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An Analysis of Fee-Shifting Based on the Margin of Victory: On FrivolousSuits, Meritorious Suits and the Role of Rule 11

  • Lucian Arye Bebchuk
  • Howard F. Chang

We show that, when plaintiffs cannot predict the outcome of litigation with certainty, neither the American rule of litigation cost allocation (under which each litigant bears its own expenses) nor the British rule (under which the losing litigant pays the attorneys' fees of the winning litigant) would induce plaintiffs to make optimal decisions to bring suit. In particular, plaintiffs may bring frivolous suits when litigation costs are sufficiently small relative to the amount at stake, and plaintiffs may not bring some meritorious suits when litigation costs are sufficiently large relative to the amount at stake. We analyze the effect of more general fee-shifting rules that are based not only upon the identity of the winning party but also on how strong the court perceives the case to be at the end of the trial -- that is, the 'margin of victory.' In particular, we explore how and when one can design such a rule to induce plaintiffs to sue if and only if they believe their cases are sufficiently strong. Our analysis suggests some considerations to guide the interpretation of Federal Rule of Civil Procedure 11.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4731.

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Date of creation: May 1994
Date of revision:
Publication status: published as Journal of Legal Studies Vol. XXV, No. 2, pp. 371-403 (1996)
Handle: RePEc:nbr:nberwo:4731
Note: LE
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  1. Lucian Arye Bebchuk, 1987. "Suing Solely to Extract a Settlement Offer," NBER Working Papers 2161, National Bureau of Economic Research, Inc.
  2. Steven Shavell, 1981. "The Social versus the Private Incentive to Bring Suit in a Costly Legal System," NBER Working Papers 0741, National Bureau of Economic Research, Inc.
  3. Png, I. P. L., 1987. "Litigation, liability, and incentives for care," Journal of Public Economics, Elsevier, vol. 34(1), pages 61-85, October.
  4. Hylton, Keith N., 1990. "The influence of litigation costs on deterrence under strict liability and under negligence," International Review of Law and Economics, Elsevier, vol. 10(2), pages 161-171, September.
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