Lower dodge AC by half, or make it next to nothing, and much like we have in ghost form, potions, items, skills, and feats cannot be used while under the fear effect.
Characters fumbling, shaking too much to use an item. Not thinking clearly so "Fight or Flight" is their only option (Fight being rather impossible with the magically induced fear, and penalties thereof)
The character might move maybe 50% faster being panicked, and having a temporary adrenaline rush...but suffers dex or discipline checks randomly every few rounds to reflect how afraid they are, prone to make mistakes, slip and fall.
Fighters could stay in this position, but they'd most likely die, and even if they stay to fight say...a bonebat, they're not going to be much use with -15 AB, half their dodge AC gone, and randomly falling every few rounds.
Thus, the line would get broken (Credit to Minstrel), players can enjoy RPing being fearful, the "Help me!" emote could come up when they become Feared (Thank you, DragonMystique), and the server-wide frustration that the poorly implemented Fear spell causes is gone, replaced with a great addition of horror that makes our server even more unique and enjoyable for everyone.
Problem solved.
Keep the ideas coming guys, and I'll keep putting stuff together. Thoughts on this idea? Maybe some input from the Dev Team on whether this can be accomplished or not (I'm pretty sure it can)