Posted August 19, 2008, 9:00am
Welcome to NewTalk’s online discussion of the pros and cons of a loser-pays model for courts. We have a panel with broad and deep expertise in this area representing a diversity of perspectives. I am delighted to have the opportunity to moderate this discussion. Before we begin, I would like to define some terms for our readers. You will probably see participants refer to “loser-pays,” or “fee-shifting” or the “English Rule.” All of these terms refer to the idea that a party to a civil lawsuit who loses must pay the attorneys’ fees and costs of the winning party. In the United States, losing parties already pay the “costs” of the winner–which can include travel costs, depositions, telephone calls and copies–but not the attorneys’ fees of the other side UNLESS there is a statute requiring that fee-shifting occur.
There are a number of such statutes, but few require a losing plaintiff to pay the winning defendant’s fees, only a losing defendant. Fee-shifting statutes typically exist in areas in which a state legislature or the U.S. Congress has tried to encourage plaintiffs to file meritorious lawsuits. An example would be employment discrimination litigation. Additionally, we have court rules that allow a judge to penalize a party for filing a frivolous claim or defense by ordering that party to pay the other party’s fees. As a general rule, however, parties to lawsuits in America pay their own attorneys’ fees–win, lose or draw. America is virtually alone in this regard; other Western nations enforce a loser-pays model. What we want to explore over the next two days is whether the United States model is a good one, or whether we should seriously consider changing. To begin the discussion, let me pose an opening question: why has the United States thus far rejected the loser-pays model? What goals have we been trying to serve? Are we achieving those goals?
Posted August 19, 2008, 9:20am
The so-called English Rule was tried in the US in certain counties in Florida and Alaska. What occurred is very instructive and from my view quite predictable. It explained in part why the English Rule, as a practical matter, cannot work in the US. Whenever it might be implemented, as a matter of practical politics, the judge will be given discretion not to apply it in cases of hardship and to "do justice" (or some similar palliative). With that in place, most American judges are likely to engage (and have) in one-way fee shifting. Defendants pay when they lose, but plaintiffs do not.
Posted August 19, 2008, 9:45am
The Florida experience also shows that changing the fee rules is a significant alteration of the incentive structure in litigation. There is no doubt that some cases will be deterred as the potential plaintiff will be made more risk-averse by the prospect of having to pay for the defendants' fees (assuming, contra Victor, that courts will come to assess these fees). But some will be incentivized. Consider for example defamation cases in Britain. It is true that the substantive law is more favorable to plaintiffs there. But the cases have value (and tremendous potential chilling effect) because a liability judgment will be overwhelming.
But more significant is the effect on parties once they are in litigation. For those cases that do get brought and not settled immediately, the escalation of costs can be staggering. There is an economic model for this, but the simple version is as follows. If you assume a 50% chance of each side winning, then every marginal expenditure costs you half. So, to the extent that parties resist an escalation of litigation costs because they have to internalize the risk/reward ratio, that is altered in a loser pays setting. Every time I spend a dollar, there is a 50% chance that you will pay for it, so its discounted cost to me is 50 cents. Further, since I cannot control what you are spending, there is the risk that you may be spending me into oblivion—another incentive to escalate.
The great difficulty is with cases that are worth little in terms of damages, but where liability is pretty certain. Then there is no internal cost constraint on what the plaintiff might spend. This is more of a problem on the plaintiff's side because the defendant is not the first mover in litigation. There are some pretty notorious British cases on point.
Posted August 19, 2008, 9:57am
I agree with Victor that many judges view plaintiffs as a class as impoverished and defendants as a class as wealthy, so they are uncomfortable with a rigid "loser pays" rule. Going back to Rebecca's definitions, part of the problem is the concept of a "party"—which elides the distinction between the client and the lawyer and puts them together in one unit. In many types of cases, the actual decision-maker re: whether to bring a claim or defense is the lawyer, not the client. That is why some statutes (such as the federal one on frivolous or dilatory litigation, 28 USC 1927) allow for cost-shifting to the lawyer instead of, or in addition to, the client. Plaintiff's lawyers are typically a lot wealthier than their clients—at least in mass torts cases—and plaintiff's lawyers are the ones who actually decide whether or not to bring claims. So a rule that creates economic incentives that affect the client but not the lawyer will not get at the actual decision-maker in that situation.
Posted August 19, 2008, 10:03am
Most decision-makers in our present legal system, on both plaintiffs' and defendants' sides, oppose loser-pays. A cynical view is that compensating the victims of litigation would likely put many of them out of work by curbing the volume of such litigation. A less cynical view is that they’ve grown up with this system and can't readily imagine one so different.
Organized big business is almost as uniformly opposed to loser-pays, thinking that our lawyers and judges would rig the implementation to their disfavor. As for "public interest lawyers", they’ve carved out their own peculiarly favorable "one-way" fee shift regime: why level the playing field?
Someone out there, though, recognizes the idea’s essential fairness: the loser-pays idea polls very well with the public. And more and more Americans have spent time living in other advanced countries. They’re hard to scare with the bogey stories about the supposedly terrorizing effects.
Posted August 19, 2008, 10:11am
Loser pays is undesirable because it is simply un-American and is certainly in many cases unfair. It is perhaps much better suited to societies such as England or the civil law countries on the Continent which inherited the system along with wigs and robes. The courts in this country have traditionally been the place where injured parties "get even," that is to say, obtain some measure of justice. Many of these parties are seeking to enforce fundamental rights given them by Congress such as workplace, labor or civil rights which they often test in court proceedings. The burden of loser pays will obviously fall on disappointed plaintiffs. There seems to be a built-in assumption that such parties have brought "frivolous" or "meritless" claims and should be punished as they are an excrescence on the legal system. Many non-prevailing plaintiffs, however, have indeed brought meritorious claims brought in good faith. They may lose their cases for a host of reasons unrelated to the merits such as judicial error, refusal or inability of witnesses to testify, novel interpretations in he law or the vagaries of jury verdicts. Often, it is difficult to determine which party really prevailed. Suppose a suit is brought for an injunction and is dismissed as moot because the defendant in response to the suit changed its illegal practices. Suppose a corporation and its directors who were sued in a derivative action rescinded a questionable transaction and the suit was dismissed? Suppose there is law office failure: a lawyer failed to make a demand or meet a deadline required by law, but the claim is meritorious nonetheless? Should the litigant be compelled to pay the other side's legal fees? One would think not. Loser pays, it is true, may deter some suits that shouldn't be brought. There are however, sufficient penalties in place under the present system for bringing vexatious or frivolous litigation. The cost of litigation is too high as it is, with associates' salaries in large law firms exceeding the salary we pay to the Chief Justice of the United States. We should not add to that burden by imposing an additional economic tax on the litigant who thought she had a good case, but, in an adversary system that inherently advantages those with money anyway, wound up on the losing side.
Posted August 19, 2008, 10:16am
In answer to Rebecca's question, the history here is instructive—and it suggests a different answer from the one offered in Victor Schwartz's interesting post.
The origin of the so-called American rule lies in the transformation of the legal profession in the Age of Jackson. Lawyers in the first half of the nineteenth century started making side-deals with their clients for fees greater than the court-regulated fees. Some clients were willing to make these deals to get better representation; others no doubt felt they had little choice in the matter. But either way, side deals started getting struck. And some of these fees were contingent on a successful outcome—the now familiar contingency fee.
Here's the key part: Courts were willing to uphold these side deals, including the contingent fees. But courts were not willing to treat them as part of the costs that losers paid to winners at the end of a case (as far as I know, no lawyer ever actually had the chutzpah to ask for their side deal to be passed on to the other side). The American rule thus gets its beginning in a classically American moment of privatization. It happens under the regulatory radar. And it sticks because it is under the regulatory radar. The bar as a whole (not just the plaintiffs' bar) has an interest in keeping its fees deregulated and private. The American rule leaves the lawyer's fee to the free bargaining of the lawyer and client. But as soon as you adopt the English rule of loser-pays, then courts will have to monitor and rule on the reasonableness of those fees.
I should add a second historical reason why the American rule has stuck since its beginnings in the Age of Jackson. No one can really tell whose ox would be gored by a switch to the English rule. Some of my colleagues on the panel will know more about the game theory and the empirical evidence, but a vast literature on this question concludes that it is not at all clear that the English rule would reduce so-called frivolous lawsuits. Look at it this way: a plaintiff with a taste for risk, or the judgment-proof plaintiff mentioned by Victor Schwartz, will be more likely to sue under the English rule because it expands the size of the available winnings. The risk-loving plaintiff won't care that much that her downside risk has increased. And the judgment proof plaintiff won't have any added downside risk at all. If you think about it this way, the history of the American rule may be, well . . . accidental. But it's not at all clear that it's worth the candle to change it.
Posted August 19, 2008, 10:21am
Samuel worries that a loser-pays rule will cause litigation expenses to escalate because each party gets all of the benefit of their own additional spending while a portion of that cost is borne by the opposing party. This worry would be well-founded if additional spending always improved a party's chances of success at a set rate and if the expenditures were not what economist Avery Katz calls "provocative"—that is, did not inspire the opposing party to also spend additional funds.
But neither of these things seems to be true of actual litigation. First, the law of diminishing returns seems to apply to additional spending. Second, as our fellow panelist Herbert Kritzer has found, spending in litigation is largely driven by the number of litigation "events," such as motions and hearings, that occur. Spending more money by filing an additional motion is a classic "provocative" expenditure: the opposing party will have to spend more money as well. Even Katz agrees that provocative spending doesn't trigger the kind of escalation that Samuel worries about.
Posted August 19, 2008, 10:30am
I am glad that Sam brought up the example of defamation in Britain, which is a good example of the toxic effects of loser-pays combined with a set of rules that seem biased towards plaintiffs—the result, predictably, is to exponentially increase the risk-adjusted cost of liability for defendants.
Transnational comparisons can be tricky, but they are probably as useful in the formation of policy as formal theory (that is, both are modestly useful). Consider the following: The U.K. has loser-pays and the contingency fee and Germany has loser-pay and no contingency fee. The U.S., U.K. and Germany have some of the highest litigation rates among developed nations (the U.S. and U.K. are at the very top—along with Israel—and Germany is just below).
I have spoken to many German lawyers who have told me that their client's decision whether or not to sue depends entirely on whether they have "legal insurance" which is pre-event insurance to cover the cost of bringing a suit; and in the U.K., of course, there is a healthy market in "post-event" insurance that covers the risk of paying one's opponents costs if one sues and loses.
This suggests to me that even if we change the loser-pay rules, litigation rates may stay high if alternate funding mechanisms are developed. The incentive to "load up" on costs is present in the U.K. and Germany under their different systems. What keeps the costs down in Germany, I think, are their rules of civil procedure, not their loser-pay rule.
