Litigation Expenditures Research Articles

Optimism & Expenditures: The Effect on Settlements

Abstract This article challenges the conventional wisdom in economic models of litigation that optimism necessarily increases the likelihood of trial and that pessimism increases the chances of settlement. We show that optimism may, to the contrary, expand the settlement range. By increasing the perceived value at stake in litigation, optimism may induce parties to invest additional resources in a dispute, which increases the overall bargaining range. Because of the strategic nature of litigation expenditures, optimistic litigants may spend an amount that outweighs the negative impact of optimism on the bargaining surplus. Whether optimism increases or decreases the settlement rate ultimately depends on whether, in concrete instances, the negative effects of optimism on the bargaining surplus outweigh the positive effects created by the additional investments in litigation. Our results provide counterintuitive insights into the selection of disputes for litigation. (JEL K00, K21).

The Effect of Fee Shifting on Litigation: Evidence from a Policy Innovation in Intermediate Cost Shifting

Abstract We study the effect of fee shifting rules on litigation. First, we build a model to study the theoretical effect of a change in cost-recovery rules on case filings, (postfiling) settlement, win rates, and plaintiffs’ average litigation expenditures. We then undertake an empirical analysis of the introduction of an intermediate cost shifting rule that falls between the English and American Rules: a reform that limits the size of fee awards to successful litigants in cases decided by the Intellectual Property Enterprise Court (IPEC), one of two venues where IP cases may be filed in England and Wales. Our empirical analysis takes advantage of heterogeneity among case types and compares IPEC cases with intellectual property cases litigated at the PHC of England and Wales, which was not subject to this reform. We find that patent case filings increased following the IPEC’s shift from a pure English Rule to a rule that caps costs awards. Consistent with our model’s predictions, we also find evidence that smaller plaintiffs both won less often and settled more often postreform, as well as evidence that larger plaintiffs spent less on litigation postreform.

Litigation and the Product Rule: A Rent Seeking Approach

Abstract This paper examines the suppression of the product rule in litigation from a rent seeking perspective. We show that there are some important arguments in favor of not applying it. First, the expected judgment is always lower when the product rule is used, especially for relatively strong cases. Second, litigation expenditures are often larger when the product rule is used, again especially for relatively strong cases. Both of these factors decrease the plaintiff’s expected value for such cases. Third, when the product rule is suppressed, the plaintiff files all cases that he or she should win. This is not so when the product rule is applied. Fourth, for many of the weakest cases (the ones in which the quality of all issues is rather weak), the expected value of the plaintiff’s case is larger when the product rule is used. The main argument in favor of the application of the product rule is that when the rule is suppressed, plaintiffs file more cases in which the quality of one issue is weak and the quality of the other issue is strong. However, the influence of this factor on the ex ante incentives of the injurer is relatively small.

The optimal adjustment to liability when litigation is costly: A note

We show that the optimal liability award with variable litigation costs may be either larger or smaller than the sum of the victim's harm and litigation costs. The reason is that there are two countervailing effects at play. On the one hand, larger damage awards lead to increased litigation expenditures, which have a dampening effect on optimal damages. On the other hand, variable litigation costs only make sense if the parties anticipate a gain from expending litigation effort, which necessarily translates into a probability of plaintiff victory that is less than one. Consequently, the deterrence function of the trial is mitigated, justifying an upward adjustment in the optimal damage award. The optimal adjustment balances these two effects.

Standards of Proof and Civil Litigation: A Game-Theoretic Analysis

AbstractIn litigation models, the parties’ probability to succeed in a lawsuit hinge upon the merits of the parties’ claims and their litigation efforts. In this paper we extend this framework to consider an important procedural aspect of the legal system: the standard of proof. We recast the conventional litigation model to consider how alternative standards of proof affect litigation choices. We analyze the interrelation between different standards of proof, the effectiveness of the parties’ efforts, and the merits of the case. We study how these factors jointly affect the parties’ litigation expenditures, the selection of cases brought to the courts, pretrial bargain solutions and preemptive strategies. Our results show that standards of proof are not only instrumental to balancing the competing goals of access to justice and judicial truth-finding, but they also play a critical role in affecting parties’ litigation investments and settlement choices, and in sorting the mix of cases that will actually be filed and defended in courts. The understanding of the sorting effect of standards of proof sheds light on their role as a policy instrument in civil litigation.

