Loser-Pays Court System: A Refinement - Island of Sanity

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Loser-Pays Court System: A Refinement


Background

Recently the idea of a "loser pays" court system has been gaining popularity. Under such a system, whoever loses in a law suit would be required to pay the legal expenses of both sides: his own and his opponent's.

The reasoning behind this is simple enough: If someone brings a lawsuit against you that has absolutely no merit, you still have to defend yourself. At a minimum you will probably have to take time off work. You usually have to hire a lawyer, and if the case is big and complex enough you might have to hire private detectives to gather evidence, pay expert witnesses to bolster your claims, etc. Even if you are completely innocent of any wrongdoing or negligence, it could cost you a lot of money to prove it.

It is not uncommon for people to settle out of court rather than face all these expenses. Suppose someone sued you for $1000. You talk to a lawyer and you find it will cost you at least $2000 to defend yourself in court. It would make a lot of sense to negotiate and, say, offer the person $500. Indeed you would save money if you just gave up and gave this person the $1000 he's demanding. Note that this is true even if you are absolutely certain that you would win in the end -- it still costs you more to win than to give up.

Rebuttal

But critics of a loser-pays system worry that it would: a) bias the system against poor people, and b) drive up legal costs.

Suppose you have some very legitimate grounds for a lawsuit against a big corporation. Through their negligence or breaking a contract or whatever, they have cost you $10,000. (For this discussion, let's not worry about what the actual case might be -- I don't want to get off on the merits of any particular type of lawsuit.) Your brother-in-law Earl, who happens to be the lawyer in the family since he just barely managed to pass his bar exam last Thursday, says he can handle the case for $1,000. Meanwhile, the corporation has a staff of hundreds of experienced lawyers who could be put to work on the case. It would be nice to believe that your chances of winning would depend purely on the merits of your case, and not on the amount of legal talent that can be brought to bear. It would also be incredibly naive to believe that. Under the present system, you might give it a shot anyway: at worst you lose $1,000 and some time and aggravation, but you help your brother-in-law get a start on his legal career, and, hey, you might win despite their big guns. But under a loser-pays system, you'd better think very carefully. Sure, if you win you get an extra $1,000. But if you lose, you could be required to pay hundreds of thousands of dollars to reimburse the corporation for their legal fees. You could lose everything you own.

It is not far from here to see how loser-pays could drive up legal costs. Both sides in every law suit would know that if they win, it doesn't matter how much they spent -- the other guy will have to pay it. Again, I am not so cynical as to think that the side with the most expensive lawyers always wins, but I am also not so naive as to think that the amount you spend on legal fees has nothing to do with your chance of winning. Under loser-pays, spending more not only increases your chance of winning: the more bills you pile up, the more likely that you'll never have to pay them.

Under such a system, legal costs could sky-rocket. No one would be able to control costs. There would be little point in economizing on your own legal expenses if your opponent is spending freely. Every extra dollar you spend paradoxically reduces your costs, because it means you're more likely to pay nothing. Every dollar your opponent spends adds to your costs, because you may have to pay it.

Legal battles could end up like an auction where the person who makes the highest bid not only gets the merchandise, but the losing bidder has to pay both his own bid and the winner's and gets nothing. Every incentive would be to spend more and more.

My Humble Proposal

I suggest a slightly modified loser-pays that I believe answers many of these objections. Namely: The loser in a lawsuit must reimburse the winner for an amount equal to the loser's expenses.

Suppose Smith sues Jones. Smith spends $1,000 while Jones spends $20,000. Jones wins. Under a conventional loser-pays system, Smith must pay Jones $20,000. Of course he is also out the $1,000 he spent himself. Under this loser-pays-double, Smith would pay Jones $1,000.

This proposal would eliminate the potential bias against poorer people. You're thinking of suing a major corporation, but you know that they can spend far more on lawyers than you can? Much less of a problem. If you spend $1,000 while they spend $10 million, and you lose, you just have to pay an extra $1,000. It would hurt, of course, but you wouldn't be financially ruined.

Each party would be able to control expenses. You would not be held responsible for extravagant bills run up by an opponent. Unlike a conventional loser-pays where you have no control over expenses and no ability to budget, under a loser-pays-double you could budget easily, as long as you bear in mind that every dollar spent could end up costing two. If you determine that the absolute most you can afford to spend on this case is $4,000, then as long as you limit your own expenses to $2,000, you will stay within budget. Indeed, if you ran up extravagant bills yourself, you could end up paying them all twice.

Note that this system only differs from a conventional loser-pays if the two parties spend significantly different amounts on legal expenses. If both spend $10,000, than it doesn't matter whether the loser must reimburse the winner's actual expenses or pay the winner an amount equal to the loser's expenses: the two numbers are the same anyway. Thus, this system would still offer most of the advantages of a loser-pays system in protecting defendants from frivolous lawsuits and reducing incentives for innocent people to "surrender" and settle out of court. But it also answers the objections about bias against poor people and escalating legal costs.

Objections and Responses

Perhaps I should anticipate a couple of likely objections to this proposal.

One, under this scheme, if the winner spent less than the loser, he gets an unearned windfall. Suppose I claim you cheated me and sue you. I spend $20,000 on the case, while you spend only $1,000. But my money doesn't help -- justice is blind -- and you win. You make a "profit" of $19,000, not because you did anything, but simply because you didn't cheat me. There are millions of people out there who never cheated me at anything: why do you get the $19,000 and not them?

My simple response is that I don't think this is a very serious problem. So someone might occassionally make a profit out of being unfairly sued. Maybe it serves as compensation for the grief.

Two, when it comes time to pay up, the loser could lie and understate his expenses. If both sides spent $3,000 each on the case, the loser could claim he spent only $1,000, and the winner is out $2,000 unjustly.

This is a real problem. But note that a similar problem exists in a conventional loser-pays system: the winner could lie and overstate his expenses. In either case it would be difficult to do this without the co-operation of the lawyer, so the real protection against this kind of fraud would be sanctions against lawyers who get involved in such schemes.

Conclusion

Loser-pays is not really a new or revolutionary idea: judges sometimes order losers to pay both sides costs today. Some of these cases have confirmed the fears of opponents of conventional loser-pays. I saw one case a few months ago where someone was sued for damaging another's property during a protest against his business. The protestor ended up paying about $5,000 to repair or replace the property, and he was also ordered to pay the owner's legal fees. Over $100,000. If there was not such a thing as loser-pays, I am sure the onwer would never have run up those kind of legal bills for a relatively minor suit.

I am not aware of my proposal ever having been tried. I suppose if it was, some clever people would find a way to abuse it. But at least it avoids the worst pitfalls of present proposals.

© 1996 by Jay Johansen


Comments

Pedro Jul 23, 2014

if there ever was an easy answer...in one of my faviorte songs, "strange relationship", prince sings about it all. here is the beginning:i guess u know me well, i don't like winterbut i seem 2 get a kick out of doing u coldoh, what the hell, u always surrenderwhat's this strange relationship what we hold on 2?baby i just can't stand 2 see u happymore that that i hate 2 see u sadhoney if u left me i just might do something rashwhat's this strange relationship?i came and took your love, i took your bodyi took all the self respect u ever hadi took u 4 a ride and baby i'm sorrythe more u love me sugar, the more it makes me mad.....

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