Posted August 19, 2008, 10:35am
Loser-pays does tend to do better at vindicating strong small claims, which of course is a feature rather than a bug. But all non-U.S. systems I know about incorporate safeguards against the tendency to overinvest in the lawyering done on behalf of such claims. Either they try carefully to scrutinize whether the outlays by the winning side were truly reasonable and necessary (a job for the U.K.'s "taxing masters") or they low-ball the recoverable costs, leaving some of them to lie where they fall, or both.
Pace my friend Victor Schwartz, the Alaska and Florida experiences are as different from each other as can be. Alaska has retained its loser-pays principles for these many decades because they work well (they include "low-balling", in the form of assigning only a percentage of incurred costs). Florida's med-mal experiment was a sad botch that illustrates the observation (hardly unique to this topic) that poorly drafted legislation administered by those unsympathetic to it can abound with unintended consequences.
Posted August 19, 2008, 10:42am
Losing a case does not mean that the plaintiff brought a frivolous lawsuit or that that the defendant mounted a frivolous defense. Much of the discussion of “loser pays” mistakenly assumes otherwise, but the revolutionaries who founded this nation complained that Mother England had taxed away our ability to go to court. That is what the Stamp Act controversy was about and why the Declaration of Independence scored the King for denying us trial by jury. Instead, we have made a constitutional commitment that Americans should have their day in court. An interest in deterring frivolous lawsuits—and which cases qualify is often in the eye of the beholder—cannot outweigh our imperative to have disputes resolved in a impartial tribunal when no other means is available. Any other rule would artificially and improperly curtail access to the courts by all but the well-heeled. “Loser pays” looks too much like that Stamp Act tax.
Posted August 19, 2008, 10:47am
I agree with Victor that Florida's experiment with loser pays for medical malpractice cases from 1980 to 1985 is instructive, but I disagree with his conclusion that loser pays is unworkable in the U.S. The Florida rule was in many ways a misunderstood success, though it took a couple of good economists several years to figure this out. Edward A. Snyder and James W. Hughes analyzed a large database of Florida malpractice cases before, during, and after the loser pays period. They concluded that loser pays caused plaintiffs with weak claims to drop their suits far more often, leaving courts to focus on more meritorious claims. While spending per litigated case went up, so did the average stakes per litigated case—the average stakes were higher under loser pays because the really weak cases had already been weeded out. As a function of stakes, spending per case changed very little. Snyder and Hughes also learned that loser pays meant fewer cases went to trial: only 6% of Florida medical malpractice cases were actually tried under loser pays compared with 11% of cases under the American rule.
Posted August 19, 2008, 10:53am
I'm glad that Anthony raised the important issue of litigation expense insurance, which is very common in loser-pays jurisdictions, but I disagree with his suggestion that insurance undermines the effects of loser pays. After-the-event insurance in particular introduces beneficial underwriting into the case selection process. Under loser pays, insurance companies have a strong interest in separating good claims from bad before any complaint is filed, and they have more expertise to make this assessment that the average plaintiff. Bad cases in the UK are not insurable.
Posted August 19, 2008, 11:01am
We all have to acknowledge that there is at least the perception that litigation is too easily brought, and very expensive to defend. There is also a perception that those of us who are lawyers have a vested interest in the system, and are unwilling to look at the flaws of that system. I return to my original question, with a twist: what are we trying to accomplish with our American civil justice system? Do we want a system that provides a just, speedy and inexpensive determination of every dispute? (That language, of course, comes right out of Rule 1 of the Federal Rules of Civil Procedure.) Do we want a system that permits people to resolve differences—large or small—in court? If so, do we have that kind of a system? I suggest not. Maybe what we should all try to do is define the problem. Is the problem too much litigation, or is the problem that the cost of litigation—to litigants and society—is generally too high?
Posted August 19, 2008, 11:06am
Loser pays is a very blunt instrument to discourage “frivolous lawsuits.” First I think the real issue is abusive litigation, rather than frivolous cases, by which I mean cases that may have some merit but which are freighted with abusive discovery and satellite litigation in an effort to make them more valuable then the merits would support.
One thing to think about is having a loser pays approach follow some sort of merits screening process as some states use for malpractice cases, so that the loser pays approach would kick in if such a screening panel found no basis for the claim.
The other variant on loser pays that presents a real opportunity is offer of judgment rules. Not Federal Rule 68 which just shifts costs rather than fees, but rules like we have in New Jersey, where the failure to recover in excess of the offered amount will shift fees, although there are various court-made complexities.
Posted August 19, 2008, 11:12am
I believe (in part based on personal experience) that our system allows and encourages litigants and lawyers to take clearly unreasonable (if not "frivolous") claims or defenses to court because there is very little risk of being sanctioned for doing so. At the same time, I am impressed with the already-stated concerns that a broad loser-pays regime might be a cure worse than the disease or be undermined by judicial reluctance to require losing plaintiffs—even those who have brought vexatious claims—to pay defendants' fees.
I wonder whether more narrowly drafted fee-shifting rules, such as those contingent on early offers or offers of judgment, might produce more social benefits and fewer social costs than a broad loser-pays regime.
I also wonder whether judges might be more willing to enforce such rules even-handedly if the rules specified that in contingent-fee cases, any fee-shifting in favor of defendants must come at the expense of the lawyers who bring losing claims rather than the plaintiffs themselves. This would also be in keeping with the fact that, as others have pointed out, the lawyers are usually the real decision-makers in such cases.
Posted August 19, 2008, 11:24am
I would dispute the notion that litigation is too easily brought. The contingency fee system by which plaintiffs pay lawyers means that a premium is placed on investigating claims, getting expert evaluations, and determining whether the risks and rewards are sufficient to support the case. The time and money that goes into cases is significant. When the plaintiff loses the case, the lawyer is not only out of a fee, but out of significant expenses. This operates, without loser pays or without any form of sanctions, as a significant barrier to filing a case from the outset.
Posted August 19, 2008, 11:34am
I agree with Robert (and others previously) that the fact that a lawsuit is lost does not necessarily mean that it was "frivolous" ex ante.
But that raises an interesting issue for me: what do we really mean by "frivolous"? Would we want to deter only "frivolous" lawsuits, or also perhaps some of those that are not "frivolous" but were just very unlikely to succeed? For example, if an attorney could predict in advance that a given lawsuit (or defense) had far less than a 50% chance of success (or 10% or 1%), would we want to deter it from being brought? Perhaps there is a social value to some lawsuits (or defenses) being brought even though they only have a very small chance of success? But is that necessarily true for all lawsuits that have only a very small predicted chance of success? Why should the defendant pay "his" costs of defense where the lawsuit was very unlikely to succeed? Is giving a plaintiff a "day in court" so valuable that the defendant should subsidize whatever it costs, even if the chances of success were very low?
In short, are there ever any cases that could be brought but should not be brought? Or do we (and I note that most of us are lawyers) think that all possible cases that can be brought, always should be brought, even if the chances of success are very low and that the defendants should pay "their" costs? Wouldn't a policy that encourages low probability of success cases create powerful incentives to bring a lot of such cases with no real hope of success merely in order to create settlement value in terms of the costs of defense avoided for defendants?
Posted August 19, 2008, 12:01pm
The British example also shows what happens when those costs are not internalized. It is not just the question of bringing suit or not, but how much to invest in a case. Under the American system, no case with potential damages of $100,000 will prompt a plaintiff (or plaintiff's lawyer) to invest more than that amount (and likely considerably less) since the recovery is capped by the amount in controversy. Under fee-shifting, however, costs are not internalized and there is no natural limit to the amount a party with a strong hand is likely to spend. This puts a great deal of pressure on what the British term the “taxing judges.” But even in Britain, costs routinely exceed the amount in controversy. The defamation cases are a good example of this.
Posted August 19, 2008, 12:14pm
I agree with the thrust of Don's comments/questions. In particular, I am convinced that the social costs of giving every potential plaintiff his or her "day in court" often exceed the social benefits.
To pick one example, our one-way fee-shifting rules in federal civil rights litigation encourage a lot of employees who are legitimately dismissed for underperformance to bring bogus or unreasonable discrimination claims based on race, disability, age, or gender discrimination. A strong case can be (and has been) made that this is bad not only for wrongly accused employers but also for the valuable employees (and potential employees) whom the civil rights laws are supposed to benefit.
Because unwarranted wrongful dismissal lawsuits are so much more common than failure-to-hire lawsuits, employers know that new hires who do not perform well will be far more difficult or expensive to dismiss if they are members of protected minorities. One employer told me privately that 20 percent of his company's new hires don't work out, and that the company is routinely sued when it dismisses those who are members of protected minorities. This creates a major disincentive to hiring protected minorities, especially when they are competing with equally qualified applicants who cannot claim protected-minority status.
The same rules that encourage unwarranted claims thus discourage employers from hiring protected minorities who (in most cases) could turn out to be excellent employees. Saying that all civil rights lawsuits are good and should be encouraged by (among other things) one-way fee-shifting rules does not make it so.
Posted August 19, 2008, 12:29pm
Samuel's observation about the British system is spot-on. When Grand Prix race car czar Max Mosley recently sued Rupert Murdoch's News of the World in the London High Court for invasion of privacy related to the tabloid's secret videotaping of Mosley engaged in a sadomasochistic orgy, he was awarded roughly $120,000 in damages. But the publication also had to pay Mosley's legal fees, estimated at $900,000 as well as its own fees, which were reported to come to $800,000. It is possible that in America, the Mosley case, which was more about prurient than legal interests, would never have been brought. For further information about the issues involved in the Mosley suit, see my column in the New York Sun of August 12.
Posted August 19, 2008, 12:39pm
Ahh, Mr. Peck is right that the contingent fee system is a good cipher to prevent personal injury lawyers from bringing cases that are assured "loser". But a significant part of the real world, as I am sure Mr. Peck knows, is left out of this picture. Just ask any small business person, school district or other potential defendant that is subject to smaller claims. A real example: A plaintiff’s lawyer sued someone who owned a restaurant and bar. The plaintiff claimed that he was served liquor when he was inebriated and then had an accident. He sued for $200,000. He said this was in violation of the State's Dram Shop Law (it was). Only problem: when the plaintiff told police where he drank on his binge, he did not mention the bar. Good reason: he was never there. But his lawyer offered to settle for $10,000, under the cost of defense. The Restaurant's insurer wanted to settle. From a pure economic point of view, the insurer was correct. The state's frivolous claim rule (just like Fed. R. Civ. Pro 11) was weak and useless. Bottom line is that "bottom feeder" plaintiff lawyers beat the contingent fee system. Stronger rules to sanction frivolous claims MAY help.
