Gaming Frivolity

This past week, the Senate Judiciary Committee heard testimony on whether to overrule two recent Supreme Court decisions that made it much harder for plaintiffs to bring civil lawsuits.  The decisions, Bell Atlantic v. Twombly and Iqbal v. Ashcroft, held that a court may dismiss a suit if it finds that the plaintiff’s claims are “implausible” even before the plaintiff has had an opportunity to obtain information from the defendant to prove its case.

Critics have slammed the decisions as barring the courthouse door to meritorious suits in which crucial information is solely in the hands of the defendant.  An example of such a suit might be one alleging a price-fixing.  In such a case, evidence showing that the defendant’s prices were the result of a conspiracy rather than simply meeting competition is not likely to be available to a plaintiff unless the defendant is compelled to produce it in a lawsuit.  But under Twombly and Iqbal, a court could dismiss a price-fixing lawsuit before the plaintiff had the opportunity to obtain that information on the ground that the defendant’s actions appeared equally consistent with fair competition.

Supporters of these decisions counter that requiring a plaintiff to identify facts at the outset that tend to exclude innocent explanations is warranted in order to weed out frivolous lawsuits.  They claim that otherwise, plaintiffs may blindly file meritless lawsuits that defendants will be coerced to settle rather than face the cost of litigation.

While the cases and editorial pages are replete with references to the scourge of frivolous litigation, it turns out that there is very little empirical support for the claim that courts are awash in it.  And there are reasons to believe that defendants settle too few rather than too many of the kind of suits that Twombly and Iqbal seek to eliminate.

The game theory of frivolous litigation is nicely modeled in a 1997 article by law professor Robert G. Bone.*  Among the many scenarios he analyzes is the case, like our price-fixing example, where a defendant knows at the outset whether a plaintiff’s case has merit, but the plaintiff can only find out before filing suit, if at all, though a very expensive investigation (bribing an insider, for example).

In this case, it turns out that the defendant’s best strategy is to fight every unmeritorious case, and offer to settle some but not all meritorious cases at the outset.  The plaintiff’s best strategy is drop its case some of the time when the defendant declines to settle at the outset, not knowing whether or not its case has merit.  Thus defendants never pay to settle unmeritorious cases, but plaintiffs sometimes unknowingly drop meritorious ones.  The result is a transfer of wealth from uncompensated meritorious plaintiffs to guilty defendants, not from innocent defendants to frivolous plaintiffs.

Twombly and Iqbal, it turns out, are a solution in search of a problem.  They should be repealed.

* Modeling Frivolous Lawsuits, 145 U. Pa. L. Rev. 519 (1997).

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