Judiciary
HomepageThank you, Mr. Chairman, for the chance to speak about Section 101 of the proposed Common Sense Legal Reforms Act of 1995. This section would provide for awarding attorney's fees to the prevailing party in so-called diversity litigation in federal courts.
My name is Walter Olson. I am not an attorney. I am a senior fellow with the Manhattan Institute, which is based in New York. Today, however, I am speaking only for myself. In 1991 I wrote a book entitled The Litigation Explosion (Dutton/Plume), which looks into the question of why we have so much litigation in this country and what can be done about it. The book argues that the best way to address the problem would be to move toward the "loser-pays" principle found in other countries. So you have caught me out on one of my pet topics.
On a personal note, I'm delighted to be back among old friends in this body. Years ago I worked as a legislative analyst for what was then the minority party in this House. The House Republican Research Committee at that time occupied a space very high up in Longworth, confined to the attic almost, as in a Gothic novel. I understand that it has moved to better office space recently.
I come here today, however, on behalf of a cause that ought to be very much bipartisan. The loser-pays principle is found in countries around the world representing every shade of political opinion. That includes countries like Sweden, Denmark and the Netherlands which are not usually thought of as laboratories for conservative reform.
In this country as well, the issue cuts across political lines. In the January 12 New York Review of Books the writer James Fallows, who it's fair to say is no great fan of many of the provisions of the Contract with America, says the loser-pays idea is "overdue" in this country. He also describes the bill we are discussing today as "surprisingly solicitous" of the interests of less affluent persons. More on that below.
Last June Steven Brill of the American Lawyer and Court TV, an acute observer of our legal system, wrote in a widely noted piece in the Washington Post (June 5, 1994) that against some of his own original instincts he had reached the conclusion that abusive litigation is rampant and that vigorous measures against it are needed. "The cure is simple, and overdue," he said, and went on to propose a general loser pays rule with features that would, in fact, go well beyond those of the bill we are discussing today.
Over the years, one of the most energetic advocates of the loser-pays principle has been Charlie Peters, editor of the excellent magazine Washington Monthly, which is often described as neo-liberal. Without suggesting that Mr. Peters would agree with everything I say, or vice versa, I'd like to take this opportunity to salute him for his eloquent advocacy of this reform over many years.
It is not such a lonely fight anymore. Or so I conclude from the newest opinion survey, which was reported in a recent U.S. News and World Report ("How Lawyers Abuse the Law", cover story, January 30). It had an amusing twist. They asked the following question: "If someone sues you and you win the case, should he pay your legal costs?" 85 percent said yes. Then they turned the question around: "If you sue someone and lose the case, should you pay his costs?" Only 44 percent said yes to that one.
We may smile at the spread between the numbers, but look more closely. 44 percent is not that low a number and 85 percent is quite high. If you take the halfway point, you get 65 percent in favor, or nearly two-thirds. Close to half the respondents find the justice of the loser-pays idea to be so plain that they favor it even when it cuts against them. But fewer than one in six admire the current rule enough to go to that extreme. To put it another way, among people who have thought the issue through to a consistent view one way or the other, the loser-pays idea wins by something like three to one.
Unfortunately, it sometimes seems as if the fifteen percent who oppose it include every organized lawyer across the land, from Kodiak to K Street. The plaintiffs' trial lawyers are at the forefront, explaining that it would be bad for their clients. Not far behind are many in the defense bar, who say it would be bad for their clients, the same ones who are sued by the first group. The ABA Litigation Section, with members from both sides, thinks it's an awful idea -- for their clients, of course. It is no secret that the big business community has been less than enthusiastic. It's true that all these groups raise legitimate concerns, which I hope to address as we go along. And it's also true that the current draft needs some tinkering, at least.
Let me start with some background. It is usual to contrast the American Rule with the English Rule. Both terms are misleading. In the first place, America is far from consistent in following the so-called American Rule. In recent years, Congress has enacted some 150 different laws which require losing litigants to pay legal fees. We already have a great deal of fee-shifting. The difference is that it is one-way fee-shifting: losing defendants pay plaintiffs, but losing plaintiffs do not pay defendants. Heads-I-win, tails-we're-even, you could call it. I will not stop to debate the merits of this idea, except to observe that of the four different ways one might shift fees -- one way in either direction, both pay, or neither pay - this is the method that manages to encourage the most filing of suits.
