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Texas Expands “Loser Pays” Rule

By Robert C. Rodriguez, Litigation News Associate Editor – August 8, 2011

The “American Rule” for attorney fees no longer applies in Texas. Although many in the business community hail this as overdue tort reform, an equal number of critics contend the law is as unnecessary as the emergency session called by the governor to pass it.

The new law House Bill 274 [PDF] takes effect on September 1, 2011. The law grants Texas courts authority to order the “losing” party pay for the prevailing party’s attorney fees and costs under certain circumstances. It also instructs Texas courts to develop and implement procedures to dismiss “frivolous” lawsuits early on in litigation.

The law was pushed through the legislature designated as an “emergency.” Texas Governor Rick Perry touts the law as " important legislation [that] will help make Texas that much more attractive to employers seeking to expand or relocate from countries all over the world by allowing them to spend less time in court and more time creating jobs."

Highlights of “Loser Pays” Law
According to its proponents, the law implements several measures designed to streamline litigation in Texas courts and allow litigants to resolve their disputes quickly and cost effectively. The law includes features that:

  • Direct the Texas Supreme Court to draft rules requiring a ruling on a motion to dismiss “causes of action that have no basis in law or fact on motion and without evidence” within 45 days of its filing (H.B. 274 § 1.01), and requiring the court to award costs and reasonable attorney fees to the “prevailing party” on a motion to dismiss. (H.B. 274 § 1.02).
  • Direct the Supreme Court to draft rules that ensure most “actions [under $100,000 in total recovery] will be expedited in the civil justice system” (H.B. 274 § 2.01).
  • Permit a trial judge to allow an appeal from an order that is otherwise not appealable without requiring all parties to agree if a ruling by a court of appeals could decide the case. (H.B. 274 § 3.01).
  • Limit a defendant’s ability to delay identifying or naming third-party defendants. (H.B. 274 § 5.01)

The law also amends Texas’s settlement statute [PDF] by expanding the definition of recoverable litigation costs. The revised provision now includes reasonable deposition costs in an award of litigation costs, and increases the scope of a prevailing party’s attorney fees recovery. (For example, recoverable attorney fees computed using a formula that, among other things, “preserved” as much as 50 percent of an economic damages award.)

Law Supporters Pleased with Result
According to the committee report [PDF] by Texas House Research Organization, the law implements “solid, fair, and necessary reforms to the Texas civil justice system to lower the cost of litigation.” The report states that supporters contend the law “level[s] the playing field between plaintiffs and defendants,” and will “do a great deal to improve business confidence in Texas and encourage investment.” Supporters testifying in favor of the law included Texas Association of Defense Counsel, the Greater Houston Partnership, and Texans for Lawsuit Reform.

From the perspective of those supporting the law, perhaps the greatest inequity corrected is in the fee-shifting statute. Under the present statute, a defendant may only “recover” its fees as an offset against a plaintiff’s recovery from that defendant. Under the revised law, the plaintiff will be responsible for a defendant’s recoverable fees even if the plaintiff takes nothing from his or her suit.

Critics Say Law Aimed at Nonexistent Problem
According to the report, those opposed to the law reject the premise that the courts are “clogged with frivolous lawsuits.” They note that plaintiffs’ attorneys work on a contingency basis and “have a strong incentive to take only cases they feel have merit in order to maximize their chances of winning the case and receiving their commission.”

Opponents testifying against the statute included the Texas Trial Lawyers Association and the Texas AFL-CIO. Those entities view the law’s changes as unnecessary and harmful to individual litigants.

Critics note that Texas passed tort reform in 2003 related medical malpractice and product liability litigation, including caps on noneconomic and punitive damages. They also point to a 2006 U.S. Tort Liability Index [PDF] by the Pacific Research Institute that ranked Texas as “the best state in the nation in which to do business based on tort liability.”

Litigators React
Despite the widespread attention that these reforms are receiving, “much of this was already the law in Texas, though in a more limited form,” observes Jennifer B. Bechet, New Orleans, cochair of the ABA Section of Litigation’s Minority Trial Lawyer Committee, who has practiced in Texas. Bechet adds that the previous “loser pays” law was capped at 50 percent of the plaintiff’s economic damages recovery, while the new law contains no such cap.

“There is now an increased premium on the negotiation and analytical skills of every Texas litigator,” concludes Bechet. She notes that this will make lawyers more likely to spend the requisite time to value their case realistically. She notes that turning down a reasonable offer under the new law could now have more serious consequences for the client.

“The ‘loser pays’ provisions will chiefly impact modest income individual litigants, as these people have real assets to lose if a party goes after them for attorney fees and costs,” says P. Arley Harrel, Seattle, cochair of the Section of Litigation’s Employment and Labor Relations Committee. He notes that these modest income litigants, “don’t want to be bankrupted because they filed a lawsuit, [but] if you have no money or assets, you might not be too deterred by this change in the law.”

Despite claims that this reform will attract businesses looking to relocate to Texas, Bechet is skeptical. “I am not so sure a company is going to choose to relocate to a state simply because these new tort reform laws exist, ” she says. Although the new law may be a factor that some companies consider, she doubts it will be the deciding factor.

What Is Next in Texas and Beyond
Trend spotters wonder if other states will follow suit and try to emulate Texas’ efforts. “I suspect that other states might consider ‘loser pays’ laws, and it will be interesting to see how soon that happens, or what the results will be because there will now undoubtedly be strong lobbying efforts on both sides of this issue,” says Richard L. Horwitz, Wilmington, cochair of the Section’s Corporate Counsel Committee.

It will also be interesting to see if Texas plaintiffs’ attorneys mount a constitutional challenge. This was the 2008 approach in response to Texas’s Medical Malpractice and Tort Reform Act of 2003, Texas’s last major tort reform effort. (In September 2010, the Magistrate recommended dismissal of that constitutional challenge. That case was still active in the system at press time.)

Editor’s Note: Jennifer B. Bechet is also admitted in Texas.

Keywords: litigation, “loser pays” rule, attorney fees, House Bill 274

  • August 10, 2011 – Once again, corporate America's investment in purchasing politicians has paid off, at the expense of the most envied tort recovery system in the world. Now we have no meaningful regulatory mechanisms, & no deterrence by litigation, of the worst abuses committed by corporate actors.


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