«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 ...»
Let us turn to the case of imperfect information by the supermarket owner regarding the plaintiff’s type. Recall that two equilibria potentially arise given asymmetric information. Suppose the probability that a piggyback victim arises per unit of activity is.02. This conjectured value for the potential number of such plaintiffs is so small that the supermarket owner will perceive a “sufficiently large” probability that a plaintiff’s claim is genuine.81 Table 5 identifies the net value to the supermarket owner under both possible equilibria when the probability a victim is a piggyback victim is.02 per unit of activity.
81 See infra, App. for details.
Since the threat of piggyback victims is low relative to the probability of an accident for every care level, it should not be surprising that a Type 1 equilibrium emerges as optimal. Indeed, every activity level–care combination under a Type 1 equilibrium yields a higher net value than the corresponding activity level–care combination under a Type 2 equilibrium. Note that in this equilibrium, the supermarket owner chooses to operate two stores and to exercise a low level of care. (This maximized net value is highlighted in the left-hand panel of the above table.) When compared to the equilibrium under perfect information, the existence of piggyback plaintiffs results in beneficial deterrence with respect to the supermarket owner’s activity level in the sense that the owner now operates two stores rather than three, which is the efficient level of activity. Notice, however, that the supermarket owner’s level of care is unaffected by the presence of piggyback victims. This reflects the conclusion reached above that under a Type 1 equilibrium, the injurer exercises the same level of care as in the perfect information model, and too little care from a social perspective. This example illustrates the conclusion that piggyback lawsuits may imperfectly correct for the problem of underdeterrence.
Suppose instead that the probability a piggyback victim arises per unit of activity is much higher than in the previous example; specifically, suppose it is now.20. The following table depicts the net value of activity to the supermarket owner in this case.
2014] THE IMPACT OF FRIVOLOUS LAWSUITS ON DETERRENCE 325
Given that the potential number of piggyback plaintiffs is relatively large, the supermarket owner will perceive a “sufficiently small” probability that the plaintiff’s claim is genuine. Therefore, it should not be surprising that a Type 2 equilibrium will emerge. As shown in the Table 6, the net values of activity for each activity level–care combination under a Type 2 equilibrium are higher than their Type 1 equilibrium counterparts. As the highlighted entry in the right-hand panel shows, the supermarket owner chooses to operate two stores and to exercise a middle level of care. Note that these choices correspond to the social optimum in this example, illustrating again how piggyback lawsuits are capable of enhancing deterrence in a socially valuable way.
Finally, consider a value that lies between the conjectured values we have utilized above. Suppose, in particular, that the probability a piggyback victim arises per unit of activity is.10. Table 7 depicts the net value of activity for each activity level–care combination under this scenario.
From the table it is evident that the supermarket owner must compare the net values of activity under both equilibria—that is, some activity levelcare combinations yield higher returns under a Type 1 equilibrium, while the remaining combinations yield a higher return under a Type 2 equilibrium. In this example, a Type 1 equilibrium in which the injurer operates two stores and exercises a low level of care turns out to be optimal. The
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outcome is therefore the same as in the example where the probability a piggyback victim arose per unit of activity was.02.82 The foregoing numerical examples illustrate the positive claim that piggyback lawsuits are sometimes capable of inducing beneficial deterrence. Although perhaps imperfect, piggyback lawsuits in these examples provide an incentive for the injurer to exercise levels of care and activity that, in some cases, are closer to the social optimum than those that would arise in a world characterized by perfect information (i.e., where piggyback suits are not a threat). We hasten to add, however, that these examples are only meant to be illustrative. We could just as easily have chosen values of the parameters to show that the threat of piggyback lawsuits can result in too much care and too little activity compared to the social optimum—that is, they could have resulted in overdeterrence. This, of course, obviates the usefulness of piggyback suits from a policy perspective. Still, an understanding of their impact on deterrence is important for properly evaluating the impact of policies that have been proposed for reducing frivolous litigation. That task is the purpose of the next section.