Remember this when it is claimed that any move toward loser-pays would be hasty or radical. For years Congress has been pleased to create new one-way fee shifts almost routinely, with very little public debate, for the benefit of plaintiffs. Doing it on behalf of plaintiffs and defendants together should not prove to be such an exotic departure that we must wait for a commission to report back after studying the matter for ten years.
"English Rule" is something of a misnomer as well. The loser-pays rule is found in English law. But it also goes back to Roman law. It is found in the civil law systems all over Continental Europe which evolved from Roman law and were codified in France, Germany and elsewhere at the time of Napoleon. It even developed in the church courts. Scandinavia, unlike most of Europe, does not trace its civil procedure to the Romans, but nonetheless developed loser-pays. Rather than the English Rule, some have called loser-pays the Rest of the World rule. I do not claim to know the rules of procedure in every country around the globe, but I do not know of any country that does not go further than this country does to put a price tag on suing unsuccessfully, compensate those who prevail, or both. (The most useful single survey, from which I draw many of my details here, remains the article by Werner Pfennigstorf in the journal Law and Contemporary Problems, in the 1984 symposium edited by Professor Thomas Rowe.)
This raises several immediate questions. If, as we keep hearing, loser-pays is obviously unworkable, how has it managed to work in so many places for so long? If it is horribly unjust, why has it independently evolved and endured in countries governed by so many of the great philosophies and religions of mankind? If it is nothing more than a way for the rich to grind down the poor, why does it prevail in what are usually seen as the most progressive social democracies?
In fact, the mainstream of Western legal thought outside this country has long considered loser-pays to be the natural and logical rule on grounds of both practicality and fairness. Start with the practical reasons. Litigation is tremendously costly to the parties and to society at large. Its cost should be borne by those who insisted on it, whether that means the plaintiff who refuses to accept a reasonable settlement offer, or the defendant who was liable but refused to make such an offer. By forcing a trial, the losing side has squandered not only the opponent's money and time but also that of the public which toots the bill for the court system, the other litigants who are waiting in line for their cases to be heard, and the variety of third parties who get dragged in, such as witnesses summoned by compulsory process. If we wish to match the perceived costs of people's actions to the actual costs, and encourage them to take a sober look at the merits before lobbing this kind of cost bomb into their fellow citizens' affairs, then we will have to stop pretending that all this comes for free.
Fairness goes hand in hand with practicality here. Litigation is one of the most unpleasant things that can happen to people. It eats up not only money but time, energy, and privacy. It is commonly an assault on reputation and good name as well. It is a breach of the social peace. If, at the end, the targets manage~ to show they were completely right, the person or lawyer who put them through all this can just walk away under our present rule. This is worse than just wasteful and inefficient. It's unfair. And the public knows it. If someone injured you in any other way, our organized bar would be eager to lend a hand in making that person compensate you -- to make you whole, as the phrase goes. But they are much less keen on compensating injury and deterring misconduct when it comes to the people ~y injure. Which is why, if you want to hurt someone in this country, don't do it with your fender or your scalpel. You might have to pay. Do it with a lawsuit.
No misconception about loser-pays is more prevalent than the one that runs as follows. Someone sues you in Europe. They drag in a dozen different theories of liability against you, the way they would in America. You know you are mostly in the right, but the law is complicated and chancy, and they manage to land one punch, proving liability on a minor theory for a small amount of damages. Next thing you know you are presented with their bill for 10,000 hours from the Belgian or Austrian equivalent of Cravath, Swaine & Moore. You might just as well sign yourself into indentured servitude and get it over with. Other defendants over there are so afraid of suffering this fate that they never resist lawsuits, but that's okay because all the plaintiffs are so frightened of the same thing that they never file them. Or so the theory goes.
