Fee-shifting Rules Research Articles

Litigation Spending and Care under the English and American Rules: Experimental Evidence

Abstract We investigate the effects of fee-shifting in an experimental litigation game. In our setup, a defendant may cause harm to a plaintiff. The defendant can take precautions to lower the probability of harm at a personal cost. In case of harm, the parties go to court, where the winner is determined by a rent-seeking contest. We compare two fee-shifting rules: under the American rule each party bears its own litigation costs; under the English rule the loser has to reimburse the winner’s expenses. We test the hypothesis that the English rule leads to higher litigation spending but also to higher care compared to the American rule. The experimental results largely support the predictions: fee-shifting leads to higher litigation spending, which motivates higher levels of care. When the parties are offered the possibility to settle their dispute out of court, fee-shifting leads to even higher litigation spending in court, but it neither affects the settlement rate nor care.

Do fee-shifting rules affect plaintiffs’ win rates? A theoretical and empirical analysis

This article studies whether fee-shifting rules can affect plaintiffs’ win rates. Beyond theoretical modeling, this study goes a step further and provides empirical evidence on this issue, thanks to the study of a real change in Spanish legislation. Spain applied the so-called English rule in 2011 in the administrative jurisdiction. This study explores whether plaintiffs were more or less successful when litigating against public administrations since then. After controlling for several other factors, it is shown that the new rule considerably increased plaintiffs’ win rate (while also reducing litigation). The paper also presents a theoretical model explaining that the English rule can increase the prevalence of judgments in favor of plaintiffs through two channels: the selection of cases brought before the courts by interested parties and the level of deference paid by courts to the decisions under review.

Fee shifting and accuracy in adjudication

When adjudication is not perfectly accurate, litigants with unmeritorious cases may benefit from court errors, which in turn may result in a dilution of incentives for primary behavior and frivolous litigation. We study how shifting the court fees to the loser may improve the accuracy of adjudication. If litigation costs are high, the American rule performs better than the English rule, and vice versa if litigation costs are low. Yet, the optimal rule typically lies in between the American and the English rule, allowing the court to modulate fee shifting based on the accuracy of the evidence submitted by the parties. Our results rationalize observed patterns of use of fee shifting. In the United States, fee shifting is less common than in Europe, where litigation costs are lower. When used, fee shifting commonly depends on the accuracy of the evidence. Moreover, fee shifting filters extreme cases out of litigation, resulting in a more representative set of cases—including also more extreme ones—being adjudicated under the American rule as compared to the English rule. Finally, we identify a characteristic of fee-shifting rules, their “flatness”, which guarantees that fee shifting does not affect the settlement rate and show that flatness is a feature of an optimal mechanism.

Auctioning Class Action Representation

Class actions feature severe agency problems, resulting from divergence of interests between class members and the class attorney. This paper proposes a novel mechanism for selecting the class attorney and aligning her interests with those of the represented class. The mechanism applies a combined percentage and hourly litigation fee structure, in which lawyers earn a percentage of the class’ common fund, and bear the same percentage over their time investment. To guarantee a maximum expected payoff for the class, we supplement this fee structure with a preliminary auction, in which the role of the lawyer is tendered using competitive bidding. We propose an auction mechanism which elicits bids equal to the net expected value for the class and extracts all rents from lawyers. We then extend the model and apply the proposed mechanism to litigation funding, and to alternative fee-shifting rules.

Brief of Professor Scott Dodson as Amicus Curiae in Support of Neither Party, Hamer v. Neighborhood Housing Serv. of Chi. & Fannie Mae, No. 16-658 (S. Ct. 2017)

This case presents the question of whether the civil appellate deadline of Rule 4(a)(5)(C) is jurisdictional. In this blissfully short brief, I make two arguments advanced by neither party. First, I argue that a rule's jurisdictional character is not dependent upon labels or distinctions with claim-processing rules. Rather, a rule is jurisdictional when -- and only when -- it addresses a boundary between adjudicative bodies. Appellate jurisdiction, original jurisdiction, and personal jurisdiction all qualify because they address boundaries of authority among different adjudicative bodies. By contrast, a limit on court authority is nonjurisdictional when it speaks only to that court's authority, independent of other adjudicative bodies. Statutes of limitations, limits on punitive damages, statutory coverage, fee-shifting rules, inherent-power limits, and the like are nonjurisdictional because they speak only to a court's authority in isolation from other courts. Under this definition, the appellate deadline in Rule 4 is jurisdictional. Second, I argue that a rule's jurisdictional character does not determine its effects. rote belief that a jurisdictional limit is nonwaivable, nonforfeitable, and inexcusable is simply wrong. A rule has whatever effects the rule and other law provide. jurisdictional deadline to appeal in Sec. 2107(c), for example, may be extended according to judicial discretion, party conduct, and equitable circumstances: The district court MAY, UPON MOTION filed not later than 30 days after the expiration of the time otherwise set for bringing appeal, extend the time for appeal upon a showing of EXCUSABLE NEGLECT OR GOOD CAUSE. Thus, Rule 4(a)(5)(C)'s jurisdictional status does not mean that it cannot be forfeited by an appellee or extended for equitable reasons. Those questions, instead, must be answered by resort to ordinary principles of rule interpretation; they cannot be answered simply by resort to the Rule's jurisdictional character.

