Friday, July 8, 2011

Potential Solutions for the Frivolous Lawsuit -- Of Rule 11 Proposals and Loser Pays

The U.S. Chamber of Commerce is arguing in favor of the Lawsuit Abuse Reduction Act, which is pending in the House and would change Rule 11 back to its pre-1993 mandatory sanctions approach and remove the current 21-day "safe harbor" for a litigant to withdraw challenged filings.  In the 1980s, I believe the mandatory-sanctions/no-safe-harbor regime was blamed for increasing costly satellite Rule 11 litigations brought by both plaintiffs and defendants who perhaps in an excess of zeal repeatedly argued that the other side's positions were utterly meritless and frivolous.

The U.S. Chamber of Commerce also suggests that the Lawsuit Abuse Reduction Act would make it easier for parties challenging to recover their attorneys' fees.  That modification raises the larger question of "loser pays" as a broad and perhaps more effective way to deter frivolous lawsuits.  Under loser pays, the party that loses in a litigation must pay the attorneys' fees of the prevailing party. Followed in much of the world outside the U.S., loser pays deters frivolous litigation by removing much of the litigation costs that are used as a weapon to extract a nuisance-value settlement.  For example, if it costs a defendant $50,000 in legal fees to obtain a ruling that a lawsuit is meritless, a plaintiff lawyer might offer to settle with the defendant for $25,000 -- less than it costs to litigate to a judge ruling.  Unless the defendant thinks the plaintiff lawyer will turn around and sue the defendant again, the defendant may well choose the $25,000 settlement, even if the lawsuit seems clearly meritless or frivolous.  But the $25,000 settlement may sufficiently compensate (via contingency fee) the plaintiff lawyer to incentivize the plaintiff lawyer to file another meritless claim against another defendant, and indeed, the plaintiff lawyer might even develop a successful business in frivolous claims.  In contrast, if a loser-pays rule applies, defendant might well reject the $25,000 settlement and elect to spend $50,000 to obtain a court ruling exposing and dismissing the frivolous claim, also confident that the defendant can seek to recover the $50,000 in attorneys' fees from the plaintiff under the loser-pays rule.  Moreover, ex ante, the plaintiff lawyer in a loser-pays jurisdiction should decline to even file a meritless claim, because the plaintiff lawyer would expect that the defendant would refuse a nuisance settlement and instead litigate to a ruling that will impose defendant's attorneys' fees on the plaintiff.  The presence of loser pays is often cited as one reason that countries outside the United States have less litigation -- see, e.g., John Stossel, When Lawyers Become Bullies, Real Clear Politics (April 8, 2008).

One significant objection to loser pays is that impecunious plaintiffs will elect never to file their claims not because their claims are frivolous, but because they are risk averse about the possibility of defendants' attorneys fees being imposed on them.  This concern is even greater in tort litigation, where injured plaintiffs are regular folks whose finances may already be strained by an injury.  So the argument goes, loser pays should be rejected because these impecunious plaintiffs will not file what are meritorious suits -- and access to justice is denied.

But what if the cost of loser pays were permitted to be shifted from a plaintiff to his or her attorney?  Plaintiff attorneys already make entrepreneurial decisions about the likelihood of success in a case when plaintiff attorneys decide whether to take a case on contingency fee and risk no reimbursement if they lose at trial or by judicial ruling.  Adding fee-shifting via loser pays would only increase the size of the bet on each case, and plaintiff firms could adjust to that larger bet by becoming somewhat larger and greater diversifying that risk, or even by gaining greater access to outside capital and loans (the latter of which is itself controversial).  Ultimately, injured plaintiffs would conceivably still have access to attorneys for meritorious cases, but having lost the threat of nuisance-value settlements and now fearing fee-shifting via loser pays, plaintiff lawyers would screen out frivolous claims and never file them.

I think there is much to recommend this market-finance-oriented version of loser pays, but of course plaintiff lawyers might resist it because it would remove the stream of income from nuisance-value settlements.  And even though they might not admit it, defense lawyers also benefit from being hired to defend frivolous cases, so they might not vigorously push such a proposal, unless their defendant clients vigorously pushed them to do so.  Ultimately, a reduction in frivolous litigation reduces the wealth of the entire bar, but the bar has no valid entitlement to enrichment by waste.  Notwithstanding lawyers' interests, Alaska has had a version of loser pays, and Texas over a month ago enacted a version of loser pays.  If Texas Governor Rick Perry enters the Republican primary as a candidate for President in 2012, loser pays as litigation reform (and tort reform) may well receive substantial national attention. That would be a good thing.

BGS

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