Posted August 19, 2008, 12:43pm
Let’s break down the discussion a bit. Assume that a ‘frivolous’ lawsuit is one that is lacking in legal and factual merit and brought only for settlement value. Without addressing the question of how many of those lawsuits are actually brought in a given year, can we agree that they should be deterred, and if so, how?
Posted August 19, 2008, 12:48pm
Let me approach the question of loser-pays from a normative perspective. Let’s assume that the adoption of loser-pays would not make a significant difference to the rate of frivolous or long-shot litigation, and it would not reduce the cost of litigation. Is there non-consequentialist argument for the English (and European rule)?
It seems to me that argument for the American rule is that no one should be “punished” for exercising her rights. But this seems like a weak argument to me. To ask someone who initiates a process which dragoons others into responding to pay for the costs of that process is not unfair—after all, they are the one who chose to initiate the cost-creating activity. Of course, one might say that the “initiator” (i.e. plaintiff) is not acting voluntarily when she files a tort suit. No one (other than fraudsters) wants to be a plaintiff in a personal injury; they are there because they have been compelled by the acts of the person whom they are suing (i.e. the defendant).
But the defender of the American rule has to be careful here: they can’t assume that the defendant’s compulsion of the plaintiff’s suit is wrongful. After all, the defendant may have caused the plaintiff’s injury without fault, or the defendant may not have caused the plaintiff’s injury at all (the plaintiff may have a reasonable but false belief about the defendant’s culpability). So the real question is, who is responsible for the “secondary costs” (to use Calabresi’s phrase) of an accident which was not wrongfully caused?
The analysis above suggests to me that, assuming no provable immediate consequential difference between the choice of rules, supporters of strict liability in tort (and there are some on both sides of the political spectrum) should support the American rule while supporters of corrective justice (and there are some on both sides of the political spectrum) should lean towards the English rule.
Posted August 19, 2008, 12:56pm
I agree with Taysen that merits screening processes make good sense (and am currently working on an academic piece re same). Among other reasons, it is the power of the state that compels the defendant to appear in court and to incur costs to respond. I don't feel that the state may constitutionally compel someone to appear and respond without first satisfying itself that there is a reasonable basis for a lawsuit that justifies requiring the defendant to answer it.
In a sense, "loser pays" attempts to use economic incentives to make the initiating party (e.g. plaintiffs' lawyer considering whether to file a suit) into the "merits screener." The hope is that the risk of losing and paying the other side's costs will result in better decisions about which cases to pursue (and as Sam rightly points out, also how much to invest in them). But there are lots of reasons in behavioral economics (as well as our own experience) to believe that people are not necessarily objective or particularly good at making rational decisions about projects in which they are themselves involved. So a third party may be in a better position to act as a "merits screener" than a litigant or her lawyer. Although perhaps there is some value to having both consider whether a case should be brought (and how much process costs to invest in same).
Posted August 19, 2008, 1:06pm
The first goal, I suppose, is to identify whether there's a problem with litigation in this country that fee-shifting might address. My experience as a practicing lawyer is that claims and defenses have gotten more extreme—claimants sue for the moon, and defendants make up all kinds of excuses to drag things out. There is no disincentive to making extreme arguments. This doesn't mean that they ultimately prevail—judges and juries are generally sensible—but it does reduce the level of trust in justice. A Harris poll found that only 16% of Americans would trust justice if someone brought a baseless claim. Ask any teacher, or manager, or doctor, and you will hear stories of legal threats. This undercurrent of legal fear skews sensible judgments and erodes the authority needed to run classrooms, to make sensible healthcare decisions, and to interact honestly in society. It's not just the fear of losing, but the fear of being dragged over the coals at the whim of some angry person. So I believe there's a problem, caused in part by the perception that justice doesn’t aspire to keep claims and defenses reasonable.
The main solution, as I've argued elsewhere, is for judges to take the responsibility to draw boundaries of reasonable claims. But I also think there should be a disincentive for making arguments that are remote or extreme. What about a rule that requires judges to make a factual finding at the end of each case as to whether there was a reasonable basis for the losing claim or defense? If there was not, then the judge could shift fees for that portion of the claim or defense. If judges did this every once in a while, that alone might be sufficient to drive litigants back towards reasonableness.
Posted August 19, 2008, 1:12pm
It seems to me that the debate needs to get beyond the vague generalities of the “day in court” tradition, on the one hand, and "frivolous lawsuits," on the other.
There are at least two things we know about fee-shifting. The first is that it would require substantial new mechanisms for regulating the fees that could be passed on to the loser (thus the deregulatory history of the American rule). The second thing we know is that fee-shifting rules send a shock of altered incentives coursing through the highly decentralized American litigation system. The effects of these altered incentives might be good, they might be bad, but they would be just as complicated as the labyrinthine system into which they would flow.
As far as I can tell, we don't right now know how such a change would ripple through the interactive behavior of plaintiffs, plaintiffs' lawyers, defendants, defense lawyers, and insurers. We've got a little bit of theory and some isolated empirics, but we're basically in the dark. One suspects that the effects would vary widely by litigation context -- defamation will be different from auto cases, which will be different from med mal and products cases, etc. Each will turn on a highly local political economy of lawyers, clients, and insurers. If that's right, then generalities about loser pays in the abstract will not be all that useful.
Posted August 19, 2008, 1:16pm
Thank you, Rebecca, for finally raising this issue. Anecdotes abound, but I know of no systematic research showing that frivolous lawsuits occur as a significant proportion of cases (or claims) that are brought. I am not saying that there are no such claims or cases, only that no one has been able to document that they constitute a significant proportion of what is out there. In the course of research on insurance defense practice, I asked lawyers if this was a significant problem in the cases they defended. The general response was that such cases were rare when a lawyer was on the other side; if there was a problem, it involved pro se claimants.
On another thread, if we were to move to some sort of large-scale fee shifting system, we would need to create an reasonable structure/system for determining what should be shifted. This is not something our judges find interesting. Would we want to create a set of "costs judges" (as they are now called in England)? Are we prepared for the extensive satellite litigation that would ensue over fees?
Finally, research in Alaska, the one jurisdiction with a routinized fee shifting regime, provides no evidence that "frivolous" cases are deterred. When Alaskan defense lawyers were asked about the impacts of the state's lower pays rule, the primary effect they described was that it increased the value of plaintiffs' cases.
Posted August 19, 2008, 1:36pm
I doubt that any lawyer or client would admit to bringing a lawsuit "lacking in legal or factual merit" unless that means that the plaintiff has a less than 50-50 chance on the merits, which could mean every lawsuit. The Rule 11 that was put in place in 1983 and removed less than a decade later is an example of post-hoc judging of the validity of claims, that hit at both lawyers and clients and was often used as a threat to drop viable cases. No one thought it worked well and that is why it had such a short, but destructive, life.
I doubt that any major change in the American rule is likely to occur, nor should it; if there are problems, they are centered on certain kinds of claims or conduct, and we should focus on drafting sensible and narrow rules to deal with them. As for the comment made earlier by Walter Olson that loser pays polls well, this issue is much too complicated to be determined by polls of people who have almost certainly never given the issue a moment's thought—unless they would have benefited from the English rule.
Posted August 19, 2008, 1:45pm
There is a deeper difficulty here because no one will defend a lawsuit totally lacking in legal and factual merit. However, there are two types of lawsuits that some might place in that category, but do not belong there. First is the type of lawsuit that requires a certain amount of experience losing before it succeeds. In this category, we might place pioneering cases, whether they were the types of civil rights cases designed to overcome adverse precedents step-by-step, or cases like those brought against the tobacco industry, which boasted a spotless record for so long. As for the latter, it would not have been hard to expect that the tobacco companies would have pointed to that record and claimed the lawsuits were frivolous, lacking both legal and factual merit. In fact, it was not until the documents hidden from normal discovery came out that some of these misrepresentation cases succeeded for the very short window that the statute of limitations allowed. The second category, perhaps related, constitutes those cases that cannot be made without discovery. Given our system’s heavy dependence on mandatory discovery to make or break a case, it seems that it will often be difficult to know whether the client’s version of the facts holds up or not. So, to tell Stuart Taylor’s proper employment discrimination claimant from one that has no grounds is often impossible until the case is filed. Still, there is a social benefit from allowing the filing. Those who were discriminated against will not simply see the system tilted in favor of protecting the discriminators, but instead will find the system capable of making judgments. Perhaps this is what Daniel Webster meant in arguing the Dartmouth College case when he said that the “law of the land” is “law which hears before it condemns; which proceeds upon inquiry, and renders judgment only after trial.”
Posted August 19, 2008, 1:49pm
Would the advocates of loser pays dock the "plaintiff loser" of a non-frivolous lawsuit with the defendant "winner's" legal fees in the following circumstances:
1. An action for divorce (where the husband may bear the wife's legal fees anyway) where the wife claims cruelty, the husband does not contest the allegations, but the Court finds the alleged misconduct insufficient to grant the divorce.
2. An action for personal injuries brought by a guardian ad litem where the guardian may feel she has a fiduciary duty to bring the claim, and be subject to serious criticism and even litigation if she doesn't.
3. An action by a widow against her stepchildren so that certain personal property of the decedent will not be taken from the marital household.
4. An action by a Presidential candidate for a recount of the voting in certain counties where the winner of the lawsuit will become the President.
5. An action for child custody where the father is found to be the better parent.
6. An action under the civil rights law where a homeless man is beaten by a police officer.
Posted August 19, 2008, 2:07pm
Let’s talk about Alaska for a moment. There, it was found that the people most affected by the fee-shifting rule were people of modest means (but not poor people), who were dissuaded from filing if there were weakness in the case—but overall, few attorneys said the rule affected their decision to file or not to file. Hence, the system weeds out marginal but not necessarily frivolous cases—but there is an overall decrease in lawsuits per person in Alaska compared to other states.
Is that really an objective in and of itself? I would suggest not.
We must also remember the declining rate of trials in the United States, and the fact that very few lawsuits actually result in jury verdicts or judgments and published case law. We have already constructed a system where settlement is almost mandatory. Would loser-pays change that dynamic and encourage more cases to go to trial?
Posted August 19, 2008, 2:55pm
Going back to question that Philip raised: Is there something wrong with litigation in the US and will loser pay fix or help fix it? I would say there is something terribly wrong with litigation, but that an overall loser pays rule will not likely help much. And that’s for all the reasons stated: the cultural unwillingness to actually enforce such a rule against individuals trying to obtain redress for perceived wrongs, and the complexity in the B to B context of figuring out who won what and what costs and fees are properly attributable to the part won.
