HOUSE BILL NO. 316 "An Act relating to civil liability for false claims and improper allegations or defenses in civil practice; and providing for an effective date." Representative Mulder, Sponsor HB 316, spoke in support of the legislation. House Bill 316 requires parties to lawsuits to be truthful and responsible in their pleadings. He maintained that the bill discourages false statements in litigation and encourages responsibility by all parties and their attorneys. He stressed that the legislation would require more careful and focused preparations and presentations of pleadings. Representative Mulder observed that the bill creates an obligation for litigants and attorneys to make reasonable efforts to insure that claims have a probability of succeeding. If the claim is knowingly or recklessly false, both the attorney and the party can be assessed damages. He stressed that HB 316 requires attorneys and their clients to research their claims to assure they are factually supported before filing a suit. He maintained that the legislation will help eliminate "boiler plate" pleadings in lawsuits and encourage responsible and focused pleadings. He stated that "boiler plate" pleadings include everything anyone could ever imagine could have happened rather than focusing on those specific issues that actually happened. He maintained that these extraneous pleadings are expensive to work through and are most often thrown out. They simply cause one party to expend significant dollars to pare the filing down to the real issues. 2 Representative Mulder noted that some lawsuits are cheaper to settle than litigate, regardless of their merit. He stressed that the bill does not affect suits filed in good faith. He asserted that the legislation will have a significant deterrent effect on claims without merit. Representative Mulder pointed out that the bill assigns financial responsibility to those who file lawsuits without probable cause, those who provide false information, and those who want to use claims and cross claims to cloud the issues. Representative Mulder observed that the jury will make the determination whether the information presented was intentional and material. Representative Parnell provided members with a Committee Substitute for HB 316 (FIN), #9-LS103\R, dated 3/7/96 (copy on file). BOB MINTZ, ATTORNEY, ANCHORAGE testified via the teleconference network. He testified in support of HB 316. He maintained that the intent of the legislation is to give injured parties effective remedy for being subjected to bad faith civil legislation. The people that suffer harm from the abuse of the civil justice system will be able to be compensated for their injuries. Those that cause the harm by abusing the civil justice system will be forced to pay compensation. He observed that intentionally lying or asserting claims and allegations without first making an effort to determine if the claims and allegations have a reasonable basis constitutes abuse. The standard of conduct required by HB 316 is similar to conduct in Civil Rule 11. He observed that HB 316 departs from the existing system of self regulation of the legal profession. Mr. Mintz reviewed the proposed House Finance Committee Substitute for HB 316. He noted that Section 1(a)(1) provides that a person (a party or attorney) should not knowingly or recklessly file a pleading that contains a false allegation or misstatement of fact. He observed that this standard is higher than the standard for negligence. The false allegation or misstatement of fact would have to be intentional. Mr. Mintz noted that subsections 1(a)(2) and (3) are similar to Civil Rule 11. Subsection 1(a)(2) requires that each claim should be well rounded in fact and supported by existing law. Subsection 1(a)(3) prohibits intentionally interposing claims to harass, create unnecessary delay or increase cost. 3 Mr. Mintz observed that subsections 1(d), (e) and (f) comprise a variation of the existing malicious prosection common law action. Under common law a person who is the victim of a malicious lawsuit has to prove that the lawsuit was brought maliciously and that the conduct of the party bringing the lawsuit was unreasonable. He observed that the difference between proposed CSHB 316 (FIN) and existing law is that, under the proposed committee substitute, a client and attorney will be held personally liable for damages caused by their conduct. He acknowledged that if the bill is enacted most attorneys will experience a minor inconvenience due to the potential for liability. He maintained that if someone is going to knowingly lie to drag a party into court they will pay. An attorney that issues claims before they have been checked for reasonable basis would be liable. If someone files a case maliciously to extort money, because it is cheaper for a defendant to settle than to fight, they would be liable. He asserted that there are currently insufficient adverse economic consequences associated with such abuses of the legal system. In response to a question by Co-Chair Foster, Mr. Mintz explained that the legislation does not affect criminal cases. MICHAEL LESSMEIER, ATTORNEY, STATE FARM INSURANCE INCORPORATED testified in support of HB 316. In response to a question by Representative Kelly, Mr. Lessmeier clarified that an attorney signs the pleadings. Representative Parnell questioned if HB 316 would also stop the laundry list of affirmative defenses that get thrown into pleadings. Mr. Lessmeier responded that the legislation would stop such abuses. Mr. Leesmeier stated that the legislation would make attorneys responsible and bring truth into the system. He referred to subsection (b) on page 2, lines 5 - 11. He noted that subsection (b) provides that if a person comes into court and lies that they automatically lose the claim. There is no such provision in current law. He maintained that this provision would result in attorneys informing their clients regarding the consequences of lying in court. The only current sanction is the loss of credibility. He maintained that court system resources are used litigating such issues. He noted that the jury would make the call. A judge would not be required to decide the truth of a pleading. He maintained that court system time should not be wasted to false claims. 