Texas Adopts Loser Pays

Did Texas just adopt a loser-pays rule for all lawsuits? Not quite, but it is a good start!

HB 274 will now head to the Governor's desk for signature. It is officially known as the 2011 Omnibus Tort Reform Bill and makes several tweaks to the civil justice system designed to reduce the cost of lawsuits and reduce the number of frivolous lawsuits, all welcome goals. TLR's summary of HB 274 can be found here.

The provision in the bill getting all the attention is a "loser-pays" provision. A "loser-pays" rule has long been a dream of tort reformers in Texas and beyond. Why? In today's civil justice system, the plaintiff in a lawsuit has no risk if he can find an attorney willing to take the case on a contingency fee basis (the attorney only gets paid with a % of whatever award or settlement is reached). Meanwhile, the defendant is forced to sustain significant legal expenses even to defend meritless claims in court. Even assuming the defendant can convince a judge to dismiss the case, the defendant has no means to recover the thousands of dollars expended to defend the case.

This becomes a means of legal extortion by which unscrupulous plaintiffs and their attorneys file meritless lawsuits seeking "nuisance" value settlements costing thousands of dollars. A loser-pays rule would discourage such lawsuits because plaintiffs would now face the penalty of having to pay the defendant's legal fees if they failed to win their case. Such a rule would be a significant disincentive to suit.

This is more than a theory. The state of Alaska has a loser-pays rule and torts suits constitute only 5 percent of all civil legal matters. Tort costs in the U.S. as a percentage of GDP is double the cost in Germany and three times the cost in France and the U.K. See here. Germany, France, and the U.K. all have loser-pays rules.

So, did Texas just take a giant leap toward reducing tort costs? Let's hope so. HB 274's loser-pays rule reads as follows:

Continue reading here.