Alternatives for Tort Reform In Georgia

By John G. Malcolm

An 81-year-old woman from New Mexico spills a cup of McDonald’s coffee on herself and suffers third-degree burns. A jury awards her $160,000 in compensatory damages and $2.7 million in punitive damages. A San Francisco jury awards a former secretary of a prestigious law firm who claimed that she had been sexually harassed $50,000 in compensatory damages for emotional distress and $7.1 million in punitive damages. A $1,000 dispute over a car loan turns into a lawsuit, and the finance company is hit with a $50 million punitive damage award.

“Help!” cry businessmen and stockholders. “There is a lawsuit being filed every five minutes! The legal system has gone haywire. It’s those trial lawyers! It’s time for TORT REFORM!”

“Stop!” cry the members of the American Trial Lawyers Association, “Do not believe the lies of the insurance industry!”

“Beware!” shout consumer groups across the nation. “Without easy access to the courts, the possibility of punitive damages, and strict laws governing product liability, hapless Americans will be at the mercy of careless, greedy corporations, whose heartless pursuit of a dollar places every consumer’s health and well-being on the losing side of a cold, cruel cost-benefit analysis! Remember the Pinto!”

So goes the crisis rhetoric of the public debate surrounding current efforts to reform the American legal system. As with most battles fought in the popular press, there is some truth on both sides. What is the nature of this crisis? And what should be done to ameliorate the situation?

At the center of the controversy is the way the legal system handles non-contractual disputes, known as torts, arising between private parties. Torts are not limited to actions resulting in physical injury. Slander, fraud, interference with contractual relations, and trespass are all torts. Most of the rhetoric surrounding the argument on tort reform, though, is concerned with cases involving physical injury and, more specifically, medical malpractice and product liability.

America is unquestionably the most litigious society in the world. We, as a nation, take our private problems to court more readily than the people of any other country on the planet. It seems that the maxim “for every wrong, there is a right” has been converted into “for every injury, there is a lawsuit.” In 1992, approximately 20 million civil lawsuits were filed in both state and federal court — approximately one lawsuit per ten adults in America. The number of civil lawsuits filed in federal court has tripled in the last 30 years. By some estimates, the number of medical malpractice cases has increased 300 times since 1969.

Despite these sobering numbers, however, statistics do not bear out the assertion that the courts are choking on tort suits. Recently, the Conference of Chief Justices, composed of the highest judicial representative from every state and territory of the United States, pointed out that tort filings in state courts normally account for only 10 percent of the country’s state court caseload. The American Bar Association is fond of citing statistics indicating that, for the past ten years, tort claims in federal court have been steadily decreasing as a percentage of total claims filed.

Why Reforms Are Needed

What, then, has caused a controversy so bitter that the Republican party opted to include tort reform as part of its election-winning strategy, “The Contract With America?” Why do we need tort reform?

First, although tort claims make up a relatively small portion of the federal and state dockets, docket statistics do not tell the entire tale. The impact of tort claims — guarding against them, insuring against them, and dealing with them when they arise — is enormous, more so than for other types of lawsuits. In 1991, tort costs in this country (including insured and self-insured costs) were approximately $132 billion — that’s 2.3 percent of our nation’s gross domestic output, as compared to 1.3 percent in Italy, 1.2 percent in West Germany and Belgium, 1 percent in Spain and Switzerland, and far less than 1 percent in most other countries. Thus, tort costs put U.S. corporations at a competitive disadvantage vis-a-vis international corporations that do not have to contend with such costs.

Many of these costs are absorbed by corporations — viewed by consumer advocates as evil monoliths with bottomless resources who prey upon the public. The truth is that the overwhelming majority of corporations are not evil, nor do they have limitless resources. On the front end, the corporation may pay the damage award; but, on the back end, the bill is footed by stockholders, taxpayers and consumers, in the form of reduced share prices, increased administrative costs and higher prices for goods and services. The money awarded to successful plaintiffs is not manna from heaven; rather, it is money that is not going to be used to pay employees, reward shareholders, or fund research and development. Just the potential for liability has another adverse impact on the business climate in that it discourages would-be entrepreneurs from venturing into the business world and creating the jobs, products and services that are so vital to the present and future prosperity of our country.

