Toward procedural optionality: Private ordering of public adjudication

New York University Law Review

Volumn 84, Issue 2, 2009, Pages 514-571

  Rhee, Robert J ^a  

^a UNIVERSITY OF MARYLAND SCHOOL OF LAW   (United States)

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EID: 67949084993     PISSN: 00287881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (251)

1. See H.L.A. HART, THE CONCEPT OF LAW 82 (2d ed. 1994) ("[W]here there is law, there human conduct is made in some sense non-optional or obligatory.").
2. A procedural rule is inalienable in the sense that the obligation is not subject to rearrangement by the parties. See Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972) ("An entitlement is inalienable to the extent that its transfer is not permitted between a willing buyer and a willing seller.").
3. See supra note 1.
4. Calabresi & Melamed, supra note 2, at 1092;
5. see also IAN AYRES, OPTIONAL LAW: THE STRUCTURE OF LEGAL ENTITLEMENTS 3-6 (2005) (arguing that substantive entitlements can be analyzed through prism of option theory). Option theory originally arose from the field of financial economics, which developed theories for valuing financial options such as call and put options.
6. See generally RICHARD A. BREALEY ET AL., PRINCIPLES OF CORPORATE FINANCE 538-620 (8th ed. 2006) (introducing option theory).
7. Most disputes never reach the courthouse because most parties privately agree on the price of the dispute and reach a settlement. See ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES 1 (1991) ("A principal finding is that ... neighbors apply informal norms, rather than formal legal rules, to resolve most of the issues that arise among them.");
8. H. LAURENCE ROSS, SETTLED OUT OF COURT: THE SOCIAL PROCESS OF INSURANCE CLAIMS ADJUSTMENTS 141 (1970) (noting that ninety-five percent of bodily injury claims against insured automobile drivers are settled by negotiation). Even when lawsuits are filed, most cases still settle prior to the final disposition of the matter by the court.
9. See, e.g., Gillian K. Hadfield, Where Have All the Trials Gone? Settlements, Nontrial Adjudications, and Statistical Artifacts in the Changing Disposition of Federal Civil Cases, 1 J. EMPIRICAL LEGAL STUD. 705, 730 tbl.7 (2004) (finding that settlement rate of contested federal civil cases is approximately sixty-nine percent as of year 2000).
10. Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 YALE L.J. 950, 968 (1979).
11. See, e.g., ELLICKSON, supra note 5, at 65-81 (observing that neighbors often ignore fence laws and apply informal norms that contradict legal prescriptions).
12. R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).
13. See id. at 15 (arguing that assuming no transaction costs, legal rights will be rearranged through market whenever it would increase value).
14. See Steven Shavell, The Fundamental Divergence Between the Private and the Social Motive To Use the Legal System, 26 J. LEGAL STUD. 575, 577 (1997) (arguing that level of litigation is not socially correct because there is divergence between private incentives and social interest).
15. As used in this Article, "to bond" means to secure an obligation by making some form of additional, up-front payment. See BLACK'S LAW DICTIONARY 193 (8th ed. 2004) (defining verb "bond" as "[t]o secure payment by providing a bond"). For example, economists explain the act of purchasing stock as stockholders bonding their contractual obligation to bear the specialized risk of the enterprise by putting up the capital needed to purchase assets.
16. MICHAEL C JENSEN, A THEORY OF THE FIRM 141 (2000).
17. It is acknowledged that courts have defined the standards of proof and attorney fee rules as matters of substantive law. See, e.g., Marek v. Chesny, 473 U.S. 1, 35 (1985) (Brennan, J., dissenting) ("The right to attorney's fees is 'substantive' under any reasonable definition of that term."); Haberman v. Hartford Ins. Group, 443 F.3d 1257, 1264 (10th Cir. 2006) (noting that for purposes of diversity jurisdiction, substantive law of forum state governs standard of proof). This Article classifies these rules as procedural because they relate to public adjudication but are essentially unrelated to the underlying entitlement giving rise to the dispute. This term is adopted for simplicity and clarity, and this Article's argument neither depends on nor intends to provoke a general rethinking of the substance-procedure dichotomy.
