Texas “Loser Pays” Statute Creates Risk for Defendants, Not Just Plaintiffs

In the 2011 legislative session, the Texas legislature passed what many have called a “loser pays” bill. This is really not accurate, and much of what this legislation contains is not new.

In litigation matters, the “loser pays” provision of the bill is actually a “think carefully before you reject this offer” provision. This rule has been in effect since January 1, 2004 and provides that, if the plaintiff rejects a defendant’s settlement offer before trial and then recovers less than 80% of the settlement offer, the plaintiff must pay the litigation costs that the defendant incurred from the date the offer was rejected. However, the amount the defendant can recover is capped at the amount the plaintiff receives at trial, e.g, if the plaintiff recovers zero, the amount the defendant can recover is also zero. While the rule sounds like a real benefit to defendants, it can be dangerous for defendants as well. Once the defendant makes an offer, the plaintiff can make one too. If the defendant rejects the offer and plaintiff recovers more than 120% of the offer, then the defendant must pay the plaintiff’s litigation costs. The litigation costs are still limited to the amount recovered by the plaintiff.

The new legislation also requires the Texas Supreme Court to create among other things, procedures for a “motion to dismiss.” While motions to dismiss are common in federal procedure, Texas has no such procedure. Under the new rules, the court will be permitted to grant the motion if there is “no basis in law or fact” for the claims filed by the plaintiff. New rules from the Texas Supreme Court are expected in the spring of 2012.

These new laws, and the rules that will go with them, are complicated, and there are nuances to them that are far too complex to describe here. If you’re interested in learning how these new laws affect your business, please contact Jim Clancy.