The incentive effects of litigation fee shifting when legal standards are uncertain

Abstract

In recent years, various commentators have argued that adopting the British rule for litigation costs, which requires the losing party to pay the winner's reasonable legal expenses, would reduce the cost of litigation in the United States. The economic literature on litigation so far has failed to support this claim. This paper considers the effects of the British rule, not on litigation costs, but on the incentives to engage in efficient primary substantive behavior. To do this, we bring together two branches of the literature that previously have been analyzed separately: the relation between litigation costs and substantive behavior, and the effect of legal uncertainty on substantive behavior, as analyzed by Calfee and Craswell. Our analysis shows that when legal standards are administered imperfectly, the efficiency of fee shifting is a problem of the second best. In some cases, the British rule corrects the distortions created by legal error and improves incentives to take care. In other cases, however, the British rule can exacerbate the inefficiencies created by legal error. We conclude that just as there is no reason to believe that the British rule generally reduces the procedural costs of litigation, there is also no good reason to think that it generally promotes efficient substantive behavior.