A model in which suits are brought for their nuisance value

Abstract

By a suit brought for its nuisance value, we mean a suit 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. This note considers a model of the legal dispute allowing for the occurrence of such nuisance suits (among other types of outcome). The main features of the model are illustrated in Figure 1. Specifically, the plaintiff may choose to file a claim at some (presumably small) cost. If the defendant does not then settle with the plaintiff and does not, at a cost, defend himself, the plaintiff will prevail by default judgment. If the defendant does defend himself, however, the plaintiff then may either withdraw or may, at a cost, litigate, resulting in a favorable verdict only with a probability (and a low one if his case is weak). Given the model and the assumption that each party acts in his financial interest and realizes the other will do the same, it is easy to see how nuisance suits can arise. By filing a claim, any plaintiff, and thus the plaintiff with a weak case, places the defendant in a position where he will be held liable for the full judgment demanded unless he defends himself. Hence, the defendant should be willing to pay a positive amount in settlement to the plaintiff with the weak case--despite the defendant's knowledge that were he to defend himself, such a plaintiff would withdraw. This idea is elaborated below in Section II, which presents a general analysis of the model using numerical examples. The situations in addition to that of the nuisance suit that are discussed in the analysis are those where the plaintiff's case is 'meritorious'--h e would be likely to prevail at trialmbut he would still not want to go to trial because the litigation costs would exceed the expected judgment; where the plaintiff's case is sufficiently strong and the expected judgment sufficiently high that he would be willing to go to trial; and, generally, where litigation costs are shifted to the losing party at trial. Section III formally analyzes the model and proves the results of Section II. The concluding Section IV considers the realism of the model, offers several qualifying remarks, and comments on previous models of the litigation process.