«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»
2014] THE IMPACT OF FRIVOLOUS LAWSUITS ON DETERRENCE 305 various federal and state tort reform measures).22 In addition, the general public sometimes criticizes the assertion of fanciful or bizarre legal claims, including not only those that are adjudicated in favor of the defendant,23 but also those that result in plaintiffs’ verdicts.24 Successful yet perhaps novel cases, including the infamous matter of Liebeck v. McDonald’s Restaurants,25 are occasionally considered by the public to be frivolous in nature.
These conjectured group-level views, however, differ from the manner in which frivolous lawsuits are treated under American jurisprudence. According to the United States Supreme Court, “a complaint, containing as it does both factual allegations and legal conclusions, is frivolous where it lacks an arguable basis either in law or in fact.”26 Similarly, Black’s Law Dictionary defines the term “frivolous” as “[l]acking a legal basis or legal merit.”27 The Restatement (Third) of Law Governing Lawyers states, “A frivolous position is one that a lawyer of ordinary competence would recognize as so lacking in merit that there is no substantial possibility that the tribunal would accept it.”28 Based on these perspectives, we can conclude that certain extreme causes of action are clearly frivolous in nature. For instance, we would all agree that filing suit against Satan for deprivation of one’s constitutional rights is a fanciful allegation, unfit to be heard by the courts.29 22 Id.
23 See, e.g., Pearson v. Chung, 961 A.2d 1067 (D.C. Cir. 2008). In this case, the plaintiff Pearson, an administrative law judge, sued the defendant owners of a dry cleaning business for allegedly losing a pair of the plaintiff’s pants, which were left for alterations. Id. at 1069. Requesting punitive and injunctive relief, the plaintiff sought damages for as much as $67 million (though later reduced) under theories of statutory unfair trade practices, common law fraud, conversion, and negligence. Id. at 1070, 1070 n.1. The trial court awarded judgment in favor of the defendants and the ruling was later affirmed on appeal. Id. at 1069. Unfortunately, to cover their defense costs, the defendants were forced to close two of their three dry cleaning shops. See Lost Pants Case Exposes Scary Side of Legal System, WASH.
POST, Dec. 23, 2008, at B03; $54 Million ‘Pant Suit’ Runs Cleaners out of Business, VIRGINIAN-PILOT, Sept. 20 2007, at A2. Third parties also had a fundraiser aimed at defraying more than $100,000 in litigation costs incurred by the defendants. He’s No Santa Claus, BISMARCK TRIBUNE, Sept. 21, 2007, at 7C.
24 Rhode provides a brief overview of a number of novel, real-world cases—some frivolous, some not—to illustrate the inherent difficultly in distinguishing legitimate cases from frivolous ones. Deborah L. Rhode, Frivolous Litigation and Civil Justice Reform: Miscasting the Problem, Recasting the Solution, 54 DUKE L.J. 447, 447–49 (2004).
25 Liebeck v. McDonald’s Rests., P.T.S., Inc., No. CV-93-02419, 1995 WL 360309 (N.M. Dist.
Aug. 18, 1994).
26 Neitzke v. Williams, 490 U.S. 319, 325 (1989). Fantastic or delusional factual allegations or indisputably meritless legal theories give rise to a complaint lacking an arguable basis. Id. at 327–28.
27 BLACK’S LAW DICTIONARY 739 (9th ed. 2009).
28 RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 110 cmt. d (2000).
29 See generally United States ex rel. Mayo v. Satan & His Staff, 54 F.R.D. 282 (W.D. Pa. 1971) (dismissing the plaintiff’s claims against Satan for failing to state a claim upon which relief could be granted, in addition to questioning whether personal jurisdiction and service of process were proper).
5306 JOURNAL OF LAW, ECONOMICS & POLICY [VOL. 10:2
However, a determination of frivolity may not always be this easy to establish. For some cases, the dividing line between a frivolous and potentially unsuccessful lawsuit, ex ante, may be difficult to identify. It should therefore not be surprising that at least one court has recognized that the term “‘frivolous’ is incapable of precise determination,”30 and accordingly, it may be the case that the lack of preciseness in defining the term “frivolous” has hampered scholarly analyses on the topic.31 In an effort to shed light on exactly what constitutes a frivolous lawsuit, we consider the reasonable possibility that frivolous lawsuits often “piggyback” on genuine claims—hence we label them as piggyback lawsuits—though we concede that there are other motivations for initiating lawsuits without merit.32 Prior to justifying our treatment of frivolous lawsuits as piggyback lawsuits, we must first establish the incentives for plaintiffs to file frivolous lawsuits and for defendants to pay them off. A rational plaintiff will file a frivolous suit if and only if she expects to obtain a sufficiently large settlement offer prior to trial. Absent this expected settlement offer, a plaintiff will not have the proper incentives to file a frivolous lawsuit in the first place because she will inevitably lose (or be very likely to lose) at trial. As a result, the plaintiff’s (or plaintiff’s lawyer’s) motivation for filing a frivolous lawsuit must be to extract a positive settlement offer. But why do defendants pay off frivolous claims? At first blush, it appears that defendants ought to simply litigate all matters in an attempt to distinguish frivolous from genuine cases. However, as the model to be described below will illustrate, a policy of litigating all matters may not always be desirable from the defendant’s perspective.