Putting aggregated claims aside for the moment, which creates its own set of problems, one key thing that is clearly wrong is the enormous expense and delay of the litigation process and the ability it provides participants to harass and oppress their opponents far beyond any reasonable measure. The expense and delay results from open-ended discovery and the unwillingness of the system to resolve some or all of the claim before the completion of discovery.
This suggests we should be crafting “loser pay” rules toward the discovery process, for example, taxing the costs of discovery that did not yield evidence used at trial or on a dispositive motion. Somehow we need to provide some disincentive for the punishing leave-no-stone-unturned discovery model that is actively encouraged today. That’s what I would take from our European colleagues, not loser pays, but their aversion to endless, disproportional discovery.
Posted August 19, 2008, 3:12pm
A brief story in response to Taysen:
I just got back from a trip to Australian National University. I was joined in Canberra by Deborah Hensler, now of Stanford Law School, and previously the director of the RAND Institute of Civil Justice. She told of making a presentation about the supposed "discovery problem" to a some members of the Civil Rules Committee. When she was done, several people expressed surprise at the data because nowhere did they see "their" cases. Deborah's response: “Your cases are off the map.”
Are there cases in which discovery is huge, excessive, and burdensome? Of course there are. Does this constitute a significant proportion of the cases in either state or federal courts? Almost certainly not. Do these cases capture the attention of judges, lawyers, and the media? Yes, because they are big, unusual, complex, and often innovative (and they are the cases that take significant amounts of judges' time).
The challenge: to the degree that there is a problem, how does one craft a solution that does not create more problems for the cases where this is not an issue?
Side note: the one consistent pattern in research on increasing judicial management of litigation is that it increases costs for many more cases than it decreases costs (it may speed up the process, but at a real monetary cost to the parties).
Posted August 19, 2008, 3:15pm
Herbert and Rebecca each cite portions of the same Alaska survey finding 1) that loser pays did not deter "frivolous suits" and also 2) that loser pays did deter low-probability-of-success lawsuits involving non-indigent plaintiffs. Alaska attorneys could agree with both of these statements because they regarded only lawsuits filed by completely irrational actors as "frivolous." Changing people's financial incentives obviously will not affect the behavior of a small minority who make wholly irrational decisions. Rather, the goal of loser pays is to discourage low probability-of-success lawsuits filed by rational actors in order to extract nuisance settlements from defendants.
Robert argues that plaintiff's lawyers have an adequate incentive to refuse to file such suits under our contingent-fee system, but Lucian Bebchuk and others have shown that negative-expected value lawsuits (those that would lose money if tried to a verdict) can be filed and settled for sums that make them worthwhile to lawyers and clients. Highly capable plaintiff's lawyers do indeed reject lousy cases, but Herbert's research has also identified a subset of less elite plaintiff's lawyers who take many small and uncertain cases on the assumption that most will settle. Low-merit cases can settle under the American rule because plaintiff's lawyers (this part is me, not Herbert) exploit a sort of collective action dilemma faced by defendants: the trial lawyer has a portfolio of suits against different defendants, some of which will certainly settle and keep the lawyer in business even if you don't. The right move, then, is to settle as well, since doing so is cheaper than going to trial. Loser pays is a good idea because it makes it far less profitable to be a "nuisance lawyer:" a less-successful member of the trial bar who files primarily low-probability-of-success suits.
Posted August 19, 2008, 3:24pm
Certainly fishing expeditions as a discovery strategy are easily condemned, but all too often discovery fights are about trying to ferret out damaging information purposefully and carefully hidden. In a case in which the Supreme Court denied certiorari at the end of the term, the defendants sought review of the judgment against it despite a massive trial record that described a defense strategy of denial, deception, and subterfuge. Documents were withheld from discovery that demonstrated the defendants’ bad faith and that supported a specific jury finding that the defendants intended harm to the plaintiffs. Some of these documents were discovered only after the trial, causing the 11th Circuit to note on appeal that the defendants’ contemptuous abuse of discovery “prejudiced plaintiffs in their presentation of evidence to the jury, and on appeal.” A system that attempts to dispose of issues quickly without permitting discovery runs a substantial risk that such behavior will become standard practice.
Posted August 19, 2008, 3:36pm
But, Taysen, discovery is highly regulated. Depositions are generally limited to one day per witness. Parties routinely seek protective orders where discovery becomes too burdensome or too intrusive. Cost shifting, and sometimes fee shifting, in discovery have been sewn into the fabric of the system for years. Sure, there may be "unproductive" discovery because the standard is not what is admissible, but what is reasonably calculated to lead to admissible evidence. Nonetheless, discovery saves time later, avoids surprise ("trial by ambush"),enables the parties to narrow the issues, creates a blueprint for trial and streamlines trial preparation. Most importantly, it often leads to settlement. As for the "law's delay," that's been around since Hamlet.
Posted August 19, 2008, 3:40pm
Perhaps there is little abusive discovery in personal injury litigation, but in the subset of corporate and securities litigation, discovery requests are themselves a bludgeon for settlement. I had one case last year, involving a separation of two partners, that had over a million documents produced. It wasn't useful—just very, very expensive.
Posted August 19, 2008, 3:42pm
I fear I step out of my moderator’s role, but I cannot constrain myself. Indeed, our research indicates that broad discovery occurs in a significant portion of American civil cases, and that such discovery drives up the costs of litigation significantly. Those costs are being compounded by the advent of e-discovery. I fully agree with Taysen that we can productively focus our discussion on how to control abusive discovery (propounded both by plaintiffs and defendants) without eliminating the discovery to which Bob Peck refers—and that if we could get that problem under control, we would go a long ways toward balancing the costs of litigation more fairly.
I also must add that our data suggest that when judges manage cases appropriately, the delays are minimized and time does mean money. I would be interested in hearing more from Bert about his contention that real costs actually increase when a judge controls the litigation closely. Certainly, there are techniques that have resulted in increased costs without commensurate benefits (various pretrial filings may fall in that category), but overall, the benefits of case management appear clear.
Posted August 19, 2008, 3:47pm
Marie Gryphon does not accurately describe my research. I do find that lawyers take many cases that would not be "profitable" to litigate on the expectation that they will settle. Importantly, where there is uncertainty about the outcome of the case, that uncertainty does not typically reflect issues of negligence but issues of (a) value, and (b) causation of specific injuries (did the accident aggravate an existing back injury or does the current condition simply reflect a normal progression?).
One must ask who would be most impacted by loser pays? The answer is that it hits the middle class (particularly the upper middle class) the hardest because they do have assets (homes, retirement funds, college savings for children, etc.) that might be lost in an adverse outcome. Persons of low or modest means would be "judgment proof" and those with substantial income/assets could afford to spin the dice.
Posted August 19, 2008, 4:01pm
We've got a number of different balls in the air right now, but let me ask: Why does Marie Gryphon think that zero-value suits become positive value suits as the result of defendant-side collective action problems? There are lots of different kinds of cases we could be talking about, but in tort and accident cases the defendants are often not disaggregated individuals subject to collective action problems, but deep-pocket repeat players, insurance companies or large self-insuring firms. As for those defendants who are one-shot players, liability insurance allows them to substitute a repeat player as the real party in interest. If all that is right, then defendants actually seem to be in a pretty good position to exploit economies of scale and develop long-term value maximizing settlement strategies.
A young scholar named Nora Freeman Engstrom has an excellent paper in draft with a much better account of how plaintiffs'-side settlement mills turn zero-value cases into positive-value settlements. The answer Freeman Engstrom gives is that the settlement mills and the insurers essentially collude, agreeing to a pattern of settlements that raises the value of the low-value claims in return for discounts on the settlement of claims that would have positive value if brought on their own. This is not necessarily a pretty picture of the lowest rungs of the tort system—one class of plaintiffs with relatively greater injuries is subsidizing another class of plaintiffs with relatively lesser injuries. But as a descriptive matter, the story Freeman Engstrom tells seems to me to make a good deal more sense of what's going on at the bottom end of the market than the defense-side collective action problem. And as far as I can tell, fee shifting might not change the conduct of these settlements at all.
Posted August 19, 2008, 4:05pm
I would be curious to know what constitutes (a) broad discovery, (b) a significant portion of American cases, and (c) what American cases are being referred to?
There almost certainly is more discovery in federal cases and the CJRA evaluation did not find large amounts of discovery in more than a relatively small portion of the federal cases it studied.
Regarding judicial management increasing costs, it reflects the lawyers' need to be responsive to the demands of the judge. In a big, complex case this may reduce time and costs. In more modest cases it adds costs. This is not unique to the U.S.; it is also one of the impact of the Wolff reforms in England.
Posted August 19, 2008, 4:10pm
The potential for stark change in American practice being pretty modest, discussion about the effects of various alternative versions of Loser Pays runs some risk of violating the maxim that the perfect is the enemy of the good. If there are actions taken in the litigation system that unjustly impose costs on persons who did no or very little wrong (and it seems we mostly agree that this does happen), the productive questions are what might be done to ferret these out and deter them. Perhaps this is another version of a question Rebecca Kourlis recently asked.
It is certainly right that the tools of deterrence presently placed in the hands of judges do not get deployed often enough to make much difference. Bob Peck and James Zirin are correct to say that the notion of citizen access to an independent judiciary is as old as the Republic, and judges as a class take this access as part of their mission. One of the reasons why judges may overcompensate in vindicating this right of Americans is that judges know very little about how high the cost of litigation really is. Courts work to isolate themselves from discovery disputes (one reason why we deal with discovery through "regulation"), and by the time you take out the nuisance settlements and general settlements, judges don't learn much about how much all this actually cost. A regime that somehow informed judges about this aspect of American justice would probably make a difference.
Working in the realm of the possible, the mention today of screening processes, fees assessed to lawyers, and focus on less global solutions seem most likely to be useful.
Posted August 19, 2008, 4:48pm
I agree with John that many nuisance suits feature repeat-player corporate defendants who are pursuing maximizing strategies over their entire case portfolios. The reason that they nonetheless face a collective action problem in the context of small, traditional tort suits featuring individual fact patterns (slip-and-fall cases are good examples) is that they are being sued by many different trial lawyers (each of whom may only have one case pending against a particular defendant at one time) who are themselves each suing many different corporate defendants. It is true that this analysis does not apply to mass torts or similarly related claims. The forthcoming Engstrom paper sounds exactly right to me as an account of what happens in the context of mass torts, and I look forward to reading it. Coincidentally, I offered the same thesis—that trial lawyers and defendants collude in order to impose settlement agreements that transfer value from high-expected value cases to low ones—as a critique of the ethics of the Vioxx mass tort settlement in a short article in January.
