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.