Sunday, March 12, 2006

Loser pays

I'm currently reading John Stossel's book "Give Me A Break." It's very easy to read, probably because I already know about and agree with almost everything Stossel discusses. But one thing I wasn't aware of was the idea of "loser pays." Here's an article by Stossel that hits the main points he covers in the book.

"Loser pays" would impose penalties on the plaintiff if they bring a case to court and lose. An example Stossel uses in his book is Instant Replay in the NFL. When it first debuted, there was no cost to making a challenge to a call and the system was abused, slowing down the game. Fans revolted and Instant Replay got thrown out. Of course, the system has been brought back, but now teams that challenge a ruling get charged a time out if they lose the challenge. Big surprise...this system works better now.

In America, we're still operating under the old Instant Replay system. If a plaintiff loses a lawsuit, they rarely, if ever, get penalized. This makes it really easy for frivolous liability lawsuits to be brought. The practice of champerty (think venture capitalism funding of lawsuits) may even be used. As Stossel points out in his article, since the American system lacks "loser pays," determined lawyers can file an unlimited amount of lawsuits until they finally reach the desired outcome.
This is what happened with the lawsuits against the tobacco companies.
They just keep suing until they do; they lost 700 lawsuits before they started winning against the cigarette makers.
With deep pockets and a battery of lawyers hoping to cash-in on a mega settlement, it's easy to see why liability lawsuits are they're own little cottage industry in America.

Almost every other country (England, Denmark, Sweden, the Netherlands, Canada, etc.) has "loser pays." And it helps deter frivolous lawsuits. As Walter Olson points out:
European courts also come down hard on the Yankee practice of blowing up routine injuries into whopping cash demands. The litigant who claims a million marks or francs in damages but proves only a hundred thousand is deemed to have lost at least in part, and some lump of fees will be deducted from his award. (Various rules deal with the special cases where damages cannot be precisely calculated.) England's "pay into court" rule serves a similar function: If a plaintiff turns down a settlement offer and does worse at trial, the plaintiff has by definition not prevailed for purposes of fees incurred after the offer.

Thus (a Swiss law professor explained to me) when a Zurich or Frankfurt accident victim walks into the office with a good case, the first order of business after establishing the case's merit is to figure out what is a reasonable amount of money to request, based on what the courts have given for similar injuries. Asking for more could risk a fee penalty. An American lawyer who handled a case that way would probably be sued for malpractice or disbarred on grounds of insanity.
America needs to institute "loser pays" now. Oh, and Stossel's awesome.

UPDATE: For comments, see the original blog post here.

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