Attorneys' Fleece

Some potential dangers of "loser-pays"

Mark S. Pulliam from the November 1995 issue

(Page 2 of 2)

The attorney then requested twice that amount$270,720from the defendant to compensate for the attorney's risk of failure. The trial court quite sensibly rejected this claim on the ground that the contingent-fee agreement the attorney had with his client set the upper limit of a reasonable fee. A unanimous New Jersey Supreme Court disagreed. Neither the contingent-fee agreement nor the amount of damages awarded can limit the recovery of attorneys' fees. When courts determine rea sonable attorneys' fees, the sky is the limit.

All economic activity responds to incentives, and litigation is no exception. Even without fee -shifting statutes, there are plenty of contingent-fee wildcatters willing to prospect for damages by filing speculative lawsuits. When courts confer on prevailing plaintiffs the additional windfall of exorbitant attorneys' fees, while at the same time denying fees to prevailing defendants unless the cases were utterly groundless, they are unabashedly encouraging unnecessary litigation by rewarding the filing of weak claims and encouraging the excessive litigation of all claims. "Enhancements" and "multipliers" explicitly incentivize lawsuits.

Webster's defines barratry as "the practice of exciting and encouraging or maintaining lawsuits or quarrels: the persistent incitement of litigation." The judiciary used to punish barratry. Now the courts are engaged in it. Is it any wonder we are drowning in a flood of lawsuits?

Bad experiences with existing fee-shifting statutes don't mean that loser-pays doesn't have merit. But those experiences teach two important lessons, both of which must be heeded for loser -pays to represent an improvement over the status quo. First, the standard for awarding fees must be applied evenhandedly, without (as now) preference for prevailing plaintiffs over prevailing defen dants. The existing "American rule" is preferable to one-sided loser-pays.

Second, the existing approach for determining reasonable attorneys' fees must be abandoned. The attorneys' fees prevailing parties are allowed to recover must be strictly limited, and in the case of a prevailing plaintiff, recoverable fees should ordinarily be an amount significantly less than the damages recovered, with no enhancements or multipliers. Even in the rare case in which the legal interest being vindicated is more substantial than the amount of damages (for example, a title dis pute), recoverable fees must bear a reasonable relationship to damages.

The standard should be guided by what fee would be reasonable in a transaction between an uncoerced buyer and seller of legal services. Allowing recovery of unlimited attorneys' fees (as courts now do) in a loser-pays scheme would be a license for excessive litigation and defeat the salutary purpose of the English rule.

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