Marie Gryphon Suggests Tweaks To the English Rule For Possible Use in the U.S.
On December 2, 2008, we authored a post on Java Oil, Ltd. v. Sullivan, which explored the differences between the English Rule (losers pay attorneys' fees) and American Rule (each side bears own fees in the absence of a fee-shifting contractual clause or statutory provision). Also, in California Litigation, Vol. 21, No. 3 (2008), we wrote: "While the English Rule serves to weed out marginal cases by increasing the economic risk to a litigant who proceeds on weak grounds, the American Rule makes it easier for litigants to enter the courthouse by mitigating the consequences of losing." Recently, Marie Gryphon, Senior Fellow at the Manhattan Institute for Policy Research (an attorney herself), has proposed a "losers pay" option that she believes would improve the American legal system. This option is described in a December 2008 Civil Justice Report available for review by clicking here. We now summarize the highlights of this report and accompanying proposal.
Here are some interesting statistical/empirical highlights from Ms. Gryphon's Report:
- The direct costs of U.S. tort litigation reached $247 billion in 2006, or $825 per person in the United States.
- In 2003, direct tort litigation costs amounted to about 2.2% of the U.S.'s total gross domestic product (GDP), with the U.S. following the American Rule. This contrasts to the much different GDP consumption for direct tort litigation costs in full/predominant "losers pay" countries–Canada–0.8%; England/Northern Ireland–0.7%; Germany–1.1%; France–0.7%; and Australia–1.1%.
- In Alaska, which has always had a "losers pay" system (dating back to1884), tort suits constitute only 5% of all civil legal matters–half the national average.
- Tort costs have grown more quickly than the rest of the U.S. economy, rising at an average annual rate of 9.2% between 1951 and 2006, a period during which GDP grew at an average rate of only 7%.
- The proportion of litigation targeting small businesses is sizable, between 36 and 52% of all lawsuits filed against businesses.
- Of the approximately 30,000 small businesses sued in 2002, two-thirds spent more than $10,000 in attorney's fees in addition to any settlement or judgment.
- Lawyers spent this percentage of their time on these activities related to the resolution of litigation: pleadings and motions–16%; discovery–15%; client contact–15%; settlement talks–14%; factual investigation–12%; legal research–11%; trial and hearings–9%; other–6%; and appeal–1%.
- There is some evidence suggesting that men are more likely than women to be involved in legal disputes.
- The Chungs, the dry cleaner owners sued for $54 million based on losing some pants in Washington, D.C., had offered to settle for $12,000–much more than the value of the pants–even though the offer was rejected. Even though they were successful at trial (even though the matter is on appeal), the Chungs ended up owing close to $100,000 in fees, had to shut down the larger store where the pants were lost and had to lay off employees, and had to relocate to a smaller store where they had first started their business.
- Only 16% of Americans said they trust the civil justice system to "defend them" if someone should bring a baseless lawsuit against them.
Ms. Gryphon presents data supporting the argument that a "losers pay" system would reduce the number of low-merit lawsuits, encourage business owners to comply with the law rather than litigate, and would not discourage low-merit class actions to the same extent as ordinary tort litigation.
Ms. Gryphon suggests a bold "proposal for reform:"
- The non-prevailing party in any civil monetary-seeking lawsuit would indemnify the prevailing party for costs and attorney's fees, with fee awards being the lesser of (1) actual fees, or (2) 30% of the difference between the final judgment and the non-prevailing party's last written settlement offer made within 60 days of the filing of plaintiff's initial complaint;
- "Prevailing" means that plaintiff obtains an order for a net total judgment amount (including all substantive claims/counterclaims and excluding costs) in excess of the defendant's last written settlement offer made within 60 days of the filing of plaintiff's initial complaint–otherwise, defendant would be deemed the prevailing party;
- Within 90 days from filing of the initial complaint, plaintiff would file proof that assets are available to pay a judgment awarding costs, Proof may be in the form of a litigation-expense insurance policy bought either by plaintiff or plaintiff's attorney. The premiums for this policy would be recoverable by the prevailing party. If no such proof is filed, the complaint would be dismissed without prejudice;
- Plaintiff would be liable for costs as a non-prevailing party if plaintiff moves to withdraw a lawsuit more than 90 days after filing of the initial complaint; and
- The provision of litigation-expense insurance would not be deemed maintenance or champerty.
A key component of this proposal is litigation-expense insurance. These types of policies are well known in England and can be purchased by the ordinary consumer (usually as an adjunct to homeowner insurance) or by the putative plaintiff's attorney (just prior to commencing a suit). The premiums are actually quite affordable, and Ms. Gryphon predicts that similar policies would be made available through the U.S. insurance market if a "losers pay" option was adopted.