An Interesting Problem: What Ways Are There To Restrain Lawsuit Abuse?

First, some definition of terms.  Lawsuit abuse, as I use it here, means that the suit is either wholly unfounded, or it can have a legitimate basis, but with disproportionate or unjust demands.  For example, you ding someone's door in a parking lot--and they file a suit against you (and thus, against your insurance company) for $50,000 for emotional pain and suffering. 

The plaintiff knows that he will never get $50,000 in court.  He might even get reprimanded by the judge, or a jury might award the plaintiff absolutely nothing, because the demand is so outrageous.  The plaintiff's attorney relies on the fact that it is going to cost your insurer hundreds to thousands of dollars to fight it  There is a legitimate injury that needs correction--but filing a $50,000 suit is an attempt to turn a $150 or $200 repair into a $500 or $1000 settlement.  I've been told by insurers that it is quite common to settle such nuisance suits for a small fraction of the demand amount just so they can worry about important cases.

The problem is that the courts are very, very reluctant to impose sanctions against attorneys for abusive lawsuits.  The argument is that unless a suit is clearly and unmistakeably frivolous (advancing a theory that has been rejected by the courts, or has no connection to any plausible expansion of an existing theory), the courts should not assume the worst possible motive.  If you punish plaintiffs for somewhat questionable claims, it discourages suits concerning claims in the gray areas.

There are proponents of English rule, where the loser pays the winner's attorney fees.  The theory here is that the party with a weak case has a strong incentive to settle for a reasonable amount, before either side spends ridiculous amounts of money on lawyers.  The strongest argument against English rule is this:

Little Guy sues XYZ Megacorporation for a wrong done to him.  Perhaps he has an actual basis for his suit--but XYZ's attorneys, being smarter, and having more time to devote to it than Little Guy's attorney, still win the case.  Little Guy, who might have had some legitimate cause here, now gets a bill for $450,000 in XYZ's attorney fees.  To say that this has a chilling effect on filing suits against deep pocket defendants is an understatement.

It goes the other way, too.  XYZ Megacorporation files suit against Little Guy--and perhaps Little Guy has a legitimate argument that he didn't do anything wrong, or that XYZ is asking for an absurd level of money for the injury done.  Assuming the jury sees that justice is done, XYZ gets a $500 judgment against Little Guy--but Little Guy also has to pay XYZ's $50,000 in attorney fees.  (This is essentially the state of copyright law with respect to registered copyrights--the law provides for the defendant to pay the plaintiff's attorney fees if the plaintiff wins.)  Little Guy needs to either be completely certain that he is in the right--or risk being destroyed not by the judgment, but by the attorney fees.

So what are some alternatives?  One possibility is a requirement that if the plaintiff's demand exceeds the final judgment by more than some arbitrary amount (perhaps 10x)--the plaintiff gets stuck with his own attorney fees AND the defendant's attorney fees.  As an example:

XYZ demands for $50,000.  The final judgment comes to $500.  Little Guy still has to pay the judgment--but XYZ eats its own attorney fees, and pays Little Guy's attorney fees, because XYZ's demand was so clearly disproportionate to the final judgment.  This strongly encourages XYZ to make reasonable demands, instead of using unreasonable demands and the costs of defense attorneys as a tool for extorting quick settlements.  This should discourage exorbitant demands, and encourage early settlement outside the court system.

Similarly, if the final judgment exceeds what the defendant offered to settle for by more than some arbitrary amount, the defendant gets stuck with the plaintiff's attorney fees. What if XYZ demands $5000?  Little Guy offered to settle for $250.  The final judgment comes to $2500.  Little Guy was being unreasonable in his proposed settlement.  Little Guy gets stuck with XYZ's attorney fees, because his proposed settlement was so far removed from what the court decided was a sensible judgment.  This encourages defendants to settle such matters before it turns into a lawsuit.

The courts in many states (and at the federal level) are awash in civil suits, clogging dockets.  Some of these civil suits are inevitable--but some of them are simply an expression of greed.  Plaintiffs make absurd demands, because they know that the larger the demand, the more tempting it is to settle out of court when there might not be any actual injury, or the injury is trivial--but the cost of defense is huge.  Defendants refuse reasonable demands, because in most civil suits, they are only paying for their own legal bills, and they don't see any strong reason to resolve the matter before it has gobbled up huge amounts of private and public resources.

There's probably some holes in this.  Feel free to comment.

UPDATE: Georgia already has something similar: whoever refuses to settle needs to do substantially better on judgment or he gets stuck with the attorney fees.  This was part of Georgia's Tort Reform Act of 2005, upheld in Smith v. Baptiste (Ga. 2005).  Hat tip to Point of Law.