Three Attorney Fee-Shifting Rules and Contingency Fees: Their Impact on Settlement Incentives

This Note seeks to predict the direction and magnitude of the change in settlement frequency under the three fee-shifting rules: American, British, and the British rule as modified by the PCC. Part I analyzes the proposed rule using the theoretical model of litigation and settlement developed by Hause. Part II examines the impact of fee-shifting when the plaintiff’s lawyer receives reimbursement via a contingency fee. Analysis of indemnification in a contingency fee context raises several policy issues which section II.A addresses. Section II.B discusses the terms and assumptions made in adjusting Hause’s model to reflect the standard contingency fee arrangement, and section II.C proceeds with an economic analysis to discern the impact of the three rules on settlement. This Note concludes that regardless of how the plaintiff’s lawyer is compensated, a modified British rule will probably result in more settlements than the American rule and will moderate the likelihood of greatly increased trial expenses sometimes predicted under a pure British rule.