Tuesday, November 22, 2011

The Single Worst Law in America Today

The rule that both parties in legal disputes pay their own costs, regardless of the outcome.

This leads to gold-digging lawsuits. It leads to people suing home owners because they slipped on their pavement. It leads to disgruntled employees filing lawsuits every time they get fired. It leads to doctors being sued every time an operation is not successful, regardless of whether it was their fault. It leads to robbers suing homeowners for injuries they sustain in the course of burglaries.

Why, you may ask, does it lead to all these various things?

Because it creates the most screwed up incentives imaginable. A lot of plaintiffs get their fees charged on contingency – no win, no fee, in other words.

When someone files a lawsuit, no matter how ridiculous, the only cost is their time. Monetarily speaking, every lawsuit has a positive expected value from filing. Any risk that’s there is retained by the lawyer, who spends more time on the case.

When people defend a lawsuit, even when they win, they lose. Because there’s no payoffs to successfully defending a lawsuit, defence lawyers can’t charge on contingency. Hence, apart from a few special cases like SLAPP statutes (where you can argue that the lawsuit was designed to silence free speech), the defendant has to pay up front.

The best case scenario is that you just pay your legal fees. The worst case scenario is that you pay your legal fees and the judgment against you.

But then the plaintiffs will make you the devil’s bargain – if it will cost you at least 30 grand to defend this, why not just settle the case for five grand, even though it’s bogus?

The main people who defend lawsuits are those who have a personal conviction that they’d rather spend more money on lawyers just to make sure the plaintiff doesn’t get anything. But even then, the plaintiff doesn’t get punished, they just get zero. If defendant actually wins. Which they may not.

This system has a number of problems.

Firstly, it creates an incentive for all sorts of gold-digging lawsuits. Lawmakers end up trying to play whack-a-mole to fix the related problems, such as capping medical negligence damages (where everyone still has an expected benefit, but it’s now smaller.) Or maybe make it harder to win lawsuits if you slip over, or if you were in the process of robbing a home. But whatever you do, you’ll always be playing catch-up as long as the base incentives to file lawsuits remain in place.

Secondly, it creates a morally impoverished citizenry that views every trivial wrong as a potential lottery ticket. Those who justifiably view this system as legalized extortion may choose to voluntarily refrain from filing, but this merely means that the benefits accrue disproportionately to the shameless, the self-entitled, the greedy, and the narcissistic. What a horrible incentive to erode virtue.

Thirdly, it fails to recognize that lawsuits impose a real cost on the counterparty and society. Like any externality, when people aren’t forced to internalize the cost, they over-consume the item. Same with lawsuits. Making the losing party pay the winning party’s legal fees means that people are forced to consider if they actually suffered a serious and acute legal wrong for which they need compensation, or whether they’re just trying to punish someone they’re pissed off at. It is manifestly not the role of the legal system to help ameliorate your hurt feelings.

But for some reason, the popular support for this position is very slim. Websites like Overlawyered document very well the egregious abuses of this lawsuit-obsessed society. But they don’t really talk about why this happens, or what can be done to stop it.

I would love to see the Republicans propose ending this practice. The trial lawyers would scream bloody murder, but it would be amongst the easiest and most beneficial changes that could be made to the law.

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