The Debate Over Who Pays Fees When Litigants Mount Attacks
December 23, 2008
The Wall Street Journal
Who should foot the costs of a lawsuit? It’s a question that splits the legal world.
Should each side bear its own lawyers’ fees and other costs, as they do in the U.S.? Or should the loser pick up the tab for both parties, as they do in Canada, the U.K. and Germany?
The debate simmers across the international divide. In the U.S., the plaintiffs’ bar generally cheers the “American rule” status quo, saying it is the only way to ensure that even the poorest litigants can access the courts. Tort-reformers say adopting the “English rule” would cut down on frivolous lawsuits while encouraging defendants to settle meritorious claims.
A recent trade article zeroed in on a long-overlooked component of the loser-pays system: insurance that covers legal fees. That article, penned by Marie Gryphon, an attorney and a fellow with the right-leaning Manhattan Institute’s Center for Legal Policy, is reframing the debate.
Canada, the U.K. and Germany use a system of insuring legal expenses so that those with modest resources can still sue.
Individuals can buy such insurance as an add-on to their homeowners’ policies. If people need to file suit, they know their costs are covered — even if they lose.
In England, citizens also can buy a more limited kind of “after the event” insurance, which can be purchased by a plaintiff before a suit is filed. Often the premiums are advanced by the plaintiff’s lawyer.
Legal experts think a loser-pays system cuts down on frivolous suits. Those clearly hurt the U.S. The nation’s tort system cost $245.7 billion in 2003, amounting to about 2.2% of total gross domestic product, according to a report from professional services firm Towers Perrin. The percentage of GDP spent on litigation was at least twice those in the U.K. and Germany.
At the same time, say experts, the insurance helps mitigate the pitfalls of a loser-pays system. “Insurance does move in to fill the gap for those suits that might not otherwise be brought in a loser-pays system,” says Paul Lomas, a London-based litigator at Freshfields Bruckhaus Deringer.
When confronted with the insurance arguments, plaintiffs’ lawyers largely fall back on objections that a system of contingency fees — in which they finance the suit in exchange for a cut of their client’s potential recovery — is preferable because it requires no upfront money from the plaintiff. “If we didn’t have the contingency-fee system, only people with a lot of money would be able to pursue their rights in court,” says Susan Steinman, director of policy for the American Association for Justice, a membership organization of the plaintiffs’ bar.
Mark Lanier, a prominent plaintiffs’ lawyer who sued Merck & Co. over its painkiller Vioxx, says that under a loser-pays system, people without resources still won’t use the system. “Indigent plaintiffs will simply say, ‘Sorry, we don’t have the money to pay the other side’s fees,’ ” he says. Mr. Lanier says that low-income plaintiffs wouldn’t purchase litigation-services insurance, regardless of cost.
But some U.S. academics embrace the idea. “Insurance definitely strengthens the argument for ‘loser pays,’ ” says Richard Nagareda, a professor at Vanderbilt University Law School. Mr. Nagareda says that interest-group politics might explain the suspicion of the plaintiffs’ bar toward a loser-pays system. Under the “American rule” and the conventional contingency-fee arrangement, the plaintiffs’ lawyer is accustomed to being the exclusive financier of litigation. A move to “loser pays,” with the addition of an insurance component, would bring another entity to the table.
In her paper, Ms. Gryphon addresses the concern over making insurance companies the courts’ gatekeepers. However, she argues that if a lawsuit is denied insurance coverage, “it would be because it was highly unlikely to succeed, making it the very type of claim that ‘loser pays’ was designed to discourage.”
The U.S. may be a long way from overhauling its system. For now, only Alaska has anything resembling a loser-pays system, though it allows for only partial reimbursement. And some legal experts think that if only a few states adopt “loser pays,” plaintiffs would look for ways to sue in other jurisdictions.
The debate in the U.S. — between tort reform advocates and trial lawyers — has become polarized between the American rule and a pure loser-pays system, both of which have their problems. But some think combining “loser pays” with an insurance system, as many European countries do, gathers the benefits of both systems and sheds some of the problems.
“It cuts down the middle of what’s been a pretty polarized debate,” says Mr. Nagareda.