That is not, fortunately, the way loser-pays actually works in other countries, and it's not the way it would have to work under this proposal, especially not if we handle its details with care. Courts in loser-pays countries typically are at some pains to divide the dispute into its underlying claims or issues, and split the pool of fees according to who prevailed on what. This has several important implications. A defendant who concedes liability on one ground but successfully fights others may in fact be the prevailing party, and may collect a fee shift in the form of a deduction from what would otherwise be owed to the plaintiff. If each side wins on some issues, the net shift may go in either direction and may be added to or offset from the sum awarded to the plaintiff. So the side that wins on a so-called technicality will not necessarily capture all or even most of the fee pot. Just as important, the loser-pays rule gives each side a powerful incentive to take only its strongest claims to trial -- as the song goes, to know when to hold them and when to fold them.
Section 101 of the Common Sense Legal Reforms Act of 1995 as presently drafted divides things up by "claim"; it tells the court to award a fee "to the party that prevails with respect to a claim in such action". There are serious dangers here which arise from the fact that the legal definition of "claim" may not correspond to what the parties are actually fighting about. In particular, it is very common for parties to be fighting mostly about the level of damages and only secondarily about liability. The present language might force courts to assign fees based on the event of liability alone. That could force defendants to foot the bill for losing damage arguments against themselves, with consequent injustice and misplaced incentives.
Such applications of the rule might if anything worsen one of the reigning abuses in today's American litigation, namely the exaggeration of damages. Other countries are careful to control this abuse. In most European courts, if a plaintiff claims a million marks or francs in damages but proves only a hundred thousand, he is considered to have lost on much of the case and will accordingly find some portion of fees deducted from his award. Werner Pfennigstorf writes, "It is easy to see how this particular rule discourages plaintiffs from making unrealistically large damage claims. There are, of course, instances when it is impossible to calculate a damage claim with absolute precision, but the European codes offer a sufficient variety of procedural devices to prevent hardship in such cases. " I should note that England handles the problem of damage inflation in a different way, through a so-called offer-of-settlement or pay-into-court procedure which must be purposely triggered by the opponent rather than taking the form of an automatic penalty.
Not long ago I spoke with a law professor from Switzerland about this matter. He told me that in that country and Germany, the two systems with which he was most familiar, the first order of business when a plaintiff walked into the office with a good case, after determining, of course, that it was a good case, was to figure out what a reasonable amount of money would be to ask for, based on what the courts had awarded in similar cases. As a lawyer it was incumbent on him to ask for that amount, neither more nor less -- not less, because he wanted to do right by the client, but not more either, because he wanted to avoid a fee penalty for having embroidered. I think an American lawyer who handled a case that way would probably be sued for malpractice, or disbarred on grounds of insanity.
We should make it explicit in the bill that a failure to prove claimed damages is in itself ground for a partial fee award to the opponent, offsetting or otherwise. The case for such fees is especially compelling, of course, when the opponent has expended fees specifically on disproving damages. A different approach also well worth exploring is that of strengthening federal Rule 68, as Judge William Schwarzer and others have urged, into something closer to the English practice by allowing the shifting of attorney's fees to the party that rejects an offer of settlement.
Defendants, meanwhile, come under their own set of pressures under loser-pays. If they are tempted to stonewall and drag their heels on claims they are destined to lose, it may focus their mind to realize that two sets of meters are now running. They had also better think twice about marginal defenses and counterclaims and depositions and motions and interrogatories and document demands -- the whole arsenal of complication and delay. The message defendants get is: if you're right, take heart; but if you're wrong, better pay up rather than put the claimant through an ordeal.
A crucial function of the courts in all this, of course, is to make sure claims for legal fees themselves are not "gold-plated". European systems maintain careful controls to keep this from happening. They typically provide that costs may be recovered only for reasonable and necessary expenditures; that the loser can contest the fee award as exaggerated; that it will not do to bill at Cravath rates if a Main Street lawyer would have sufficed; and so forth. The bill we are considering, Section 101 of the Common Sense Legal Reforms Act, includes an added safeguard of this sort. It provides that the fee paid by the losing side will not be higher than that which would have been reasonable as a fee for its own lawyer. We should welcome suggestions of additional methods to help the courts avoid the danger of overbilling. Such controls, it might be added, are overdue in today's one-way fee-shifting as well.