III. POLICY IMPLICATIONS
While the theoretical model and numerical examples suggest that piggyback lawsuits—or more broadly, frivolous lawsuits—are not always detrimental to social welfare, we have been unable to uncover any source of law that recognizes the potentially beneficial deterrence externality resulting from such suits. Rather, courts and policymakers alike share an interest in deterring plaintiffs from filing frivolous lawsuits. In particular, procedural rules, statutory law, and the common law of torts serve to protect parties—including private persons and even governments—from frivolous litigation. When these legal regimes are evaluated together, it is evident that they utilize two mechanisms (perhaps simultaneously) in an effort to reduce the frequency of frivolous litigation: (i) shifting the burden of the defendant’s reasonable litigation costs and attorney’s fees to the frivolous plaintiff, and (ii) claim-quality identification.83 This section examines the 82 See supra Table 5.
83 We do not discuss the impact of rules that do not provide a potential deterrent to the initiation of frivolous lawsuits. In his majority opinion in the infamous Clinton v. Jones case, Justice Stevens noted that “[m]ost frivolous and vexatious litigation is terminated at the pleading stage or on summary judgment, with little if any personal involvement by the defendant.” Clinton v. Jones, 520 U.S. 681, 708 (1997). FED. R. CIV. P. 12(b)(6), which permits dismissal of a complaint at the pleadings stage for failure to state a claim upon which relief can be granted, is capable of eliminating frivolous claims prior to the onset of discovery. Indeed, the current pleadings standard of plausibility, articulated by the United States Supreme Court in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), may make it difficult for frivolous plaintiffs to succeed at surviving a Rule 12(b)(6) motion. See Adam Steinman, The Pleading Problem, 62 STAN. L. REV. 1293. 1300–10 (2010) (for a 2014] THE IMPACT OF FRIVOLOUS LAWSUITS ON DETERRENCE 327 positive implications of cost-and-fee shifting rules and claim-quality identification on accident avoidance in the presence of frivolous suits.
A. Litigation Cost and Attorney Fee Shifting It is frequently argued that a switch from the American rule to the socalled English rule governing the allocation of attorney’s fees will discourage the filing of frivolous lawsuits.84 The common law rule in the United States is that each party bears its own attorney’s fees at trial.85 However, a number of legal regimes aimed at reducing the frequency of frivolous lawsuits abrogate this common law rule by authorizing the use of the English rule, which permits the victorious party to recover its attorney’s fees from the losing party at trial. In addition, some legal regimes permit parties to recover reasonable litigation expenses, beyond those that would ordinarily be recoverable as taxable costs from frivolous plaintiffs.
For instance, Rule 11 of the Federal Rules of Civil Procedure deters the initiation of frivolous lawsuits by providing sanctions, including the imposition of attorney’s fees and reasonable expenses.86 Under Rule 11, a discussion of the evolution of the pleadings standard from notice to plausibility). For lawsuits that survive the pleadings stage of litigation, summary judgment via FED. R. CIV. P. 56 permits parties to eliminate frivolous lawsuits without the necessity of trial. See Beverly Dyer, A Genuine Ground in Summary Judgment for Rule 11, 99 YALE L.J. 411, 411 (1989) (recognizing that the well-established standards for summary judgment are aimed at reducing frivolous lawsuits). However, neither Rule 12(b)(6) nor Rule 56 dismissal implies a finding of frivolity, and thus, these two procedural safeguards do not directly sanction, nor do they necessarily deter, the initiation of frivolous lawsuits. See, e.g., Neitzke v. Williams, 490 U.S. 319, 329 (1989) (stating “a failure to state a claim under Rule 12(b)(6) does not invariably mean that the claim is without arguable merit”). Nevertheless, these two rules of civil procedure have received some attention in the economics literature. Hylton provides an economic framework that considers dismissal at the pleadings stage, consistent with Rule 12(b)(6). Keith N.
Hylton, When Should a Case Be Dismissed? The Economics of Pleading and Summary Judgment, 16 SUP. CT. ECON. REV. 39, 41 (2008). He argues that the standard for dismissal on the pleadings ought to fluctuate with evidentiary standards and litigation costs. Id. at 62. Kozel and Rosenberg argue for mandatory summary judgment prior to court enforcement of any settlement agreement as a solution to the nuisance-value settlement problem. Randy J. Kozel & David Rosenberg, Solving the NuisanceValue Settlement Problem: Mandatory Summary Judgment, 90 VA. L. REV. 1849, 1853 (2004).
84 Douglas C. Rennie, Rule 82 and Tort Reform: An Empirical Study of the Impact of Alaska’s English Rule on Federal Civil Case Filings, 29 ALASKA L. REV. 1, 2 (2012).
