38 J.L. & Econ. 225 (1995)
Litigation and Settlement under the English and American Rules: Theory and Evidence

handle is hein.journals/jlecono38 and id is 229 raw text is: LITIGATION AND SETTLEMENT UNDER THE
Bates College                University of Michigan
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 reason-
able limit. We develop six hypotheses regarding how these two cost-allocation
rules might affect settlements and litigated outcomes through changes in (i) the
selection of cases reaching the settle-versus-litigate stage and (ii) behavior thereaf-
ter. Using data from Florida, which applied the English rule to medical malprac-
tice claims during the period 1980-85, we examine the rules' effects on the proba-
bility 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.
FROM an international perspective, the American rule for allocating
legal costs-whereby each party bears its own costs independent of the
case's outcome-is exceptional. Throughout most of the Western world
the English rule applies, and the losing party in a dispute is liable for the
winner's legal fees, up to a reasonable limit. Our earlier research on the
English and American rules explored the question of how liability for
legal costs affects the final disposition of claims into the dropped,
settled, and litigated categories.' We found (i) a significantly higher
percentage of dropped claims under the English rule and (ii) a net increase
* The authors are, respectively, Assistant Professor in the Economics Department, Bates
College; and Professor of Business Economics and Public Policy, School of Business Ad-
ministration, University of Michigan. We thank seminar and conference participants at the
American Economic Association, American Law and Economics Association, Bates Col-
lege, University of Chicago, George Mason University, Georgetown University, Harvard
University, University of Illinois, and University of Michigan for helpful comments. Snyder
is grateful to the Olin Foundation for financial support.
1 Edward A. Snyder & James W. Hughes, The English Rule for Allocating Legal Costs:
Evidence Confronts Theory, 6 J. L. Econ. & Org. 345 (1990).
[Journal of Law and Economics, vol. XXXVIII (April 1995)]
© 1995 by The University of Chicago. All rights reserved. 0022-2186/95/3801-0007$01.50

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