Posted August 19, 2008, 5:42pm
Re Bert Kritzer's point (quoting Deborah Hensler) I'm not sure I see why it really matters if cases with abusive discovery are only a small percentage of the total federal caseload. The problem is real even if it is localized to a small percentage of cases. The observation does perhaps raise the issue of whether a single set of rules can realistically handle a very diffuse set of cases. But we're really way past that: "judicial management" can be understood as tailoring or custom designing a set of procedures to a particular case.
Posted August 19, 2008, 6:00pm
Sewing up this discussion with the thread common to most, if not all, of the posts today, it appears unlikely that the U.S. will be implementing a “loser-pays” model of fee-shifting on a national or other broad scale any time soon. There are too many uncertainties as to whether it would, in fact, remedy real or perceived problems—or whether it would, instead, cause scores of new problems. Our system of justice may be too different from those countries that do enforce the loser-pays model to accommodate such a sweeping change.
However, there does appear to be a consensus that we have abuses in our system, and that there are some potential solutions that would target those abuses, as summarized by Chief Justice Shepard. Tomorrow, I hope we turn our attention to that part of the discussion.
Thank you for your lively participation, and I look forward to our ongoing conversation.
Posted August 19, 2008, 6:09pm
With respect, I think there's a bigger point here. The metaphorical image of justice holds scales in balance. Instead justice careens here and there, tolerating wild claims and remote defenses in the name of neutrality. People fear justice, not in a good way, but somewhat in the way people fear arbitrary tyrants. Again, talk to teachers or doctors or camp counselors.
I think the opportunity for fee shifting is not as a blunt instrument to discourage all claims, meritorious or not, but as a risk to be weighed before bringing extreme and remote claims. If someone demands expensive discovery in a fishing expedition, and finds nothing, maybe they should pay for it. As we see with people's fear of litigation (overweighting by far any actual risk), perhaps people could be discouraged from bringing extreme claims by the prospect of having to pay fees when it's all over.
Posted August 19, 2008, 6:15pm
I think that whether there is a rational market in negative-value suits is an important question. Equally important are two subsequent questions: (1) How obvious is it, to a lawyer or a plaintiff, that any given case is a "negative value" case (and how much would they have to invest in to make this determination) and (2) how costly, to the system overall (and society) are "hard-core" negative value cases (cases with a negative value that is known to be so when filed)?
As to the question Marie raises—the existence of such cases—it is easy to see why a rational market in them might exist. Medical malpractice is a good example: in the case of a grave personal injury, the cost of investigation, depositions, and early-stage trial preparation plus the known fact of catastrophic damages means that it is usually rational for the insurer to offer policy limits, even if they believe that it is more likely than not that the catastrophic damages were not the result of negligence. A plaintiffs’ lawyer might truly believe that, based on the facts as they walk in her office, it is more likely than not that there was no negligence and still take the case—if the damages are high enough. I don’t see that John's answer—that repeat defense-side players can afford to litigate each negative value case until the last settlement-mill lawyer goes bankrupt—responds to this class of negative value cases.
But so what? If, as Robert points out, even in my medical malpractice example above, confidence about the truly negative value of a case is a matter of degree. If loser-pay is supposed to solve the problem of the negative-value case, it won’t work if the object of the threat, the plaintiff, doesn’t know whether he really has a negative-value case. The loser-pay rule works by relying on the plaintiff and his lawyer to decide whether to bring a suit and when to drop it (or settle cheap), and I am not sure that the plaintiff or his lawyer are the best actors upon whom to rely if this is your goal. The Europeans have loser-pay, but they also have something else, much more assertive judges.
Posted August 19, 2008, 6:35pm
While one can find examples that reflect the issues raised by Philip, the question that needs to be answered before instituting reforms is whether the kinds of fears he describes are based in broad experience or anecdotes, real or otherwise, that get conveyed through the media and the propaganda machines of organizations and interests that seek to change the civil justice system for their own benefit. A good example here is the source of any crisis that might exist regarding medical malpractice (see the work of Tom Baker or Neil Vidmar); medical malpractice is the archetypical area where one often has to file suit to get access to the information necessary to assess whether there is in fact a valid claim.
Rebecca suggests that there is a consensus that "we have abuses in our system." There is a difference between having systemic abuses and abuses occurring. I would challenge her to identify any system that does not have abuses. For example, one feature that might be implemented in a fee shifting system is that a defendant might be able to demand that a plaintiff be required to post "security for costs" before proceeding with a lawsuit. It is easy to see how this could be abused. Every system creates incentives and all incentives can be gamed in a way that some will see as abusive. Moreover, to the degree that there is a consensus among us that abuses occur, that is not the same as saying that there is a consensus on what those abuses are. I suspect quite the opposite—we sharply disagree as to the nature of any abuses we see as existing.
Posted August 19, 2008, 6:40pm
One thing to think about is whether the European advantage is not just in their rules, but also in the relative proportion of judicial resources they throw at a case. Erhard Blankenburg’s research suggests that one reason the German litigation system works well is that they have an extraordinarily high proportion of judges per capita compared to the number of lawyers and lawsuits per capita. It is possible that one reason American courts permit unfettered discovery (especially in e-discovery) is that they do not have the time or resources to challenge lawyers’ claims of relevancy. Federal judges, especially, are too busy with their criminal dockets. It is much easier to say yes to a request and externalize the cost onto the other party than to make a decision on the basis of no information and little reflection and risk reversal later.
Finally, a quick point in response to Bert’s comment that the middle class bear the greatest risk in loser-pay. I agree, but that danger could be significantly reduced if a market in litigation insurance developed or if we allowed third parties to invest in lawsuits. Third party investment by anyone other than attorney in her client’s case (through the contingency fee) is prohibited in the US and is permissible in loser-pay nations.
Posted August 20, 2008, 9:11am
On Philip's post, I think we would need to take stock of the benefits of litigation in order to assess the significance of the excesses Philip identifies. What's interesting to me about this discussion is that we've seen no consensus here that loser pays would reduce the filing of lawsuits across the board, least of all some of the kinds of suits Philip thinks are most troubling. And we've seen some reason to think that loser pays would bring pathologies of its own.
Posted August 20, 2008, 9:23am
Re the Gryphon/Witt/Engstrom thesis that "zero-value suits become positive value suits as the result of defendant-side collective action problems," let's not assume too quickly that there would be no "strike suits" without "defendant-side collective action problems." I'd love to read the Engstrom paper because I do agree that in my experience often "pattern settlements raise the value of the low-value claims in return for discounts on the settlement of claims that would have positive value if brought on their own." (I've thought of this as a standard "price discrimination" issue: a uniform price results in some people paying less than they would have been willing to pay, but reduces transaction costs of negotiating individual prices for each sale; but maybe they're right and it is sinister "collusion" by insurers and plaintiffs lawyers.)
But either way, that is NOT what causes weak cases to be brought to coerce settlements. Landes and Posner in their 1965 article in the Journal of Legal Studies showed that settlement values are a function of BOTH anticipated Judgments (J) AND litigation costs that can be avoided (C). As far as I know, that finding has never been debated and it is also true in my experience–parties do consider litigation costs that can be avoided in evaluating settlement. (And when one is a plaintiffs lawyer, as I sometimes am, one hypes the other side’s perception of the costs to defend by making broad discovery requests that will be expensive to answer, as I recently did in a case that the other side settled for "nuisance value.") Thus, a no value or low value case on the merits still has significant settlement value–created by the government compulsion to appear and answer that in turn creates defendant's costs of litigation that can be avoided by settling. (The problem becomes worse if the costs are asymmetrical: it costs less to file than to defend.)
Bert is right that there is "no systematic research showing that frivolous lawsuits occur as a significant proportion of cases (or claims) that are brought." But that's a flaw in the academic literature, not evidence that the problem does not exist. (I am currently working with the National Federation of Independent Business to try to remedy that hole in the literature; it is methodologically difficult to identify cases with little or no merit, but I can report that many small business owners pay large amounts to settle cases that they consider utterly frivolous, in order to avoid the costs of defense.)
This "forced payment of tribute" by the legal system in cases that the defendants perceive have absolutely no merit in turn leads to the cynicism and disrespect for the law that Phil so eloquently described at the end of the day yesterday.
Posted August 20, 2008, 9:30am
We miss much of the case for loser-pays if we focus only on its influence on which claims get brought. It also affects the value and settlement-timing of claims that would be brought under either system, casting a shadow that raises the value of some strong claims and lowers the value of some weak ones. This helps explain, by the way, why it's fallacious to regard impecunious plaintiffs as somehow immune from the incentive effects of loser-pays. Most of them do not expect to be impecunious at the time of settlement, and if they face an offsetting deduction from their award for having exaggerated their damages (as is typical in fee-shift systems), they will be more likely to make reasonable demands, just as defendants will be more likely to make fair offers.
Many of the benefits of narrowing the range of dispute over damages, of course, could also be pursued by way of "offer of settlement", "offer of judgment" or "pay into court" devices, which can be typed as a subset or special case of loser-pays. While those in charge of our legal system (Alaska excepted) profess horror at across-the-board loser-pays, they have shown much less of an allergic reaction to Federal Rule 68 and its (often considerably stronger) state equivalents.
Posted August 20, 2008, 9:47am
We have nibbled around the edges of—as Walter calls them—subsets or special case versions of loser-pays rules. If the panel has the appetite, let’s explore them in more depth. What about offers of settlement, offers of judgment, or fee-shifting in the discovery context, perhaps particularly with respect to electronic discovery? Certainly, they are more feasible to implement (at least on the books). Do they address the problems that Philip identifies?
Posted August 20, 2008, 10:18am
It is always tempting to talk about "zero-value" or "negative value" suits on the one hand, and strike suits on the other in the same vein. Surely what could be more frivolous than a lawsuit that, standing alone, has an expected payout of less than zero? But as Don notes, the value is a function of both the expected payout and the transaction costs of prosecuting/defending the claim. In a system with high transaction costs, many lawsuits—including meritorious ones—become negative value simply as a result of litigation costs. Indeed, the higher the litigation costs, the more negative value suits there will be. This is not an insight; it is tautology.
In a world of positive transactions costs (i.e., a non-Coasean world), for example, virtually all consumer claims are negative value claims. Does this mean that they should all be shut down? Does it mean that the filing of a consumer claim is necessarily a strike suit? At the very least, these are contestable propositions.
The simple reason for flat payout scales for low value claims is best understood not as collusion or as a complicated theory of price discrimination. It is the fact that intermediaries are needed to bring these claims into a form that overcomes the transaction costs barriers. These intermediaries are lawyers who are capable of bundling these claims either formally through class actions or similar procedural devices, or informally through market aggregations. The viability of these claims then turns on the ability to lower transactional barriers, which includes the ability to amortize costs from the few cases that might need to actually be tried, and the reduction of damages payouts to a simple matrix formula. This is the crux of the argument that John Witt and I developed in an article on the Inevitability of Aggregate Settlement that we published in Vanderbilt Law Review a few years ago. We back up the model with specific historic examples to show how the market pushes toward this form of aggregation.