Evidence Standards and Litigation: A Rent-Seeking Game

In litigation models, the parties’ probability to succeed in a lawsuit hinge upon two main factors: the merits of the parties’ claims and their litigation efforts (Katz, 1988; Hirshleifer, 1989; Farmer and Pecorino, 1999). In this paper we extend this framework to consider an important procedural aspect of the legal system: the evidence standard. We recast the conventional rent-seeking model to consider how alternative evidence standards affect litigation choices. We analyze the interrelation between different evidence standards, the effectiveness of the parties’ efforts, and the merits of the case. We study how these factors jointly affect the parties’ litigation expenditures and the selection of cases brought to the courts. The evidence standard has different effects on different types of cases, reducing litigation for high-merit cases when standards are set low and increasing litigation for low-merit cases when standards are set high. This provides a valuable key for understanding the sorting effect of evidence standards and their role as a policy instrument in civil litigation.

Rent-Seeking and Litigation: The Hidden Virtues of Limited Fee Shifting

Abstract In the past couple of decades, scholars have predominantly employed rent-seeking models to analyze litigation problems. In this paper, we build on the existing literature to show how alternative fee-shifting arrangements (e.g., the American rule and English rule with limited fee-shifting) affect parties’ litigation expenditures and their decisions to litigate. Contrary to the prevailing wisdom, we discover that, when fee shifting is limited, the English rule presents some interrelated advantages over the American rule, including the reduction of litigation rates and the possible reduction of expected litigation expenditures. Our results unveil a hidden virtue of limited fee shifting, showing that an increase in such limit may lead to a desirable sorting of socially valuable litigation.

Comparing All-or-Nothing and Proportionate Damages: A Rent-Seeking Approach

Abstract This paper compares the all-or-nothing and proportionate damage rules for allocating damages in tort cases under evidentiary uncertainty. The focus is on how the two rules affect litigation expenditures by plaintiffs and defendants. The results of simulation experiments show that the expected judgment at trial is higher under the all-or-nothing rule for cases where the defendant did not take adequate care, but the judgment is higher under the proportionate rule when the defendant took more than adequate care. As for litigation expenditures, assuming equal costs of litigation, overall expenditures are higher under the all-or-nothing rule, except for very weak and very strong cases.

Comparative versus contributory negligence: A comparison of the litigation expenditures

The previous literature on comparative and contributory negligence points out that administrative costs are higher under comparative negligence because the courts must decide on the degree of negligence by both parties and not just whether the parties were negligent. In this article, I show that this finding is not necessarily correct. I use a rent seeking model to show that the litigation expenditures may be smaller under comparative negligence. The previous literature has focused on only one effect, while there may be three effects at play.

Rent-Seeking and Litigation: The Hidden Virtues of the Loser-Pays Rule

In the past couple of decades, scholars have predominantly employed rent-seeking models to analyze litigation problems. In this paper, we build on the existing literature to show how alternative fee-shifting arrangements (i.e., the American rule and modified English rule) affect parties' litigation expenditures and their decisions to litigate. Contrary to the prevailing opinion, we discover some interrelated advantages of the English rule over the American rule, including the reduction of litigation rates and reduction of expected litigation expenditures. Our results unveil a hidden virtue of the English rule, showing that an increase in fee-shifting may have the effect of reducing total litigation costs and lead to a desirable sorting of socially valuable litigation.

