An Analysis of Fee-Shifting Based on the Margin of Victory: On Frivolous Suits, Meritorious Suits, and the Role of Rule 11
Lucian A. Bebchuk
Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Howard F. Chang
University of Pennsylvania Law School
University of Southern California Law Center Working Paper 94-3
This paper shows that, when plaintiffs cannot predict the outcome of litigation with certainty, neither the American rule of litigation cost allocation (under which each litigant bears its own expenses) nor the British rule (under which the losing litigant pays the attorneys' fees of the winning litigant) would induce plaintiffs to make optimal decisions to bring suit. In particular, plaintiffs may bring frivolous suits when litigation costs are sufficiently small relative to the amount at stake, and plaintiffs may not bring some meritorious suits when litigation costs are sufficiently large relative to the amount at stake. This paper analyzes the effect of more general fee-shifting rules that are based not only upon the identity of the winning party but also on how strong the court perceives the case to be at the end of the trial -- that is, the "margin of victory." In particular, this paper explores how and when one can design such a rule to induce plaintiffs to sue if and only if they believe their cases are sufficiently strong. The analysis suggests some considerations to guide the interpretation of Federal Rule of Civil Procedure 11.
JEL Classification: K4, K0
Date posted: July 7, 1999
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