The Effect of Fee Shifting on Litigation: Evidence from a Policy Innovation in Intermediate Cost Shifting

We study the effect of fee shifting rules on litigation. First, we build a model to study the theoretical effect of a change in cost-recovery rules on case filings, (postfiling) settlement, win rates, and plaintiffs’ average litigation expenditures. We then undertake an empirical analysis of the introduction of an intermediate cost shifting rule that falls between the English and American Rules: a reform that limits the size of fee awards to successful litigants in cases decided by the Intellectual Property Enterprise Court (IPEC), one of two venues where IP cases may be filed in England and Wales. Our empirical analysis takes advantage of heterogeneity among case types and compares IPEC cases with intellectual property cases litigated at the PHC of England and Wales, which was not subject to this reform. We find that patent case filings increased following the IPEC’s shift from a pure English Rule to a rule that caps costs awards. Consistent with our model’s predictions, we also find evidence that smaller plaintiffs both won less often and settled more often postreform, as well as evidence that larger plaintiffs spent less on litigation postreform.