The Daily Mirror has lost its House of Lords bid to change "no win, no fee" rules after it was sent a £594,000 bill by Naomi Campbell's lawyers.
Campbell received High Court damages of £3,500
The supermodel's law firm, Schillings, was hired on a conditional fee basis for her successful privacy challenge to the newspaper over her drug treatment.
Under current rules, Schillings was able to charge the Mirror a "success fee" which the paper says was £280,000.
Law lords dismissed the argument that the success fee infringed free speech.
At a May hearing, Richard Spearman QC, for the paper, told a panel of five Law Lords that, of the £594,000 bill, £280,000 represented a success fee.
He said the scale of such fees violated the right to freedom of speech under the European Convention on Human Rights.
Miss Campbell was a wealthy woman and would therefore not have been denied access to the courts in the absence of a conditional fee agreement, he argued.
Mr Spearman asked the Law Lords to consider if there was a social need why an unsuccessful defendant in a free speech case would be liable to pay as much as a 100% increase on reasonable legal costs simply because they lost to a client who had entered into a no win, no fee agreement.
But on Thursday all five Law Lords rejected the paper's argument, adding that it was up to Parliament to change the rules.
Giving his ruling, Lord Hoffmann said: "MGN were mortified to find that although the award of damages had been only £3,500, they were being asked to pay legal costs [in addition to their own] in the sum of £1,086,294."
'Price of failure'
He went on to say that the newspaper group complained that the threat of a liability to pay a large sum by way of costs was just as likely to inhibit freedom of expression as the threat of liability to pay a large sum of damages.
Lord Hoffman pointed out that the extension of the use of conditional fee arrangements to defamation and breach of confidence claims was to enable people of modest means to protect their reputations and privacy.
He added that, in the past, powerful publishers had not feared litigation, prompting the need for people to be protected.
Lord Hoffman went on: "Finding ways of moderating the costs of defamation cases would then be in the best interests of all concerned. But the rich and powerful have also had to pay the price of failure.
"Finding ways of ensuring that the impecunious claimant can also do this may be more of a challenge. In the end, therefore, it may be that a legislative solution will be needed."
In May 2004, Miss Campbell won her breach of confidentiality claim against the Daily Mirror.
By a three-to-two majority, the Law Lords overturned an Appeal Court ruling that the Mirror had been justified in publishing information about her.
Miss Campbell had objected to the publication of pictures of her leaving drug addiction treatment in early 2001.
The Appeal Court had ordered her to pay the paper's £350,000 legal costs after overturning a High Court ruling.