Recently, legislation was filed that would institute a “loser-pays” system in Texas where the loser pays the litigation costs for the prevailing side. Governor Rick Perry has touted loser-pays as the next step of tort reform in Texas, and as seen in this Wall Street Journal article, he’s right. The costs of our nations tort system amounts to roughly 2.2% of the total gross domestic product (GDP).
Lawrence McQuillen explains the impact of frivolous lawsuits on the economy in the Wall Street Journal: “[A]ny true estimate of the costs of America’s tort system must also include these dynamic costs of litigation—the impact on research and development spending, the costs of defensive medicine and the related risk in health-care spending and reduced access to health care, and the loss of output from deaths due to excess liability.” These opportunity costs leave us wondering what benefits society might have seen had not our productive resources been diverted to deal with these harmful lawsuits.
So what is the problem with a loser-pays system? Plaintiffs’ attorneys, like Thomas Melsheimer argue that the litigation costs will skyrocket. He wrote, “It’s really hard to imagine there being much grass-roots support for it once people understand that it could make the ordinary citizen suing Wal-Mart pay for Wal-Mart’s legal fees if they lose,” he said.
However, this argument ignores the fact that a loser- pays system would help overcome the current high transaction costs that bar access to the courts and therefore give greater access to the judicial system to those who have truly been harmed. Such a system would decrease the cost of litigation and ensure that only meritorious claims are heard.
In other words, with “loser-pays,” everyone wins.