Litigation does not create wealth; it merely redistributes it from defendants to plaintiffs when the plaintiffs prevail. Further, regardless of whether a plaintiff wins or loses, the attorneys for both sides seem to get a disproportionate share of the money involved. Whenever a lawsuit is filed, the only sure winners are usually the attorneys. Thus, both plaintiffs’ and defendants’ attorneys have a vested interest in the current system.

Leaving aside the issue of how much money should be siphoned off by the attorneys, there is nothing per se wrong with redistributing money from defendants to plaintiffs. There are times when money should be redistributed because a serious wrong has been committed. The trick, though, is figuring out when money should be redistributed and how much, and to create a system which weeds out, as best it can, genuine claims from those in which “sympathetic” plaintiffs make false accusations against deep-pocket defendants in an attempt to extort money, using and abusing the legal system in the process. The court system is probably the least cost-effective way of settling disputes, and should be used sparingly. Hence, the need for curbing the negative impact tort litigation has on our economy, in an increasingly global marketplace, is very real.

The second reason why we need tort reform is because a tort claim is the type of lawsuit most likely to give rise to frivolous accusations. The attitude of “I’ve been injured, so someone must pay; it was someone’s fault other than my own,” has become a too-prevalent part of the American psyche. Bad luck is no longer acceptable. Victims of it must be compensated. Personal responsibility is no longer required, or even important. The existence of the contingency fee, which allows a claimant to proceed without paying a lawyer unless successful, only adds fuel to the fire.

Consider one recent case in California. The plaintiff was hit and severely injured by a drunk driver. He successfully sued the manufacturer of the phone booth where he was standing at the time of the accident, claiming that the door did not open in time for him to escape the oncoming vehicle. The luckless victim and his innovative lawyer are wealthy. The phone booth manufacturer and the insurance industry were enraged.

In another case, a volunteer baseball coach was sued by a little leaguer who had the misfortune of getting bopped on the head with a pop fly. In a climate in which little league errors can blossom into major league lawsuits (rather than being resolved with an ice pack, some encouragement and extra practice), the public, understandably, is getting fed up.

The third aspect of tort litigation that makes it an obvious target for legal reform is the fact that many tort cases involve claims for both noneconomic and punitive damages. Claims for noneconomic damages encompass such things as “pain and suffering,” “emotional distress,” and “loss of consortium,” not medical bills, lost wages, or other types of harm that can be precisely measured in monetary terms. While claims for noneconomic damages still fall within the category of an attempt, albeit a crude one incapable of precise measurement, to make a victim “whole,” punitive damages are not designed to compensate the victim at all. They exist to “send a message,” to punish a defendant for misconduct and, hopefully, to affect the cost-benefit analysis of similarly-situated would-be tortfeasors. (Tortfeasor is the legal term that simply refers to the party that committed the tort.) The economic impact of tort lawsuits, the ease with which they can be abused, and the vagaries of tort-related damages have created a crisis that calls for reform. Two areas that need to be addressed on a state and national scale are limitations on damages and changes to the system of accountability for those who bring dubious claims.

LIMIT NONECONOMIC AND PUNITIVE DAMAGES

Although both noneconomic and punitive damages have attracted a lot of attention, tort reform critics are quick to note that noneconomic damage awards are often nominal. They also state that, although awarded more frequently than in the past, large punitive damage awards are still rare and the most egregious awards are often reduced on appeal (for instance, the notorious McDonald’s hot coffee case was reduced on appeal to $480,000, and the case was subsequently settled for an undisclosed amount of money).

The problem, though, is that both types of damages interject a high level of uncertainty into the cost of doing business. This is because it is impossible to predict with any degree of certainty when a jury will award noneconomic or punitive damages, or how much it will award. This degree of unpredictability distorts the litigation process because neither side can accurately predict what the likely outcome will be.