Now, the normative question is whether there is anything sinister about this. For any one of these cases, the costs of actually prosecuting the claim would exceed its likely value. But no one with feet on earth believes that any one of these claims stands alone. There are many procedural devices that could drive these claims out of the system. These include prohibitions on aggregation, dramatically increased filing fees, and restraints on lawyer solicitation or referral arrangements. Interestingly, it is not clear that loser pays would do so, since it would free plaintiffs' lawyers from the restraint imposed by the low value of any individual claim. But the question remains: what is the normative justification for driving out of the system claims of legal merit whose enforcement is compromised by the high transactions costs of our system? In most markets, the impulse is to find ways to lower transactions costs in order to preserve value, not to drive up the deadweight cost of doing business.
Posted August 20, 2008, 10:28am
Rebecca is pointed in the right direction. The authority already exists for judges to apportion expenses in e-discovery situations, as well as in other cases where the demands for documents become are excessively voracious (our panel does seem to be into food metaphors this morning). The basic problem is that the adversary system which was the crown jewel of the English common law and which we adopted as our own informs the advocate to be zealous in the representation of her client. The inevitable by-products are exaggerated claims for relief, defenses bordering on frivolity that are made for the record to place as many hurdles in plaintiff's path as possible and allegations flung against the wall of justice in the hope that one (or more) might stick. None of these tendencies should present too much of a problem if judges were rigorous in intervening to prevent abuse. This is the area where imposition of costs and legal fees can be most beneficial.
I do believe that the griping about medical malpractice cases is overblown. In most situations, there has been an horrific loss, and the object of the exercise is who should bear it. Doctors are favored in New York, as well as in many states with a shorter statute of limitations than the rule applying in other forms of professional malpractice, notably lawyers, engineers and accountants. Pre-judgment interest is not available despite long waiting periods for trial. In some states, I believe, there are medical malpractice panels, consisting of doctors, lawyers and health care professionals, who must screen claims before they are filed. From my perspective, the fault, dear Brutus, is not in the system but in the lawyers and judges who administer it.
Posted August 20, 2008, 11:11am
Or, as Pogo would say (for those of you who are old enough to remember), we have met the enemy and it is us. If that is the case, what rules, statutes, or changes in practice would be most likely to curb abuse? And, by the way, since we are leaving no holds barred, how about the hourly rate? Don’t we have an economic structure for lawyers that implicitly and explicitly encourages more-is-better? (Note that it is also clear that contingency fees do not fall prey to the same concern here).
Posted August 20, 2008, 11:18am
I fear that the entire loser pays discussion has become a metaphor for lawyer bashing in the land of the fee. We have always been an unpopular profession. Shakespeare's Falstaff wanted to "kill all the lawyers;" Hamlet wondered in the graveyard "Why may not that be the skull of a lawyer? Where be his quiddities now, his quillets, his cases, his tenures, and his tricks?" And Sandburg asked, "why is there always a secret singing when a lawyer cashes in? Why does a hearse horse snicker hauling a lawyer away." We should focus on how we as lawyers can bring down the huge cost of legal fees with wasteful time charges that accomplish nothing for the client, whoever pays, rather than on a flat-out loser pays regime the burden of which will inevitably fall on the less affluent members of society and which, in many cases, impose a chilling effect on access to the courts and, economic mumbo-jumbo notwithstanding, perpetuate the public's distrust and dislike of lawyers.
Posted August 20, 2008, 11:36am
Apologies for the delay in weighing in. Driving to Vermont with family and fig newtons.
I must say this discussion certainly expands my thinking on this matter.
In response to Becky's last post, it seems to me that it's hard to accommodate the various goals and fears with a hard rule. I think it's inevitable that judges will have to draw any line here. But I believe there needs to be a new principle—something that discourages excess and overargument and leaves litigants at risk of fees.
Posted August 20, 2008, 11:52am
Don Elliott's point about the paucity of data concerning low or negative value lawsuits and about the commonness of small business settlements under circumstances in which the defendant firmly believes that tribute is being paid leads me to the point that there is a societal cost to such settlements. It is the public's attitude about lawyers/judges and the effect of that attitude on respect for the rule of law. I once found myself on an airport parking lot bus at a moment when the driver stopped unexpectedly. One passenger still finding his way to a seat spun around rather wildly before finally grabbing a rail to keep from falling. "You almost won the lottery," said another passenger. This produced general laughter on the bus, no further explanation being needed to plumb the meaning.
Having said that, I'd rather focus on a topic broached yesterday about narrow measures that might matter. While American judges shrink from Loser Pays on grounds that it will close the door to the courthouse too broadly, they sign off rather routinely on "costs" that have been incurred by the prevailing party. Perhaps working with the definitions of "costs" might be productive. Most rules and case law contemplated litigations expenses from an era long before e-discovery.
Posted August 20, 2008, 12:11pm
It is hard to argue against the idea that lawyers should be charged for excess costs that they impose on others by making arguments that are without substantial justification. I would agree with Phillip that judges have to draw lines, and with many others, that an inflexible "loser pays" rule is too blunt an instrument. The difficulty is that federal (and I assume, also state) judges have had this power for many, many years (under 28 USC 1927, among other authorities)—and they almost NEVER use it.
So an interesting problem that maybe our judicial (and former judicial) members can enlighten us on is—why judges almost NEVER use the powers that they have long possessed to sanction lawyers under Rule 11—or more modestly, simply require them to bear the costs for unjustified litigation costs that they have imposed on others with arguments that are not substantially justified under 28 U.S.C. 1927?
I was very struck by Chief Justice Shepard's observation yesterday that judges rarely see the costs that excessive litigation imposes. This may be an unintended consequence of the “privatization" of legal fees that Prof Witt has described.
But how could we make judges more aware of the costs (economic and otherwise) of lawyers making arguments that are without substantial justification? And would it help persuade judges to be more active in using their powers—not to "shift" costs (which implies that the costs have a natural or pre-determined incidence and we are somehow artificially "shifting" them)—but rather to put them where they belong?
Posted August 20, 2008, 12:16pm
I think the Olson/Kourlis line of thought fits well with the "costs" point I made earlier. My experience is that the imposition of costs or the offer of settlement and pay into court mechanisms are treated as automatic by judges (indeed, in my court the necessary actions are taken by the clerk, with judicial participation nearly unheard of).
While it might be possible to build on these ideas, they are unlikely to work a revolution. That might be just fine. Actions that take the hard edge off the litigation system without setting in motion outcomes that are difficult to predict might still make a difference. What scares the teachers and camp counselors Philip Howard mentioned are the periodic reports of outlier results. While they may be a fraction of the activity, cases like the McDonald's hot cup of coffee or the O.J. Simpson trial did occur in real life.
Posted August 20, 2008, 12:24pm
James raises what I think is the most powerful objection to loser pays: that it could bar the courthouse door against plaintiffs with strong claims but modest means. This is why loser pays reforms should be accompanied by regulatory reforms that will permit the development of a robust litigation insurance market.
About ten years ago, England and Wales effectively privatized their system for resolving personal injury claims with two reforms: 1) legalizing "conditional fees" similar to our contingent fees, and 2) virtually eliminating the availability of public legal-aid lawyers for this kind of suit. The result was the rapid rise in availability and popularity of so-called after-the-event (ATE) litigation insurance, which is now purchased for about 75% of personal injury cases. ATE insurance is available at the time a suit is filed for a modest fee (because most cases settle: 200-300 English Pounds) advanced as costs by the plaintiff's attorney. If the plaintiff prevails, the premium itself can be recovered from the defendant as costs and, as in the U.S., lawyers do not often seek to recover costs from their unsuccessful clients. The trick is, not all cases are insurable. But that's a good thing.
Posted August 20, 2008, 12:27pm
In response to Rebecca's request for specific changes in the rules that are likely to curb abuse, the federal civil rules advisory committee is currently considering a proposal to amend Rule 56 (re: Summary Judgment) to require specific factual statements of the issues not genuinely in material dispute and a counter-statement by the party opposing summary judgment of the facts that they contend ARE in genuine dispute that should preclude summary judgment—a practice that it already common in many districts. One controversy that has arisen (and on which the committee is currently seeking comment) is whether if someone successfully opposes summary judgment by suggesting that there ARE material facts in dispute, but it later turns out that those facts were NOT really in genuine dispute, then should they pay for the extra costs that they have imposed on the other party by wrongfully precluding summary judgment in a situation where the judge later decides there was no genuine dispute. To me, this should be a "no brainer"—but the committee in its wisdom has found even this modest and targeted version of "loser pays" deeply controversial. It is discouraging to me, but there seems to be a norm—broadly accepted by both the Bar and the Judiciary—that imposing excessive and unjustified costs on one's opponents in litigation is a legitimate tactic of "zealous representation" and should therefore not be "sanctioned."
Posted August 20, 2008, 12:31pm
Responding most respectfully to Don Elliott: As professions go, lawyers are not unique in creating costs for work that is not substantially justified. Doctors order tests every day that lack substantial justification. Accountants prepare pro forma calculations that are without substantial justification. Architects draw preliminary plans, —and charge for them—only to be ordered back to the drawing board by a disappointed client. Even judges admit dangerous defendants to bail.
As an Assistant United States Attorney, I once argued a motion before federal judge Thomas Murphy. My adversary prefaced his argument by stating that he had three reasons why the requested relief should be granted. As he developed the argument, Judge Murphy rejected the first two points as being without substantial justification. When the lawyer said, "that brings me to my third point, your Honor," Judge Murphy quipped, "I hope you saved the best for last."
As one of our panelists, noted yesterday, it's all "in the eye of the beholder."
Posted August 20, 2008, 12:39pm
When the parties are free to design their own dispute resolution system, as they can in arbitration clauses, the best results are achieved by imposing strict overall time limits, limiting discovery and the length of any hearing. Fee shifting is less important because the overall system is geared towards relatively rapid and inexpensive determination of the merits which is the best antidote to use of the arbitration process for some other goal. There are competing surveys out there about whether consumers prefer arbitration, but it seems clear that rapid, inexpensive systems are preferable for consumer as well as business to business disputes perhaps linked to an out to the judicial system under appropriate circumstances.
It is interesting to see the ferocity of the attack on arbitration now underway in Congress and I understand that the arguments have focused on class action bars and the use in settings of perceived unfairness, such as nursing homes. But I also see the response as the litigation industry defending its turf, and reflecting how powerful the groups are that depend on litigation for their livelihood.