It should be noted that the money spent on attorneys' fees is only part of the cost inflicted by litigation, and not always the most hurtful part. I have a soft spot for Sweden and Norway, which reportedly require that losers compensate winners for the time and energy spent on compulsory court appearances. That would certainly put a crimp in the power of American litigators to bully their opponents around by ordering them to depositions. In general, however, no country tries to make the victims of litigation completely whole. They just go a lot further in that direction than we do.
No brief discussion such as this can do justice to all the subtleties of fee-shifting as it has developed over centuries and even millennia of experience. Suffice it to say that if we choose to move in this direction, we will find a very rich literature and a very wide record of human experience to guide us in our efforts. Some countries entrust fee assessment to specialized magistrates (England's "taxing masters"), while others treat it as an issue of damages to be decided by the judge along with other damages. Loser-pays countries also recognize numerous exceptions and special cases, and it would be appropriate for us to do so too, so long as they do not swallow the general rule. (One exception often found provides for a waiver of the fee shift in unusually close cases, as where a panel of judges is split or a decision is overturned on appeal.) The present bill includes a provision that would allow for the carving out of such exceptions and special cases. It provides that judges may waive or reduce fee awards "to the extent that the court finds special circumstances" that make such an award "unjust". I would urge Congress to consider clarifying what kinds of exceptions are meant, or encourage formal rule-making with the aid of the courts. We should not foster needless uncertainty, much less litigation, about which cases are suitable for exceptions.
Turning to the principal arguments against loser-pays, we might observe that two of them are closely related to each other. One is that the rule would terrify litigants with good cases out of their claims. The other is that, whatever its virtues as applied to litigation between large entities, it would be unfair or impractical as applied to cases involving litigants of modest means.
The terror argument is based on the observation that even the best case can lose, and even the worst case can win, on a fluke. There are no sure things in the jury box, or for that matter in the judge's chambers. So we are told by the Association of Trial Lawyers of America and the American Bar Association, and they ought to know. They assert that even the remote chance of paying two fees would scare people out of insisting on their rights, in a way, presumably, that the dead certainty of paying one big fee does not scare many people now.
These distinguished lawyers now tell us that there is a random factor in our court system that puts even the most innocent litigant in the world under a genuine fear of losing. I would never think of challenging this admission. In fact, I am delighted to enshrine it permanently on the record, because it's one they're so reluctant to make on other occasions. When people like me charge that bad lawyers can make a living off shoddy cases, ABA and ATLA respond that we must be imagining things. If a lawyer gets paid only when he wins, why would he ever file a case that's destined to lose, and why wouldn't an opponent just hold out for the inevitable vindication? But if the filer of long-shot cases can rely on a random factor to scare his opponents -- quite aside from the threatened cost of responding to the litigation, or the reputation Al threat -- then it's not hard to see how abuses could become profitable. In fact, that's an important part of the case for loser-pays.
The idea of loser-pays, of course, is to improve the standing of the side with the better case, whichever side that may be. That is why I am always surprised to find descriptions like the following, taken from the news columns of the Wall Street Journal (Paul M. Barrett, "Warily, Hatch Mulls Changes in Civil Justice", January 31, 1995): "A loser-pays' rule would likely discourage suits by individual plaintiffs who under the current system don't face the risk of footing their opponent's bill." It would be equally accurate, or misleading as the case may be, to say, "A loser-pays' rule would likely encourage suits by individual plaintiffs who under the current system have to swallow their lawyer's bill but could now finally hope to make their opponent foot it. "
We all agree that loser-pays would discourage many weak cases. It is like pulling teeth to get the other side to admit that it would also encourage many strong cases. In fact, although our current system is usually seen as pro-plaintiff, it actually does a poor job of vindicating many well-founded claims. The incentive it gives defendants to delay is one obvious example (and even awarding prejudgment interest won't help if the suit is being filed, for example, to obtain an injunction). Another category of case very ill-served by present rules is the fixed-dollar claim that doesn't include demands for punitive damages, pain-and-suffering or the like, as when someone has totaled your car when you weren't in it. Our failure to make the losing side pay means that even a defendant who knows he's liable has reason to offer less than full value as settlement in such cases.