In this environment, outcomes are determined less on the merits of the case and more on the basis of which parties are risk-averse and which ones prefer to roll the dice. The possibility of “jackpot” may unduly affect a plaintiff’s decision to bring a claim: why not play the litigation lottery? It is not unlike playing the slot machines in a Las Vegas casino. The people in the casino keep pumping money into the machines because at any given moment, they can hear the bell and siren of a slot machine making a payout to some lucky winner. This “information” overshadows the fact that, at the same time that one person is winning, hundreds of slot machines are being fed by eager gamblers, silently taking money and yielding nothing in return. In fact, playing the litigation game can be cheaper than playing the slot machines since the people playing the slot machines at least have to put up some money before pulling the lever.

The ripple effect of well-publicized, staggeringly high damage awards also results in more frequent and higher than reasonable settlement offers on the part of defendants. Better to settle a case, even for a higher than reasonable dollar amount, than to risk an astronomical award of noneconomic or punitive damages. Further, because of the potential adverse impact on a company’s ongoing business and its reputation within the business community, a highly-publicized threat of punitive damages may be far more deleterious to some companies than the actual imposition of such an award.

Is the threat of a huge punitive award, or the actual imposition of such an award, necessary to deter all but the most wanton and stubborn of tortfeasors? Probably not.

For one, the amount of money spent to make victims “whole” — to compensate the victim — may already be “punitive” from the company’s perspective. Consider the following example. Let’s assume that an individual buys a $500 appliance (for which the company makes less than a $500 profit since it will have expenses associated with the manufacture and sale of that appliance) and is badly injured because of some defective component. Once the injured party files a lawsuit, the company may end up paying a million dollars or more in compensatory damages alone — just to make the injured party “whole” — even though the appliance manufacture’s profit was only a minuscule fraction of that amount. If several hundred consumers were to be similarly injured, the company could be bankrupted even if it never paid a dime in punitive damages.

Nor is it correct to assume, as many tort reform critics do, that big companies must face the threat of huge damages or they won’t feel the sting. Large corporations, by virtue of their size, also deal with a larger and broader array of consumers and, therefore, face greater risks of being sued by more people in more places. They do not require one huge club to keep them in line. Many small clubs should suffice.

Large awards of punitive and noneconomic damages are also not the only means of “sending a signal.” The adverse publicity from losing a tort suit, and the threat of suits by other similarly situated plaintiffs, will still create a large incentive for people and corporations to act properly, not to mention the fact that U.S. corporations are still subject to regulations and criminal laws that prohibit most egregious forms of conduct.

Limitations on damages have long existed in other areas of public concern without any noticeable reduction in their deterrent effect. For instance, in antitrust and securities cases, aggrieved parties can receive up to three times their actual damages, but no more. There is no evidence to suggest that this ceiling deters plaintiffs from filing such actions or that it does not have a deterrent effect on would-be wrongdoers.

The United States Supreme Court has addressed the issue of punitive damages three times and will hear arguments in another case dealing with this issue in the near future. In the past, the High Court has shied away from adopting an argument that would allow an award to be overturned on substantive grounds as being violative of either the Due Process Clauses of the Fifth and Fourteenth Amendments, or the Eighth Amendment’s prohibition against the imposition of “excessive fines.” In other words, the Court has refused to invalidate a punitive damages award as unconstitutional “just because it’s too big,” although the Court has yet to categorically reject that possibility. Instead, the Court has indicated that the awards are to be judged not by their size, but by the process by which they are rendered. The process should include certain safeguards, such as adequate instructions to the jury to guide its discretion, and a mechanism for meaningful judicial review of such an award upon appeal.

The latest case, which will not be decided until next year, is BMW of North America v. Gore, in which a lawsuit was filed by an Alabama consumer who purchased a new $40,000 BMW car, and discovered that the car’s surface had been damaged and resurfaced by the dealer before the sale. He was awarded $4,000 for the “diminished value” of his car, and $2 million dollars in punitive damages. This time the parties hope the Supreme Court will address the constitutional issues left unresolved in the prior three cases.

Reforms In Georgia

Without clear guidance from the nation’s highest court, states across the country have begun redefining the circumstances under which noneconomic and punitive damage awards can be rendered. Happily, at least with respect to punitive damages, Georgia’s efforts in this arena have not been deficient, although the Georgia General Assembly should consider imposing reasonable limitations on such items as pain and suffering and loss of consortium.