18. See generally Jack B. Jacobs, The Vanishing SubstanceProcedure Distinction in Contemporary Corporate Litigation: An Essay, 41 SUFFOLK U. L. REV. 1 (2007) (providing overview of protean nature of substantive and procedural divide in context of corporate law).
19. Additionally, even in arbitration, courts sometimes prohibit the contractual rearrangement of certain entitlements. See, e.g., DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459, 462-63 (S.D.N.Y. 1997) (holding that arbitrator manifestly disregarded law by refusing to award prevailing plaintiff attorney fee under Title VII); Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 682 (Cal. 2000) (holding that arbitration agreement cannot limit statutory remedies such as right to punitive damages and attorney fees).
20. For example, we do not see a line of employment cases in which the employees have agreed to a higher standard of proof in public adjudication as a condition of the employment contract.
21. See generally Thomas D. Rowe, Jr., The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 DUKE L.J. 651 (exploring rationales and implications of fee-shifting rules). In addition to these major rules, there is one-way fee shifting, which allows an identified class of disputants, typically plaintiffs, attorney fees upon prevailing.
22. See id. at 662-65 (explaining policies of one-way fee rule);
23. see also, e.g., 12 U.S.C. §4246 (2006) ("When the United States, through private counsel retained under this subchapter, prevails in any civil action, the court, in its discretion, may allow the United States reasonable attorney's fees and other expenses of litigation as part of the costs."); 29 U.S.C. §216 (b) (2006) ("The court in such action shall... allow a reasonable attorney's fee to be paid by the defendant, and costs of the action."); Serrano v. Priest, 569 P.2d 1303, 1315 (CaI. 1977) (upholding award of attorney fees to plaintiffs under equitable doctrine of private attorney general).
24. Rowe, supra note 15, at 651.
25. But see Geoffrey Woodroffe, Loser Pays and Conditional Fees-An English Solution?, 37 WASHBURN L.J. 345, 346 (1998) (noting that smallclaims disputes are primary exception in English legal system to general rule of fee shifting).
26. Rowe, supra note 15, at 651.
27. Id. at 657-58.
28. See Thomas D. Rowe, Jr., American Law Institute Study on Paths to a "Better Way": Litigation, Alternatives, and Accommodations, Background Paper, 1989 DUKE L.J. 824, 888 ("Loser-pays fee shifting does have desirable effects-for example, fuller compensation of winners and deterrence of nuisance claims.").
29. See id. ("[T]he rule may excessively discourage the pressing of plausible but not clearly winning claims, particularly when the prospective plaintiffs are strongly risk averse.");
30. Thomas D. Rowe, Jr., Indemnity or Compensation? The Contract with America, Loser-Pays Attorney Fee Shifting, and a One-Way Alternative, 37 WASHBURN L.J. 317, 330 (1998) (positing that English rule may deter risk-averse claimants from filing meritorious actions).
31. The American rule, to the extent that it connotes a general American practice, is somewhat misleading. Exceptions to the rule are commonplace. Rowe, supra note 15, at 651 & n.5. There are six primary categories of exceptions: contracts containing fee-shifting provisions, as well as common fund, substantial benefit, contempt, bad faith, and feeshifting statutes and rules of procedure.
32. John F. Vargo, The American Rule on Attorney Fee Allocation: The Injured Person's Access to Justice, 42 AM. U. L. REV. 1567, 1578-90 (1993).
33. See Steven Shavell, Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative Methods for the Allocation of Legal Costs, 11 J. LEGAL STUD. 55, 59-60 (1982) (noting that frequency of suits is greater under American rule when likelihood of success is below "critical level").
34. See Rowe, supra note 19, at 888 (noting that burden of English rule falls heavily on middle class plaintiffs, who, unlike poor litigants, have money to lose and, unlike rich litigants, cannot afford to lose much).
35. See Cruzan v. Dir., Mo. Dep't of Health, 497 U.S. 261, 283 (1990) ("The more stringent the burden of proof a party must bear, the more that party bears the risk of an erroneous decision."). Thus, under the beyond a reasonable doubt standard, the government bears the substantial burden of erroneous decisions because the criminal defendant's interest at stake is so great.
