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 expenditure and examine the effects of the two allocation rules on pretrial issues of suit and settlement. The data demonstrate that game theoretic equilibrium models produce good qualitative predictions of the relative institutional response to changes in the allocation rule and to differences in such parameters as case merit and lawyer productivity. In our most significant result, we find that the English rule produces significantly higher expenditure at trial than the American rule. On the other hand, the frequency of trial is significantly lower under the English rule. Combining these two effects, we find that average expenditure per legal dispute is higher under the English rule than under the American rule.