The incentive effects of litigation fee shifting when legal standards are uncertain (original) (raw)
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Fee Shifting in Litigation: Survey and Assessment
2010
Should the party who loses in litigation be forced to pay the legal fees of the winner? This paper surveys the economic literature regarding the effects of legal fee shifting on a variety of decisions arising before and during the litigation process. Section 2 provides a brief survey of the practical situations in which legal fee shifting does and does not arise. Section 3 analyzes the effects of indemnification on the incentives to expend resources in litigated cases. Section 4 examines how indemnification influences the decisions to bring and to defend against suit, and Section 5 assesses its effects on the choice between settlement and trial. Section 6 addresses the interaction between the allocation of legal fees and the parties' incentives for efficient primary activity behavior. Section 7 considers two important variants on simple indemnification: rules that shift costs based on the parties' settlement negotiations (such as US Federal Rule 68 and the English practice of payment into court), and rules that shift costs based on the margin of victory (such as US Federal Rule 11 and the common law tort of malicious prosecution). Section 8 reviews the brief but instructive empirical literature on legal cost shifting, and Section 9 summarizes the discussion and offers conclusions.
Legal compliance and litigation spending under the English and American rule: Experimental evidence
2016
We investigate fee-shifting rules in litigation with regard to their impact on legal compliance, settlement, and litigation spending. We develop a model to compare the English rule, according to which the winning party is compensated by the losing party, to the American rule, according to which parties pay their own expenses independent of the outcome of the trial. We conduct an experiment to put the predictions to an empirical test. In accordance with the model, we find that litigants spend substantially more under the English rule than under the American rule. Defendants are significantly more compliant under the English rule when out-of-court settlement is not possible, but not when settlement is possible. Settlement rates do not significantly differ between the two rules, nor do they differ within the subsets of strong or weak cases.
An Experimental Analysis of the Structure of Legal Fees: American Rule vs. English Rule
The expanding volume of lawsuits and the ballooning of legal expenditures in recent years has attracted the interest, concern, and even anger of the American public and politicians. These developments have led law makers to consider alternative legal fee allocation rules as methods for administering justice more efficiently. Under the traditional American rule, parties to a lawsuit must each pay their own legal expenses. One reform proposal is the English rule, under which the losing party must pay the prevailing party's attorney fees in addition to her own expenses. To evaluate the different effects of these two rules on litigant behavior and legal outcomes, we conduct a theoretical and experimental analysis of environments which can be interpreted as legal disputes in which the probability of winning a lawsuit is partially determined by the legal expenditures of the litigants and partially determined by the inherent merits of the case. We investigate decisions regarding trial ...
European Journal of Law and Economics, 2007
In this paper, we explore the possibility that the percentage of litigations settled before getting to court is affected 1) by the degree of contingency of lawyers' fees and 2) by the possibility of shifting lawyers' fees to the losing counterpart. In our view, a litigation is a game where not only the plaintiff and the defendant, but also their lawyers are independent players. The main consequence of this assumption is that the authority to settle is allocated endogenously to either the clients or their lawyers, depending on the value of the relevant parameters. In this game theoretical setup, 1) we show that only the degree of contingency of lawyers' fees affects pretrial settlement rates, while cost shifting rules have no effect, and 2) we state the conditions under which non-contingent lawyers' fees provide better incentives to settle than contingent ones. JEL Classification Code: K0, K4
Advances in Accounting, 2001
This paper reports the results of two experiments, each consisting of six sessions, designed to investigate seller behavior in an auditing game . Across the two experiments, we vary the legal cost allocation rule . In experiment one, the seller must pay his or her legal costs regardless of the outcome of litigation (the American rule) . In experiment two, the seller must pay his or her legal costs (and the buyer's legal costs), but only if the seller is liable for damages suffered (the British rule) . Within each experiment, we investigate whether the seller's behavior (effort choices, fee offers, and settlement offers) is consistent with game theory or behavioral theory. Across the two experiments, we investigate whether differences arise in behavior, which may be attributable to the legal cost allocation system .
Rent-Seeking and Litigation: The Hidden Virtues of the Loser-Pays Rule
SSRN Electronic Journal, 2012
In the past couple of decades, scholars have predominantly employed rent-seeking models to analyze litigation problems. In this paper, we build on the existing literature to show how alternative fee-shifting arrangements (e.g., the American rule and English rule with limited fee-shifting) affect parties' litigation expenditures and their decisions to litigate. Contrary to the prevailing wisdom, we discover that, when fee shifting is limited, the English rule presents some interrelated advantages over the American rule, including the reduction of litigation rates and the possible reduction of expected litigation expenditures. Our results unveil a hidden virtue of limited fee shifting, showing that an increase in such limit may lead to a desirable sorting of socially valuable litigation.
Legal fees contracts and alternative cost rules: An economic analysis
International Review of Law and Economics, 1983
I. r~RODUCTION * We wish to thank M. J. Trebilcock, R. G. Evans, the participants of the Law and Economics Workshop of the Faculty of Law, University of Toronto, and two anonymous referees for their helpful comments and suggestions. Editorial advice is gratefully acknowledged.
2021
Ideally, the law acts like an algoritm producing a fair and just outcome. If this is not respected, a party who feels disadvantaged can submit the case to court. The court will follow the rules of procedural law and apply material law on the case, and produce a fair outcome. Unfortunately, being right is in many cases not the same as getting right, and procedures can be manipulated. Economic considerations are key in these manipulations. This paper seeks to find which are the economic factors behind litigation, and how can they be applied by parties in their favour.
Managerial and decision economics, 2006
Under contingent fees, the attorney gets a share of the judgment; under conditional fees, the lawyer gets an upscale premium if the case is won which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a principal-agent framework where the lawyer chooses unobservable effort after she has observed the amount at stake. Contingent fees provide better incentives than conditional fees independently of whether upfront payments are restricted to be non-negative or not. Under contingent fees, the attorney uses her information about what is at stake more efficiently.
Settlements out of Court: Efficiency and Equity
1998
This paper considers a model of out-of-court settlement negotiations in which rational individuals hold potentially differing beliefs about the merits of the case. The following results pertain in equilibrium. First, under incomplete information, self-interested disputants will fail to attain negotiated settlements (at least some of the time). Second, there is a fundamental tradeoff between settlement efficiency and equity. Increasing the frequency of out-ofcourt settlements inevitably means adopting settlements that are less responsive to the true merits of the case. Third, the frequency of litigation increases as court costs decline. Moreover, this response can be so great that average court expenditures rise with the decline in legal costs. Fourth, a shift from the American system to the British system of allocating court costs results in a fall in the frequency of litigation.