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Texas' "loser pays" law mixed bag for business

State's new tort reform bill is designed to make litigation faster and less costly.

Texas Governor Rick Perry made tort reform a cornerstone of his campaign when he was elected in 2000. Under his leadership, the state has passed caps on noneconomic damages in medical malpractice cases, asbestos and silica litigation reforms and multidistrict litigation procedures to take matters away from plaintiff-friendly courts.

But Perry wasn’t content to stop there. He was after the holy grail of tort reform—a loser-pays law. Common in Europe but unprecedented stateside, a loser-pays system requires the loser to shoulder the prevailing party’s court costs and legal bills. And Perry almost made it happen when the Texas House of Representatives passed H.B. 274 in May. The statute would have made Texas the first state to shift the burden of litigation to the losing party, erecting a major barrier to plaintiffs without the financial wherewithal to risk incurring massive legal bills.

Ultimately, the unprecedented reform didn’t gain traction in the Senate, and a modified version of the bill passed on May 30.

The most significant feature of the 2011 Omnibus Tort Reform Bill is a modified loser-pays proposition that shifts fees to the loser when a case is disposed of on a motion to dismiss. While Perry has publicly touted the law as a landmark reform that will attract businesses to the state and allow employers “to spend less time in court and more time creating jobs,” the statute may prove to be a mixed blessing, and it certainly won’t deliver a deathblow to the plaintiffs bar.

“We came close to being a strict loser-pays state,” says Roy Atwood, a partner at Jones Day. “Ultimately, I don’t view this as significantly altering the playing field.”

Speedier Processes

While Perry wasn’t able to deliver on passing a loser-pays law, the statute does implement several important reforms designed to make litigation in the state faster and less expensive.

Prior to passage of the latest tort reform bill, Texas was one of only eight states that didn’t permit parties to file motions to dismiss, which challenge the legal sufficiency of the allegations in the complaint. Not only does the new law create a motion-to-dismiss procedure, but it also makes it mandatory that the loser pays the winner’s fees for litigation of the motion. This has two advantages for businesses—courts can quickly dispose of meritless lawsuits prior to costly discovery, and a company can force the plaintiff who filed the case to foot the bill for the motion.

The flip side is that the loser-pays provision goes both ways. If a defendant files a motion to dismiss on which the plaintiff ultimately prevails, the defendant will be paying plaintiffs counsel’s bills. Many think the provision ultimately favors the plaintiffs bar.

“I like the mandatory award of fees for the prevailing party on a motion to dismiss,” says Brad Parker, director of legislative affairs for the Texas Trial Lawyers Association. The Association originally opposed the loser-pays bill, but it did not object to the version that was passed. “This will prevent defense attorneys from filing motions unless they really believe they’re meritorious,” Parker adds.

The reform law also attempts to speed up the resolution of cases by giving plaintiffs with claims less than $100,000 the option to choose simplified discovery procedures on a separate docket that will focus on quickly resolving smaller claims.

While the motion-to-dismiss procedure and small case “rocket docket” are designed to expedite case resolutions, another feature of the law may slow the courts down. Texas adopted an interlocutory appeal rule similar to that in New York state courts. Essentially, if the case turns on a “controlling issue of law,” there is an automatic right to an appeal. Typically, parties are required to wait until a case is resolved on a final order before appealing.

“Interlocutory appeals will delay disposition of cases and increase fees,” says Glenn Ballard, a partner at Bracewell & Giuliani.

Settlement Incentives

Finally, the reform attempts to encourage both sides of a dispute to settle cases before trial by clarifying the rules for making an offer of judgment. Similar to Federal Rule of Civil Procedure 68, the Texas law permits a party to protect itself from incurring additional legal fees early on by making a reasonable settlement offer or demand.

Under the new rule, if a plaintiff obtains a jury verdict of 80 percent or less of the settlement offer made by the defendant prior to trial, the defendant is entitled to its legal fees incurred after the date of the settlement offer, up to the total amount of the verdict. Likewise, if the plaintiff obtains a verdict of 120 percent or more than his settlement demand, the plaintiff is entitled to recover fees incurred after the demand was made. The statute also permits the prevailing party to recover costs associated with taking depositions, such as court reporter fees.

“This is a small move toward the British system,” Ballard says. “But it won’t ultimately impact large lawsuits. In multimillion-dollar cases, attorneys’ fees are the least of your worries.”

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