The Tort Reform Act of 1987 instituted several important reforms, most of which have been upheld by Georgia’s courts. First, the statute tightened up the standard for an award of punitive damages in tort cases, requiring proof “by clear and convincing evidence that the defendant’s actions showed willful misconduct, malice, fraud, wantonness, oppression, or that entire want of care which would raise the presumption of conscious indifference to consequences.” In other words, a showing of simple negligence is insufficient under Georgia law to justify punitive damages — punitive damages are thereby reserved for those who truly deserve to be punished. Further, an aggrieved plaintiff must make the requisite showing by “clear and convincing” evidence, rather than by merely a “preponderance of the evidence,” as is the case in many other states.

With respect to product liability cases, there is no limit on the amount of punitive damage awards. However, only one award of punitive damages may be recovered in Georgia from a particular defendant on a specific product liability claim. The idea behind this “one shot” rule is that a company should only be “punished” once for the same malicious conduct. The second, fifth, or fiftieth plaintiff injured by the same product may be compensated, but will not be allowed to seek punitive damages, since the punitive “message” has already been sent. Moreover, 75 percent of any such award must be paid to the state treasury, highlighting the fact that such an award is punitive, and not compensatory, in nature. Thus the dual public goals of punishing the malicious tortfeasor and deterring other would-be tortfeasors from embarking on a similar course of wanton or intentional misconduct are achieved without producing a private windfall to the injured, but fully compensated, plaintiff.

In other tort cases in which a plaintiff is able to demonstrate that the tortfeasor acted with a “specific intent to cause harm,” there is no punitive damage cap or limit to the number of times the intentional tortfeasor can be punished. Hence, the most harsh treatment is properly reserved for the most egregious tortfeasor.

In any other tort action, however, in which the tortfeasor was more than simply negligent, but did not act with the specific intent to cause harm, the maximum amount that can be awarded as punitive damages in one case is $250,000. And, finally, no punitive award is allowed where the underlying claim does not involve physical or economic injury, as opposed to pure emotional distress.

In the area of punitive damages, the Georgia General Assembly is one step ahead of Congress, but Congress may soon close the gap and, in some respects, pass Georgia. As part of the “Contract with America,” the House of Representatives passed a bill that would, among other things, strictly limit the availability of punitive damages. Under the proposed law, all punitive awards would be subject to a cap of three times the amount of compensatory damages or $250,000, whichever is greater, and a plaintiff must demonstrate “by clear and convincing evidence that the harm suffered was the result of conduct manifesting actual malice,” which is further defined as a specific intent to cause harm, or “flagrant indifference to the rights of the claimant and an awareness that such conduct is likely to result in serious personal injury.” This is arguably a stricter standard than the “conscious indifference to the consequences” standard that currently exists under Georgia law because it requires an actual awareness by the tortfeasor that the conduct at issue was likely to result in serious injury. This cap would apply to all federal and state civil litigation.

The Act, passed as H.R. 956, also places some much-needed limitations on joint and several liability. Joint and several liability means that if a plaintiff successfully sues more than one tortfeasor, the plaintiff can recover the entire amount of the damages awarded from any one, or all, of the tortfeasors involved. While such a system increases the likelihood that damage awards will, in fact, get paid to deserving plaintiffs, it also increases the incentives for aggrieved plaintiffs to search for “deep pockets” to sue, even though that entity’s connection to the harm suffered may be tenuous at best (as in the case of the phone booth manufacturer discussed above).

The proposed Act eliminates joint and several liability for noneconomic damages, meaning that in cases in which a jury determines that more than one tortfeasor is at fault, each defendant is responsible only for its own proportionate share of the injury caused. The Act preserves the concept of joint and several liability for the recovery of economic damages in order to ensure that the injured plaintiffs hospital bills, lost wages, and the like, will be paid. As with the limit on punitive damages, this would apply to all state and federal civil litigation.

