A new options theory for risk multipliers of attorney's fees in federal civil rights litigation

New York University Law Review

Volumn 73, Issue 6, 1998, Pages 1943-1977

  Huang, Peter H ^a  

^a UNIVERSITY OF PENNSYLVANIA   (United States)

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EID: 22444454399     PISSN: 00287881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (182)

1. Madonna, Video Timeline (VH-1 television broadcast, Aug. 13, 1998).
2. In this article, the term "federal civil rights laws" includes both Reconstruction-era and modern civil rights statutes. For examples of the latter, see, e.g., Voting Rights Act of 1965, 42 U.S.C. § 1971 (1994); 42 U.S.C. §§ 1981-1983 (1994); Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000(e) (1994 & Supp. 1995); Americans with Disabilities Act of 1990, 42 U.S.C. § 3601 (1994).
3. Professors Stewart Schwab and Theodore Eisenberg have found that most civil rights litigation is undertaken by solo practitioners and small private law firms. See Stewart J. Schwab & Theodore Eisenberg, Explaining Constitutional Tort Litigation: The Influence of the Attorney Fees Statute and the Government as Defendant, 73 Cornell L. Rev. 719, 768 n.178 (1988)
4. (citing J. Casper, Lawyers in Defense of Liberty: Lawyers Before the Supreme Court in Civil Liberties and Civil Rights Cases, 1957-66, at 207 (1968) (unpublished Ph.D. dissertation, Yale University)).
5. Professor Michael Selmi also presents empirical data on the importance of private representation in enforcing federal civil rights. See Michael Selmi, The Value of the EEOC: Reexamining the Agency's Role in Employment Discrimination Law, 57 Ohio St. L.J. 1, 22, 57 (1996).
6. Julie Davies, Federal Civil Rights Practice in the 1990s: The Dichotomy Between Reality and Theory, 48 Hastings L.J. 197, 262-63 (1997) (arguing that Supreme Court decisions since 1976 harmfully reduce incentives for private attorneys to accept civil rights cases).
7. Several federal civil rights statutes contain fee-shifting provisions. See, e.g., Age Discrimination in Employment Act of 1967, 29 U.S.C. § 626(b) (1994); Clean Water Act, 33 U.S.C. § 1369(b)(3) (1994); Civil Rights Attorney's Fees Awards Act of 1976, 42 U.S.C. § 1988(b) (1994); Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e-5(k) (1994); Fair Housing Act, 42 U.S.C. § 3613(c)(2) (1994); Americans with Disabilities Act, 42 U.S.C. § 12205 (1994). In addition, different states have their own state civil rights laws; California, for example, still allows courts discretion to award risk multipliers in areas like employment discrimination. See Cal. Civ. Proc. Code § 1021.5 (West 1980 & Supp. 1996). Other federal statutes promoting the public interest also authorize fee-shifting. See Privacy Act of 1974, 5 U.S.C. § 552a(g)(2)(B), (g)(3)(B) (1994 & Supp. 1996); Government in the Sunshine Act, 5 U.S.C. § 552b(i) (1994 & Supp. 1996); Equal Access to Justice Act, 28 U.S.C. §§ 2412(b), (d) (1994); Clean Air Act, 42 U.S.C. § 7607(f) (1994); Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. § 9659(f) (1994). Each issue of the Attorney Fee Awards Reporter, which is published bimonthly, includes an updated list of federal statutes authorizing the awarding of reasonable attorney's fees. The options theory of litigation presented in this Article not only applies to civil rights actions, but also to public interest lawsuits generally. The Supreme Court has stated that its rulings on risk multipliers apply uniformly to all fee award statutes. See City of Burlington v. Dague, 505 U.S. 557, 562 (1992).
8. Indeed, the number of attorney's fee cases on the Supreme Court's docket has increased significantly in the last decade. See Davies, supra note 4, at 209-10 & n.50 (citing Thomas D. Rowe, Jr., The Supreme Court on Attorney Fee Awards, 1985 and 1986 Terms: Economics, Ethics, and Ex Ante Analysis, 1 Geo. J. Legal Ethics 621, 632-36 (1988)).
9. See Davies, supra note 4, at 200 (arguing that damages for discrimination against poor or underemployed are "too low to offer much compensation to an attorney in the event of a settlement").
10. See id. at 246, 264 (citing expert fees, length of time in taking case to trial, defense strategies involving delay, and amount of resources channeled into collateral litigation as reasons for high cost of lawsuits).
11. The term "risk" comes from an early Italian word "risicare" meaning "to dare." For a fascinating history of the role of risk in human society, see Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk 8 (1996).
12. For more on such a traditional multiplier calculation, see Samuel R. Berger, Court Awarded Attorneys' Fees: What Is "Reasonable"?, 126 U. Pa. L. Rev. 281, 324-26 (1977) (discussing reasonableness of court-awarded attorney's fees);
13. Marshall J. Breger, Compensation Formulas for Court Awarded Attorney Fees, 47 Law & Contemp. Probs. 249, 259 (1984) (analyzing alternative approaches to attorney compensation rates);
14. William J. Lynk, The Courts and the Plaintiffs Bar: Awarding the Attorney's Fee in Class-Action Litigation, 23 J. Legal Stud. 185, 187 (1994) (discussing risk multiplier approach);
15. see also Affidavit of Frank H. Easterbrook & Robert A. Sherwin at 2-3, In re Burlington Northern, Inc., Employment Practices Litigation, Nos. MDL 374, 78 C 269, 1985 WL 1808 (N.D. Ill. May 31, 1985) (on file with the New York University Law Review) (discussing factors affecting multiplier).