4 Mr. Leesmeier asserted that HB 316 will place greater responsibility on attorneys to talk to their clients and assure that pleadings have substance and are correct. Representative Parnell stated that in 8 years of practice he has not experienced the type of abuses that the legislation is designed to protect. He observed that the court system does not generally sanction Civil Rule 11 grounds. He referred to subsection (c), page 2. line 13 and subsection (d), page 2, line 21. He noted that subsection (c) does not include punitive sanctions and that subsection (d) does include punitive sanctions. Mr. Mintz stated that "punitive damages" was removed from subsection (c) by the House Judiciary Committee. In response to a question by Representative Parnell, Mr. Mintz stated that probable cause requires that there be a reasonable basis for the claim. There has to be a basis in fact and in law, or in an extension of existing law. In response to a question by Representative Parnell, Mr. Mintz clarified that subsection (d) does not mandate punitive damages. Punitive damages would be available. He gave an example in which punitive damages might be awarded. He stated that if an insurance company had an express policy of knowingly denying valid claims of less than $1.0 thousand dollars based on the fact that claimants would not have the resources to fight and would settle for less the company might receive punitive damages. He noted that attorney fees alone would not be a sufficient deterrent in such cases. Representative Parnell compared the proposed House Finance Committee Substitute for HB 316 to CSHB 316 (JUD). He noted that provisions regarding misleading allegations were removed. He stressed that it would be difficult to craft a standard for "misleading". Representative Parnell asserted that Civil Rule 11 has been used as a harassment tool. He expressed concern that HB 316 not become a tool of harassment. He explained that subsection 1(g) was added to prevent abuse of the provisions of HB 316. He maintained that if a party faces the potential of actual reasonable attorney fees that they will think twice about asserting false claims. He suggested that subsection 1(g) be amended to clarify that claims can be awarded to either the plaintiff or defendant. He suggested that subsection 1(g) read: If a person brings an action under (c) or (d) of this section, the court shall also award actual reasonable attorney fees to the prevailing party, regardless of whether the prevailing party is the plaintiff or defendant." 5 In response to a question by Representative Kelly, Representative Parnell noted that page 1, line 13 forbids a person from signing a civil pleading before making reasonable inquiry that the information is grounded in fact. He discussed affirmative defenses that can be asserted against each claim. Failure to assert a claim upon which relief can be granted is an automatic defense. He restated his intention that the potential of sanctions apply to both the plaintiff and the defendant. If a person files a claim that is disproved the defendant would collect fees paid to defend against the claim. Representative Brown pointed out that "also" is not needed in (g). Representative Parnell agreed. Representative Brown asked for further clarification regarding differences in the proposed committee substitute. Mr. Leesmeier explained that the "trier of fact" was substituted for "court" to clarify that the jury would make the decision. Representative Parnell noted that the court could be the trier of fact in certain circumstances. The language would encompass the judge or jury depending on who is the trier of fact. Representative Parnell explained that subsection (e) clarifies that if a false claim is brought against an attorney, the attorney can receive attorney fees for their defense against a false claim even if the underlying action is lost. Mr. Mintz explained that a person would not have to be the prevailing party in order to receive attorney fees. A person can collect on frivolous claims even if they did not win on all the claims. He added that subsection (f) is the same concept. Representative Mulder MOVED to adopt Committee Substitute for HB 316 (FIN), #9-LS103\R, dated 3/7/96 amended on page 3, lines 4 - 5, subsection 1(g) read: If a person brings an action under (c) or (d) of this section, the court shall also award actual reasonable attorney fees to the prevailing party, regardless of whether the prevailing party is the plaintiff or defendant." Representative Brown questioned if the legislation will result in additional costs to the Alaska Court System. Mr. Leesmeier disagreed that there will be additional