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.

Keywords: Litigation, Legal Costs, Legal Fees, Legal Fee Shifting, Offer of Judgment Rules, Payment Into Court Rules, Rule 68

JEL Classification: K40, K41