36. Coase, supra note 8, at 2.
37. Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 19 (1991); James v. Horace Mann Ins. Co., 638 S.E.2d 667, 670 (S.C 2006). Many jurisdictions require punitive damages to be established under the heightened standard. Victor E. Schwartz, Mark A. Behrens & Joseph P. Mastrosimone, Reining in Punitive Damages "Run Wild": Proposals for Reform by Courts and Legislatures, 65 BROOK. L. REV. 1003, 1013-14 (1999);
38. see, e.g., OHIO REV. CODE ANN. §2307.80(A) (West 2004) (establishing standard of awarding punitive damages under "clear and convincing evidence" standard in product liability context).
39. See, e.g., Conservatorship of Wendland v. Wendland, 28 P.3d 151, 154 (Cal. 2001) (applying heightened standard to decision to withhold life-sustaining treatment from impaired but conscious person);
40. In re G.M., 596 S.W.2d 846, 846 (Tex. 1980) (applying heightened standard to involuntary parent-child termination proceedings); State v. Addington, 588 S.W.2d 569, 569 (Tex. 1979) (applying heightened standard to mental health commitment proceedings).
41. See infra note 57 and accompanying text.
42. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 37 (1991) (arguing that society can create system of penalties by taxing corporate activity deemed undesirable).
43. Cf. Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. 347, 348 (1967) ("A primary function of property rights is that of guiding incentives to achieve a greater internalization of externalities.").
44. Full internalization does not refer to equivalence in the sense of a market transaction. The suggestion here is that the cost is fully internalized within the limitations of a legal system that compensates injuries, such as lost lives and limbs, with money. See generally Eric A. Posner & Cass R. Sunstein, Dollars and Death, 72 U. CHI. L. REV. 537 (2005) (discussing problem of assigning dollar value for life).
45. Such issues have generated enormous controversy. See generally COST-BENEFIT ANALYSIS: LEGAL, ECONOMIC, AND PHILOSOPHICAL PERSPECTIVES (Matthew D. Adler & Eric A. Posner eds., 2001).
46. Social efficiency must be distinguished from economic efficiency. The concept of social efficiency does not turn on the correctness of a legal rule based on some normative principle but instead refers to the idea that laws should be obeyed and that perfect compliance or enforcement should be the societal goal. Economic efficiency, on the other hand, is defined as the allocation of resources in a way that maximizes value. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 11 (7th ed. 2007). This suggests that laws maximize economic efficiency. See Richard A. Posner, A Theory of Negligence, 1J. LEGAL STUD. 29, 33 (1972) (arguing that function of negligence liability is to achieve cost-efficient level of accidents and safety).
47. In addition, proponents of economic efficiency propose that the law should be violated if it inefficiently allocates resources. See Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target's Management in Response to a Tender Offer, 94 HARV. L. REV. 1161, 1192 (1981) ("If a given act involves a violation of law, penalties may follow. Managers' duty calls for them to minimize the sum of penalty costs and the cost of compliance with the rule.").
48. Cash costs are primarily attorney fees and litigation costs. In many cases, however, these costs are not the largest cost component in the resolution of a case. See Robert J. Rhee, The Effect of Risk on Legal Valuation, 78 U. COLO. L. REV. 193, 198-99 (2007). Valuational discounts given by the parties as a result of the risk profile of the case can be significant. These discounts are not seen as transaction costs because there is no cash expense, unlike attorney fees. Rather, the discount is hidden because it is embedded in the valuation.
49. Id. at 199, 229.
50. A classic study of this problem is Gary Becker's analysis of criminal enforcement and sanctions. See generally Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1968).
51. See Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 417-18 (1973) (showing how prospect of settlement depends on each party's litigation expenses, settlement costs, and perceived expected value of cost of judgment for plaintiff);
52. Alan E. Friedman, Note, An Analysis of Settlement, 22 STAN. L. REV. 67, 80 (1969) (describing parties' bargaining limits as function of expected damage award; probability of award; and litigation, settlement, and opportunity costs). Beyond this basic proposition, there is rich economic and legal literature, too voluminous to cite comprehensively, on bargaining problems.