16. See infra Part I (discussing Supreme Court treatment of risk multipliers).
17. Financial (call) options provide their holders with the right, but not the obligation, to buy a certain amount of an underlying financial instrument, such as a stock, bond, commodity (such as corn, soybeans, wheat, or gold) futures contract, foreign currency, or index at a certain price on or before a certain date. The awarding of the 1997 Nobel Prize in economics to two financial economists, Robert Merton and Myron Scholes, for their pathbreaking theoretical research about options is only the latest indication that options are an increasingly relevant economic tool. See, e.g., Michael M. Phillips, Two U.S. Economists Win Nobel Prize: Merton and Scholes Share Award for Breakthrough in Pricing Stock Options, Wall St. J., Oct. 15, 1997, at A2.
18. Not only are stock options now a $148 billion industry, but also, "[i]f you have a mortgage, for example, you are an options trader: You have the option to pay off that mortgage at any time." David R. Henderson, Message from Stockholm: Markets Work, Wall St. J., Oct. 15, 1997, at A22.
19. For more about financial options, see generally Richard A. Brealey & Stewart C. Myers, Principles of Corporate Finance 557-88 (5th ed. 1996) (providing overview of financial options for corporate managers);
20. George Crawford & Bidyut Sen, Derivatives for Decision Makers: Strategic Management Issues 16-21 (1996) (explaining how options work);
21. Ronald J. Gilson & Bernard S. Black, The Law and Finance of Corporate Acquisitions 231-50 (2d ed. 1995) (providing options primer for corporate lawyers);
22. Philippe Jorion, Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County 38-57 (1995) (explaining role of derivatives and structured notes in collapse of Orange County Investment Pool);
23. Robert W. Kolb, Financial Derivatives 73-122 (1996) (describing options markets);
24. Roberta Romano, A Thumbnail Sketch of Derivative Securities and Their Regulation, 55 Md. L. Rev. 1, 40-46 (1996) (providing definition of options).
25. Of course, the imminent collapse and recent bailout of Long-Term Capital Management (with Merton and Scholes as principals) suggests that "the elite of America's financial powerhouses - as well as a few dozen other global heavyweights, either didn't know about or were comfortable with the risks they were taking in their dealings in Long-Term Capital." How a Big Hedge Fund Marketed Its Expertise and Shrouded Its Risks, Wall St. J., Sept. 25, 1998, at A1.
26. "Real options" refer to those that options managers have in capital investment projects, such as the option to abandon, to make follow-on investments, to wait (and learn) before investing, or to vary a firm's output or its production methods. See generally Brealey & Myers, supra, at 589-616 (providing an overview of real options for corporate managers); Avinash K. Dixit & Robert S. Pindyck, Investment Under Uncertainty 6-25 (1994) (describing options approach to investment);
27. Lenos Trigeorgis, Real Options 1-4, 9-20, 121-50 (1996) (providing an overview of conceptual framework for real options in capital budgeting). Commonplace options include leasing (or renting) with an option to buy a car, a home, furniture, or appliances; the option to refinance a home loan at a lower interest rate by prepaying a mortgage; the option to switch consumer credit card purchases to a new card with special introductory low interest rates on balance transfers; and "pawn shop" or no-recourse margin loans in which borrowers have the option to walk away from their loans without repaying them, but in so doing forfeit the items pawned or their margin amounts (and whatever items were purchased on margin). An example of an option which may be familiar to budding lawyers is the option to accept an offer for permanent employment as an associate in a law firm after working at that firm as a summer associate.
28. See, e.g., Hensley v. Eckerhart, 461 U.S. 424, 433 (1983) ("The most useful starting point for determining the amount of a reasonable fee is the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate.").
29. See, e.g., Lindy Bros. Builders of Philadelphia v. American Radiator & Standard Sanitary Corp., 487 F.2d 161, 167-68 (3d Cir. 1976) (setting forth guidance for applying risk multipliers to lodestar); Detroit v. Grinnell Corp., 495 F.2d 448, 471 (2d Cir. 1974) (establishing standards for calculating risk multipliers); Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974) (providing list of twelve factors to guide courts' discretion to enhance lodestar figure).
30. For the early history of risk multipliers, see John Leubsdorf, The Contingency Factor in Attorney Fee Awards, 90 Yale L.J. 473, 475-78 (1981).
31. 461 U.S. 424 (1983).
32. See id. at 433.
33. Id. at 449 (Brennan, J., concurring).
34. 465 U.S. 886 (1984).
35. See id. at 897, 901.
36. See id. at 898.
37. See id. at 899-900.
38. See id. at 900.
39. See id. at 901.
40. See, e.g., Blanchard v. Bergeron, 489 U.S. 87, 94 (1989) (adopting "the lodestar approach as the centerpiece of attorney's fee awards," without any multiplier); see also King v. Palmer, 950 F.2d 771, 776 (D.C. Cir. 1991) (en banc) (noting that Supreme Court has been "steadily subsuming most other factors" into lodestar figure).