Early attempts to explain the success of frivolous lawsuits in a rational agent model suggested that defendants offered positive settlement amounts to frivolous plaintiffs in an effort to avoid costly litigation. For instance, Rosenberg and Shavell argue that nuisance suits arise out of a divergence
30 De Vaux v. Westwood Baptist Church, 953 So. 2d 677, 683 (Fla. Dist. Ct. App. 2007) (quoting
Wendy’s of N.E. Fla., Inc. v. Vandergriff, 865 So. 2d 520, 524 (Fla. Dist. Ct. App. 2003)). It should be noted that there is some state court disagreement with respect to evaluating whether a lawsuit is frivolous. Keeling recognizes that the term “frivolous” is defined differently in different jurisdictions.
Byron C. Keeling, Toward a Balanced Approach to “Frivolous” Litigation: A Critical Review of Federal Rule 11 and State Sanctions Provisions, 21 PEPP. L. REV. 1067, 1070–71 (1994). Some define it to imply subjective bad faith, while other states evaluate it according to an objective standard. Id.
31 In his article, Bone acknowledges that the “[o]ne obstacle [to developing a model of frivolous lawsuits] is the lack of a clear and generally accepted definition of a ‘frivolous suit,’” and uses a game theoretic approach to address this problem. Robert G. Bone, Modeling Frivolous Suits, 145 U. PA. L.
REV. 519, 528 (1997).
32 In particular, our model does not consider the possibility that a frivolous lawsuit may be initiated simply to harass another person or entity, or that a frivolous lawsuit may be filed to further an ulterior motive in the context of antitrust law, i.e., sham litigation.
2014] THE IMPACT OF FRIVOLOUS LAWSUITS ON DETERRENCE 307 between plaintiffs’ filing costs and defendants’ litigation costs.33 By incurring small filing costs in conjunction with the option to withdraw at a later time, frivolous plaintiffs are able to obtain positive settlement offers, since defendants recognize they will have to incur litigation costs in an effort to avoid default judgments.34 Similarly, Cooter and Rubinfeld discuss nuisance suits in the context of an optimism model, where such suits arise out of asymmetric litigation costs borne by parties at trial.35 In particular, defendants will pay positive settlements if they have higher trial costs than plaintiffs.36 Both of these early attempts treated a suit as frivolous when the defendant knew that the plaintiff would be unwilling to pursue (or unable to succeed at) trial.37 The defendant’s incentive to settle was related to its inclination to steer clear of costly litigation.
Recent attempts to explain the behavior of parties to frivolous litigation assume a more realistic scenario of asymmetric information. P’ng finds that frivolous plaintiffs sometimes succeed in obtaining settlement offers when the defendant has private information regarding its own liability.38 However, subsequent authors have pointed out that a frivolous plaintiff does not have a credible threat to reject a settlement offer and proceed to trial under P’ng’s analysis because the defendant knows when a suit is frivolous.39 In an effort to address the problem of threat credibility, Bebchuk assumes instead that it is the plaintiff who holds private information about the quality of a suit.40 Treating frivolous lawsuits as negative 33 See David Rosenberg & Steven Shavell, A Model in Which Suits Are Brought for Their Nuisance Value, 5 INT’L REV. L. & ECON. 3, 3 (1985) (considering a model allowing for the occurrence of such nuisance suits).
35 Robert D. Cooter & Daniel L. Rubinfeld, Economic Analysis of Legal Disputes and Their Resolution, 27 J. ECON. LIT. 1067, 1083–84 (1989).
36 Id. at 1084.
37 Rosenberg and Shavell define a frivolous lawsuit as one in which “the plaintiff is able to obtain a positive settlement from the defendant even though the defendant knows the plaintiff’s case is sufficiently weak that he would be unwilling or unlikely actually to pursue his case to trial.” Rosenberg & Shavell, supra note 33, at 3. Cooter and Rubinfeld state that “[a] nuisance suit can be defined as a suit that both sides recognize as having no merit, in which case the expected damage award is nil....” Cooter & Rubinfeld, supra note 35, at 1083.