53. Posner, supra note 35, at 417-18.
54. Id. at 418;
55. see also Evans v. Jeff D., 475 U.S. 717, 734 (1986) ("Most defendants are unlikely to settle unless the cost of the predicted judgment, discounted by its probability, plus the transaction costs of further litigation, are greater than the cost of the settlement package.").
56. See Robert J. Rhee, A Price Theory of Legal Bargaining: An Inquiry into the Selection of Settlement and Litigation Under Uncertainty, 56 EMORY L.J. 619, 631-32 (2006) (discussing conventional law and economics model).
57. Cf. Samuel R. Gross & Kent D. Syverud, Don't Try: Civil Jury Verdicts in a System Geared to Settlement, 44 UCLA L. REV. 1, 62 (1996) ("We have designed a spectacular system for adjudicating disputes, but it is too expensive to use.").
58. To be clear, "low value" is not an absolute concept of some threshold dollar value but rather refers to the ratio of the expected value to transaction costs. For example, a case for injury of $100, 000-a substantial sum-qualifies as a low value case if the expected litigation cost is $90, 000.
59. See Rowe, supra note 19, at 889 (discussing expense "of litigation as barrier to full litigation of small claims).
60. Scholars have noted that many meritorious claims for injuries are not prosecuted. DEBORAH R. HENSLER ET AL., RAND, COMPENSATION FOR ACCIDENTAL INJURIES IN THE UNITED STATES 142 (1991) ("[C]laiming is a statistically unusual behavior: many more injured people decline to claim-or never even consider claiming-than attempt to activate the legal process.");
61. see also TOM BAKER, THE MEDICAL MALPRACTICE MYTH 68-69 (2005) (noting that many meritorious medical malpractice claims go unprosecuted);
62. Marc A. Franklin et al., Accidents, Money, and the Law: A Study of the Economics of Personal Injury Litigation, 61 COLUM. L. REV. 1, 10 (1961) (observing that most claims for injury in New York are never adjudicated in court);
63. Michael J. Saks, Do We Really Know Anything About the Behavior of the Tort Litigation System-and Why Not?, 140 U. PA. L. REV. 1147, 1183 (1992) ("A great many potential plaintiffs are never heard from by the injurers or their insurers."). This empirical fact obviously undermines the notion that a litigation compensation scheme such as tort law is economically efficient.
64. See Robert J. Rhee, Tort Arbitrage, 60 FLA. L. REV. 125, 129-30, 167-69 (2008) (arguing that theory of negligence cannot be economically efficient because of nonprosecution of injuries and undervaluation of plaintiff claims).
65. This is the precise situation in which a corporation commits low value infractions against consumers, which makes individual lawsuits infeasible without fee shifting. Left unprosecuted, the aggregate benefit from such repeated violations can result in great financial gain to the wrongdoer. The result is that rent can be earned from the litigation cost structure, or the wrongdoer can select the level of its liability vis-à-vis society through the political process.
66. See FED. R. CIV. P. 19 (required joinder of parties);
67. FED. R. CIV. P. 20 (permissive joinder of parties);
68. FED. R. CIV. P. 23 (class actions);
69. see also infra note 128 (providing rationale for class actions).
70. As the term is used here, a frivolous suit has three essential elements: (1) The plaintiff knows or should know that the action has no merit; (2) the probability of success is in fact very small; and (3) the plaintiffs motive is to procure a positive settlement value. This is the core of a Rule 11 inquiry. See FED. R. CIV. P. 11(b) (providing that by presenting papers to court, attorney certifies that filing is not presented for improper purposes and is supported by nonfrivolous legal arguments and factual contentions). A frivolous lawsuit can also be brought to harass or annoy a party. Here, the problem of transaction costs may be more peripheral; anyone willing to harass or annoy another at the cost of one's own attorney fees under the American rule may still do so under the English system if the ill will is strong enough.