41. 478 U.S. 546 (1986).
42. See id. at 547.
43. Id. at 564.
44. Despite hearing a reargument specifically about risk multipliers in Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 483 U.S. 711 (1987), the Court was not able to reach consensus. Due to the lack of a majority opinion, the most important legacy of Delaware Valley was Justice O'Connor's concurring opinion, which agreed with the dissent that Congress intended to allow for risk multipliers in computing the reasonable attorney fees authorized by fee-shifting statutes. See id. at 731 (O'Connor, J., concurring); see also id. at 735-42 (Blackmun, J., dissenting). Justice O'Connor's concurring opinion formulated a market approach to risk multipliers, which simply meant that courts should compute risk multipliers that are not case specific, but instead are determined for a class of cases reflecting the particular market for that case. See id. at 733 (O'Connor, J., concurring); see also id. at 745-47 (Blackmun, J., dissenting).
45. 505 U.S. 557 (1992).
46. See id. at 565. Such fee-shifting cases differ from common fund cases in which the plaintiff's attorney's fee comes from the plaintiff's recovery.
47. See id. at 562-63.
48. Id. at 563. This particular fear has not been borne out by an empirical survey of civil rights practitioners in the 1990s. See Davies, supra note 4, at 250-51.
49. See Dague, 505 U.S. at 565.
50. Id. at 566.
51. See Hensley v. Eckhart, 461 U.S. 424, 435 (1983). Note, however, that the Court has never specified what would make a case "exceptional."
52. 804 F. Supp. 69 (C.D. Cal. 1992).
53. See id. at 78-79.
54. See id. at 71.
55. In its most recent consideration of attorney's fees pursuant to the Civil Rights Attorney's Fees Awards Act of 1976, the same California district court noted that: In its lodestar calculation, the Court starts from the premise that in determining a reasonable hourly rate the proper focus is not upon what an appropriate or customary hourly rate should be for the particular lawyer who has done the work, but rather upon the nature of the services rendered, and what a reasonable commercial client would pay by the hour for those services if the client were free to choose its own counsel. Gillen v. Gates, 847 F. Supp. 1475, 1480 (C.D. Cal. 1994). It is unclear whether the Dague reasoning extends beyond statutory fee-shifting cases to common fund cases. A recent case suggesting this might be the case is Berg v. Gackenbach (In re Bolar), 800 F. Supp. 1091, 1095 (E.D.N.Y. 1992) (holding that limitations on multipliers in statutory fee-shifting cases extend fully to cases in equity).
56. See Crawford & Sen, supra note 12, at 7-10 (describing oldest references to derivatives).
57. This may have been an early instance of the type of monopolization that is illegal under § 2 of the Sherman Act. See 15 U.S.C. § 2 (1994) (prohibiting any "person who shall monopolize . . . combine or conspire . . . to monopolize any part of the trade or commerce among the several States, or with foreign nations"). Another historical example of an options contract is from the book of Genesis, in which Jacob acquired the option to marry Rachel by working for seven years in her father Laban's fields. See Genesis 29: 18-21 (King James);
58. see also William F. Sharpe, Investments 470 (3d ed. 1985) (describing biblical options). Unfortunately, Laban insisted that Jacob marry Leah because she was older than Rachel. Jacob did marry Leah. However, he also acquired a second option to marry Rachel by working for another seven years in Laban's fields. This was perhaps the first instance of a fraudulent option and certainly not the last example of how an option investment may involve unforeseen risks.
59. See Dixit & Pindyck, supra note 12, at 24-25 (noting costs and risk aspects of marriage, suicide, and legal reform).
60. Id. at 24.
61. Id. at 24-25.
62. Id. at 25.
63. See Bradford Cornell, The Incentive to Sue: An Option-Pricing Approach, 19 J. Legal Stud. 173, 174 (1990) (introducing options approach to analyzing litigation investments).
64. For other applications of options theories to legal rules and institutions, see also Ian Ayres & J.M. Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703, 704 (1996) (citing recent articles deconstructing difference between liability rules and property rules in terms of different prices of options);
65. Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 Harv. L. Rev. 775 (same);
66. William M. Landes, Sequential Versus Unitary Trials: An Economic Analysis, 22 J. Legal Stud. 99, 100 (1993) (arguing that sequential trials may decrease expected cost of litigation);
67. Paul G. Mahoney, Contract Remedies and Options Pricing, 24 J. Legal Stud. 139, 143-44 (1995) (considering money damages for contract breach as an option);
68. Frederick C. Dunbar et al., Shareholder Litigation: Deterrent Value, Merits and Litigants' Options (National Bureau of Econ. Research Working Paper No. 95-07-a, 1995) (analyzing shareholder class actions as options);
69. Michael S. Knoll, Put-Call Parity and the Development of the Modern Mortgage (USC Law Center Working Paper No. 94-12, 1994) (analyzing mortgages as options);
70. Lucian Arye Bebchuk, The Options Approach to Corporate Reorganization (March 1998) (unpublished manuscript, on file with the New York University Law Review) (applying options approach to the division of value in corporate reorganization);
71. Jeff Strnad, Taxes and Renewable Resources: The Impact on Exploration and Development 5-10 (July 1996) (unpublished manuscript, on file with the New York University Law Review) (discussing impact of taxes on the options to drill for oil, to develop oil wells, and to begin oil production).
