Last week at Overlawyered I had a little back and forth with its publisher, Walter Olson, on the concept of a loser-pays system. For those not familiar with the idea, this specifies that the loser of a lawsuit pays the legal fees of the winner. This is in contrast to the “American Rule” that says, generally, each side bears its own costs.

There are exceptions, of course, such as legal fees being part of a sanction for frivolous litigation, but we deal here today with the general rule.

There are two issues regarding the rule: The first is that it effectively closes the courthouse door to much of middle America. On one side in a typical tort case is likely to be a multi-billion dollar insurance company defending an auto collision or medical malpractice case, and on the other a person who may be struggling to work, or incapacitated and trying to figure out how to pay the mortgage or rent.

One side has incentive to run the meter and stall, and can readily afford to do so. If the litigant loses a simple issue of “who had the green light” then financial devastation may follow, but there is no such threat on the other side. The parties are not equal and the scales of justice unbalanced.

But the second issue is more interesting to me here because it deals with even broader public policy issues, and that came up with Olson’s comment responding to me:

A “legal system that only the wealthy can use” is not an accurate description of the pluses and minuses of the legal systems in the great majority of advanced democracies where loser-pays is the norm, such as Canada, the U.K., Scandinavia, the Netherlands, and so forth. It does, unfortunately, accurately describe some sectors of the American legal system (such as small high-merit claims and many injunctive matters) where neither fee shifts nor contingency fees are available. Oppose loser-pays if you like, but enough of the sloganeering.

The U.S. system here is compared to other nations with reputations for significant social service programs (and high taxes to pay for them). Universal health care is the most obvious example. The U.S., by contrast, has far less government involvement with our lives and some of the lowest taxes of any industrialized nation on earth.

If we close the court house door on people by making it more difficult to proceed, then what happens to those already injured? Well, they absorb the costs themselves until they are poor enough for the minimal social service programs that we have and then the taxpayer picks up the tab. And they remain poor, having now been victimized first by the negligence of others and then again by being forced to bear the financial burden.

The American Rule, as it now stands, is consistent with the parties working things out privately in court with minimal government intervention. Sure, verdicts can get tossed out if they are true outliers, but for the most part verdicts are respected.

The interesting part about this political discussion, I think, is that last week Overlawyered became affiliated with the Cato Institute, a libertarian think tank. While I certainly wouldn’t want to speak for them, it seems to me that a loser-pays system (and other tort “reform” measures that give protections and immunities to those who are negligent) garners greater government involvement in the lives of the populace, contrary to its own political philosophy.

If we want to shift the costs of injuries caused by negligence away from the tortfeasors and onto the backs of the taxpayers, then we need those Scandanavian government economies to accommodate that shift and provide the support.

The U.S., I think it’s clear, isn’t going that way.  We are faced with a choice as to whether we let parties duke things out privately or let the government come in with support. A nation can have one or the other. But what we can’t have, is both the stripping away of private rights at the same time that we have limited government support. That is not the model used by any industrialized nation that I know of.