Reverse Contingency Fees as a Way to Deter Frivolous Lawsuits

Abstract This paper analyzes the impact of reverse contingency fees – compared to hourly fees – on the likelihood of frivolous lawsuit, the probability of pre-trial settlement, and the total litigation costs, considering an asymmetric information game of litigation. Under reverse contingency fees, the defendant’s lawyer gets a share of the amount his client saved in litigation, which is the difference between the plaintiff’s claim and the final settlement or judgement. In our set-up, ignoring whether the plaintiff suffered harm or not, the defendant prefers to settle if the probability of dealing with a truly injured plaintiff is sufficiently high. Reverse contingency fees raise the threshold probability, making settlement less desirable for the defendant and hence lawsuit less attractive for an uninjured plaintiff, which reduces total expenditures, as compared to hourly fees. Reverse contingent fees may then be seen as an additional instrument to deter frivolous litigation, beyond the implementation of sanctions or the use of the English fee-shifting rule.