72. See C. Frederick Beckner, III & Steven C. Salop, Issue Sequencing, Summary Disposition, and Optimal Legal Procedure 8-25 (Apr. 18, 1995) (unpublished manuscript) (developing model of sequential legal procedure and determining optimal standards of summary disposition and optimal sequence of legal and factual issues which a court should analyze).
73. Further, Professor Cornell's analysis extended an earlier literature in which litigation decisions were based solely on the present discounted value of costs and (expected) benefits. See Cornell, supra note 47, at 173. See generally John P. Gould, The Economics of Legal Conflicts, 2 J. Legal Stud. 279 (1973) (applying expected value approach to civil litigation);
74. William M. Landes, An Economic Analysis of the Courts, 14 J.L. & Econ. 61 (1971) (applying expected value approach to criminal litigation);
75. Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. Legal Stud. 399 (1973) (applying expected value approach to civil and criminal litigation);
76. Steven Shavell, Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative Methods for the Allocation of Legal Costs, 11 J. Legal Stud. 55 (1982) (applying expected value approach to litigation under four legal systems).
77. There have been several recent extensions of this literature. See Lucian Arye Bebchuk, A New Theory Concerning the Credibility and Success of Threats to Sue, 25 J. Legal Stud. 1 (1996) (developing model of credibility and success of threats to bring negative expected value suits);
78. Lucian Ayre Bebchuk, On Divisibility and Credibility: The Effects of the Distribution of Litigation Costs over Time on the Credibility of Threats to Sue (Harvard Law School, John M. Olin Center for Law, Economics, and Business Discussion Paper No. 190, 1996) (same); Dunbar et al., supra note 47, at 26-32 (applying options value perspective to plaintiffs' attorneys' approach to nuisance suits and securities litigation);
79. Joseph A. Grundfest & Peter H. Huang, Real Options and the Economic Analysis of Litigation: A Preliminary Inquiry, 15, 17 (John M. Olin Program in Law and Economics Working Paper No. 131, 1996) (developing general real options theory of litigation).
80. See James D. Dana, Jr. & Kathryn E. Spier, Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation, 9 J.L. Econ. & Org. 349, 350 (1993) (discussing conflicts between incentives for clients and incentives for attorneys under contingency fee arrangements).
81. See, e.g., John C. Coffee, Jr., The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. Chi. L. Rev. 877, 883 (1987) (discussing agency cost problem in large class actions);
82. Jonathan R. Macey & Geoffrey P. Miller, The Plaintiff Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 41 (1991) (discussing incentive conflicts between representative plaintiffs and plaintiffs' attorneys in class actions).
83. See A. F. Conard, Winnowing Derivative Suits Through Attorney Fees, 47 Law & Contemp. Probs. 269, 281-85 (1984) (discussing incentive conflicts in derivative suits).
84. An alternative way to calculate her expected wealth is to realize that there is a probability of p that she will receive net earnings of $100,000, and there is a complementary probability of (1-p) that she will not get paid, meaning that she will receive net earnings of (-$100,000). Thus, her expected total wealth from undertaking this lawsuit is just the probability-weighted sum of her possible earnings, which is $100,000p + (1-p)(-$100,000). This expression simplifies to $200,000p-$100,000.
85. It might seem that a socially desirable policy would look to streamline the legal system by discouraging lawsuits in which the plaintiff initially has a low probability of winning at trial. However, a low initial probability of the plaintiff winning at trial does not necessarily mean that the case is meritless. The plaintiff may uncover favorable information through discovery, for example. Additionally, the socially optimal amount of public interest litigation should take into account the effects of possible lawsuits on the incentives of potential defendants to engage in activities that generate harm or injury. For a model of these and other considerations in private litigation, see generally Steven Shavell, The Fundamental Divergence Between the Private and Social Motive to Use the Legal System, 26 J. Legal. Stud. 575 (1997).
86. See Fed. R. Civ. P. 55(d).
87. See Model Rules of Professional Conduct Rule 1.180(j) (1997) (stating that plaintiff's attorney "shall not acquire proprietary interest in the cause of action except for a reasonable contingent fee contract").
88. See Charles W. Wolfram, The Second Set of Players: Lawyers, Fee Shifting, and the Limits of Professional Discipline, 47 Law & Contemp. Probs. 293, 296-97 (1984) ("Scholars who study the legal profession have been reporting for some time that lawyers regularly depart from the professional model of client control and make critical decisions on their own in . . . civil representations.").
89. Id. at 295-96. The balance between attorney and plaintiff ownership of lawsuits is further complicated by the method of payment: Concern for reputation aside, if the attorney were paid either a fixed fee or an hourly fee, then she would have little financial incentive to reveal to her client that the case had a low expected return. Instead, she might lead the plaintiff blindly into litigation regardless of the case's merit. When the attorney is paid a contingent fee, however, then she will act in her clients' interest and pursue only those cases with a sufficiently high expected return. Dana & Spier, supra note 49, at 350.