71. In a world of zero transaction costs, a great many frivolous suits might still be filed because there is always the chance that the court might make a mistake and because the opportunity to litigate would be cost free. But in such a system, the opportunity cost of one's effort provides the minimum cost barrier, which could reduce the number of frivolous suits to near zero if the plaintiff's opportunity costs are greater than the expected value of a mistake by the court.
72. See Lucian Arye Bebchuk, A New Theory Concerning the Credibility and Success of Threats To Sue, 25 J. LEGAL STUD. 1, 2 (1996) (noting that defendant will not agree to settle negative-net-value suits unless plaintiff's threat to litigate is credible). Consider also that insurers often pay a "danger value," a premium in excess of the risk-neutral value, on low probability claims involving death or serious injury. This is not because the insurer is likely to be found liable but because the insurer seeks to avoid the possibility, however slight, of high litigation payouts. Ross, supra note 5, at 199-204.
73. See infra notes 175-78 and accompanying text (discussing problems with overreliance on Rule 11 and similar court-imposed sanctions as means for deterring frivolous suits).
74. See supra notes 29-34 and accompanying text (discussing problems of social cost, compliance, and enforcement).
75. See supra note 15.
76. We can show this algebraically: If P > 1 - P, meaning P > 0.5, then it must be true that P(L + C) - C > PL - T. This inequality reduces to PC > T. Since P > 0.5, PC > T if C = 2T.
77. If P < 1 - P, meaning P < 0.5, then it must be true that P(L + C)-C
78. The plaintiff's calculations are as follows: PL-T=0.4* 100 -20 = 20 (American rule); P(L+ C)-C = 0.4(100 + 40) -40 = 16 (English rule). The defendant's calculations are as follows: PL + T = 0.4 x 100 + 20 = 60 (American rule); P(L + C) = 0.4(100 + 40) = 56 (English rule).
79. Richard L. Schmalbeck & Gary Myers, A Policy Analysis of Fee-Shifting Rules Under the Internal Revenue Code, 1986 DUKE L.J. 970, 977 ("[T]he clear effect of using the English rule ... is to increase each party's stakes by the sum of both parties' litigation costs, not merely by the other party's costs.").
80. See Rhee, supra note 33, at 199 ("Thus, variance is defined as the measure of one's belief about the possible deviations of a judgment from expectation, and it gauges the subjective perception of uncertainty.").
81. Only when the probabilities are in equipoise does the expected value remain the same under the American and the English rules. If P = 1 - P, meaning P = 0.5, the plaintiff's returns are the same: P(L + C)-C = PL - T. The same is true for the defendant's returns: P(L + C)= PL+T.
82. See James W. Hughes & Edward A. Snyder, Litigation and Settlement Under the English and American Rules: Theory and Evidence, 38 J.L. & ECON. 225, 249 (1995) ("The English rule likely reduces the frequency of low-merit claims . .. .");
83. David Rosenberg & Steven Shavell, A Model in Which Suits Are Brought for Their Nuisance Value, 5 INT'L REV. L. & ECON. 3, 5 (1985) ("[U]nder the British system the willingness of the plaintiff to litigate and to file a claim will be less than under the ... American system if the likelihood of prevailing is low.").
84. See Lucian Arye Bebchuk & Howard F. Chang, An Analysis of Fee Shifting Based on the Margin of Victory: On Frivolous Suits, Meritorious Suits, and the Role of Rule 11, 25 J. LEGAL STUD. 371, 372, 374 (1996) (arguing that fee shifting should be based on adjudicated case merit).
85. See, e.g., id. (requiring adjudication and judicial discretion in proposal to shift fees based on case merit). But see infra notes 175-78 and accompanying text (critiquing this aspect of Bebchuck and Chang's proposal).
86. It is of course true that even if a fee rule is made to apply to a certain class of cases regardless of individual case merit within that class, prevailing on the merits is a condition of a fee award.
