Academic journal article The Review of Litigation

Lawsuit Abandonment Options in Possibly Frivolous Litigation Games

Academic journal article The Review of Litigation

Lawsuit Abandonment Options in Possibly Frivolous Litigation Games

Article excerpt


The aggregate quantity of litigation in the United States, both in comparison with other countries and over time, has been and remains the subject of much controversy.1 But the often heard phrase "litigation explosion" is merely descriptive, being devoid of any particular normative content. A recent, related, and more specific debate concerns the nature or quality of litigation in specific areas, including but not limited to, medical malpractice, product liability, and securities fraud.2 In particular, many legal and social commentators feel that America is and has been experiencing an explosion in so-called strike lawsuits, also known as nuisance lawsuits or frivolous litigation.

An explosion in frivolous litigation is not normatively neutral. A perceived rise in frivolous lawsuits alleging securities fraud was a major impetus for the provisions imposing strict pleading requirements contained in the Private Securities Litigation Reform Act of 1995, which Congress enacted over President Clinton's veto.3 The politics of American litigation reform and specific anti-litigation campaigns are an interesting reflection of American culture, history, and society that is beyond the scope of this Article.4

Whether there has been such a frivolous litigation explosion is a descriptive and historical question that is empirically challenging to resolve because nearly all lawsuits settle,5 with many of the settlements involving confidentiality agreements. Everyone agrees there is a demand for more empirical research and work about civil procedure and litigation,6 but unfortunately the supply of it is still rare.7 But positive theoretical economics can provide insights into frivolous litigation in the form of implications from analytical, formal, rigorous, and systematic models.8 What procedural or substantive reforms would reduce frivolous litigation is a normative question that raises difficult concerns involving procedural fairness, both outcome-based and process-based, in addition to questions regarding the nature and limits of substantive rights. But normative theoretical economics can help answer this question by identifying and comparing the various error and process costs of alternative reforms.

This Article develops a new theory of possibly frivolous litigation by focusing on a plaintiff's options to unilaterally abandon a lawsuit.10 Federal Rule of Civil Procedure 41(a)(1)(i) and its various state law counterparts permit, under certain circumstances, a plaintiff to voluntarily dismiss her lawsuit without prejudice.11

A. The Value of Litigation Abandonment Options: A Hypothetical Example

The following hypothetical example illustrates the value of a plaintiff's option to abandon or drop litigation. Suppose that Portia sues Daphne. In addition, suppose that Portia's ex ante or initial expected probability of prevailing at trial is 1/2. Suppose also that, initially, the monetary judgment that Portia expects to win at trial is $1,000,000. Under these facts, Portia's actual initial expected judgment at trial is (1/2)($1,000,000), or $500,000. Suppose that Portia's total expected litigation cost of proceeding to a trial is $550,000. Portia's lawsuit will have a net expected value of $500,000 - $550,000 = -$50,000 < 0.

Now divide the lawsuit into two stages, discovery and trial, each of which costs Portia $275,000. In addition, suppose that discovery resolves all of the risks of Portia's litigation, so the posterior or ex post probability conditional upon discovery of Portia's prevailing in court is either 0 or 1. Portia would only proceed when she has a sure winner, and Portia would abandon a sure loser. Under those facts, the revised initial expected value or initial option value that the lawsuit has for Portia would be (1/2)($1,000,000 - $275,000) - $275,000 = (1/2)($725,000) - $275,000 = $362,500 - 275,000 = $87,500 > 0. …

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