90. Wolfram, supra note 56, at 297. In addition, plaintiffs' attorneys have the option to withdraw from representing the plaintiff, although the exercise of this option requires court approval. See Model Code of Professional Responsibility DR 2-110 (1980); Model Rules of Professional Conduct Rule 1.16 (1997). Withdrawal is "something that is granted in the great majority of cases but that occasionally may be denied, especially if opposed by the client, or else granted with an unwelcome public tongue-lashing. Moreover, the attorney may want to avoid getting a reputation as someone who abandons clients in midcase." Geoffrey P. Miller, Some Agency Problems in Settlement, 16 J. Legal Stud. 189, 212 (1987).
91. There are well-known "framing effects" that cognitive psychologists have discovered in human decisionmaking. See, e.g., Beth E. Meyerowitz & Shelly Chaiken, The Effect of Message Framing on Breast Self-Examination: Attitudes, Intentions, and Behavior, 52 J. Personality & Soc. Psychol. 500, 505-07 (1987) (finding in study of breast self-examinations that pamphlets describing positive effects of self-examinations are ineffective, while pamphlets stressing negative effects of failing to undertake self-examinations lead to behavioral change).
92. For two recent applications of framing effects to the law, see generally Mark Kelman et al., Context-Dependence in Legal Decision Making, 25 J. Legal Stud. 287 (1996) (presenting experimental evidence of context dependence in legal judgments);
93. Edward J. McCaffery et al., Framing the Jury: Cognitive Perspectives on Pain and Suffering Awards, 81 Va. L. Rev. 1341 (1995) (finding gain versus loss framing has large impact on size of nonpecuniary damage awards).
94. See, e.g., Lynk, supra note 10, at 187 (contrasting percentage-of-recovery agreements often made between plaintiffs and attorneys with lodestar formula ordinarily used by courts in awarding attorney's fees); William J. Lynk, The Courts and the Market: An Economic Analysis of Contingent Fees in Class-Action Litigation, 19 J. Legal Stud. 247, 256-59 (1990) (summarizing calculation of federal class action fee awards).
95. See supra Part II.B (analyzing litigation as series of discrete stages).
96. See supra note 10 and accompanying text. A similar damage multiplier that offsets the probability of nonenforcement has a long history. For various reasons why the damage multiplier should not be simply the reciprocal of the probability of enforcement, see John E. Calfee & Richard Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 Va. L. Rev. 965, 994-97 (1984) (arguing that strict relationship oversimplifies calculation);
97. Richard Craswell, Damage Multipliers in Market Relationships, 25 J. Legal Stud. 463, 465-66, 468, 473 (1996) (arguing that other factors, such as risk aversion of defendant, need to be considered);
98. Richard Craswell & John E. Calfee, Deterrence and Uncertain Legal Standards, 2 J.L. Econ. & Org. 279, 292-97 (1986) (showing that multiplier may be inappropriate even when enforcement costs are fixed or absent);
99. Richard Craswell, When is a Willful Breach 'Willful'? General vs. Specific Deterrence in Contract Remedies 53-55 (May 11, 1996) (unpublished manuscript on file with New York University Law Review).
100. See supra Part II.B.
101. See supra Part II.B.
102. For further analysis of economic approaches to settlement, see Andrew F. Daughety, Settlement, in Encyclopedia of Law and Economics (B. Bouckaert & G. DeGeest eds., forthcoming 1998) (surveying asymmetric information game-theoretic models of pretrial settlement);
103. Geoffrey P. Miller, Settlement of Litigation: A Critical Retrospective, in Reforming the Civil Justice System 13, 14-19 (Larry Kramer ed., 1996) (reviewing law and economics literature on settlement and litigation in general).
104. Two main arguments have been made against settlement. The first is based on concerns that justice requires the process of a public trial. See Albert W. Alschuler, Mediation with a Mugger: The Shortage of Adjudicative Services and the Need for a Two-Tier Trial System in Civil Cases, 99 Harv. L. Rev. 1808, 1820 (1986) (arguing that "Americans currently settle many of their disputes for the wrong reasons");
105. Jules Coleman & Charles Silver, Justice in Settlements, Soc. Phil. & Pol'y 102, 106-08 (1986) (arguing that settlements are undesirable because they may strain justice in our society);
106. Owen M. Fiss, Against Settlement, 93 Yale L.J. 1073, 1075 (1984) (arguing that settlement is "a highly problematic technique for streamlining dockets").
107. The second set of arguments is based on economic concerns over judicial precedents being public goods, see Richard A. Posner, The Federal Courts: Crisis and Reform 10 (1985) (arguing that judicial precedents have significant external benefits as public goods),
108. and efficiency concerns about the under-enforcement of laws, see Louis Kaplow, The Value of Accuracy in Adjudication: An Economic Analysis, 23 J. Legal Stud. 307, 323 (1994) (arguing that socially optimal system of regulation must internalize process of enforcement itself);
109. A. Mitchell Polinsky & Daniel L. Rubinfeld, The Deterrent Effects of Settlements and Trials, 8 Int'l Rev. L. & Econ. 109, 110 (1988) (suggesting disparate effects of trials and settlements on deterrence).