Fee Shifting and Accuracy in Adjudication

When adjudication is not perfectly accurate, litigants with unmeritorious cases may benefit from court errors, which in turn may result in a dilution of incentives for primary behavior and frivolous litigation. We study how shifting the court fees to the loser may improve the accuracy of adjudication. If litigation costs are high, the American rule performs better than the English rule, and vice versa if litigation costs are low. Yet, the optimal rule typically lies in between the American and the English rule, allowing the court to modulate fee shifting based on the accuracy of the evidence submitted by the parties. Our results rationalize observed patterns of use of fee shifting. In the United States, fee shifting is less common than in Europe, where litigation costs are lower. When used, fee shifting commonly depends on the accuracy of the evidence. Moreover, fee shifting filters extreme cases out of litigation, resulting in a more representative set of cases—including also more extreme ones—being adjudicated by American courts as compared to European ones. Finally, as an aside, we identify a characteristic of fee-shifting rules, their “flatness”, which guarantees that fee shifting does not affect the settlement rate and show that flatness is a feature of an optimal mechanism.

Litigation Finance and the Problem of Frivolous Litigation

Litigation finance companies have some incentives to screen plaintiffs applying for financing based on the strength of their claims, but a company may still have incentives to provide financing when the probability that a plaintiff would prevail at litigation is low. The result is that litigation finance may facilitate both meritorious and nonmeritorious claims. This Article argues that fee limitation rules for litigation finance companies can improve their incentives to select only relatively high probability cases, thus enhancing the normative case for states to enact legal reforms allowing litigation finance. A simple version of the rule, which will work if a case is sure to go to trial, allows a successful plaintiff to return no more than the amount borrowed and then the same amount again, plus ordinary interest. This rule will encourage finance companies to lend only where a plaintiff’s probability of winning is expected to be greater than 50%, although the rule can be altered to target lower probability thresholds. The Article also describes alterations to the rule to accommodate the possibility of settlement, cases in which damages are disputed, where injunctive relief is at issue, where financing is provided in installments, and where only a portion of the plaintiff’s expenses are paid by litigation finance companies. Should fee limitation rules become established in the fee limitation context, they also might be extended as a vehicle of tort reform. A requirement that plaintiffs and defendants fund some portion of their litigation costs through litigation finance can reduce frivolous suits and frivolous defenses of meritorious suits and may have advantages over other mechanisms, such as fee-shifting rules.

The State in Court: the economic effects of fee-shifting rules in Spain when suing the government

Following the recent public debate concerning the situation of the Judicial system in Spain, the paper analyses the special position of the State in Court, essentially with reference to suits brought by individuals against the State before Spanish first instance Courts, although international Courts are touched as well. The analysis focuses on the incentives to litigate and to settle in a dispute with the State, focusing on the State’s special procedural rules and the fee-shifting rules applied in the Spanish Justice system. The asymmetries in favor of the State reduce the incentives to litigate against the State, but also reduce the settlement range in order to achieve out-of-Court settlements.

Civil Justice Reform: A Mechanism Design Framework

The main goal of the court system is to differentiate between those who obeyed the law and those who did not. We describe a mechanism design framework that facilitates the characterization of a set of procedural mechanisms that would minimize the resources used to achieve this goal. This framework can also help to formulate and evaluate procedural rules, and to identify necessary and sufficient conditions for deciding disputes according to substantive law with minimal costs of litigation and delay. We illustrate our approach using three examples: fee-shifting rules, discovery rules, and third-party alternative dispute resolution mechanisms. (JEL: C 72, D 70, D 82, K 40, K 41)

Fee-Shifting Rules in Litigation with Contingency Fees

This article theoretically compares the British and American fee-shifting rules in their influences on the behavior of the litigants and the outcomes of litigation. We build up a comprehensive litigation model with asymmetric information and agency costs, which makes it possible to make comparison on a broad arrays of issues in a single unified framework. We then solve for the equilibria under both American and British rules, and thereby compare their equilibrium settlement amounts and rates, expenditures incurred in trials, as well as the plaintiff's chances of winning and incentive to sue. The theoretical results are broadly consistent with existing empirical evidence.

Fee-Shifting Rules in Litigation with Contingency Fees

This paper theoretically compares the British and American fee-shifting rules in their influences on the behavior of the litigants and the outcomes of litigation. We build up a comprehensive litigation model with asymmetric information and agency costs, and solve for the equilibria under both American and British rules. We thereby compare their equilibrium settlement amounts and rates, expenditures incurred in trials, as well as the plaintiff's chances of winning and incentive to sue. The theoretical results are broadly consistent with existing empirical evidence.