Under Georgia law, the presumption is still that tortfeasors are jointly and severally liable for the entire amount of any damages awarded. Juries in Georgia are given some discretion to apportion damages among tortfeasors, but only in cases in which the plaintiff himself has acted negligently in a manner that contributes to his injuries. If H.R. 956 is passed by the Senate and signed into law by President Clinton, it would supersede Georgia law. If the bill fails, the Georgia General Assembly ought to consider enacting the sorts of limitations on joint and several liability that are contained in H.R. 956.

In addition to making sweeping changes applicable to all tort cases, H.R. 956 takes specific aim at two areas: product liability and medical malpractice claims. Under the proposed Act, Congress would “federalize” product liability torts. Despite Congress’ current penchant for “de-federalizing” in other areas, applying a uniform standard to the area of product liability makes some sense. This is because many, if not most, products are manufactured in one state and sold in other states. The disparity in state laws create confusion and inconsistency. In many cases, the current system subjects manufacturers of products to the applicable standards of all 50 states, many of which may conflict with each other.

Finally, the Act exempts products that have been approved by the Food and Drug Administration as safe from any imposition of punitive damages for claims arising from approved uses of the product. The Act also limits damages for “pain and suffering” in medical malpractice cases to $250,000. There is no reason why this limitation on noneconomic damages should not be extended to other tort actions as well.

ADOPT A “LOSER PAYS” RULE

Tort remedies exist for laudable and powerful reasons: to provide incentives to individual actors, such as doctors, to perform services in a non-negligent manner; and to provide incentives to corporate actors to produce safe products, to warn consumers about known defects in products, and to protect the environment. Under any sensible system of justice, there must be some incentive for truly injured parties with meritorious claims to pursue them in court. The problem with our legal system is that, as it currently operates, there is virtually no incentive not to bring a claim, even an arguably frivolous one, and the uncertainty of outcomes defeats the system’s intended goals of spreading risk equitably while motivating safe behavior.

America is the only western nation where, for anything other than small claims, each party is normally required to pay its own costs and legal fees, regardless of the outcome of the case — a system referred to, for obvious reasons, as the American Rule. In virtually every other country, the normal routine requires that the loser pay the court costs and the attorney’s fees of the winner — this alternative mechanism is referred to euphemistically as the “English Rule.”

Alaska is the only state in the Union that has any kind of a two-way fee shifting statute in effect. It is a modified version of the English Rule, however, in that the fee schedule for a prevailing plaintiff is based on a decreasing scale according to the amount awarded, and the fees that may be awarded to a prevailing defendant are left completely to the court’s discretion. In practice, however, Alaskan courts have awarded fees to defendants in cases in which a plaintiff over-litigated a winning claim. For instance, in one case, a court ruled that the plaintiffs who had already recovered a substantial amount of money on some of their claims from the defendant in an earlier action, but who kept pressing at a second trial, were not the prevailing parties in the second action, and were ordered to pay the defendant’s attorney’s fees.

Florida experimented in the early 1980s with the English Rule in medical malpractice cases. In the end, though, the doctors themselves found the procedure disagreeable because several multimillion dollar verdicts were accompanied by multimillion dollar contingency fee awards, and because prevailing doctors often found themselves unable to recover their attorney’s fees because the plaintiffs were insolvent.

The sole, which is not to say insignificant, advantage to the American rule is that it diminishes economic barriers to access to the court system. Thus, the poor have readier access to justice because they only have to worry about paying their own lawyer if they lose; and, in cases involving contingency fees, they don’t even have to worry about that.

The disadvantages of the American Rule, on the other hand, are numerous. First, it prevents even victorious plaintiffs from being made “whole” since legal fees can eat up a huge percentage of any amount won in court. And, ironically, the American Rule can also discourage a plaintiff with a legitimate grievance from filing a lawsuit. This is because any recovery by the plaintiff will be diminished by the costs of his attorney’s fees. When the expected legal costs are too great relative to the amount of the claim, the plaintiff may decide not to sue. This, of course, would not occur if the plaintiff could be assured that the wrongdoer was going to end up paying the plaintiff’s bill.

