End frivolous lawsuits - make the loser pay

There is an explosion of lawsuits in the United States today. We have all heard of ridiculously frivolous suits. The civil courts are the venue for "jackpot justice". See this by Walter Olson, a fellow at the Manhattan Institute, which appeared in the Wall Street Journal, for more about the problem and its costs in California.

Are we helpless to stem this tide? No. While there have been many other proposals for tort reform, most of them simply tinker with the system without changing its inherent unfairness. This blog , also by Walter Olson, discusses the "loser pays" system of civil justice that is used by virtually all other civilized countries, Alaska, and (as of 9/1/11) Texas. The principle is simple: the losing side should "make whole" the prevailing party, including paying its legal costs. Olson's essay also answers the most common criticisms that are leveled at loser-pays.

It is a little-known fact that California already has some of the legal structure to make loser-pays a reality. Section 998 of the Code of Civil Procedure provides, in essence, that if one party makes a settlement offer, and the other side rejects it and then does not obtain a better result at trial, then the rejecting party must pay both their own legal costs and those of the other party. Attorney Geoffrey L. Bryan describes this more fully and analyzes some technical issues.

I propose three modest and very reasonable amendments to section 998.

The first concerns costs. In the arcane world of legal jargon, the word "costs" has a specific meaning. It generally does not include attorney fees, even though they are often the largest expense of a lawsuit. While California law does award attorney fees to the prevailing party in a few narrow cases, I completely fail to understand the reluctance of the law to do so universally. Section 998 in particular should include among the expenses awarded to the winner, reasonable and necessary attorney fees incurred after the offer is rejected.

Second, courts have interpreted the law to mean that only "reasonable" offers are eligible (Pineda v. Los Angeles Turf Club, Inc. (1980) 112 Cal. App. 3d 53, 63, and Wear v. Calderon (1981) 121 Cal. App. 3d 818, 820-21). This ruling is restrictive and unnecessary. Since the cost-shifting mechanisms of section 998 do not kick in unless the rejecting party does worse at trial, it seems obvious that the offer was reasonable, since it was better than the trial result. The legislature should clarify that an offer that is no worse than the trial result is reasonable. Even an offer of $0 is reasonable if the offering party prevails. 

To understand my third proposal, suppose a lawsuit is filed and the defendant immediately offers to settle for $0. If the lawsuit is frivolous, the plaintiff would be wise to accept the offer and dismiss the suit before the defendant begins running up legal bills. Suppose the plaintiff rejects the offer. If the defendant prevails, his costs will be paid by the plaintiff under section 998. If the plaintiff prevails, his costs will generally be recovered as part of the judgement (that is the way the system works today). Voila! - the loser pays.

In reality, the defendant would have some small costs in having a qualified attorney prepare and serve the offer to settle for $0. And if the defendant's attorney fails to make the offer (perhaps he doesn't realize its benefits), the defendant loses its protection. Since there is no reason not to make the offer, I would propose that section 998 be amended to say that all defendants are presumed to have made such an offer immediately after a suit is filed. This would make loser-pays the law of the land for all Californians.

Simple. Easy. Fair. Let's do it.

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This page was last updated on 26 Aug 2015.

Written by Charles R. Landau. Copyright (c) 2003, 2005, 2011, 2014, 2015. All rights reserved.

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