Guest Opinions

‘Loser pays’ arrangement produces counterintuitive results

Patrick Bageant
Patrick Bageant

Should a lawsuit’s loser pay for the winner’s lawyer? According to the Idaho Supreme Court, the answer is, yes, unless the Legislature says otherwise before March.

On Monday, Idaho’s House of Representatives did just that, and the matter now depends on the Senate. The hand-wringing and uncertainty this has brought to the legal community is not occurring in a vacuum, however: Our Senate can look to Alaska, which has studied its own “loser pays” rule, and to California, whose statutory damages rule in civil rights cases also offers insight, albeit from a different context. Here is what it will find.

First, strong “loser pays” rules encourage trivial litigation. Intuition suggests the risk of picking up someone else’s legal tab should discourage pointless lawsuits. But that does not appear to be so. Instead, mandatory attorney fees create incentives to hurl resources at trivial cases — if the trivial case is a winner. Just look to California, where many prevailing civil rights plaintiffs “shall” be awarded fees. The rule’s laudable purpose was to advance civil rights, and it may have done so, but it also created a cottage industry of small-fry court cases over technical but harmless violations. Why? Because rational parties will pursue a $200 case if guaranteed that someone else will finance the lawyer to do it. To be sure, California’s is not a bilateral loser-pays regime like Idaho is considering, and it is mandatory, not permissive, but it is instructive nonetheless.

Second, “loser pays” has not worked well in Alaska, which permits prevailing parties to recover portions of fees. A study by the Alaska Judicial Council found that courts awarded fees less than 10 percent of the time, and most awards were less than $5,000. Alaska’s conclusion? It “seldom plays a significant role in civil litigation.”

Savvy readers will recognize that Alaska’s teaching contradicts California’s: does fee-shifting encourage trivial suits, or has it little effect? The answer may be some species of “both.” Regardless, however, if we want significant and predictable results, the “loser pays” model seems a clumsy tool at best and a counterproductive one at worst.

Third, contrary to intuition, “loser pays” can unfairly benefit plaintiffs’ lawyers and disadvantage defendants. The first unfair benefit is discussed above: incentive to maximize reimbursement by overworking strong but trivial cases. The second is that it increases the cost to settle lawsuits. Alaska found that its rule increased the dollar value of settlements, because adding legal fees to the mix automatically made every lawsuit bigger.

Meanwhile, the system can hurt defendants. Such rules (including Idaho’s) often contain exceptions for “justice” — a concept courts use to avoid saddling parties with unbearable burdens. Generally, plaintiffs lack money (that’s why they sue) and defendants have it (that’s why they get sued). It takes little imagination to see why deep-pocket defendants are disadvantaged compared to impoverished plaintiffs.

Patrick Bageant is a local attorney. He represents an equal number of plaintiffs and defendants in civil litigation matters.