This Note explores how the federal circuits interpret the bad faith exception differently and recommends that the exception must apply to both prelitigation and litigation conduct to serve the policies of the American rule and the bad faith exception. Part I sets out the history underpinning the American rule. Part II sets forth the rule’s bad faith exception and the policies underlying the exception. It then distinguishes the common-law bad faith exception from Rule 11 fee-shifting. Part III introduces three Supreme Court cases that have established the parameters of the bad faith exception. It then examines the varying ways in which the circuit courts have applied these cases and limited the bad faith exception to conduct occurring during certain time periods. Part IV examines the reasons the courts have given for limiting the exception and refutes them. It considers what the exception’s parameters should be based on the policies behind the American rule and its bad faith exception. Finally, Part V proposes applying the bad faith exception to bad faith conduct both before and during litigation and discusses the ramifications of such a proposal.