«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 ...»
124 We recognize the divergence between the jurisprudential view of the English rule and its application to the theoretical model. In particular, a narrow interpretation of the English rule would only permit the victorious party at trial to recover its attorney’s fees, and not necessarily its litigation expenses.
125 Return to the example, supra note 71, where the plaintiff’s damages are $100,000 and her trial costs are $20,000. Provided filing costs are $500, if the plaintiff goes to trial and wins, she will receive compensation of $100,000, and in addition, her trial and filing costs will be reimbursed. Thus, she will not settle for an amount less than $100,500.
2014] THE IMPACT OF FRIVOLOUS LAWSUITS ON DETERRENCE 333 Under perfect information, where the defendant can distinguish piggyback from genuine plaintiffs, the defendant will offer the minimum acceptable settlement to all genuine plaintiffs and zero to all piggyback plaintiffs.
Given the presence of the English rule, the defendant therefore fully internalizes all of the harm it causes in addition to the plaintiff’s filing cost. No piggyback plaintiffs are induced to file suit, and accordingly, the injurer’s objectives are identical to the social planner’s objectives. As a result, the English rule induces the injurer to exercise the socially optimal levels of care and activity when there is perfect information.
Under imperfect information, the defendant’s total costs under a Type 1 equilibrium will again be the same as in the perfect information case; that is, the costs will consist of the plaintiff’s damages plus filing costs. In contrast, under a Type 2 equilibrium, the defendant will be required to compensate a genuine plaintiff for her litigation and filing costs. Thus, a trial now costs the defendant the amount of the plaintiff’s damages, plus the trial costs of both parties and the plaintiff’s filing costs (given that the plaintiff wins with certainty under strict liability). Therefore, the defendant’s total costs under a Type 2 equilibrium are correspondingly adjusted upward compared to the perfect information model and the imperfect information model under the American rule. As a result, the injurer will exercise more care and less activity in both equilibria under the English rule as compared to the American rule.
Comparison with the social optimum further shows that under a Type 1 equilibrium, the injurer will exercise the socially optimal level of care but will underengage in activity. It underengages in activity (for instance, the supermarket owner will operate fewer stores) because it recognizes that it will settle with some piggyback plaintiffs, which raises its expected liability costs per unit of the activity (per store). Under a Type 2 equilibrium, the injurer will overinvest in care and underengage in activity. The injurer overinvests in care because it recognizes that trial is very costly under the English rule—not only will the injurer be liable for the plaintiff’s damages, but it will also be liable for the plaintiff’s litigation costs and filing cost (in addition to its own litigation costs). In comparison, a social planner would compel the injurer to fully internalize the plaintiff’s damages and filing cost without the necessity of trial. The same intuition applies to the injurer’s activity level in a Type 2 equilibrium, which is why the injurer will underengage in activity from a social perspective. These results suggest that a switch from the American rule to the English rule in the presence of frivolous suits will not necessarily enhance deterrence in a socially valuable way.
B. Claim-Quality Identification We now shift our attention to the positive implications of bodies of law that further the objective of identifying claim quality prior to trial. The
legal regimes governing frivolous lawsuits are capable of providing defendants with some relevant information about the merit of a case upon its filing. Indeed, at least two general types of law serve to aid the defendant in his determination of whether a lawsuit is genuine or frivolous prior to trial.
The first punishes attorneys for handling a frivolous matter, while the second makes information regarding filers of frivolous lawsuits publicly available.
As an extension of the literature regarding legal representation as a signal of merit, attorneys are deterred—either via personal liability or statebar-level discipline—from litigating a frivolous matter. (Some of the previously discussed legal regimes governing cost and fee shifting—for example, Rule 11—may also further this end.) At the federal level, attorneys are personally liable for costs, expenses, and attorney’s fees arising from unreasonable or vexatious conduct under 28 U.S.C. § 1927.126 Under this statute, sanctions may be imposed only against attorneys and not parties to a lawsuit.127 The United States Supreme Court has held that liability under this statute will not be imposed for mere discourtesy to the court. Rather, the attorney must have acted intentionally or with reckless disregard to be liable under 28 U.S.C. § 1927.128 Since a “multiplication of proceedings” must have occurred, initial pleadings are beyond the scope of 28 U.S.C. § 1927,129 which suggests the penal nature of this statute has a similar effect to that of the tort of abuse of process.130 Furthermore, attorneys have an ethical obligation to refrain from filing frivolous lawsuits.131 Under the Model Rules of Professional Conduct, “[a] lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modificaU.S.C. § 1927 (2012) reads, Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.
