Fee Shifting in Litigation: Survey and Assessment

Abstract

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.

'No Win, No Fee', Cost-Shifting and the Costs of Civil Litigation: A Natural Experiment

“…It has also been recognized, however, that cost-shifting can have the negative external e↵ect of weakening cost-control incentives amongst claimants; Hause (1989) shows how this can come about in the Nash equilibrium of a game played between claimant and defendant. Evidence for both arguments can be found in Snyder and Hughes (1990) and Hughes and Snyder (1995)'s analysis of a short experiment with cost-shifting that took place in medical malpractice cases in Florida in 1985 (see Katz and Sanchirico (2010) for a survey). That experiment demonstrates the importance attached to the allocation of legal costs in many jurisdictions, but the fact that a limited experiment over thirty years ago still represents the firmest empirical evidence on the impact of cost-shifting indicates the di culty of empirical testing when rules do not change over time.…”

Costly Pretrial Agreements

“…Below we consider four main rules for allocating such trial costs. These are well known in the legal literature (Katz and Sanchirico, 2012) and of course many nuanced versions and hybrids of these four basic rules can be constructed and are in fact observed in different legal systems around the world.…”

Litigation with Default Judgments

“…19 The result is first identified by Reinganum and Wilde (1986) in the context of the signaling model, but it also applies in the screening model. For a survey of the literature on fee shifting see Katz and Sanchirico (2010).…”