38 Ivan P. L. P’ng, Strategic Behavior in Suit, Settlement, and Trial, 14 BELL J. ECON. 539, 540– 41 (1983). P’ng’s analysis supposed that the plaintiff did not know whether it put forth a genuine or frivolous claim. Only the defendant knew whether it was liable to the plaintiff. Therefore, under P’ng’s model, the defendant held information that was not available to plaintiff. Id.
39 See Lucian Arye Bebchuk, Suing Solely to Extract a Settlement Offer, 17 J. LEGAL STUD. 437, 438 (1988) [hereinafter Bebchuck, Settlement Offer] (“[G]iven P’ng’s assumptions, the defendant knows that it would not be in the plaintiff’s interest to go to trial in the absence of a settlement; there is thus no reason for the defendant to believe that this would happen; and the defendant's best strategy is, therefore, to sit tight.”).
40 Id. at 440.
6308 JOURNAL OF LAW, ECONOMICS & POLICY [VOL. 10:2
expected value (NEV) suits,41 Bebchuk’s game theoretic model demonstrates that a frivolous plaintiff may succeed in obtaining a positive settlement offer due to uncertainty on the part of the defendant about whether a lawsuit is an NEV or a PEV (positive expected value) suit.42 In a follow-up article, Bebchuk widened the scope of his original model to consider the case where a defendant is reasonably certain that the plaintiff’s suit is actually an NEV suit.43 When this is the case, he argues that the divisibility of costs within the litigation process may still afford a plaintiff holding an NEV with the opportunity to extract a positive settlement offer.44 Katz extended Bebchuk’s original model by focusing on the plaintiff’s incentive to file suit, in addition to the defendant’s optimal settlement strategy.45 In Katz’s model, which is also based on asymmetric information on the part of the plaintiff, some frivolous lawsuits succeed in extracting a positive settlement in equilibrium.46 Subsequent models have extended the previous insights and proposed remedies for the problem of frivolous suits. For example, Miceli identifies the conditions under which repeat defendants are able to establish credible threats to deter the initiation of frivolous lawsuits.47 Farmer and Pecorino also utilize a reputation model in their analysis of frivolous lawsuits,48 but they assume a plaintiff is able to obtain a positive settlement offer by establishing a reputation—i.e., a credible threat—to proceed to trial when a settlement offer is rejected.49 Rosenberg and Shavell offer a different solution to frivolous lawsuits—permitting courts to prevent pretrial settlement.50 Finally, Schwartz and Wickelgren find that the discovery process is capable of inducing frivolous plaintiffs to reduce their settlement offers or withdraw their cases.51 41 A NEV suit exists when the plaintiff’s expected judgment at trial is less than its expected litigation costs. In other words, the plaintiff expects a negative net return by proceeding to trial. Lucian Arye Bebchuk, A New Theory Concerning the Credibility and Success of Threats to Sue, 25 J. LEGAL STUD.
1, 1 (1996) [hereinafter Bebchuck, Threats to Sue].
42 Bebchuk, Settlement Offer, supra note 39, at 440–41.
43 Bebchuk, Threats to Sue, supra note 41, at 4.
45 Katz, supra note 20, at 26.
46 Id. at 25.
47 Thomas J. Miceli, Optimal Deterrence of Nuisance Suits by Repeat Defendants, 13 INT’L REV.
L. & ECON. 135, 137–41 (1993).
48 Amy Farmer & Paul Pecorino, A Reputation for Being a Nuisance: Frivolous Lawsuits and Fee Shifting in a Repeated Play Game, 18 INT’L REV. L. & ECON. 147, 147 (1998).
49 Id. at 148–49.
50 David Rosenberg & Steven Shavell, A Solution to the Problem of Nuisance Suits: The Option to Have the Court Bar Settlement, 26 INT’L REV. L. & ECON. 42, 42–43 (2006).
51 Warren F. Schwartz & Abraham L. Wickelgren, Credible Discovery, Settlement, and Negative
In sum, most of the recent literature on the topic of frivolous, or nuisance,52 suits has focused on the defendant’s optimal policy in choosing whether to settle or litigate particular claims. These models typically assume that there is some exogenous, or given, probability that a plaintiff is uninjured or barely injured. Without a trial, the defendant would be unable to discern genuinely injured from uninjured plaintiffs, but utilizing trial as a separating mechanism requires the defendant to incur litigation costs.