For an in-depth examination of the elements required to satisfy this statute, see Pollak, supra note 119, at 623–29; see also Janet E. Josselyn, The Song of the Sirens—Sanctioning Lawyers Under 28 U.S.C.
1927, 31 B.C. L. REV. 477 (1990) (discussing the standards utilized by the circuit courts when evaluating whether an attorney has “unreasonably and vexatiously” multiplied proceedings).
127 Zaldivar v. City of Los Angeles, 780 F.2d 823, 831 (9th Cir. 1986).
128 United States v. Ross, 535 F.2d 346, 349 (6th Cir. 1976).
129 Zaldivar, 780 F.2d at 831. See also Wade, supra note 121, at 472 (stating the statute’s “prime target is not the filing of a meritless action but multiplying “proceedings... unreasonably and vexatiously...”).
130 See supra note 115 for a discussion of the tort of abuse of process. Notice again that abuse of process generally does not apply to the initiation of a frivolous lawsuit.
131 See generally 7 Am. Jur. 2d Attorneys at Law § 46 (providing an overview of an attorney’s ethical obligation to refrain from filing frivolous lawsuits).
2014] THE IMPACT OF FRIVOLOUS LAWSUITS ON DETERRENCE 335 tion or reversal of existing law.”132 Failure to comply with this ethical rule may lead to attorney discipline, including the possibility of disbarment.133 While an attorney will ordinarily not be personally liable in negligence for breaching this ethical rule,134 this state-level sanction ought to have the effect of deterring the initiation of frivolous lawsuits by attorneys.
Given the presence of 28 U.S.C. § 1927 at the federal level and the state-level ethical rules punishing attorneys for vexatious conduct, we expect that, all else equal, attorneys will exercise greater discretion in choosing whether to handle a frivolous claim. If anything, an attorney’s willingness to represent a particular client will be biased against claims asserted by frivolous plaintiffs. In terms of our theoretical model, these rules are aimed at reducing the probability that a potential piggyback victim arises per unit of activity. This suggests that conditioned on legal representation, the ex ante probability that a case is of the piggyback variety ought to be smaller given the existence of these rules. Put another way, the probability that a claim is piggybacking upon a genuine claim should be smaller when an attorney represents the matter. This line of thinking is consistent with the perception that legal representation is a signal of a case’s inherent merit (though note that this perception is not due to the presumption, asserted by economists, that attorneys will only accept cases that promise a positive expected return, but rather on the presumption that attorneys practice ethical discretion in their decisions regarding which cases to accept).
In addition to the legal regimes punishing attorneys for representing clients with frivolous claims, a few states have enacted statutes to “name and shame” filers of frivolous lawsuits. These states make the names of filers of frivolous lawsuits publicly available. If a person appears on one of these lists, extra burdens are imposed to file a lawsuit. Since 1991, California has maintained a Vexatious Litigant List.135 To appear on this list, a litigant must satisfy at least one of many statutorily identified criteria, for example, by repeatedly filing frivolous motions or pleadings.136 Under California law, any named vexatious litigant, when not represented by an attorney, must obtain court approval prior to filing a lawsuit. A trial court will only allow a vexatious litigant to proceed with a civil action if its purpose is 132 Rule 3.1 Meritorious Claims and Contentions, ANN. MOD. RULES PROF. COND. s. 3.1 (2011).
133 7 Am. Jur. 2d Attorneys at Law § 46 (citing Parler & Wobber v. Miles & Stockbridge, 756 A.2d 526 (D. Md. 2000)) (holding that violating Maryland’s Rules of Professional Conduct, “which prohibits the filing of frivolous suits, is grounds for attorney discipline and can lead to disbarment”).
