Contracting on litigation

Abstract

Two risk‐averse litigants with different subjective beliefs negotiate in the shadow of a pending trial. Through contingent contracts, the litigants can mitigate risk and/or speculate on the trial outcome. Contingent contracting decreases the settlement rate and increases the volume and costs of litigation. These contingent contracts mimic the services provided by third‐party investors, including litigation funders and insurance companies. The litigants (weakly) prefer to contract with risk‐neutral third parties when the capital market is transaction‐cost free. However, contracting with third parties further decreases the settlement rate, increases the costs of litigation, and may increase the aggregate cost of risk bearing.

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

“…Again, the results are largely unchanged, though we also find a marginally statistically significant increase in case filings for all plaintiff types in all non-patent IP cases. 40 Results using monthly data are shown in Table H-5 in the Online Appendix 41 For details on these case-and litigant-level characteristics see Online Appendix E. 42 In addition to cases that were clearly dropped -e.g., because the defendant entered into bankruptcy -we also assume that a case was dropped if the case file contained the claim form but lacked any response from the defendant. 43 AIPLA (2019: I-29, I-42), for example, reports that lawyers who practice IP law at U.S. law firms employing more than 150 lawyers charge a median hourly fee that is twice as large as the median fee charged by lawyers at firms employing 5 or fewer attorneys.…”

“…We further limit the analysis to IPEC and PHC cases in which the defendant appeared and affirmatively defended the case to a settlement or court decision. Accordingly, we remove all cases that were dropped by the plaintiff, 42 as well as all cases that were still pending in the first instance at the time of our data collection. Unfortunately, imposing these restrictions comes at a significant cost: it reduces the number of patent cases at the IPEC to just 15 cases before the introduction of the costs cap and just 52 cases afterwards (9 and 34 of which, respectively, were filed by SMEs).…”

Efficient liability law when parties genuinely disagree

“…theory, where the parties'observed failure to settle can be explained by their di¤erent expectations about the trial's outcome. Recent additions to this in ‡uential literature include Spier and Prescott (2019) and Vasserman and Yildiz (2019).…”

The Effect of Patent Litigation Insurance: Theory and Evidence from NPEs

“…Faure and de Mot (2012) provide a direct comparison of third-party litigation funding (not including funding via insurance) and legal-expense insurance. Prescott et al (2014), Spier (2016), de Mot andFaure (2016), Spier and Prescott (2019), or Lavie and Tabbach (2020) study the functioning of more general third-party litigation funding mechanisms.…”