An Analysis of Fee Shifting Based on the Margin of Victory: On Frivolous Suits, Meritorious Suits, and the Role of Rule 11

Abstract

When plaintiffs cannot predict the outcome of litigation with certainty, neither the American rule (each litigant bears its own litigation expenses) nor the British rule (the losing litigant pays the attorneys' fees of the winning litigant) would induce optimal decisions to bring suit. Plaintiffs may bring frivolous suits when litigation costs are small relative to the amount at stake; plaintiffs may not bring meritorious suits when litigation costs are large relative to this amount. More general fee-shifting rules are based not only on the identity of the winning party but also on how strong the court perceives the case to be at the end of the trial (the "margin of victory"). We analyze when such a rule can induce plaintiffs to sue if and only if they believe their cases are sufficiently strong. We explore the implications of our analysis for the use of Federal Rule of Civil Procedure 11.