110. For a discussion of both the justice based and economic critiques of settlement, see generally Miller, supra note 65, at 21-25. In addition, there are process concerns about settlement. See Frank Michelman, Law's Republic, 97 Yale L.J. 1493 (1988) (arguing that settlement prevents civic engagement and formation of community relationships);
111. Judith Resnik et al., Individuals within the Aggregate: Relationships, Representation, and Fees, 71 N.Y.U. L. Rev. 296, 320 (1996) (expressing concerns about preventing victims and accused from publicly telling their respective stories);
112. Eric Talley, Liability-Based Fee-Shifting Rules and Settlement Mechanisms Under Incomplete Information, 71 Chi.-Kent L. Rev. 461, 498 (1995) (arguing that "process" concerns make normative value of settlement questionable). All of these concerns apply to civil rights litigation, and indeed may be more important for civil rights than for private litigation.
113. See, e.g., 42 U.S.C. § 1988 (1994).
114. See Evans v. Jeff D., 475 U.S. 717, 742-43 (1986) (holding that "District Court did not abuse its discretion in upholding a fee waiver"); Moore v. National Ass'n of Sec. Dealers, 762 F.2d 1093, 1110 (D.C. Cir. 1985) (emphasizing voluntariness as prerequisite to fee waivers); Cynthia M. Culton, Comment, Voluntary Fee Waivers During Simultaneous Negotiation of Merits and Attorney's Fees in Title VII Class Actions: Moore v. National Association of Securities Dealers, Inc., 7 U. Bridgeport L. Rev. 361, 370 (1986) (discussing policies of and problems created by fee waiver opinion in Moore).
115. 473 U.S. 1 (1985).
116. Fed. R. Civ. P. 68.
117. See Marek, 473 U.S. at 10-11; Jean R. Sternlight, The Supreme Court's Denial of Reasonable Attorney's Fees to Prevailing Civil Rights Plaintiffs, 17 N.Y.U. Rev. L. & Soc. Change 535, 566-68 (1989-1990) (discussing Marek);
118. see also David A. Anderson, Improving Settlement Devices: Rule 68 and Beyond, 23 J. Legal Stud. 225, 229 (1994) (analyzing bargaining game under Rule 68);
119. Tai-Yeong Chung, Settlement of Litigation Under Rule 68: An Economic Analysis, 25 J. Legal Stud. 261, 265, 279-80 (1996) (analyzing incentives under Rule 68);
120. Geoffrey P. Miller, An Economic Analysis of Rule 68, 15 J. Legal Stud. 93, 121-23 (1986) (discussing distributional and settlement effects of combining Rule 68 with fee-shifting statutes);
121. Kathryn E. Spier, Pretrial Bargaining and the Design of Fee-Shifting Rules, 25 Rand J. Econ. 197, 200-02 (1994) (same).
122. The effects of fee-shifting and settlement rules on the attorney-client relationship are well documented. See, e.g., John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Colum. L. Rev. 669, 691, 717-19 (1986) (explaining how lodestar formula precipitates collusion between defendants and plaintiffs' attorneys because it decouples settlement figure and fee award); Grundfest & Huang, supra note 48, at 15, 17 (noting that settlement option can be decoupled into two separate options, an option based on merits and another based on litigation costs). Attorney's fee awards based on the lodestar figure mean that plaintiffs' attorneys share their clients' downside risk, but not their potential for upside gain of recovery from trial. See Coffee, supra, at 717-18. This option creates an incentive for plaintiffs' attorneys to accept settlements that plaintiffs would not accept themselves. For an analysis of the effects on settlement of alternative fee arrangements and allocations of settlement power between plaintiffs and plaintiffs' attorneys, see Miller, supra note 58, at 204-15.
123. See supra notes 56-59 and accompanying text (discussing decision whether to go to trial in situations where plaintiffs' attorneys control that decision de facto).
124. For an analysis of the situation in which the plaintiff is actually in control of the decision to settle, see Grundfest & Huang, supra note 48, at 17 (developing general real options model of litigation). Note that, in most cases, neither the plaintiff nor the plaintiff's attorney completely controls the settlement decision.
125. Model Rules of Professional Conduct Rule 1.2(a) (1997).
126. Wolfram, supra note 56, at 297.
127. Additionally, there is always the possibility of unethical plaintiffs' attorneys who fail to inform plaintiffs of defendants' settlement offers. Such unscrupulous conduct is hard for defendants' attorneys to detect because of the requirement that defendants' attorneys can only communicate with the plaintiff via the plaintiffs' attorneys. See Model Code of Professional Responsibility DR 7-104 (1980); Model Rules of Professional Conduct Rule 4.2 (1997).
128. See Prandini v. National Tea Co., 557 F.2d 1015, 1021 (3d Cir. 1977) ("Only after court approval of the damage settlement should discussion and negotiation of appropriate compensation for the attorneys begin.").
129. See, e.g., Folsom v. Butte County Ass'n of Gov'ts, 652 P.2d 437, 446 (Cal. 1982) (rejecting bifurcation of fee and settlement discussions).
