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Is The US Looking Across The Pond?; Texas Enacts Tort Reform Law With "Loser Pays" Provision

July 20, 2011

Texas recently enacted a new tort reform law that seeks to decrease the number of frivolous lawsuits brought in Texas courts by including a "loser pays" rule, among other provisions.  This new law will apply to civil actions filed in Texas on or after September 1, 2011.

Texas's Loser Pays Rule

The Texas law establishes that, for the first time, motions to dismiss may be filed in civil actions and adopts a loser pays rule for these motions.  A party may file a motion that a claim has "no basis in law or fact," without having to provide evidence in support of the motion.  The prevailing party, whether a motion to dismiss is granted or denied in part or in full, is entitled to "costs and reasonable and necessary attorney's fees."  The final version of the Texas law, however, differs substantially from an earlier version that contained a true loser pays provision that would have allowed prevailing parties in lawsuits to recover costs and attorneys' fees from losing parties.  However, it was changed in committee to only allow prevailing parties to recover costs and fees at the motion to dismiss stage.

Many commentators see little immediate effect of the law on state practice.  According to Walker Friedman, chairman of the State Bar of Texas Litigation Section, "The way the bill was initially written was a different matter.  But the way that ultimately the issues were resolved – I don't think there's going to be a tremendous, overwhelming effect on lawyers."

What is the "Loser Pays" Rule?

The loser pays rule, commonly referred to as the "English Rule," requires that the losing party in a litigation pay the fees and costs of the prevailing party.  This system has been adopted by much of Europe, including the UK, and Canada.  In contrast, the general rule in most US jurisdictions is that civil litigants bear their own fees and costs.  There are, of course, exceptions to this standard, as many state and federal statutes include fee-shifting provisions providing for the payment of a prevailing party's costs and/or attorney's fees.  For example, many state consumer protection and deceptive trade practice statutes provide that prevailing claimants may recover costs and fees.  And in federal court cases, "costs – other than attorney's fees – should be allowed to the prevailing party."  Fed. R. Civ. P. 54(d)(1).  In most civil suits in the US, however, the loser does not pay.

Currently, Alaska is the only state that employs a true loser pays rule.  Tort reformers in the US, however, have focused their efforts on pushing state legislation that adopts a loser pays system, though usually modified from the English Rule.  During legislative sessions in 2011, states passed more than thirty tort reform laws, but Texas is the only state to adopt a loser pays law.  Legislatures in Pennsylvania and South Carolina passed tort reform, although without loser pays provisions.  An Arkansas bill similar to the Texas law did not make it out of committee.  In addition, governors in several states, including Georgia, Florida, and Indiana, have publicly supported the loser pays system.

Potential Effects of the Texas Law

Although not a true loser pays regime, Texas's new law may affect civil litigation in its courts in several different ways.

First, plaintiffs' attorneys and potential claimants will need to consider the effect of the new law when selecting the appropriate forum in which to bring claims.  Although it remains to be seen how the Texas Supreme Court will implement the motion to dismiss rule, and how courts will apply the new rule, plaintiffs will need to contemplate early on whether their cases are sufficiently robust to survive a motion to dismiss.

Second, the new fee-shifting in Texas may actually discourage some defendants from filing early motions to dismiss. The law requires that any party that loses a motion to dismiss, whether a plaintiff or a defendant, bears the costs and fees of the prevailing party.  Many courts may understandably be reluctant to grant early motions to dismiss, before a plaintiff has had a chance to develop its case, and thus this law may disincentivize the filing of motions to dismiss unless a defendant has very strong arguments for dismissal.  Many cases may thus pass the motion to dismiss stage without any substantial challenge.

Third, Texas's fee-shifting rule only applies at the motion to dismiss stage and is thus unlikely to curb escalating discovery costs.  Discovery in the US is becoming increasingly complex, particularly as it involves the production and review of large amounts of electronic materials, which contribute to the high cost of litigation.  A loser pays system like the English Rule may incentivize parties to minimize costs since either party may be held responsible for those expenses once the case ends.  But since Texas law only applies to motions to dismiss, it is not likely to have an effect on resources that parties spend over the course of civil cases that proceed to trial.

Fourth, the introduction of a loser pays rule may lead to innovative developments in the litigation funding arena.  In many jurisdictions that adopt the English Rule, and in some US states where fee-shifting occurs, litigation funding is available for the purpose of pursuing lawsuits.  These normally take the form of insurance policies, or companies that provide individuals with the financial means to sue where they might otherwise be discouraged from doing so because of the prospect of being responsible for a defendant's costs and legal fees.

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