The New “Loser Pays”

A lot of my friends have asked me about the new “loser pays” law and how I expect it to affect litigation in Texas.  For years, Texas and most other states followed the so-called, “American Rule” whereby litigants pay their own attorneys’ fees.  There were exceptions, such as certain statutory provisions that allowed recovery of attorneys fees in breach of contract, declaratory judgments, and other types of lawsuits.  The new law is a departure from our historical approach, and represents a Texas version of the “English Rule,” allowing the prevailing party to recoup attorneys’ fees and litigation costs.

Originally enacted in 2003 and revised significantly last year, the law allows a party to make a settlement offer and trigger a loser-pays situation.  If the judgment ultimately rendered is significantly less favorable to the party who rejected the offer, that party is required to pay the other party’s costs and attorneys’ fees (from the date of the offer forward).  “Significantly less favorable” is defined as less than 80% of an offer rejected by a plaintiff, and more than 120% of an offer rejected by a defendant.
My prediction when the law originated was that it would rarely be used.  I thought this would be especially true in the kind of high-stakes litigation involving most of our firm’s clients.  Sensible attorneys avoid adding to their clients’ litigation costs and avoid taking unnecessary risks. This is especially true when the issues are complex and the potential recovery is enormous.  It bears adding that some of my clients are businesses and insurance companies in litigation against individuals who have no assets from which a judgment could be collected.

My own experience and the reported cases involving the statute seem to support the prediction.  The lawyers in my firm have not been involved in a single case in which in which the new law has been invoked.  Only three appellate courts have written opinions concerning the loser-pays statute—so most of my colleagues share our experience.  Only one of the reported cases involved a recovery over $ 1 Million.  In two of the three cases, (including the multi-million dollar case) litigation expenses and fees were awarded to the Plaintiff, not the defendant, in sharp contrast to the claims of some legislators who supported it as a protection against meritless claims.
In short, the law has just not been invoked much in its eight-plus years of existence, and nothing about the 2011 amendments is likely to change that.  For those interested in learning more, the statute can be found at https://statutes.capitol.texas.gov/Docs/CP/htm/CP.42.htm#42.004 .   A good history of the legislation is summarized at Tex Parte Blog.