130. See Fed. R. Civ. P. 12(b). Generally, modern liberal rules of pleading are designed to allow the survival of a fairly broad class of claims.
131. (M-1)L > 0 because M > 1 as long as the initial probability the plaintiff would prevail was less than one.
132. Under Fed. R. Civ. P. 26(b)(1), the scope of discovery is quite broad and includes information not admissible at trial, so long as the information requested "appears reasonably calculated to lead to the discovery of admissible evidence." Id.
133. Fed. R. Civ. P. 26(b)(2)(iii) limits discovery to requests whereby compliance does not impose a burden that is likely to outweigh the benefits, while Fed. R. Civ. P. 26(g)(3) allows courts to impose appropriate sanctions for violations.
134. For an in-depth analysis of the discovery game, see generally Robert D. Cooter & Daniel L. Rubinfeld, An Economic Model of Legal Discovery, 23 J. Legal Stud. 435, 438 (1994).
135. See D. Rosenberg & S. Shavell, A Model in Which Suits are Brought for Their Nuisance Value, 5 Int'l Rev. L. & Econ. 3, 4-6 (1985) (explaining nuisance suits where defendant incurs substantial costs before plaintiff incurs any costs).
136. The cost of complying with discovery requests is an example of how the litigation process can mirror the phenomenon known in the economics literature as raising rivals' costs. See, e.g., Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209, 230-31 (1986).
137. See Herbert M. Kritzer, Let's Make a Deal: Understanding the Negotiation Process in Ordinary Litigation 58-59 (1991) (discussing empirical work documenting difficulty in quantifying value of litigation claims).
138. See Davies, supra note 4, at 263 (suggesting need for Congress and federal courts to narrow their focus when considering reforms).
139. See id. at 261 ("Payment of an hourly rate following five to seven years of difficult litigation, and then only if one prevails, is not the equivalent of an hourly rate paid monthly regardless of the litigation outcome.").
140. 738 F.2d 188 (7th Cir. 1984).
141. Id. at 195. Professor Silver agrees, stating that "[f]ees equal to those that lawyers ordinarily receive from paying clients further the goal of enabling parties to secure counsel sufficiently well." Charles Silver, Incoherence and Irrationality in the Law of Attorneys' Fees, 12 Rev. Litig. 301, 310 (1993).
142. See generally Thomas D. Rowe, Jr., The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651, 652 (analyzing rationales for adopting fee shifting system).
143. See Affidavit of Steven M. Shavell at 2-3, In re Burlington Northern, Inc., Employment Practices Litigation, Nos. MDL 374, 78 C 269, 1985 WL 1808 (N.D. Ill. May 31, 1985).
144. See id. at 6.
145. See id.
146. See id. at 9-12.
147. See id. at 11.
148. See supra Part IV.
149. See Affidavit of Shavell at 16-17, In re Burlington (Nos. MDL 374, 78 C 269).
150. See City of Burlington v. Dague, 505 U.S. 557, 562-63 (1992) (relying heavily on this argument).
151. See supra Part III (outlining benefits of encouraging attorneys to take high risk cases).
152. There may be social benefits which exceed the private returns to individual litigants in civil rights litigation. These public goods include the resolution of statutory ambiguity, increased judicial experience, and the symbolic message that justice will prevail, which might deter other future violations. See Kirchoff v. Flynn 786 F.2d 320, 327 (7th Cir. 1986) ("Much civil rights litigation is designed to obtain injunctions or precedents. These may be exceptionally valuable but have no ready monetary equivalent."); see also James D. Kole, Comment, Nonpayment Risk Multipliers: Incentives or Windfalls?, 53 U. Chi. L. Rev. 1074, 1090 (1986) (arguing that fee arrangements can "give no indication of the appropriate fee in cases with primarily injunctive or precedent-creating motivations, which cannot be reduced to monetary terms" (citing Kirchoff, 786 F.2d at 328)).
153. See Dague, 505 U.S. at 563 (noting this perverse incentive effect); Affidavit of Shavell at 18, In re Burlington (Nos. MDL 374, 78 C 269).
154. One possibility is to compute traditional multipliers where the relevant probabilities are not particular to a given case, but instead are relevant to a general class of cases. This is the market approach to risk multipliers Justice O'Connor proposed in Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 483 U.S. 711, 731 (1987) (O'Connor, J., concurring); see also Leubsdorf, supra note 15, at 501-10 (arguing for "across-the-board" approach to risk multipliers). However, the question then becomes what the relevant set of cases should be: 1) all cases; 2) that particular attorney's historical portfolio of cases; 3) a broad category of cases (for example, civil rights cases); or 4) a more restricted classification of cases (for example, cases involving employment discrimination). In addition, if the multiplier is not based on the particular case in question, it will lead to overcompensation for all of the inframarginal cases, which involve probabilities of the plaintiff winning that exceed the threshold cutoff level.
155. See Affidavit of Shavell at 17-19, In re Burlington (Nos. MDL 374, 78 C 269).
156. It is unclear whether the objective is or should be to attract into civil rights litigation lawyers of any quality, lawyers of quality comparable to those involved in other areas of litigation, or only the "cream of the crop." See Charles Silver, Unloading the Lodestar: Toward a New Fee Award Procedure, 70 Tex. L. Rev. 865, 931 (1992) ("The law will continue to be a jumble unless and until the term 'competent counsel' is authoritatively defined.").
