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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

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  • Lucian Arye Bebchuk
  • Howard F. Chang

Abstract

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.

Suggested Citation

  • Lucian Arye Bebchuk & Howard F. Chang, 1994. "An Analysis of Fee-Shifting Based on the Margin of Victory: On FrivolousSuits, Meritorious Suits and the Role of Rule 11," NBER Working Papers 4731, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4731
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    1. 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.
    2. 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.
    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. Bebchuk, Lucian Arye, 1988. "Suing Solely to Extract a Settlement Offer," The Journal of Legal Studies, University of Chicago Press, vol. 17(2), pages 437-450, June.
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    Cited by:

    1. Michael R. Baye & Dan Kovenock & Casper G. Vries, 2005. "Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach," Economic Journal, Royal Economic Society, vol. 115(505), pages 583-601, July.
    2. Giorgio Rampa & Margherita Saraceno, 2018. "Accuracy and Costs of Dispute Resolution with Heterogeneous Consumers. A Conjectural Approach to Mass Litigation," DEM Working Papers Series 155, University of Pavia, Department of Economics and Management.
    3. Daniela Marchesi, 2007. "The Rule Incentives that Rule Civil Justice," ISAE Working Papers 85, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    4. Llobet Gerard & Suarez Javier, 2012. "Patent Litigation and the Role of Enforcement Insurance," Review of Law & Economics, De Gruyter, vol. 8(3), pages 789-821, December.
    5. Douglas Cumming, 2001. "Settlement Disputes: Evidence from a Legal Practice Perspective," European Journal of Law and Economics, Springer, vol. 11(3), pages 249-280, May.
    6. Miceli, Thomas J. & Stone, Michael P., 2014. "“Piggyback” lawsuits and deterrence: Can frivolous litigation improve welfare?," International Review of Law and Economics, Elsevier, vol. 39(C), pages 49-57.
    7. repec:spr:italej:v:4:y:2018:i:2:d:10.1007_s40797-017-0059-x is not listed on IDEAS
    8. Ben Chen & Jose A. Rodrigues Neto, 2017. "Emotions in Civil Litigation," ANU Working Papers in Economics and Econometrics 2017-653, Australian National University, College of Business and Economics, School of Economics.
    9. Schwab, Christian & Tang, Hin-Yue Benny, 2011. "Die Steuerungswirkungen unterschiedlicher Prozesskostenregelungen: Ein Überblick zum Stand von Theorie und Empirie
      [The economic effects of alternative fee shifting rules: A review of the theoretic
      ," MPRA Paper 32746, University Library of Munich, Germany.
    10. Kim, Iljoong & Kim, Jaehong, 2015. "Frivolous Suits In The Infinitely-Repeated Litigation Game With Uncertainty," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 56(1), pages 21-33, June.
    11. repec:hit:hitjcm:v:56:y:2015:i:1:p:21-33 is not listed on IDEAS

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