134 The common law of torts does not extend liability to an attorney for filing a frivolous lawsuit under a theory of negligence. As Wade describes, negligence actions are routinely unsuccessful when aimed at recovering damages for the filing of a frivolous lawsuit. Wade, supra note 121, at 452. This is even true when a negligence action relies on an attorney’s violation of a state-level ethical rule as evidence of negligence per se. Id. at 453.
135 See California’s Vexatious Litigant List, ADMIN. OFFICE OF THE CA. COURTS (Nov. 1, 2013), http://www.courts.ca.gov/documents/vexlit.pdf.
136 CAL. CIV. PROC. CODE § 391(b) (2013).
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not to harass or delay, and even then, the vexatious litigant may be required to post security.137 Texas has adopted similar legislation under Chapter 11 of its Civil Practice and Remedies Code.138 Vexatious litigants in Texas are required to obtain permission to file suit139 and are required to post security.140 A number of other states have imposed rules restricting vexatious litigants from bringing suit, including at least Florida,141 Hawaii,142 Nevada,143 Ohio,144 and Utah.145 These statutes provide some information regarding claim quality to defendants, particularly when a plaintiff is named on one of these lists and is required to obtain court approval, post security, or both. The overall impact of these vexatious litigant lists is that they ought to reduce the probability that a piggyback victim will arise per unit of activity, much like the legal regimes punishing attorneys for handling frivolous claims. In the context of the theoretical model, their presence also ought to decrease the potential number of piggyback suits.
Given the prediction that legal regimes aimed at claim-quality identification ought to decrease the probability a piggyback victim will arise, what can be said about their impact on deterrence? The decrease in potential piggyback suits that arguably results from these bodies of law should shift the state of the world towards that of perfect information. This implies that defendants will be less willing to go to trial, and as was demonstrated previously, injurers will tend to underinvest in care and overengage in activity.
Even if these legal regimes result in some frivolous lawsuits being filed, it is more likely that a Type 1 equilibrium will emerge with all cases settling.
As was demonstrated previously, the effect of a Type 1 equilibrium is that defendants underinvest in care and underengage or overengage in activity.
The net effect on deterrence is therefore ambiguous. As a result, as a descriptive matter, it is unclear whether these legal regimes enhance social welfare, given the possibility that the success of some frivolous lawsuits in obtaining settlement may enhance deterrence in a socially desirable direction.
137 CAL. CIV. PROC. CODE § 391.7(b) (2013).
138 See List of Vexatious Litigants, TX. OFFICE OF COURT ADMIN. (Oct. 30, 2010), available at http://www.txcourts.gov/oca/Vexatious_Litigants.pdf.
139 TEX. CIV. PRAC. & REM. CODE ANN. §§ 11.101–102 (2013).
140 TEX. CIV. PRAC. & REM. CODE ANN. § 11.055.
141 FLA. STAT. § 68.093 (2013).
142 HAW. REV. STAT. § 634J (2013).
143 NEV. SUP. CT. R. 9.5 (2013). See Vexatious Litigant List, ADMIN. OFFICE OF THE NEV. COURTS
CONCLUSION In this paper, we have examined the impact of frivolous lawsuits on the care and activity choices of injurers. Specifically treating frivolous lawsuits as piggyback lawsuits, we showed that despite conventional wisdom on the topic, frivolous lawsuits are not necessarily detrimental to social welfare. Rather, under certain conditions, the existence of frivolous lawsuits may provide incentives for injurers to engage in more efficient accident avoidance. Despite this theoretical conclusion, we were unable to uncover any case or statutory law that seems to recognize the possible social value of frivolous lawsuits. This is understandable, given that most observers of the legal process would find the concept of an “optimal level of frivolous litigation” to be oxymoronic. And beyond that, even if one accepted the analysis in this paper, it would be impossible as a practical matter to identify the precise level of frivolous litigation that is socially desirable.