Should Losers Pay Litigation Costs?

The Washington Examiner reports that in the United States, defendant companies often settle big lawsuits that could cost them millions of dollars, even if the suits are frivolous. But what if cases that went to trial required the losing party to pay litigation costs?

Businesses are significantly impacted by class action investor suits, which cost them money as well as stock value. According to the U.S. Chamber Institute for Legal Reform, shareholders lose six times the amount of money that plaintiffs typically gain from these lawsuits.

Sometimes, judges will sanction litigants for misconduct under Rule 11 of the Federal Rules of Civil Procedure, requiring the sanctioned party to compensate the other for legal costs. For example, when law firm Robbins Geller accused Boeing of illegal misrepresentations, Boeing decided to stick it out, refusing to settle the case. As the suit unfolded, it became clear that the plaintiffs had no foundation for their claim. The federal judge overseeing the case accused Robbins Geller of “repeated misconduct,” requiring them to pay Boeing’s legal fees.

The Washington Examiner writes that these sanctions are rare. However, by instituting a “loser-pays” system — in which losing litigants are required to cover the legal costs of the winning party — plaintiffs would be dissuaded from filing frivolous lawsuits. Similarly, defendant companies would be more likely to take these cases to trial, confident that they could recoup court costs after the verdict.

In Delaware, the state’s Supreme Court recently ruled that corporations (and many American corporations are incorporated in Delaware) can create this own protection for themselves by instituting “loser-pays” requirements in their corporate bylaws. Unless the ruling is overturned legislatively, corporations can use this power to curb abusive suits.

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