Just as the high court ruled that what constitutes “anemic” cases must be more broadly defined so as to make it easier to dismiss such cases, so should the penalty for filing those suits in the first place actually act as a deterrent (and as relief to unfairly targeted defendants).

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In his 2011 State of the Union Address, President Obama promised to support legislation “to rein in frivolous lawsuits.” Early next month, the House Judiciary Committee will vote on a bill to make Obama fulfill that promise.

Frivolous suits are a serious problem, especially for small businesses. In March 11 committee testimony, Elizabeth Milito of the Small Business Legal Center (of the National Federation of Independent Business) cited statistics showing small companies in 2008 suffering $105.4 billion in lawsuit-liability costs. “Small businesses pay 81 percent of liability costs,” she said, “but only bring in 22 percent of the total revenue.”

An inordinately large percentage of these costs come not from being found culpable of infractions, but from paying to settle otherwise meritless lawsuits because settlement is cheaper than legal fees. Ms. Milito provided copious examples of how attorneys “troll” for cases, then send “demand letters” announcing an intent to sue and offering a comparatively cheap (several thousand dollar) settlement option to “make the whole case go away.”

Small businesses are thus targeted by bottom feeders among plaintiffs’ attorneys, who prey on those companies without fearing the legal counterattacks that big corporations can afford.

The current system provides no effective penalties for actually filing outlandish cases. If a business owner pays lawyers to file a motion alleging that the suit is frivolous, the plaintiffs’ attorney can withdraw the suit, penalty-free, within 21 days – but the business owner has no chance to recoup his own legal costs.

“Demand letters are the rattlesnake’s nest of frivolous claims,” said Victor Schwartz, co-author of the most widely used law-school torts casebook in the United States, during the same Judiciary Committee hearing. “You can hear them rattle, but you do not see them in court.” If they’re not in court, a judge can’t do anything to deter them.

Worse, if the defendant bears the expense of convincing a judge the claim is not just unwarranted but actually frivolous – a specifically defined legal standard – the defendant even then is unlikely to be made whole. Current rules tell judges not to treat fines for frivolous suits as a means to compensate the suit’s innocent victims, but instead to collect merely enough from the plaintiffs’ lawyer to deter misbehavior. Those penalties usually are kept by the court, not given to the defendant. The innocent defendant, therefore, remains financially injured.

In 1993, Supreme Court Justice Antonin Scalia wrote that this system allows plaintiffs to “file thoughtless, reckless, and harassing pleadings, secure in the knowledge that they have nothing to lose.”

To correct these flaws, Judiciary Committee Chairman Lamar Smith, R-Tex., introduced the Lawsuit Abuse Reduction Act (LARA). LARA has two main provisions. First, it would eliminate the 21-day “safe harbor” rule that, in Schwartz’ words, “allows unscrupulous lawyers to game the system.” Second, it would direct judges to penalize frivolous plaintiffs enough to cover the defendants’ court costs – and defendants, not the courts, would receive the reimbursement.

To be clear, this would not be a “loser pays” system that deters suits filed by aggrieved parties who merely fail to prove their case. For that large majority of cases, filing suit still would not attract a penalty. Instead, LARA would apply only to those cases ruled “frivolous,” which is defined as those having “no basis in fact” whatsoever.

For example, Schwartz cited an Irish pub sued by a man, injured while driving drunk, who claimed the bar should not have served him while inebriated. It turned out the man had not even visited that pub on the night in question.

In two recent cases, Bell Atlantic Corp. v. Twombly (2007) and Ashcroft v. Iqbal (2009), the Supreme Court recognized that frivolous lawsuits are problematic. Before Twombly, a case could be dismissed for “failure to state a claim” only if it were “beyond doubt” that “no set of facts” could support it. In Twombly, seven justices overturned that standard. Former Justice David Souter wrote that a valid complaint must assume facts that are not merely “conceivable” or “speculative, but actually “plausible.” Otherwise, he wrote, “The threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching those proceedings.”

The Twombly and Iqbal cases set the predicate for Chairman Smith’s LARA proposal, which well complements those decisions. Just as the high court ruled that what constitutes “anemic” cases must be more broadly defined so as to make it easier to dismiss such cases, so should the penalty for filing those suits in the first place actually act as a deterrent (and as relief to unfairly targeted defendants).

As Ms. Milito testified, these reforms would help small-business owners save both money and “time that could be better spent growing their enterprises and employing more people.” Indeed, LARA is effectively a jobs bill – one that would cost the government not one dime.