Putting aside the political realities, I think there would be overall improved satisfaction of the parties (but not their lawyers or the other member of the litigation-industrial complex) with an administrative process to resolve disputes coupled to an out to the judicial system which is freighted with penalties so that those who use it and are unsuccessful, are properly taxed.
Posted August 20, 2008, 12:47pm
The England and Wales experience shows the uncertainties that are created by major changes in what I call fee regimes (consisting of who pays, how the fee is calculated, and how fees are regulated/reviewed). Massive (and continuing) satellite litigation has arisen over both fees and the recoverability of after-the-event (ATE) insurance. Some in England have begun advocating moving to percentage fees without fee shifting!
(It is also important to note that prior to the developments of ATE and conditional fees, England did not have a pure fee shifting system; there was significant variation in whether costs were recoverable, and if they were recoverable, who would pay those costs for an unsuccessful plaintiff.)
Posted August 20, 2008, 12:51pm
Judicial aversion to fees as sanctions flows both from the access point and from a thought that Bob mentioned yesterday—concern over effect on cases that pioneer new law but take a while before they succeed. Members of my court will sometimes say, "we need to make is possible for people to develop new law"—or similar sentiments. Reflecting this concern, sanction rules in the states tend to use the most draconian words to describe when it's appropriate (like "obdurate behavior" or "frivolous"). If these rules instead made provision for a prevailing party to ask the judge to consider whether the actual size of the costs imposed by the loser in light of the odds of prevailing, this might lead to a regime in which the judge was asked to decide whether pay-your-own-expenses was "just" or "unjust." It might be feasible to draft such a petition under many existing rules, but my experience is that the request for fees focuses on a critique of the loser's position without giving the court much idea of how costly it was to resist it, even successfully.
Posted August 20, 2008, 12:55pm
I would like to try to list the measures that we have mentioned as possible solutions:
- Some kind of early neutral evaluation of the case, with shifting risks flowing from that evaluation
- Penalties for opposing summary judgment when the opposition is grounded in a contention that some portion or all of the material facts ARE in dispute, and it later devolves that those facts are not actually disputed
- Teeth in Rule 11, such that it is mandatory, increasingly punitive—or such that the presiding judge enters the finding that the claim or defense is frivolous or groundless, and another judicial officer takes over the determination of actual monetary award in order to avoid some of the problems (and hassles) for the presiding judge
- Offers of judgment (note Nevada’s Rule 68, which provides that either party may make an offer for entry of judgment. If rejected, and if the other party ultimately fails to obtain a more favorable judgment, that party is not entitled to attorneys fees, interest or costs incurred after the offer.)
- Offers of settlement (note that Colorado has a just revised its offer of settlement statute to provide that a defendant is entitled to costs incurred after an offer of settlement is made if the plaintiff ultimately recovers a judgment for less than that offer. It was quite controversial.)
- Fee-shifting for requests for discovery that the judge deems to be excessive, fishing expeditions (although that would require a rule change, because fishing expeditions are currently permissible), or costly in a way disproportionate to the amount or issues in controversy
- Fee-shifting for abusive, dilatory tactics (note that the case law in the e-discovery area is clearly moving in this direction)
- Changing the definition of costs to include some portion of attorney fees as well
- Judicial training: particularly in area of costs of electronic discovery, but perhaps in other cost-related areas as well
Thoughts? Comments? Additions?
Posted August 20, 2008, 1:24pm
A personal account that may have some relevance:
My daughter and her three housemates moved out of their rented house in Los Angeles because the dumping of a murdered body in front of the poorly secured house and other events made them feel unsafe. The four families sent the landlord a notice terminating the lease, effective a month later, while offering to help the landlord re-rent.
We were aware that our legal grounds for terminating were not very strong. But we expected the landlord to avoid any loss by re-renting the house quickly or (if unsuccessful) demand some or all of the $17,000 in rent payable through the end of the lease. We were prepared to make the landlord whole.
Instead, the landlord filed a pro se lawsuit seeking over $200,000 from my daughter, me, and my employer, including a transparently preposterous array of claims including defamation, emotional distress, and many bogus claims of damage to the house. (In fact the damage predated the lease.)
The pro se complaint was so incoherent that the judge dismissed it twice, but with leave to re-file. He imposed no penalty for the frivolous claims.
Then the landlord hired a lawyer who re-filed against all four families for a still-outlandish $80,000 or so. The case is headed for trial. The defense costs have mounted well past $20,000 and could easily top another $20,000 through trial.
So we families have reluctantly made a settlement offer of about $25,000. We made it a "Section 998 Offer," obliging the plaintiff to reimburse our costs—but not fees—If she recovers less. But of course, the costs will be a small fraction of the fees.
Would not a rational system require reimbursement of our additional, post-offer fees if the plaintiff recovers less than our offer?
All or most of us see this experience as further proof that the near-impossibility of recovering fees in such cases encourages abusive litigation.
Posted August 20, 2008, 1:33pm
I think these solutions assume a fact not in evidence. Solutions to what? Any mass process will have abuses, outliers, etc. If we are looking at the litigation system as a whole, I am not sure that the list represents solutions to anything or that we have a sense of what the systemic issues really are.
Take the first one, an early neutral evaluation of the case. Who is to do that? How is that screening to be paid for? Do we have enough judges to handle that? Will there be a need for a new layer of magistrates? Will there be appeals from the early screen (I would assume that our due process cases would so require)? Would the screening be on pleadings alone, or would there be attestations of fact? If the latter, would it matter whether the facts are matters of public record (as apparently important in the Court's treatment of Twombly) or would this apply to cases turning on the defendant's state of mind as well? Is there any evidence that the compelled mediation processes (a form of non-binding confrontation over the merits) in Florida, California or the Second Circuit reduce overall costs?
Or take another one, teeth in Rule 11. There was a reform in 1983 that put real teeth in Rule 11. It had a strong effect on filings. In fact, it had a particular effect on filings in areas in which there was a premium on information in the defendant's possession (e.g., employment discrimination claims). The effect was sufficiently strong as to lead to the effective repeal of Rule 11 in 1993. My personal view is that the repeal went too far, but the point remains that these are complex systems we are dealing with and the law of unintended consequences tends to apply with great force.
It is one thing to ask what are the arguments over a discrete change, such as fee shifting. To rush to assume the benefits of scattershot systemic changes is a methodology I have a great deal of trouble accepting. I happen to be in favor of greater judicial management of the litigation process and the revision of some of the premises of litigant autonomy that undergird our system. But you have to work through these steps carefully and in some kind of systematic way.
Posted August 20, 2008, 1:55pm
Stuart's harrowing personal story holds an important lesson, but it may not be the one he thinks.
There will always be people who make stuff up and lie. Until we get a Federal Rule of Civ Pro that can order changes in human nature, that's the world we live in. Such people will no doubt cause headaches for the rest of us. That sucks. There oughta be a law
It's not at all clear that fee shifting will help Stuart—and as we've seen here, fee shifting could create other problems to boot. Might it help? Sure. But it's sure hard to tell whether this lawsuit or any other particular lawsuit would or wouldn't be filed under the English rule. Fee shifting not only allows Stuart to recover from the lying plaintiff should Stuart win, it also allows (by hypothesis) the lying plaintiff to recover from Stuart should the lying plaintiff win. A plaintiff with a taste for risk may be more likely to sue Stuart under a fee shifting regime than under the American rule. The same holds true for a judgment-proof plaintiff (as far as we can tell, this house is not much of an asset!), who only gains from a fee shifting rule. And behavioral economists tell us that the same may hold true for a plaintiff who genuinely (though mistakenly) feels aggrieved such that an endowment effect has kicked in.
If all we get are ambiguous effects, do we want to run the risk of substantially increased legal costs (see Issacharoff) and substantially higher regulatory oversight requirements (see Kritzer and Witt) and a whole lot more judge time (see Sebok)?
Posted August 20, 2008, 2:07pm
Yesterday, Alan correctly pointed out the disaster that befell the system when Rule 11 was put on steroids. It became a source of expensive and extensive satellite litigation and was used as a weapon disproportionately against civil rights and other public interest claims. The horrible result caused an immediate pullback to the present state of affairs. Part of the reason for the universally adverse reaction to such a use of Rule 11 goes back to the concern that Chief Justice Shepard and others expressed about not undermining the concept of access to justice, which is recognized as a fundamental right by the U.S. Supreme Court and explicitly guaranteed in the constitutions of 37 states. Any burden on those rights must be justified by compelling interests. In Boddie v. Connecticut, the Supreme Court found that $60 in filing fees for a divorce violated due process for those who would be deterred from filing because of the expense.
Few of the parade of horribles marched down this discussion lane can survive strict scrutiny. While vexatious filings certainly qualify as outside the protection of access to courts provisions, the bulk of concerns expressed over these few days suggest that much more of the concern is aimed at cases filed in good-faith but ultimately unavailing. Out of all the cases filed each year, very few engender much public outcry. This is a testament to how well the system works as a general matter, despite the tall tales and fractured anecdotes that the public is fed on a regular basis. That some people entertain unjustified fears about the system suggests education, rather than systemic change.
It is worth noting that the empirical studies highlight the importance of managerial judges to the expeditious and efficient resolution of lawsuits. Yet, instead of enhancing judicial resources to that end, judicial budgets are among the first to be cut—or are treated, not as a co-equal branch, but as another agency. Perhaps some of our focus should be on how to restore necessary resources to the system to make it work as intended.
Posted August 20, 2008, 2:22pm
We seem to have a couple of dichotomies at work. First, there are those who are of the view that the system does not adequately assign consequences for bad behavior (however that is defined), thereby actually causing injustice, and simultaneously creating a public perception of injustice. On the other hand, there are those who are of the view that the system works about as well as any system can be expected to work.
In the first category, I suspect that our commentators would suggest that we begin to experiment with change—measuring outcomes along the way, to the extent now possible with advances in court record keeping—but also would recognize that not all outcomes can be measured quantitatively. In short, this group would probably say that things are bad enough that we need to begin to take some risks with solutions.
In the second category, I sense that the commentators would resist those changes, viewing them as “fixes” to nonexistent problems.
I am not sure we can or should resolve those dichotomies, but it may be useful to recognize them.
Posted August 20, 2008, 2:43pm
If we are to engage in experimentation as suggested by Rebecca, might it not make sense to start with B2B cases, perhaps B2B cases involving corporations with sales exceeding some figure?
(It might be worth noting a recent study by Ted Eisenberg and colleagues which shows that the same corporations that include arbitration clauses in their consumer contracts generally choose not to include such clauses in their contracts with other corporations.)
Posted August 20, 2008, 2:55pm
Rule 11’s monetary sanction should be on the lawyer, not the client, unless the client committed fraud on the lawyer. Also, get rid of Rule 11's "free kick," where the lawyer can withdraw a claim without sanction. They do that now and then; just modify the complaint a bit and refile. Talk about bottom feeders.