Against Compromise: A Mechanism Design Approach

A risk-neutral plaintiff sues a risk-neutral defendant for damages that are normalized to one. The defendant knows whether she is liable or not, but the plaintiff does not. We ask what are the settlement procedures and fee-shifting rules (which, together, we call a mechanism) that minimize the rate of litigation subject to maintaining deterrence. Two main results are presented. The first is a characterization of an upper bound on the rate of settlement that is consistent with maintaining deterrence. This upper bound is shown to be independent of the litigants' litigation cost. It is shown that any mechanism that attains this bound must employ the English fee-shifting rule (according to which all litigation costs are shifted to the loser in the trial). The second result describes a simple practicable mechanism that attains this upper bound. We discuss our results in the context of recent legal reforms in the United States and United Kingdom. Copyright 2005, Oxford University Press.

Should Plaintiffs Win What Defendants Lose?: Litigation Stakes, Litigation Effort, and the Benefits of 'Decoupling'

Professors Polinsky and Che advocate decoupling what plaintiffs recover from what defendants pay in damages, specifically arguing that lowering recovery and raising damages (by appropriate amounts) delivers the same level of primary activity deterrence with fewer filed suits. Professors Kahan and Tuckman extend Polinsky and Che's analysis to account for the effect of parties' litigation stakes on the cost of each filed suit, provisionally concluding that Polinsky and Che's basic argument remains intact. This article reaches a different conclusion. We show that when the effect of litigation stakes on litigation effort is more fully taken into account, lowering recovery and raising damages may no longer improve social welfare. In addition, we characterize the kinds of suits in which the optimal level of recovery is no less than the optimal level of damages. Of rhetorical significance in the current policy debate, we find that such suits resemble the negative picture of modern litigation invoked by some advocates of reduced recovery. Our basic findings are robust to the possibility of out-of-court settlement, plaintiffs' employment of contingent fee lawyers, and alternative fee-shifting rules.

Optimal Design Settlement Devices for Cases of Disputed Liability: Fee-Shifting Rules and Pleadings Mechanisms

We study the effect of alternative fee shifting rules on the probability of settlement when the defendant's liability is under dispute. Using a mechanism design approach we demonstrate that the probability of settlement is maximized by a particular Pleadings mechanism: Both parties are given the choice to opt into the mechanism; if they choose to do so, the defendant is asked to plead liable or not. Based on the defendant's pleading the plaintiff is offered a settlement amount which if accepted would be binding to both parties. If the plaintiff refuses the offer, then the case goes to trial and the allocation of litigation costs between the parties is set according to the outcome of the trial and the defendant's pleading of liability. When the background rule for allocation of litigation costs is given by the American rule, we show that the probability of settlement is maximized by requiring the plaintiff to bear both litigants' costs when the defendant has admitted liability irrespective of the outcome of the trial, and by applying the Pro-Plaintiff rule in the event that the defendent has denied liability. Extensions that allow for court inaccuracy, different background rules, variable shares of costs shifted, and detterence are considered.

An Analysis of Fee Shifting Based on the Margin of Victory: On Frivolous Suits, Meritorious Suits, and the Role of Rule 11

When plaintiffs cannot predict the outcome of litigation with certainty, neither the American rule (each litigant bears its own litigation expenses) nor the British rule (the losing litigant pays the attorneys' fees of the winning litigant) would induce optimal decisions to bring suit. Plaintiffs may bring frivolous suits when litigation costs are small relative to the amount at stake; plaintiffs may not bring meritorious suits when litigation costs are large relative to this amount. More general fee-shifting rules are based not only on the identity of the winning party but also on how strong the court perceives the case to be at the end of the trial (the "margin of victory"). We analyze when such a rule can induce plaintiffs to sue if and only if they believe their cases are sufficiently strong. We explore the implications of our analysis for the use of Federal Rule of Civil Procedure 11.

Pretrial Bargaining and the Design of Fee-Shifting Rules

Legal rules for allocating the private costs of civil litigation, or rules, provide powerful incentives for settlement. Within the context of a direct-revelation mechanism, the fee-shifting rule that generates the highest probability of settlement bases the allocation of costs upon the proximity of the court's award to the pretrial announcements. This mechanism resembles Rule 68 of the Federal Rules of Civil Procedure and other offer-based rules. In a simple extensive-form game, if the litigants have asymmetric information about the level of damages (probability of prevailing), then Rule 68 increases (decreases) the settlement rate.

Three Attorney Fee-Shifting Rules and Contingency Fees: Their Impact on Settlement Incentives

Three Attorney Fee-Shifting Rules and Contingency Fees: Their Impact on Settlement Incentives

A Policy Analysis of Fee-Shifting Rules under the Internal Revenue Code

A Policy Analysis of Fee-Shifting Rules under the Internal Revenue Code

Suit, Settlement, and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs

Suit, Settlement, and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Legal Costs