87. In the context of litigation analysis, risk is defined as the degree of variance from one's expectation of the outcome, and variance is typically measured by one's confidence in one's assessment of the case. Rhee, supra note 33, at 199, 217-19;
88. Rhee, supra note 38, at 679.
89. Robert Cooter, The Cost of Coase, 11 J. LEGAL STUD. 1, 22 (1982);
90. see also George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. LEGAL STUD. 1, 9 (1984) (assuming existence of "true value" of litigation). Probability in legal assessment is not a numeric, objective measure. It is a subjective, logical concept, allowing for differences in "ex ante degrees of rational belief in the plausibility of these decision paths, irrespective of the ex post result.
91. " Rhee, supra note 38, at 653. I do not yet know a lawyer, judge, or scholar who can consistently predict the outcomes of trials, and if a person were to possess such a unique skill, she would certainly not be a lawyer, judge, or scholar for long, as she would have retired long ago to her private island.
92. Rhee, supra note 33, at 215 (emphasis added);
93. see also Rhee, supra note 38, at 665 ("The nature of litigation is stochastic . . . .").
94. See FRANK H. KNIGHT, RISK, UNCERTAINTY AND PROFIT 268-71 (Dover 2006) (1921) (noting that enterprise and markets exist because of uncertainty);
95. see also BREALEY ET AL., supra note 4, at 188-91 (discussing relationship between risk and return);
96. SCOTT E. HARRINGTON & GREGORY R. NIEHAUS, RISK MANAGEMENT AND INSURANCE 171-73 (2d ed. 2004) (discussing why corporations purchase insurance).
97. For instance, diversification, a bedrock principle of financial economics, is preferred because it obeys the rule that "the investor does (or should) consider expected return a desirable thing and variance of return an undesirable thing." Harry Markowitz, Portfolio Selection, 7 J. FIN. 77, 77 (1952).
98. See Rhee, supra note 33, at 237 (discussing relationship of risk and expected value);
99. see also J.B. Heaton, Settlement Pressure, 25 INT'L REV. L. & ECON. 264, 272 (2005) (noting that even if corporations could be presumed risk neutral because they are nonhuman entities, they can still behave in ways that reflect risk aversion).
100. See Rhee, supra note 33, at 229-39 (providing detailed analysis of this trading mechanism between parties).
101. A simple example illustrates this concept. Assume that trial outcome is binary. The plaintiff believes that the outcomes are equally probable {100, 0}, that is, a win of 100 or a loss yielding 0. The expected value is 50. The defendant has a different view of the binary outcomes {25, 75}, that is, a guaranteed loss but of either 25 or 75. The defendant shares the plaintiff's assessment of the expected value of 50. Without considering risk, we expect that the parties would settle at 50. However, if the valuational framework takes risk into account, as is the case in the financial and insurance markets, then the value is adjusted during the settlement process. Clearly, the plaintiff believes the outcomes to be riskier, since there is greater variance in her assessment. To mitigate risk, the parties will implicitly issue put options (or insurance policies) to one another, providing, in essence, side payments in the event that the other party experiences an adverse event. In the defendant's case, he expects to pay out the expected value of 50, but this value is subject to variation of up to 25. The insurance policy thus has a face value of 25. The plaintiff issues the policy and in consideration receives a reciprocal policy of 25 from the defendant. But this policy only reduces the variance of outcomes from {100, 0} to {75, 25}. There is still a residual risk. To mitigate the risk further, the plaintiff must seek additional insurance from the defendant. The defendant will issue an additional policy (that is, agree to settle, thus terminating the exposure to risk) but will do so only for additional consideration. The plaintiff must now give up some expected value for the issuance of additional insurance or a put option by the defendant. Thus, the settlement value may and probably will, in many cases, be less than the expected value. See id. at 233-37 (providing formal model of risk-adjusted litigation valuation).
102. See POSNER, supra note 32, at 618 ("The most hotly debated question about [fee] indemnity is its effect on the litigation rate, with its advocates touting indemnity as the answer to the caseload crisis.").