157. See supra Part I (discussing Court's treatment of risk multiplier).
158. See Davies, supra note 4, at 228-29 (relating one attorney's belief that Dague will have a "chilling effect on the practice of civil rights law" and will deter " 'cutting edge' cases and, thus, slow development of the law" (discussing City of Burlington v. Dague, 505 U.S. 557 (1992))); Sternlight, supra note 71, at 584 ("[F]rom the perspective of the plaintiffs' civil rights attorneys, the lodestar is both insufficient and unobtainable.").
159. See Affidavit of Shavell at 18-19, In re Burlington (Nos. MDL 374, 78 C 269). This is because, for example, the multiplier for cases with a value of p=1/2 is two, while the multiplier for cases with a value of p=99/100 is only 100/99, which is barely more than one and substantially less than two.
160. See Silver, supra note 106, at 874.
161. See Steven Shavell, A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?, 71 Am. Econ. Rev. 414 (1981). The traditional law and economics approach indicates that using taxes to redistribute income is less costly than using legal rules that shift wealth from the rich to the poor. This is because the former only distorts work incentives, while the latter also distorts the incentives to engage in activities which may lead to being sued.
162. See Davies, supra note 4, at 251 ("The plaintiffs' attorneys interviewed repeatedly noted that their economic survival demands high selectivity and careful investigation before undertaking representation of a client.").
163. See id. at 251-52 ("Employment lawyers, for example, volunteered the following motivations: commitment to bringing about positive organizational change, a belief that employment litigation is necessary to make organizations deal with the problems, and commitment to help people without power who are hurt by those with power." (citations omitted)). Davies also noted that "[a] prison conditions attorney said that despite small salaries, the attorneys in her office stay because they are committed to the type of work they do." Id. at 252 (citation omitted). For formal models of the implications of anger for the incentives of litigation participants to sue, settle, or go to trial, see Peter H. Huang & Ho-Mou Wu, Emotional Responses in Litigation, 12 Int'l Rev. L. & Econ. 31, 32 (1992) (demonstrating that plaintiffs may sue more and settle less when emotions are motivating factors).
164. See Davies, supra note 4, at 251-52. For formal models of effects of shame and guilt on corruption and professional ethics, see generally Peter H. Huang & Ho-Mou Wu, More Order Without More Law: A Theory of Social Norms and Organizational Cultures, 10 J.L. Econ. & Org. 390 (1994).
165. Margaret Jane Radin, Contested Commodities 104-05 (1996) (arguing that commodified and noncommodified exchanges pervade our market society and most individuals experience work as partially defining their identities).
166. Observe that the level of plaintiff's recovery does not appear in this analysis and may even be nonmonetary in nature if the plaintiff is, for example, seeking injunctive relief instead of damages.
167. As Professor Donohue pointed out, "attorneys do not have an opinion about the probability of success of a client's case from the minute the client walks in the door. Research, fact-finding, and lengthy discovery are all prerequisites to the formulation of an opinion." John J. Donohue, III, The Effects of Fee Shifting on the Settlement Rate: Theoretical Observations on Costs, Conflicts, and Contingency Fees, 54 Law & Contemp. Probs. 195, 217 (1991).
168. Revised expected net wealth = p[(M-1)L]+(1-p)(-D) = pML-pL-D+pD = pML-p(D+T)-D+pD = pML-pT-D.
169. REW = p(M-1)T+(pM-1)D = pMT-pT+pMD-D = pM(D+T)-pT-D = pML-pT-D-T+T = pML-pT-L+T = pML-L-pT+T = EW+(1-p)T.
170. Using an equivalent expression for REW, this means solving for p when p(M-1)L = (1-p)D, or pD+p(M-1)L = D, or p[D+(M-1)L] = D, or p[D+(M-1)D+(M-1)T] = D, or p[MD+(M-1)T] = D, or p(MD+MT-T) = D, or p(ML-T) = D.
171. Notice that p** > 0 because D > 0 and (ML-T) > 0, which is true because ML = MD + MT > MT > T as M > 1 and D > 0. Also, notice that p** < 1 because D < ML-T, or equivalently, D+T < ML = MD+MT = M(D+T) because M > 1. Thus, p** is a bona fide probability that resides in the open interval (0, 1).
172. M > 1 means that M-1 > 0, and T > 0 means that (M-1)T > 0, or MT-T > 0, or MD+MT-T > MD, or ML-T > MD, or 1/M > D/(ML-T), or p* > p**.
173. See supra Figure 1 for a depiction of this result.
174. 2 < 0.
175. 2 = > 0 as M > 1.
176. 2 < 0 as M > 1.
177. M** > 1 is equivalent to (D+pT) > pL = pD+pT, or D > pD, or 1 > p.
178. p < 1 means that (D+pT) < D+T, or (D+pT) < L, or (D+pT)/L < 1, or(D+pT)/pL < 1/ p, or M** < M*.
179. See supra notes 19-36 and accompanying text.
180. 2) < 0.
181. 2 > 0 as p < 1.
182. 2 < 0 as p < 1.