cost to the Court System. He estimated that cases with a significant issue of credibility will be taken out of the courts. He stressed that cases will not be litigated that are not reasonably based in fact. Attorneys will be forced to look seriously at and investigate claims before they are introduced. He noted that no sanctions are provided under Civil Rule 11. He felt that the risk of financial sanctions 6 would have a significant deterrent affect. Representative Brown asked how the legislation will affect state attorneys. Mr. Leesmeier noted that state attorneys are already responsible to comply with the provisions of Civil Rule 11. He did not think there would be sovereign problems as result of the legislation. He added that the legislation would apply to state attorneys. In response to a question by Representative Brown, Mr. Leesmeier asserted that false claims commonly occur. He stressed that innocent parties that win still lose due to the high cost of defense. He acknowledged that there are abuses by both sides. He maintained that it is important that the legislation apply to both sides. Representative Navarre expressed support for the legislation. He observed that insurance companies sometimes settle over the objections of the insured. (Tape Change, HFC 96-69, Side 2) Representative Navarre noted the disadvantage of persons defending themselves against false claims by insurance companies. Mr. Leesmeier emphasized that the legislation should be neutral. He maintained that the intent of the legislation is to prevent abuses on both sides. Representative Navarre stated that the legislation has the potential to stop frivolous lawsuits and reduce the number of lawsuits. Representative Parnell referred to the disparity of sanctions in (c) and (d). He noted that the legislation addresses intentional conduct. He pointed out that if there is a claim against someone for intentional misrepresentation they are exposed to punitive damages. He questioned the disparity. Mr. Leesmeier noted that the threshold for instituting a claim is lower under (d). He added that punitive damages would not be mandatory under (d). Mr. Mintz asserted that the Court should have discretion to award punitive damages where appropriate in cases of outrageous conduct. He noted that punitive damages requires intentional conduct. He maintained that in some instances punitive damages are the only future deterrent. Representative Parnell MOVED to insert "and punitive" on page 2, line 13. There being NO OBJECTION, it was so ordered. Representative Parnell referred to page 2, line 21. He emphasized that (d) is not a mandate for punitive damages. 7 He maintained that punitive damages are only a potential remedy. Representative Brown interpreted the language to provide that punitive damages are not necessarily going to apply. Representative Grussendorf referred to the fiscal note by the Alaska Court System. CHRIS CHRISTENSEN, STAFF COUNSEL, ALASKA COURT SYSTEM clarified that the Alaska Supreme Court is neutral in regards to the legislation. He discussed Civil Rule 11. He noted that the Alaska Supreme Court has left the rule unchanged. He observed that the federal government found that the mandatory sanctions on frivolous lawsuits increased the number of claims. The federal mandate for sanction was repealed. He stated that the Court feels that the legislation will result in a slight increase in cases. He acknowledged that the legislation will benefit some plaintiffs and defendants. He observed that the legislation requires that sanctions be applied in a more labor intensive manner. He estimated that changes to CSHB 316 (FIN) will result in a slight increase to the Alaska Court System's fiscal note due to the change in subsection (e). Representative Brown asked which portions of the legislation would be mandatory. Mr. Christensen stated that subsections (a) and (c) require that the judge grant sanctions. Mr. Leesmeier noted that the federal Court is moving in the direction of adopting mandatory sanctions to get people to do the right thing. He maintained that the legislation only provides a remedy if someone abuses their responsibility. The remedy is not without responsibility. If a claim is entered and lost the defendant's attorney fees would be reimbursed. He added that the Alaska Court System may have underestimated the deterrent factor of the legislation. He noted the difficulty of defending against frivolous lawsuits. In response to a question by Representative Therriault, Mr. Leesmeier pointed out that the Federal Rule 11 did not have the responsibility that is provided in HB 316. Absolute sanctions were not applied to the opposites side's attorney fees if a claim was entered and lost. Representative Mulder spoke in support of the legislation. He noted that the intent of the legislation is to create a more level playing field for both sides. Representative Parnell asserted that attorneys will make sure that they show claims to their clients before they are introduced. He noted that attorneys may add a disclaimer 8 stating that they have read the complaint and that they believe the facts contained in it are true and correct to the best of their belief and knowledged. He expressed support for the legislation. Representative Kelly MOVED to report CSHB 316 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. CSHB 316 (FIN) was reported out of Committee with a "do pass" recommendation and with a fiscal impact note by the Alaska Court System.