What is the American Rule of Legal Fees?

The American Rule of Legal Fees is a principle in the U.S. legal system that dictates how attorney fees are handled in litigation. It can be contrasted with the English rule of legal fees. Under the American Rule, each party is responsible for paying its own attorney fees, regardless of whether they win or lose the case. Of course, our legal system takes many notes from the English common law system. In fact, several of our common law rules stem from English law in the 1600s. There are advantages and disadvantages to each system. While you do not necessarily need to understand the English rule, understanding each in detail helps you better understand the rationale behind our system and the exceptions that apply to be reimbursed for legal fees, contrary to our standard rule.

Further, knowing when the American rule applies and does not apply can save you money in future legal proceedings. In legal systems following the English Rule, typically, the losing party pays the attorney’s fees for the winner and their own attorney. The rationale behind this rule is that defendants should not bear the cost of litigation if they are found to be not guilty or not liable at trial. This makes sense and seems to speak in the name of justice. It also encourages the defense to afford the best possible representation, even if it would not otherwise be affordable if the defendant knows they are not liable for the alleged accident. However, there are downsides to this rule. They are listed below.

A deterrence of meritorious claims
Power imbalance
Encouragement of overzealous litigation
Increased complexity in fee disputes. This can prolong the legal process.

Jump ahead to

Defining the American Rule

The American rule of Legal Fees applies in car accident cases and personal injury cases in DC and Maryland. This means that if you are injured in a car accident, your side is responsible for your legal fees whether you win or lose. Of course, there are limited exceptions which we will address. So, let’s suppose you sue an adverse driver for personal injuries arising out of a car accident. In this case, you sued the defendant for $100,000 in damages. The defendant’s insurance company provided a defense that prevailed against your lawsuit. Now, the insurance company wants reimbursement for the costs they incurred defending their insured. Under ordinary circumstances, according to the American rule, they would not be entitled to reimbursement of costs. Likewise, the plaintiff’s personal injury lawyer would not be entitled to any legal fee under the standard contingency fee structure.

The Origins and Purpose of the American Rule

The origins and purpose of the American rule form the base of legal fees in the U.S. The rule fosters litigation and values an individual’s right to seek justice without worrying about excessive costs if they are unsuccessful. The rule also avoids overcompensating prevailing parties and placing an unfair financial burden on losing parties who may already be dealing with the consequences of a legal defeat. In personal injury law, unless punitive damages are in order, you are merely entitled to compensatory damages.

This means that the purpose of damages is to bring you back to whole. In other words, you should receive enough money to be no better or worse off than before the injury. Of course, money is an imperfect remedy for a physical injury, and most victims of car accidents would trade the money back in an instant. Nonetheless, money damages are the best available remedy in a civil justice system.

Advantages of the American Rule of Legal Fees

The American Rule of Legal Fees accomplishes several things. Firstly, it encourages access to justice. If an individual or a corporation fears it may be liable for the opposing side’s legal fees, it may be less likely to seek justice despite being the wronged party. Advocates for the American rule also argue that the rule allows for legal creativity. This allows the common law of each state to evolve. As we are a common law system, the rulings of each court create precedent. If the losing party is responsible for the legal fees of both parties, the stakes are higher, and there is less room for risk.

A third advantage of the American rule is there is less litigation over excessive fees. Under the English Rule, the parties argue over the reasonableness of the legal fees. Consider this scenario: one party that knows they will win may decide to charge 100x their normal rate, knowing that the other side will have to pay the legal fee regardless. This unduly burdens the losing side, assuming they pursue a claim in good faith.

One final advantage of the American Rule is that it may put less pressure on the judicial system. A plaintiff is less likely to bring suit against the defendant unless it knows the juice is worth the squeeze. For example, if a plaintiff wants to sue a defendant for a car accident where the plaintiff suffered no more than $10 in damages, the plaintiff has a legal right to do that. However, the damages are not that significant and would burden an already full legal system. Thus, the way the American Rule is set up, there is less frivolous litigation as the final compensation is not worth the plaintiff or attorney’s resources.

Exceptions to the American Rule

While the American Rule of Legal Fees is the standard rule, there are exceptions. We explore those below.

Legal Exceptions

In some instances, federal or state laws (statutes) explicitly provide for recovering attorney fees—the 1975 U.S. Supreme Court case of Alyeska Pipeline Svc. Co. v. Wilderness Soc’y is a watershed case decided 5-2 in its favor. The court held that each party must bear its legal costs under the American Rule unless Congress explicitly authorizes fee-shifting in legislation. Additionally, this case provides limitations on the “private attorney general” theory. The theory generally allows private parties to recover attorney fees when their lawsuits benefit the public by enforcing critical legal rights, such as civil rights or environmental protections. However, Alyeska ruled that only Congress and not the courts can allow for exceptions to the American rule. To that tune, this case explicitly lays out Congress’s role in exceptions to a party recovering legal fees.

Contractual Exceptions

Contractual exceptions relating to personal injury cases may exist between an insurer and its insured. If the personal injury lawsuit arises from a breach of contract, such as an uninsured motorist claim, which includes an attorney fee provision, the prevailing party may recover fees. This exception is not preempted by statutory law.

Bad Faith Litigation

The other party can recover legal fees if a plaintiff participates in malicious or otherwise bad-faith litigation. An example may be a large company wanting to put a smaller company out of business. It chooses to tie it up in litigation when the plaintiff knows it has no basis for the suit. In this instance, its sole purpose is to make the defendant spend money on legal fees instead of competing in the marketplace. This can happen in the context of personal injury, too. At Gelb & Gelb, we participate in many legal proceedings with bars and nightclubs for malfeasance every year. If our client was suing a club to put the club out of business, the plaintiff may be responsible for the club’s legal fees and litigation costs.