Our fellow advanced democracies do much better at avoiding litigation than we do in this country. It is time we laid to rest the idea that these countries attained this measure of social progress by providing no remedy at all for the ordinary claimant with a good case -- that they somehow forgot to consider such claimants' situation in drawing up their rules. No system is perfect, and all have quirks, but American lawyers have gotten away with painting a garish caricature of the way things work abroad. Writing in the Duke Law Journal, the distinguished Oxford scholar Patrick Atiyah observes that "the reality is that the accident victim with a reasonable case should be able to find a lawyer with equal ease in England and America." (1987 Duke LJ 1002, 1017) . Who would think so from reading ATLA's literature, or the ABA's?
Many in the defense bar and among large entities that get sued have a completely different and indeed opposite set of concerns about loser-pays. They warn that defendants would pay when they lost, but would not often collect when they won. They cite two reasons: first, judges would bend the law to help sympathetic plaintiffs; second, the fee awards would be uncollectible even if they were ordered. Both of these have been blamed for the failure of Florida's experiment in shifting fees in medical malpractice cases. In addition, they warn about the application of the rule to diversity cases, as described below
Someone, it seems to me, must be wrong here. It is hard to imagine that the porridge is both too hot and too cold. Perhaps the ABA Section of Litigation could have its members huddle and get their story straight as to which is the hapless victim, plaintiffs or defendants.
On the question of bending the law, as I mentioned, the present bill allows judges to waive or reduce fees in special circumstances where such an award would be unjust. That does not strike me as an invitation to turn the exception into the rule. Cynics, it is true, could point to the amazing gymnastics engaged in by the U.S. Supreme Court in the 1968 and 1978 cases called Piggie Park and Christians burg Garment, where the Court turned what lawmakers had written as an optional two-way shift into a mandatory one way shift. (Newman v. Piggie Park Enterprises, 390 U.S. 400 (1968); Christians burg Garment v. EEOC, 434 U.S. 412, 421 (1978)) Again, further clarification of what might be considered unjust could only help.
The person who does legal damage for which he cannot pay might be called the uninsured careless motorist of the litigation world. Uncollectibility of fee awards has reportedly been a common experience of defendants in England, who would, nonetheless, never want in a hundred years to trade places with defendants in this country. There are several reasons to think that loser-pays has some effect in making even a penniless plaintiff think twice about filing a bad claim (assuming a lawyer is willing). First, it will be seen as some kind of hassle. Second, many such plaintiffs do not plan to go on being poor. Third, and surely most important, is the offset principle, or its close relative in England the offer-of- judgment rule: if the plaintiff expects to win something, then loser-pays provides a check on holding out for too much.
A question increasingly being asked -- by, for example, Steven Brill in his Washington Post piece -- is why the lawyer who takes part ownership in a claim on the upside should not be put on the hook for the downside as well. The contingency-fee bar, after all, is a big believer in the ideas of joint and several liability, vicarious liability, enterprise liability and the like. Applied here those principles would lead to a stringent result, namely, holding the lawyer liable for all the damage done by his co-venture with the client, rather than just a proportional share. But perhaps no one should be treated that unfairly in our courts.
All those worried about loser-pays can take heart from the fact that in this country as in Europe the vast majority of cases settle short of trial. The main function of loser-pays, therefore, is to influence the nature, level and timing of the settlement. And the better a claim's chances of winning, the likelier that the rule will raise rather than lower its settlement value.
Visiting Europeans, asked about the supposedly terrifying nature of their fee rules, are apt to point out that to them it is our legal system that is the terrifying one. We are the ones who attach no downside to dragging in every issue and levying every possible demand on each other. So the stakes mount and mount to a ruinous level. Loser-pays adds a certain visible risk, but its wider effect seems to be to reduce the overall riskiness of litigation by narrowing issues and cooling overheated demands.
The proposed Common Sense Legal Reforms Act of 1985 does not try to introduce loser-pays all at once. It starts with one part of the system, allowing us to gain confidence and experience before deciding on further expansions. But where is the best place to start?
One approach would be to apply the loser-pays rule to actions based on federal questions generally, or particular federal statutes or groups of statutes. Another would be to take existing laws with one-way shifts and give them two-way shifts, or, if that was too awful a prospect for the affected interest groups, offer them the option of turning some into two-way shifts and others into no-way shifts.
