Marie Gryphon on “Loser Pays”

Marie Gryphon, of the Manhattan Institute (and a Cato adjunct scholar), has a terrific new paper advocating a “loser pays” system to deter frivolous lawsuits. Here are excerpts from the executive summary:

This study argues that loser pays could be an important part of a larger effort to reduce litigation costs, better compensate prevailing litigants, and better align tort law with its goal of deterring socially harmful conduct. A loser-pays rule would discourage meritless lawsuits, but because any such rule should also ensure plaintiffs of modest means but strong legal cases access to justice, our proposal calls for:

  1. A robust litigation insurance industry similar to those that now exist in other loser-pays countries; and
  2. A cap on recoverable fees to eliminate the incentive that large litigants might have to attempt to “buy a verdict” under loser pays.

This study explores in depth how a loser-pays rule would change litigation in America. It includes key findings about the likely effects of loser-pays reform and evaluates previous experiments with loser pays in America.

The Status Quo

This study delves into the available evidence about how the legal marketplace works, which lawyers file low-merit lawsuits, and how they stay in business:

  • The subgroup of lawyers that file most nuisance lawsuits works to obtain settlements in weak legal cases before its members ever see a courtroom.
  • The American system facilitates nuisance lawsuits, since the high cost of defending against weak cases gives defendants a strong incentive to settle.
  • In contrast to nuisance suits, low-merit mass torts and class-action suits are able to attract some of the best lawyers in the United States because the potential damages stemming from these suits make them very lucrative, even when they are settled for a small fraction of the amounts demanded.

Effects of Loser Pays

This paper infers from its examination of the scholarly literature how loser pays would affect the American legal system:

  • Almost every economist who has studied loser pays predicts that it would, if adopted, reduce the number of low-merit lawsuits.
  • A loser-pays rule would encourage business owners and other potential defendants to try harder to comply with the law. Doing so should produce fewer injuries.
  • Loser pays would deter ordinary low-merit suits, but it would not discourage low-merit class actions to the same extent because the risk of enormous losses, rather than the costs of legal defense, is the primary source of pressure on defendants to settle.