Universal Prediction Model for Construction Litigation

Construction litigation expenditures have increased considerably over the years. A Universal Prediction Model (UPM) was developed to predict the outcome of construction litigation and hence encourage settlements out of court. The study was conducted by using 151 Illinois circuit court cases filed in the period 1987–2005. UPM consists of data consolidation, attribute selection, hybrid classification, and performance assessment. A code was written to automate the entire process in the WEKA (Waikato Environment for Knowledge Analysis) environment. UPM is versatile and scalable. The findings resulted in a higher prediction rate than those obtained in previous studies. The system proved to be quite robust and fast. If the outcome of construction litigation can be predicted with reasonable accuracy and reliability, all parties involved in the construction process could save considerable money and time.

Deterrence and tax treatment of monetary sanctions and litigation costs

The tax treatment of monetary sanctions and litigation expenditures varies across legal jurisdictions and time. The effects of these different tax regimes – particularly, on crime deterrence – have not been fully explored. Instead, legal intuitions in court decisions and legislative reforms are found. This paper explores the effects of these tax regimes. It shows that our common intuitions are sometimes misguided, since we tend to ignore cross-effects between crime and litigation. For example, contrary to commonly held views, it is shown that non-deductibility of monetary sanctions may increase the level of crime, if litigation expenses are deductible. In addition, if deductibility of legal expenses depends only on a successful trial outcome, this may also increase amounts spent on litigation and time allocated to crime. As this paper shows, however, a complete deductibility regime, under which both monetary sanctions and litigation expenditures are deductible, maintains the pre-tax levels of crime and litigation expenditures for risk-neutral offenders. The paper further explores the effects of different tax reforms.

BARGAINING VERSUS FIGHTING

I examine the determinants of conflict and settlement by embedding probabilistic contests in a bargaining framework. Different costly enforcement efforts (e.g. arming, litigation expenditures) induce different disagreement points and Pareto frontiers. After examining the incentives for settlement, I demonstrate how different division rules and bargaining norms have real, economic effects. I then analyze some sources of conflict. I emphasize long‐term, strategic considerations by examining an illustrative model and discussing particular historical examples.

Special levies on punitive damages: Decoupling, agency problems, and litigation expenditures

This article extends the economic model of “decoupling” the damage award payable by a defendant and the award received by a plaintiff in the context of recently enacted “special levy” statutes. These statutes require plaintiffs to hand over portions of their punitive damage awards to the state. The basic model of decoupling is expanded by incorporating the effect of levies on litigation expenditures and settlement and by examining the effect of agency problems between plaintiff and his attorney. Consistent with the basic model, we find that, in the absence of agency problems, if a case goes to trial, levies reduce the expected award payable by the defendant and the plaintiff's litigation expenses. However, the effect of levies on settlement is indeterminate. In the presence of agency problems, certain forms of levies will have no effect on the defendant's expected payments, on litigation expenses, or on settlement; and other forms will either be equally ineffective as the former forms or less effective than they are in the absence of agency problems.

Litigation Expenditures as Private Determinants of Judicial Decisions: A Comment

SINCE the Landes and Posner paper' is really two separable analyses, I have focused my work on Part II, which furthers the study of the efficiency of the common law. My intent has been to try to further this work rather than simply to find fault with it. Therefore while I will point out limitations in their analysis, I must also admit that my work often is similarly flawed. The search for final answer in this matter is not as easy as at first supposed and much work can be done to improve our intermediate answers. In examining the literature discussed by Landes and Posner, I was struck by the importance of seemingly ad hoc results. In particular, Priest bases much of his argument on the assumption that larger cases are more likely to be litigated.2 This is not obvious, particularly if both parties are risk averse or, as we shall show, if litigation costs are not fixed a priori. Since this is so fundamental to Priest's analysis we will examine it in the context of the useful model put forth by Landes and Posner. A second problem with the Priest type of analysis (which is not clearly refuted by Posner's book3 nor by the Landes and Posner article) is the meaning of his results. The basic purpose of Posner's original discussion on the efficiency of the common law4 was to show the existence (in theory and reality) of mechanism which yields efficient outcomes in the presence of various externalities. For such system, an equilibrium must be Pareto efficient in that all possible gains from trade have been exhausted.s The