or urban myth, as so often happens when people write on their own. Furthermore, I detected an effort from all sides to craft arguments that might win over the others, which did not reduce the debate to blandness, but elevated the quality of the argument. All in all, the debate left me feeling pretty good about the future of public policy debate in the U.S.

Initial Questions About “Loser-Pay”: Would Transition Costs Outweigh Gains? And, Is It Fair to Call Certain Suits “Frivolous”?

Unfortunately, while I was impressed by the debate itself, it also left me pretty depressed about the future of intelligent reform of the civil justice system.

As noted above, the question that was posed by the moderator at NewTalk was “Would loser-pay eliminate frivolous lawsuits and defenses?” To begin, any proposal that American change to “loser-pay” faces serious practical impediments. Granted, “loser-pay” is the rule virtually everywhere outside of the U.S. Even common law nations like England that allow contingency fees (where attorneys take a percentage of the judgment in cases they win) also have loser-pay. However, the American Rule – each party pays its own costs -- is deeply entrenched in our legal system. Getting rid of it in favor of loser-pays would be a big deal; and an argument to adopt loser-pays has to bear the weight of justifying such a big change. Even if a move to “loser-pay” did reduce frivolous lawsuits and defenses, that gain might be dwarfed by the transition costs to “loser-pays.”

At first, during the NewTalk debate, those participants who traditionally have criticized the tort reform movement attacked the question because of its use of the word “frivolous,” which connotes deliberate wrongdoing on the part of lawyers or their clients. “Frivolous” lawsuits—suits filed without factual or legal foundation—are already subject to a variety of sanctions, including those imposed under the federal system’s Rule 11, which exists for just this purpose. The tort reform movement has cataloged incidents of clearly frivolous lawsuits, such as the famous D.C. “dry cleaner” suits for $54 million dollars about which I have written. The problem is that we do not know how often they occur.

The Real Problem: “Negative-Value” Suits

To the credit of the group, we did not dwell too long on the problem of “frivolous” lawsuits, as that term is typically used. The group slowly moved towards a consensus that the real problem is not those lawyers (and their clients) who know that they are bringing groundless claims. Rather, the real problem involves those suits where the combined cost of figuring out the merits of the suit exceeds the value of the suit. This is what is known as a “negative-value” claim.

Many consumer fraud claims are negative-value claims. Take for example, a claim by a phone customer that his or her cell phone plan contained a “hidden” cost and that, had they known about the cost, they would have chosen another cell phone provider. The cost of ascertaining the truth of this claim through litigation is likely to be much higher than the value of the claim.

The same can be true in cases involving non-trivial sums. It is obvious that people often leave hospitals worse off than when they entered, but in some cases, that is no one’s fault—it is an inevitable feature of trying to provide healthcare. Thus, when a plaintiff walks into her lawyer’s office with an injury, the question is typically not “Is she faking it?” but rather “Was the injury the result of the hospital’s malpractice?” The cost of figuring that out can be very high, and can begin to mount up from the very first moment the hospital receives notice of the suit. The cost of investigation, expert’s opinions, and legal expenses can easily outstrip the cost to the patient of the injury.

The Dilemma Posed by “Negative-Value” Suits: They Do Have Advantages

The problem with negative-value suits is that, if they have merit, we may well want them to go forward, for a variety of reasons. Indeed, the adjudication of a negative-value suit where the defendant is found to have been a wrongdoer provides numerous benefits.

First, it sends a deterrent signal to the defendant, thus producing (one hopes) safer behavior in the future. Second, let’s assume that the cost of the suit to the plaintiff and the defendant combined is greater than the cost of the plaintiff’s injury. Even so, unless there is a settlement or a damage award to the plaintiff, much of the cost savings that occur when negative-value suits are not brought go to the defendant. Usually, if a negative-value suit is not brought, that leaves the plaintiff (or his insurer) paying for the cost of an accident that may have been the defendant’s responsibility – which is both unfair, and troubling from the standpoint of deterrence.

Can Loser-Pay Solve the Dilemma Posed by Negative-Value Suits?

The NewTalk discussion made several points clear: First, the dilemma posed by the problem of the negative-value suit is something about which discussants from all political positions may agree. Second, the practical question of whether loser-pay would help ameliorate that dilemma is something upon which the discussants disagreed.

As would be expected, the participants in last week’s debate split down party lines: Those who can be described as sympathetic to the tort reform movement claimed that loser-pay would encourage lawyers to invest more money early on to figure out which negative-value cases were more likely meritorious, while those opposed to the tort reform movement predicted that loser-pay would drive out the meritorious negative-value suits along with the meritless. Furthermore, the two groups clearly disagreed about the deterrent value of meritorious negative-value suits.

The Problem: A Lack of Empirical Evidence

Neither side could convince the other, because neither side had any useful empirical information. We really have no idea how much it would cost to increase our ability to identify meritorious negative-value suits early on. Most proposals involved increasing the power of judges to examine the merits of a suit early on, an idea that is highly controversial among those who ally themselves with the plaintiffs’ bar. No one seems to want to discuss the idea that perhaps we should, like the Europeans, invest judges with greater independent powers to demand and review evidence from both sides of the dispute.

Furthermore, we really do not know what percentage of meritless lawsuits—especially negative-value suits—are brought by hard-core liars who know that they have no claim, and what percentage are brought by sincere lawyers and clients who need discovery and pretrial practice to find out whether the other side is really a wrongdoer. The use of anecdotes has not brought us any closer to getting a sense of the answer to this all-important question.

Both sides of the tort-reform debate will be unable to go beyond the limited consensus that was achieved last week at the NewTalk debate until and unless we have a lot more empirical evidence about the performance of our civil litigation system. Why there has not been a demand for significant funding from the state and federal government into measuring the accuracy and cost of the current system is a bit of a mystery to me. Until we do have this information, though, even salutary efforts like those of NewTalk will inevitably result in experts talking past each other.

Anthony J. Sebok, a FindLaw columnist, is a Professor at Benjamin N. Cardozo School of Law in New York City. His other columns on tort issues may be found in the archive of his columns on this site.

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