Second, it means that someone who has done nothing wrong often ends up paying for someone else’s choice to use the court system to litigate a grievance. For a victorious defendant, a large legal bill renders any victory hollow indeed. Further, from the moment a case is filed, the defendant must begin calculating the relative cost of defense versus settlement, meaning that even blameless defendants often decide to settle frivolous matters rather than face the inevitable prospect of racking up huge attorney’s fees in order to vindicate their rights and reputations. In direct contrast to the American Rule, the English Rule compensates genuine victims without charging innocent parties — in other words, winners really win, and losers really lose.

Third, when combined with the existence of the contingency fee, the American Rule grants anyone a virtually free ticket to the litigation lottery — lawyer-driven “nuisance suits,” or suits grounded in plain bad judgment or bad faith, have no economic filter. By requiring the losing party to pay for one lawyer instead of two, the American Rule makes it less expensive for parties to adopt frivolous or intransigent positions and, therefore, subtly encourages them to do so. Neither side has a full incentive to hasten the proceedings because neither side has to worry about the other side’s legal bills.

A major exception to the American Rule in this country has been carved out in the area of civil rights, and certain other specified types of laws, which give prevailing plaintiffs the right to seek reimbursement of their legal fees from defendants, but not vice versa. This “one-way” fee-shifting offers an incentive to plaintiffs seeking redress of specific grievances to proceed — and serves as a tacit acknowledgment that the American Rule serves as a disincentive to do so. Of course, the one-way shifting completely distorts the playing field since, from the start of the litigation, the defendant must be concerned with the possibility of paying the attorney’s fees for both sides, while the plaintiff need never worry about this.

A “loser pays” rule that is available to both prevailing defendants and plaintiffs would discourage frivolous lawsuits and promote the early settlement of meritorious ones. A defendant would no longer have the economic incentive to try and outlast his opponent’s ability to pay his lawyer — for the defendant may end up paying his own and his opponent’s fees. Similarly, a plaintiff would be more apt to accept a reasonable early settlement offer (studies of jurisdictions adopting fee-shifting indicate a higher settlement rate results), rather than gambling on a “jackpot” at the risk of paying the defendant’s fees if he loses.

Critics claim the “loser pays” English Rule creates a system of justice that only the rich can afford. Few people, opponents claim, would be willing to risk having to pay money if they lose, even if they have a valid claim, despite the fact that the rewards for prevailing — full compensation — would be greater.

It is certainly true that the possibility of footing an opponent’s legal bill will give many plaintiffs pause. That is the point. The English Rule may even force more people to solve their problems without going to court, and may also make it more difficult for attorneys to “sell” clients on untested theories of liability (a prospect that makes trial lawyers cringe).

Moreover, the potentially harsh effects of a loser pays system on both plaintiffs and defendants can be ameliorated by both private and public forms of financing. In Great Britain, for example, unionized workers bargain for protection from legal expenses as part of their overall compensation packages. In much of Europe, legal expense insurance is a standard and popular form of insurance coverage. Indeed, in countries such as Austria, Switzerland and Germany, approximately 40 percent of all households are covered by some form of legal expense insurance, and studies suggest that the availability of this type of coverage has not led to an increase in frivolous claims or a reluctance to assert meritorious ones.

For people who do not have legal benefits as part of any compensation package and who are unable to afford private legal expense insurance, there is the more traditional public assistance mechanism of representation through legal aid. In Great Britain, for instance, indigent plaintiffs who are represented by legal aid attorneys are not required to pay the defendant’s fees if they lose; however, defendants must pay the legal aid bill if they lose. This “one-way” shift has the benefit of recognizing that legal aid lawyers are not private attorneys in the classic sense. Rather they are lawyers whose salaries are paid by the taxpayers (not by the plaintiffs) and who perform a quasi-public function in that they vindicate the rights of the indigent who would otherwise have no access to justice. As well, and most importantly, because of their limited resources, legal aid lawyers perform the valuable function of screening out abusive and patently frivolous claims prior to accepting a case. Any money received by legal aid lawyers in cases in which they prevail goes back into the general legal aid fund, not into the pockets of the attorneys themselves.

