‘Loser Pay’ Comes to Texas

Texas Gov. Rick Perry has signed legislation into law commonly referred to as the “Loser Pay Rule.” Immediately, the national press jumped on this new statute as an example of a major step forward in tort reform. However, very few of the media reports outlined, in any detail, what this legislation actually does, and just as importantly, what it does not do.

In general, “Loser Pay Rule” means that the party who loses in litigation, whether plaintiff or defendant, is responsible for the prevailing side’s attorneys fees. This is often called the English Rule because it is generally followed in United Kingdom courts. However, the Texas legislation is not so broad based and can be broken down into several specific categories. These include:

1. Early dismissal of actions;
2. Expedited civil actions;
3. Appeal of controlling questions of law;
4. Allocation of litigation costs; and
5. Designation of Responsible Third Parties.

House Bill 274 becomes effective Sept. 1, 2011. In enacting HB 274, the Texas Legislature attempted to implement a combination of a modified loser pays rule, an offer of settlement rule, and a procedure for early dismissal of meritless claims.

Particularly, HB 274 amends the Texas Government Code and Texas Civil Practices and Remedies Code to reform certain civil litigation procedures including the recovery of attorney’s fees, early dismissal of certain claims, expedited trials, appeals, and offers of settlement.

The legislation requires the Texas Supreme Court to adopt rules regarding an expedited and fair resolution of non-meritorious cases. The aim is to provide an ideal balance between lowering costs and improving fairness, while still protecting access to the civil court system.

Early Dismissal of Actions

Article 1 of HB 274 addresses early dismissal of meritless actions. This article does not fundamentally alter the way civil trials will be conducted in the future, but instead directs the Texas Supreme Court to create rules for the dismissal of certain claims that it determines should be disposed of as a matter of law, (i.e. those that do not have any basis in law or fact). This section allows the Texas Supreme Court wide latitude in adopting rules that it feels fit best with current Texas jurisprudence related to dismissing frivolous lawsuits. More importantly, the bill allows a trial court to award costs and reasonable and necessary attorney’s fees to a prevailing party on the court’s granting or denial, in whole or in part, of a motion to dismiss.

This provision does not modify the general pleading system currently followed in Texas, nor does the bill require the Texas Supreme Court to make changes in the specificity of pleadings requirement.

The Court has not yet appointed anyone to the committee to begin addressing these rules, although it is expected to do so soon. The committee will aim to have the proposed rules posted for comment sometime in July.

Expedited Civil Actions

Article 2 of the bill directs the Court to adopt rules to promote the prompt resolution of civil actions in which the amount in controversy is between $10,000 and $100,000. The goal of this section of the bill is to provide for an expedited procedure and to limit discovery for cases falling within this damage range. The amount in controversy is inclusive of any claims for damages of any kind, whether actual or exemplary, penalties, attorney’s fees, expenses, costs, interest, or any other categories of damages.

It is likely that, in response to this directive, the Texas Supreme Court will revise the existing levels of discovery in such a way as to expedite the litigation process. A committee to address these rules also has not yet been appointed. However, it also is expected have the proposed rules posted for comment sometime in July.

Appeal of Controlling Questions of Law

Article 3 of the bill authorizes a trial court, on a party’s motion or on its own initiative, to permit an appeal from an order that is not otherwise appealable if:

1. the order to be appealed involves a controlling question of law as to which there are grounds for difference of opinion; and
2. an immediate appeal from the order would materially advance the ultimate termination of the litigation.

This provision allows appellate courts to address and answer controlling questions of law in appropriate cases without the need for the parties to incur the expense of a full trial. However, an appeal under this section of the bill does not stay the proceedings unless the parties agree to a stay or the trial court or appellate court orders a stay of the proceedings pending the appeal.

An appellate court may accept an appeal if the appealing party, not later than the 15th day after the date the trial court signs the order to be appealed, files an application for interlocutory appeal explaining why an appeal is warranted. If accepted, the appeal is governed by the Texas Rules of Appellate Procedure for pursuing an accelerated appeal – meaning all appeals brought under this section will be expedited.

The Texas legislature contends that this article will not cause a flood of new appeals or unnecessary delays in future proceedings because the bill provides for a two-tiered system of gate-keeping to prevent inappropriate appeals. First, the trial court has to agree to allow the appeal. Second, an appellate court would have to agree to accept it. Conversely, opponents of the bill contend that every time a defendant loses a motion to dismiss, they will appeal the decision to the appellate court. Until case law is established one way or another, this could have serious implications. Furthermore, until case law establishes the parameters for what appeals “would materially advance the ultimate termination of the litigation” there may initially be a flood of appeals under this article.

Allocation of Litigation Costs

Presently, Texas Civil Practice and Remedies Code, Chapter 42 addresses offers of settlement in Texas. Under Chapter 42, if a settlement offer is made and rejected and the judgment rendered is “significantly” less favorable to the rejecting party than was the settlement offer, then the offering party can recover “litigation costs” from the rejecting party. Stated another way, if a plaintiff wins a case after rejecting a settlement offer and the judgment is “significantly” greater than the settlement offer, then the plaintiff may collect the award and the costs of litigation. However, under the current law, the defendant is only permitted to recover litigation costs as an offset against the plaintiff’s recovery from that defendant. Article 4 of HB 247 attempts to remove this inequity.

The act expressly provides that the litigation costs that may be awarded “may not be greater than the total amount that the claimant recovers or would recover before adding an award of litigation costs in favor of the claimant or subtracting as an offset an award of litigation costs in favor of the defendant.” The legislation eliminates the need to compute the sum of the economic and non-economic damages and subtract it from any statutory or contractual liens to determine the maximum awardable litigation costs, as is required under the current statutes.

The bill expanded the definition of recoverable “litigation costs” to include “reasonable deposition costs.” However, the bill does not state what is included in a “reasonable deposition cost,” such as court reporter fees, witness fees, expert deposition fees, or even travel costs. It should also be noted that the Legislature added lawsuits filed in small claims court to the list of types of cases to which the allocation of litigation costs do not apply.

Designation of Responsible Third Parties

Article 5 amended Section 33.004, of the Texas Civil Practice and Remedies Code by adding subsection (d). Subsection (d) provides that a defendant may not designate a person as a responsible third party with respect to a cause of action after the applicable limitations period has expired with respect to the responsible third party if the defendant has failed to timely disclose that the person may be designated as a responsible third party under the Texas Rules of Civil Procedure.

Conclusion

While the changes are significant, they do not constitute an across the board loser pay rule that applies to all litigation at all times. Consequently, it is important that litigants, and especially insurance carriers who are involved in a wide-range of litigation, know when, and to what, the new rule applies.

Topics Lawsuits Texas Legislation