This bill takes a different route. The group of cases it selects are those in diversity, that is, cases between citizens of different states which arise under state law but can be heard by federal courts as provided in Article III, Section 2 of the Constitution. Diversity cases are an intriguing and non-obvious choice of a starting place, though not necessarily a wrong one.
The corporate defense bar, which as mentioned is not exactly thrilled at loser-pays, is said to be particularly un-thrilled at the choice of diversity suits as the place to start. Here is their reasoning, if I grasp it a right. When plaintiffs lawyers sue an out-of-state company, they already have considerable discretion whether to prosecute the case in federal court or instead keep the opponent in state court by finding a local defendant to attach -- defeating diversity, as it's called. This forum-shopping power already works to defendants' disadvantage, but they would be in even worse trouble if plaintiffs could choose between two different fee regimes. Plaintiffs with strong cases, or a high ratio of necessary legal expenditure to likely damage recovery, would be attracted to federal court. Those with weak cases would switch from federal to state court to dodge the risk of a fee award.
Up to a point, at least, I am not convinced that this would necessarily be terrible news for defendants, still less for the country. To begin with, you'd think it would be a clear good for strong cases to be better vindicated and for delay of such claims to be discouraged. Even defendants that pay in these cases may obtain some benefit from fee-shifting, if the offset principle can be established in a way that causes plaintiffs to press claims more cautiously and not add marginal claims and theories.
As for a switch of weak cases to state courts, it would seem unlikely for this in itself to produce a net loss for defendants. Multistate enterprises often say they would rather be sued in federal court because state courts dish out so much "home cooking" favoring local lawyers and plaintiffs. But when a plaintiffs lawyer's first choice had been to take a weak case to federal court, it's presumably because that case was an exception to the general rule: for whatever reason, federal court will bring a bigger payoff However, as Professor Rowe points out, there is yet a further twist: because Section 101 applies only to actions "commenced" under the relevant section of federal law, plaintiffs might succeed in getting into federal court anyway without risking its new fee policy if they filed in state court and their claim was then removed to federal court. It's one thing to have your cake and eat it too, but for plaintiffs' lawyers this could be like waking up in the Sara Lee factory.
How would the system adjust? If defendants' fears are accurate, federal courts would soon garner a reputation as the place lawyers went to first when they had a really good claim (not a bad boast for a court system) while state courts, handling an increasingly un-meritorious interstate docket, would come under new scrutiny and pressure either to adopt loser-pays themselves or to improve their screening of case quality in other ways. Perhaps my argument here is too speculative. It may be simply that the choice of diversity cases as the place to start represented a decision by the bill's drafters to try to defuse charges that the measure was harmful to plaintiffs interests by drafting it in a way remarkably favorable to them.
As this House hears from the contending political forces, I hope it will not forget the very real victims of our current practice. One is Martha Culbertson, whose family owns a winery that was named along with many other California wineries in a class-action suit. After fighting the case through the courts, her company and the other defendants won a complete victory at trial. At first, they were overjoyed. The joy began to wear off when they wrote a hefty check to their lawyers, without, of course, any hope of getting it reimbursed by the side that had been proved wrong. Then came word that the lawyers suing them were demanding more than $450,000 from the various defendants. In exchange, they offered...not to file an appeal. So Ms. Culbertson's little family firm pulled out its checkbook again. "There are attorneys who focus their careers on lawsuits like this," she writes. "It is an immense danger to the small businessman. Cash reserves can be used up in the blink of an eye when in the company of lawyers. As long as it's possible for anyone to sue anybody over anything, we are all in danger." Her final thought: "It's so sad: we won, didn't we?"
Unfortunately, much of our legal establishment does not acknowledge, even in principle, that there is anything wrong with what happened to Martha Culbertson and thousands of others in her situation. But the public does realize it, and they will welcome a reform that advances the cause of simple justice. Any system of legal process carries the risk that people will use it mistakenly or in a bullying spirit. Other countries recognize that danger, and attach a price tag to discourage it. We should too. Thank you.
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Judiciary
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