Litigation and Settlement under the English and American Rules: Theory and Evidence.

Abstract

In contrast to the American rule, whereby each party bears its own costs, the English rule requires losers at trial to pay the winner's legal fees, up to a reasonable limit. We develop six hypotheses regarding how these two cost-allocation rules might affect settlements and litigated outcomes through changes in (1) the selection of cases reaching the settle-versus-litigate stage and (2) behavior thereafter. Using data from Florida, which applied the English rule to medical malpractice claims during the period 1980-85, we examine the rules' effects on the probability of plaintiffs' winning at trial, jury awards, and out-of-court settlements. The English rule increased plaintiff success rates at trial, average jury awards, and out-of-court settlements. Our interpretation of these findings emphasizes that the overall quality of the claims reaching the settle-versus-litigate stage must improve to generate the combination of effects observed. Copyright 1995 by the University of Chicago.