Empirical Evidence on the Effect of Fee-Shifting

Today I’m pleased to present a guest post:

By Christian Helmers, Yassine Lefouili, Brian J. Love, Luke McDonagh.

As previously covered on this blog (here, here, and here, for example), changes are afoot for Canada’s costs shifting regime. In 2016, the Federal Rules Committee determined that costs awarded pursuant to Tariff B of the Federal Courts Rules were inadequate, and the Rules Committee is actively working on a set of proposed amendments for publication and approval: see Allergan v. Sandoz, 2021 FC 186, [28].

In a new paper just published in the American Law & Economics Review, we present a theoretical model and report empirical findings that may help inform the Committee’s work. Our paper examines the effect of a 2010-2013 court reform process limiting the size of costs awards in cases brought in the UK’s Intellectual Property Enterprise Court (IPEC, formerly known as the Patents County Court), a venue that specializes in hearing small-to-mid-size IP disputes.

Importantly for our analysis, these reforms did not extend to the High Court of England and Wales, the UK’s separate venue for relatively large IP cases. Pre-reform, costs were awarded in both jurisdictions under a common set of principles that allowed victorious litigants to request recovery of their actual costs and recoup on average about half to two-thirds of that amount. Post-reform, while costs awards in the High Court carried on as usual, costs awards in IPEC cases were capped at a maximum of £50,000, restricting the extent to which costs are shifted from losing to winning parties.

To study the effect of this costs cap, we hand-collected data from physical case files for all available IP suits that were filed in either court from 2007 to 2013. We use this data to make two comparisons. First, we compare cases filed in the IPEC to cases filed in the High Court, in effect using High Court cases as a control group to isolate the reform’s effect on IPEC cases. Second, because a lump sum costs cap is likely to have a greater effect on (relatively high cost) patent cases, we additionally compare patent and non-patent IP cases litigated in the IPEC.

Our empirical results suggest that the reform had a sizable impact. First, the rate of IP litigation increased once the costs cap came into effect. We find that patent case filings increased in both comparisons (IPEC to High Court, and patent IPEC to non-patent IPEC) and for both small and large plaintiffs. In addition, with the costs cap in place, we see evidence that cases settled more often and that plaintiffs both won less often and spent less on litigation. Specifically, we find that, post-reform, small IP enforcers won less often in cases decided by the IPEC, that IPEC cases settled at a higher rate, and finally that large plaintiffs retained smaller (and thus presumably less costly) law firms when litigating in the IPEC.

What do these findings portend for a potential increase in average costs awards in Canada? While we study a transition from higher to lower average costs awards, the Canadian Federal Court is in the process of doing the opposite. Accordingly, it seems reasonable to hypothesize that the Federal Court might experience effects opposite to those of a costs cap: i.e., a reduction in the rate of IP litigation, along with a higher plaintiff win rate, lower settlement rate, and increase in litigation expenditures among cases that are filed.

Whether or not these effects (individually or collectively) are normatively desirable is another question, and one with no easy answer. While the UK reform that we study has generally been regarded as a success, costs shifting rules have a notoriously complex impact on litigants’ incentives. In the paper, we ultimately take no normative position on the desirability of a costs cap, and so here too we leave it for the Rules Committee’s consideration whether the potential effects identified above align with the broader goals motivating its work.