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Texas’ new ‘Loser Pays Law’: Employers score a win

by on
in Employment Law,Human Resources

by Dawn M. Knepper and F. Barham Lewis Jr., Esqs.

Texas employers have long been frustrated with the expense of defending against frivolous claims. Even when employers win a lawsuit, litigation can cost thousands in legal fees and lost productivity. Now at least some help is on the way.

The Texas Legislature has passed the much-hyped “Loser Pays Law,” which applies to all civil actions filed in Texas on or after Sept. 1, 2011.

The new law establishes for the first time that the losing party must pay the other side’s attorneys’ fees when motions to dismiss frivolous lawsuits are filed in civil actions.

A party may file a motion that a claim has “no basis in law or fact,” without having to provide evidence in support of the motion. Courts must rule on the motion within 45 days of filing. Whether the motion to dismiss is granted or denied in whole or in part, the prevailing party is entitled to their “costs and reasonable and necessary attorneys’ fees.”  

Watered down?

The final version of the Texas law differs substantially from an earlier version that contained a true “loser pays” provision. It would have allowed prevailing parties in lawsuits to recover costs and attorneys’ fees from losing parties. The legislation was changed in committee to only allow prevailing parties to recover costs and fees at the motion-to-­dismiss stage.

The Texas Legislature called for the Texas Supreme Court to adopt new rules for the motion-to-dismiss scheme, setting a deadline of March 1, 2012.

Many commentators see little immediate effect of the law on state practice. According to Walker Friedman, chairman of the State Bar of Texas Litigation Section, “The way the bill was initially written was a different matter. But the way that ultimately the issues were resolved—I don’t think there’s going to be a tremendous, overwhelming effect on lawyers.”

Potential effects of the law

Although not a true “loser pays” plan, Texas’ new law may affect civil litigation in three ways:

1. First, plaintiffs’ attorneys and potential claimants will need to consider the effect of the new law when selecting the appropriate forum in which to bring claims.

Although it remains to be seen how the Texas Supreme Court will implement the motion-to-dismiss rule (and how lower courts will apply the new rule), plaintiffs will need to evaluate early on whether their cases are robust enough to survive a motion to dismiss.

2. The new fee-shifting in Texas may actually discourage some defendants from filing early motions to dismiss.

The law requires that any party that loses a motion to dismiss, whether a plaintiff or a defendant, bears the costs and fees of the prevailing party. Many courts may under­­standably be reluctant to grant early motions to dismiss, before a plaintiff has had a chance to develop his case. Thus, this law may discourage the filing of motions to dismiss unless a defendant has very strong arguments for dismissal. Many cases may thus pass the motion-to-dismiss stage without any substantial challenge.

3. Texas’ fee-shifting rule ap­­­plies only at the motion-to-dismiss stage and is thus unlikely to curb escalating discovery costs.

Discovery is becoming increasingly complex, particularly because it involves producing and reviewing large amounts of electronic materials, which contribute to the high cost of litigation. A “loser pays” system like the English Rule may encourage parties to minimize costs, since either party may be held responsible for those expenses once the case ends.

But since Texas law applies only to motions to dismiss, it is not likely to have an effect on resources that parties spend over the course of civil cases that proceed to trial.

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Authors: Dawn M. Knepper is a shareholder in Ogletree Deakins’ San Antonio office and F. Barham Lewis Jr. is a shareholder in Ogletree Deakins’ Houston office.

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