It works as a rule if it only applies if the loser is the plaintiff who brought the case in the first place. That would indeed discourage the filing of frivolous lawsuits. In some cases, it should work the other way, but that should be up to the judge and be based on the circumstances of the case.

Edit: The downside is that it would also prevent poor plaintiffs from suing richer ones. But that is already generally the case. It's probably best to judge on a case by case basis.

You typically cap this by some metric/tables based on the suit's magnitude ("I'm being sued for $50k") and court events (e.g., adjust hourly for "representation" in court based on how much you're sued for, and then just multiply the table value for that suit-value-range with the hours in court, add bonuses for court stuff that didn't require anyone to personally show up (i.e., mail/fax suffices)). That's afaik how it's down in Germany.

Alternatively, you could cap the amount the looser pays to what they themselves payed, devising some sort of scheme to prevent exploits around lawyer-on-retainer/permanently-hired-lawyer on a large-entity's side.

I don't remember where I read this, but anecdotally, that is exactly why the United States has the cost structure we do as opposed to the rest of the world.