The American Rule is a concept in American jurisprudence that requires that in most civil suits, each side is responsible for its own legal expenses. The American rule is a controversial issue, and the nature of the controversy is best understood by understanding the rule it replaced — the English rule, or “loser pays.” In every case brought under the English rule, the party that prevails has attorney's fees paid by the losing party. This was seen as stacking the deck against a poor plaintiff, who might have a good enough case, but might not be willing to gamble on a courtroom victory. If a plaintiff is afraid to bring suit because of limited resources that would be destroyed in the event of a loss, then justice has effectively been denied.
The American rule is a default standard, overruled in some cases by statute. One such exception is that insurance companies who lose “bad faith” lawsuits brought against them by policyholders may be required to pay the policyholder's legal fees as a component of the award. In addition, some California plaintiffs who prevail in lawsuits brought in some areas of consumer law may be able to recover attorney's fees. In most cases nationwide, though, each party to a lawsuit pays its own attorney's fees.
There are many who argue against the American rule, claiming that it encourages people to file frivolous lawsuits, secure in the knowledge that the only costs they'll have to pay are those over which they have complete control. A defendant, however, must defend against even the most frivolous of lawsuits, incurring expenses that will never be recovered. Certain claims can be very costly to defend against, as well, and are often said to be legal attempts to bully defendants into offering generous settlements just to keep a case out of court. Any lawsuit with a potentially large award, such as product liability, medical malpractice, or civil rights violations, might be so costly to defend that a defendant might consider paying a settlement to have the case dropped even if it has no merit.
Supporters of the American rule claim that if plaintiffs must consider the financial consequences of a possible loss against a defendant for whom cost is no object, they might be intimidated into avoiding even the most meritorious of cases for fear of the potentially ruinous costs, thus thwarting the cause of justice. They claim that a large corporation, for example, when faced with a lawsuit that it has a 50 percent chance of winning, might help the odds by threatening to incur legal costs so high that the plaintiff would be financially ruined if the defendant won the case. In addition, they point out that regardless of the rule followed, there will always be defendants who will evaluate the likelihood of success in court against the costs involved, and might “buy off” a plaintiff to save court costs even if the chances of prevailing are good.