The National Federation of Independent Business (NFIB) can supply the facts for the need to restore the sanctions in Rule 11.
Posted August 20, 2008, 3:18pm
If I remember correctly, the biggest push for the safe-harbor provision came from the corporate side of litigation practice.
Posted August 20, 2008, 3:22pm
We have material that shows that after a brief period of satellite litigation, the strong Rule 11 worked and judges then approved it. The 1993 change was a solution to a problem that was solved. All of this material was set forth in the House Judiciary Committee Report to a bill called the Lawsuit Abuse Reduction Act (LARA) in the 109th Congress.
LARA=Lawsuit Abuse Reduction Act. Supported by approximately 350 small & medium business associations. These are practical people who do not lend their support to non-existent problems. Some academics did testify that the problem of frivolous claims did not exist. One thing did become clear. There were many demand letters without an actual claim. There are no sanctions against baseless demand letters. Yet in the real world, those letters can trigger an insurer response and a "settlement" simply to make the claim go away. Again, cheaper to settle than defend. Why not wait for the suit to be filed? More lawyer clock burning and then no ammo in Rule 11. Such is the real world.
Posted August 20, 2008, 3:27pm
Yes, organized lawyerdom ran a successful campaign to gut the old strong Rule 11—what professional group does enjoy having to compensate its victims?—but I wouldn't jump to the conclusion that the 1983-1993 experiment was a disaster for the rest of the country. I've heard differently from some well placed observers.
We're told it's wrong to scare people out of asserting good-faith litigation positions by way of the risk of paying two fees if a court disagrees. If we take this argument seriously, we'll need to rethink the many "one-way" fee provisions that force exactly this choice on defendants who have a good-faith basis for resisting claims. Any volunteers for doing that?
The principle of compensating the victims of litigation is not an all-in, radical-change-or-none affair. All sorts of incremental steps and demonstration projects are possible. To agree with Herbert for once, I too would make B2B lawsuits a prime early target for such steps. If I could make another wish, it would be for another state or two—small ones would be OK—to adopt a localized version of the Alaskan rules.
Posted August 20, 2008, 4:08pm
I agree with Rebecca that there is dichotomy at play that sees the problem as the following: “The system does not adequately assign consequences for bad behavior (however that is defined), thereby actually causes injustice, and simultaneously creates a public perception of injustice.” This viewpoint may be right, although I doubt it. Furthermore, many of the problems that loser pays should solve could arise even if we assumed that the vast majority of plaintiffs are well-intentioned. That was the point of my hypothetical “negative value” medical malpractice case. Stuart’s story could have played out in exactly the same way even if the plaintiff was a sincere person and with a misplaced belief in the justice of his claim and the truthfulness of his facts.
One way of thinking about the problem with American law is that it allows “evil” rent-seekers to exploit the system. Another way to think about the problem is that it is a tragedy—the cost of ascertaining the true value of a claim is too high, such that on both sides there are, in retrospect, results that cannot be justified by the “facts” once they are known.
One element of the American tragedy is the high cost of litigation resources. Plaintiffs in tort suits don’t complain about this because they only bear them when they have recovered something, and then they are happy. But defendants in tort suits and defendants and plaintiffs in every other kind of suit do bear these costs, and the story Stuart relates can be recounted in a variety of contexts (divorce, contract, etc.).
Why are legal costs so high? Is the cost of a “unit” of legal service by a lawyer (e.g. the hourly rate) in the U.S. higher than in other nations? Are the costs associated with discovery higher just because there is more of it, or because it costs more “per inquiry”? I don’t know the answer to these questions, and I must note that Bert has done very important work in this area. I do know that American lawyers, as a group, make less than the public believes, although I suspect that among professionals, they are better compensated relative to other American professionals than in other Western nations.
Posted August 20, 2008, 4:13pm
My own research related to Rule 11 suggests that it was not as "bad" as those who urged the repeal/revision of the 1980s version (the vast majority of sanctions imposed were very modest), although there was evidence that it had a particular damping effect on discrimination claims.
HOWEVER, there was never any systematic evidence that the problems that the 1980s Rule 11 was meant to solve was as severe as the proponents alleged.
By this same token, in the early 1980s there were moves to create sanctions for "discovery abuse," but other than anecdotes (I remember a particular one that I heard on several occasions from Judge Grady), systematic efforts to identify cases involving discovery abuse from random samples found little evidence of a widespread problem.
Solutions in search of a problem is a recurring issue in court reform, both on the civil side and the criminal side (see Malcolm Feeley's, Court Reform on Trial).
Posted August 20, 2008, 4:29pm
In response to Herbert’s recent comments, approximately 350 business associations supported removing safe harbor from filing of complaints and answers: The Lawsuit Abuse Reduction Coalition was led by NAM, the Institute for Legal Reform of the US Chamber, NFIB, and National Restaurant Association and the American Tort Reform Association.
Civil rights claims were excluded from the Federal Rule of Civil Procedure 11 revision set forth in LARA.
Posted August 20, 2008, 4:39pm
The Judicial Conference of the United States weighed in on the Rule 11 issue this way:
"It spawned thousands of court decisions and generated widespread criticism," they wrote. "The rule was abused by resourceful lawyers, and an entire 'cottage industry' developed that churned tremendously wasteful satellite litigation that had everything to do with strategic gamesmanship and little to do with underlying claims. Rule 11 motions came to be met with counter motions that sought Rule 11 sanctions for making the original Rule 11 motion."
A 2005 survey of federal district court judges conducted by the Federal Judicial Center found: “More than 80% of the 278 district judges indicated that “Rule 11 is needed and it is just right as it now stands.”
In evaluating the alternatives, 87% of the respondents preferred the current Rule 11, 5% preferred the version in effect between 1983 and 1993, and 4% preferred the version proposed in H.R. 4571. Judges’ opinions about specific provisions in Rule 11 and the proposed legislation followed a similar pattern. The results indicated that relatively large majorities of the judges who responded to our survey have the following views about Rule 11:
- 85% strongly or moderately support Rule 11’s safe harbor provision
- 91% oppose the proposed requirement that sanctions be imposed for
every Rule 11 violation
- 84% disagree with the proposition that an award of attorney fees
should be mandatory for every Rule 11 violation
- 72% believe that having sanctions for discovery in Rules 26(g) and 37
A majority of the judges (55%) indicated that the purpose of Rule 11 should be both deterrence and compensation; almost all of the other judges (44%) indicated that deterrence should be the sole purpose of Rule 11.
Posted August 20, 2008, 4:45am
And, speaking of the criminal side, does the loser pays contingent believe that it would be salutary for the government to reimburse the acquitted defendant for her legal fees or for a convicted defendant to reimburse the government? John Gotti, who was acquitted three times after 1986 and convicted but once, would be way ahead of the game.
Posted August 20, 2008, 5:00pm
A 2004 symposium issue of the Loyola Los Angeles Law Review "celebrating" the birthday of Rule 11 highlights a few interesting points about Rule 11's history. First, the 1983 version of Rule 11 was a response to Corporate America’s concerns that it was being inundated with tort claims that existing law was powerless to stop. Second, the 1983 version of Rule 11 gave rise to numerous complaints, among them: new, additional Rule 11 motions practice increased costs and delay in litigation; lawyers were becoming increasingly uncivil to one another; the rule unfairly targeted plaintiffs’ lawyers and had a chilling effect on civil rights litigation; and the rule allowed judges to indulge their personal animus toward particular lawyers.
The "safe harbor" was a compromise solution resulting from two years of deliberation by the Advisory Committee. The Committee noted that without a safe harbor, parties who asserted baseless claims and who regretted those claims and wished to withdraw them were loath to do so, for fear of creating evidence of a Rule 11 violation. The safe harbor gave them an out and accommodated their regret. As Robert Peck notes, the 2005 Federal Judicial Center survey shows that federal judges overwhelmingly support the rule and prefer the 1993 version of the rule to the 1983 version. Sanctions are down but so are sanctions motions. There was no evidence of a decrease in frivolous filings after 1993 but there was no evidence of an increase either. And, efforts to abandon the safe harbor provision have proved unsuccessful. All of this shows that neither the old nor the current Rule 11 may provide the answer to today’s concerns.
Posted August 20, 2008, 5:08pm
We have materials showing that the judges were satisfied with the effective Rule 11(1983 version) after it was in place for awhile. Later the judges appeared to like the modified weakened 1993 rule. We concluded that there was some evidence that judges might prefer the rule that was in place. We were more certain of the fact that there was a need to develop a means to place lawyer cost sanctions on baseless demand letters, and would welcome suggestions from those who represent the organized plaintiff's bar as to finding effective ways that we could agree upon as to how this very practical goal might be accomplished.
Posted August 20, 2008, 5:12pm
James Zirin asks whether loser-pays principles would or would not be extended to various realms of legal conflict such as criminal or divorce law. The best way to answer that is to look at what actual existent loser-pays systems do, and have done, through history. The unrivaled reference source here is Werner Pfennigstorf's magisterial 1984 survey of European practice in Law and Contemporary Problems (someone should take on the project of expanding/updating it for more recent developments and countries outside Europe). The answer to the questions, if memory serves, is that, no, other countries don't shift fees in criminal prosecutions and that they shift fees only sometimes in matrimonial cases. Those sound like the right answers to me.
Posted August 20, 2008, 5:16pm
As we wrap up, one theme that seems to resonate throughout our discussion is a plea for more judicial intervention and control—and associated resources for the court to make that possible. Agreed?
Posted August 20, 2008, 5:22pm
I applaud our Moderator's list as a good summary of the possible changes one might pursue through continued examination or experimentation. Although most of these have already found their way into the public domain, many of them might profitably be viewed through new lenses as a result of the exchanges of the last two days. As for whether American litigation is as good a regime as human beings could possibly devise and shouldn't be altered in any respect, I throw in my lot with those who assert that the present system does in fact dole out some injustices that might be prevented. I do not fear that the tangible benefits that lawyers and judges and courts contribute to the American experiment will somehow be frittered away even by modest reforms, and do not feel in any way imbued with the passion to do nothing.
Posted August 20, 2008, 5:30pm
But Walter, my friend, the same policies (if sound) should apply. The logic is that if you choose to game the system and lose (by whatever yardstick), you pay. An innocent defendant in a criminal case can be bankrupted by the cost of avoiding jail.
Posted August 20, 2008, 6:00pm
This has been, as Philip noted, a discussion that advances the thinking of all of us - as well as of anyone who reads the compiled comments. Although loser-pays is not a panacea, we have jointly identified possible solutions that may contribute to allowing Lady Justice to stand a bit taller. Thank you all for your insights. This discussion is now closed.