There are obvious problems from the perspectives of both plaintiffs and defendants with the English Rule. From the plaintiff’s perspective, assuming that private funding options and legal aid are not available, there is the possibility that the plaintiff may be bankrupted by having to pay the defendant’s legal bills should he lose. From the defendant’s perspective, as was the case with the doctors in Florida, there is the possibility of being saddled with having to pay an astronomic contingency fee bill, should he lose, or the possibility that the plaintiff may be insolvent and unable to pay the defendant’s legal bill, should he win. For the fainthearted, there are alternative modifications of the English Rule that are worthy of exploration.

First, as in Alaska, Georgia can consider a sliding scale approach to fees that varies the amount that the winning party must pay in legal fees, according to a schedule, as a percentage of the underlying judgment. In this manner, at least a portion of the winning party’s legal bills are paid by the non-prevailing party. Alternatively, Georgia could adopt a “loser pays” rule subject to a review by the courts of the reasonableness of the fees charged by the prevailing attorney. A codified system of exemptions could be built in, if necessary.

Second, the Georgia General Assembly could consider a “Refusal to Settle” format. This is the approach that was recently passed by the House of Representatives in H.R. 988, soon to be considered by the Senate. However, if the proposed legislation is ultimately enacted, it would only apply to so-called “diversity” cases in federal court, in which a federal court has jurisdiction only because the parties are from different states and where the controversy exceeds $50,000. The legislation specifically exempts civil rights cases. Federal diversity cases in this range make up only about 1 percent of all civil litigation, and only 20 percent of the federal docket.

A “Refusal to Settle” system requires the losing party to pay the winning party’s legal bill if the losing party rejected a favorable settlement offer, and ultimately loses, or winsless than the amount of the last offer. The House bill further limits any fees imposed to the amount of the losing side’s own legal bills, and applies only to fees and costs incurred after the last settlement offer was made.

One problem with this proposal is that is creates the possibility that a plaintiff may file a nuisance suit and then adopt a wait-and-see attitude (thereby incurring few expenses) in the hopes of extorting an early, favorable settlement. The defendant may, on the other hand, take the case seriously and incur a great deal of expense to defend itself. And, of course, it could result in little actual fee shifting because parties can, and often do, incur large legal fees prior to making any settlement offers.

There is no doubt that adoption of some version of the English Rule would impose certain additional administrative costs on our legal system. There may well be post-trial squabbles over the amount of fees to be assessed against the losing party. Although irksome, this in not an insuperable problem. Courts are routinely called upon to decide fee disputes, particularly in cases in which statutes already provide for “one way” fee shifting, and have been equal to the task of deciding the reasonableness of fees expeditiously. Further, winning attorneys have some incentive to charge reasonable fees to increase the chances of recovering them, and losing parties have an incentive not to challenge reasonable fee requests since they run the risk of footing the bill for the post-trial fee motions on top of the fees they already owe for the underlying dispute.

In the final analysis, both methods — “loser pays” and the American Rule — have distinct disadvantages. The disadvantages of the American Rule are greater. Application of the American Rule has created a legal system that completely distorts economic reality. With low-cost entry, lawsuits become the rule and not the exception for private problem solving. Everyone pays the price.

What Georgia Can Do

In summary, Georgia has already made great strides in eliminating some of the worst excesses that have fired the tort reform debate on a national scale. The Contract with America promises to do even more. The Georgia General Assembly should enact its own reforms to fill in any gaps left by the federal efforts at tort reform. The Georgia General Assembly should place reasonable limitations on noneconomic as well as punitive damages, amend its rules on joint and several liability, and join Alaska and the rest of the western world in recognizing the disadvantages of the American Rule and the problems it has caused the economy, the tort system, and the delivery of civil justice.


John G. Malcolm is an Assistant United States Attorney for the Northern District of Georgia and a member of the Georgia Public Policy Foundation. The opinions expressed within this article are those of the author and do not reflect the views of the Department of Justice. The Foundation is a nonpartisan, member-supported research and education organization based in Atlanta, Georgia, which promotes free enterprise, limited government and individual responsibility.

Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia General Assembly.

© Georgia Public Policy Foundation (April, 1995) Permission is hereby given to reprint this article, with appropriate credit given.

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