Recent years have seen a debate over litigation reform grow increasingly agitated. Attorneys, judges, academics, and politicians now readily and regularly disagree about how or whether to combat the debilitating litigiousness commonly purported to infect the American Bar. Within this debate, few reform proposals have received as much attention as "fee-shifting" provisions, which, in their most popular incarnation, reallocate litigation costs (particularly attorney's fees) based on the outcome of the liability phase of a trial. This attention is perhaps justified, given the nonuniformity of such rules among industrialized nations. For instance, in the British Commonwealth and much of Continental Europe, the loser of the liability phase of a civil trial generally bears the fees for both sides. Numerous other countries employ a partial fee-shifting approach, in which the losing party bears a fraction of the prevailing party's fees. The United States and Japan, in contrast, have historically eschewed such fee-shifting schemes, except in cases of misconduct by one of the parties or where explicit legislation mandates otherwise. Despite this historical resistance (or perhaps because of it), proposals to move in the direction of a loser-pays rule have seized greater domestic attention of late.
Most everyone agrees that indemnity rules can affect incentives, thereby influencing (among other things) the selection of suits for litigation, the effort expended by litigants, and the likelihood of settlement. The respective directions and magnitudes of these various effects, however, are complicated.
This Article focuses on the third of these consequences, the likelihood of settlement, and it extends a debate over the question of whether the loser-pays rule promotes settlement. Specifically, it employs a game-theoretic analysis to propose a general account of the relation between settlement negotiations and such fee-shifting rules. This account supports more particular – but ostensibly less robust – examples by others indicating the ineptness of the English rule as a settlement-catalyzing device. In fact, I push the argument even further, demonstrating that if maximizing settlement rates were one's sole aim, then a more effective (albeit seemingly perverse) reform proposal would prescribe that the winner, rather than the loser, should bear the joint costs of litigation.
Liability-Based Fee-Shifting Rules and Settlement Mechanisms Under Incomplete Information,
Chi.- Kent L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2218