85 See generally John Leubsdorf, Toward a History of the American Rule on Attorney Fee Recovery, 47 LAW & CONTEMP. PROBS. 9 (1984) (discussing the emergence of the American rule in the United States).
86 FED. R. CIV. P. 11(c)(2). For an overview of Rule 11 through its controversial amendments in 1983, see, e.g., Edward D. Cavanagh, Frivolous Litigation: Developing Standards under Amended Rule 11 of the Federal Rules of Civil Procedure, 14 HOFSTRA L. REV. 499 (1986); Robin J. Collins, Note, Applying Rule 11 to Rid Courts of Frivolous Litigation without Chilling the Bar’s Creativity, 76 KY. L.J.
891 (1988); Neal H. Klausner, Note, The Dynamics of Rule 11: Preventing Frivolous Litigation by Demanding Professional Responsibility, 61 N.Y.U. L. REV. 300 (1986); Melissa L. Nelken, Sanctions
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party is prohibited from filing a pleading, written motion, or other paper with the court that is “presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation.”87 And, the legal arguments contained therein must be “warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.”88 While monetary Rule 11 sanctions are ordinarily paid to the court, under certain circumstances a court may require the violating party to compensate the aggrieved party for the costs of defending a frivolous claim.89 Therefore, when warranted, Rule 11 may be viewed as a fee-shifting statute. In any event, as the Court aptly stated in Lewis v. Casey, since persons do not have a Constitutional right to file frivolous lawsuits,90 “[d]epriving someone of a frivolous claim... deprives him of nothing at all, except perhaps the punishment of Federal Rule of Civil Procedure 11 sanctions.”91 Given the ability of Rule 11 to deter the initiation of frivolous lawsuits, it has received some attention in the literature. Kobayashi and Parker use a game theoretic model to criticize the “safe harbor” provision of Rule 11 by finding that it might increase the frequency of frivolous filings and the rate by which Rule 11 motions challenge such filings.92 Under a certain set of assumptions, the “safe harbor” provision “renders Rule 11 useless as a deterrent, consigning it either to fall into total disuse or to generate completely pointless satellite litigation.”93 Polinsky and Rubinfeld provide a normative basis for utilizing Rule 11 sanctions as a deterrence mechanism.94 Cooter and Rubinfeld develop a theoretical model where Rule 11 sanctions may be imposed for discovery abuse.95 Bebchuk and Chang provide guidance on how courts ought to interpret the scope of Rule 11 in order to enUnder Amended Federal Rule 11—Some “Chilling” Problems in the Struggle Between Compensation and Punishment, 74 GEO. L.J. 1313 (1986); William W. Schwarzer, Rule 11 Revisited, 101 HARV. L.
REV. 1013 (1988); see also Keeling, supra note 30, at 1067 (discussing, in addition, the 1993 amendments to Rule 11).
87 FED. R. CIV. P. 11(b)(1).
88 FED. R. CIV. P. 11(b)(2).
89 Id.; Fed. R. Civ. P. 11 advisory committee’s notes, 1993 amend., reprinted in 146 F.R.D. 401, 583 (1993). Compensation under Rule 11 is limited to reasonable, not actual, fees and victims have a duty to mitigate damages. For a discussion on this topic, see Nelken, supra note 86, at 1334–35.
90 See Bill Johnson’s Rests. v. NLRB, 461 U.S. 731, 743 (1983).
91 Lewis v. Casey, 518 U.S. 343, 353 n.3 (1996).
92 Bruce H. Kobayashi & Jeffrey S. Parker, No Armistice at 11: A Commentary on the Supreme Court’s 1993 Amendment to Rule 11 of the Federal Rules of Civil Procedure, 3 SUP. CT. ECON. REV. 93, 101 (1993). The “safe harbor” provision permits a party to escape liability if it withdraws or corrects a frivolous paper within 21 days of service of a motion for Rule 11 sanctions. FED. R. CIV. P. 11(c)(2).
93 Id. at 144.
94 A. Mitchell Polinsky & Daniel L. Rubinfeld, Sanctioning Frivolous Suits: An Economic Analysis, 82 GEO. L.J. 397, 402 (1993).
95 Robert D. Cooter & Daniel L. Rubinfeld, Economic Model of Legal Discovery, 23 J. LEGAL