Why the “Loser Pays” Provision Means No One Wins

Under the Law Code of Hammurabi, which dates to about 1772 BC, if Bob accused Jim of a capital crime but failed to prove his case, Bob would be put to death. And since just about everything — including serving watered-down beer — was a capital crime in those days, one suspects Hammurabi’s judges had a lot of free time on their hands. The cause of justice may not have been well served, however.

More recently, citing the fiction that litigation is “out of control” and civil courts clogged with nuisance lawsuits, politicians have come up with one way after another to discourage personal injury suits. One of their favorite ideas is called “loser pays,” also sometimes called the “English rule.” This provides that the losing party in a lawsuit must pay the other party’s attorney fees. This idea is not as extreme as Hammurabi’s “loser pays,” but does it serve the cause of justice any better?

“Loser Pays” Provision

In December the U.S. House of Representatives passed a patent reform bill that includes a “loser pays” provision. The bill, which has yet to be considered in the Senate, is designed to discourage “patent trolls.” A patent troll is someone who files patent infringement suits to collect licensing fees or settlements but does not actually produce goods or services based on the patent.

This is a very specific situation that won’t affect many of us directly. Still, might this hurt inventors whose patents really have been ripped off by a big company? We’ll see.

The state of Texas enacted a modified “loser pays” law in 2011 that allows a judge to declare an early dismissal of a lawsuit. And if the judge tosses the case because it has “no basis in law or fact,” the court may require the plaintiff to pay attorneys’ fees to the defendant. This is supposed to be good for business, but actual business persons are finding it to be a mixed bag.

For example, last year a small business owner in Texas went to court to recover payment from a customer who stopped her check. Ted Oberg of station KTRK-TV in Houston reported that the man went to court without a lawyer. One count of his suit was dismissed, but he prevailed on another count. He won $300, but was ordered to pay $7,000 to the defendant — who did have a lawyer — for the dismissed count. An appeal brought the tab up to $10,000.

The Texas law also provides that if the defendant offers a settlement that the plaintiff refuses, and then the plaintiff is awarded a smaller amount than the defendant had offered, the plantiff could still be stuck with paying lawyer’s fees. Such fees could sometimes be bigger than the award. One state representative wanted to rename the bill the “loser-pays-but-sometimes-the-winner pays-too” bill.

Obviously, this provision of the Texas law is intended to intimidate plaintiffs into accepting settlement offers. Critics say this favors defendants with deep pockets, such as big corporations, at the expense of individuals and small business owners. Basically, the law is about who blinks first.

Who Loses Under “Loser Pays”?

If your new home falls apart from shoddy construction; if you are diagnosed with mesothelioma from asbestos in your workplace; if you lose both arms and legs (as one Texas man did a few years ago) because of simple medical negligence, even if you win your case the amount of compensation the court can award you won’t come close to covering your losses because Texas law also has restricted how much a jury can award. And you run a terrible risk of being put even further into debt.

Going back to the “loser pays” provision in the patent bill passed by the House —in the web journal The Legal Examiner, attorney Andrew Cochran wrote that some of the people who supported the “loser pays” provision might be shooting themselves in the foot.

Why? Social conservatives especially have been fighting a lot of their battles in court lately. For example, there are big lawsuits in the works to stop the Obamacare contraception provision.

“The social conservative litigators are completely opposed to Loser Pays, and I urged them to take their objections public and to inform Republicans in Congress.” Cochran wrote. “Indeed, they told me that many of the Obamacare contraception cases they’ve filed — Hobby Lobby et al –- would never have been filed if we had a national Loser Pays rule in American courts.”

Cochran continues, saying that “loser pays” means only wealthy people can engage in civil litigation. “Loser pays” advocates overlook two things — one, sometimes people have a genuine grievance and still lose, sometimes for procedural reasons. And two, state and federal judges already have authority to issue sanctions, including awards of legal fees, if parties in a case have made frivolous charges or are wasting the court’s time.