103. See A. Mitchell Polinsky & Daniel L. Rubinfeld, Does the English Rule Discourage Low-Probability-of-Prevailing Plaintiffs?, 27 J. LEGAL STUD. 141, 143 (1998) ("[T]he English rule causes a greater number of cases to go to trial, and all of these additional cases involve plaintiffs whose probability of prevailing is less than that of plaintiffs who go to trial under the American rule.");
104. Jeffrey J. Rachlinski, Gains, Losses, and the Psychology of Litigation, 70 S. CAL. L. REV. 113, 161 (1996) ("[B]y raising the stakes at trial, the loserpays system makes litigation itself more valuable and can discourage settlement.");
105. Shavell, supra note 22, at 65 ("[T]he likelihood of trial under the British system will be greater than under the American system." (emphasis omitted));
106. cf. POSNER, supra note 32, at 618 (arguing that English rule promotes more trials when party believes it will prevail);
107. Keith N. Hylton, Fee Shifting and Incentives To Comply with the Law, 46 VAND. L. REV. 1069, 1079 (1993) ("[T]he British rule raises the stakes, which makes litigation more attractive to the parties when the plaintiff places a higher estimate on the likelihood of his winning than does the defendant").
108. See Thomas D. Rowe, Jr., Predicting the Effects of Attorney Fee Shifting, 47 LAW & CONTEMP. PROBS. 139, 159 (1984) ("[A]dding the possibility of a fee shift against individual litigants relying on their own resources might well result in a greater tendency to settle claims once pursued than exists under the American rule.").
109. See Schmalbeck & Myers, supra note 53, at 976-77 ("[T]he incentive and disincentive effects of the English rule would seem, a priori, to be in rough equipoise.").
110. This term is borrowed from the financial economic principle that the value of an asset is preserved regardless of the nature of the claims against it (that is, the capital structure of the firm). BREALEY ET AL., supra note 4, at 448. This principle was announced in seminal articles by Franco Modigliani and Merton Miller.
111. See generally Franco Modigliani & Merton H. Miller, The Costs of Capital, Corporation Finance and the Theory of Investment, 48 AM. ECON. REV. 261 (1958);
112. Franco Modigliani & Merton H. Miller, Corporate Income Taxes and the Cost of Capital: A Correction, 53 AM. ECON. REV. 433 (1963). This principle states that, absent bankruptcy costs and interest expense tax shields, the capital structure cannot change the value of a firm's output. Stated differently, reconfiguration of the capital structure cannot augment or diminish the value of the underlying economic activity. This principle is relevant in the litigation context. The rules governing attorney fees do not change the loss value (the underlying liability), the contractual rate of fees, or the amount of the attorney fees expended. The rules simply determine how cost is allocated between the parties.
113. See Price v. Marshall Erdman & Assoes., Inc., 966 F.2d 320, 327 (7th Cir. 1992) (Posner, J.) ("[M]ost people are assumed to be risk-averse in their serious financial affairs . . . .").
114. Rhee, supra note 41, at 181.
115. With regard to empirical evidence, differences in the legal systems and cultural and political mores contribute to the litigation habits of those subject to the American and English rules. Rowe observed that contrary attitudes explain the difference in the rules: "The English seem to begin from an attitude that losers should naturally pay, while Americans tend to want affirmative justifications to support fee shifts." Rowe, supra note 15, at 654 n.13.
116. See supra Part I.A (providing background on fee rules and standards of proof).
117. See infra Part II.D.
118. See, e.g., RESTATEMENT (SECOND) OF TORTS §328A (1965) (setting forth burden of proof in negligence actions).
119. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (finding that summary judgment is warranted when party "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial").
120. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970) (holding that defendant moving for summary judgment must negate nonmoving plaintiffs averment of facts).
121. Clearly, the substantive law can change these risk and burden allocations. For example, burden shifting in tort law is common when policies call for the reallocation of the risk of error. See, e.g., Šindeli v. Abbott Labs., 607 P.2d 924, 937 (CaI. 1980) (shifting burden of proof on factual causation to defendant under theory of market share liability); Haft v. Lone Palm Hotel, 478 P.2d 465, 475 (Cal. 1970) (holding that "the burden of proof on the issue of causation should be shifted to defendants to absolve themselves if they can" when defendants failed to observe statute on swimming pool safety); RESTATEMENT (SECOND) OF TORTS §328D cmt. m (1965) ("In the ordinary case the great majority of the courts now treat res ipsa loquitur as creating nothing more than a permissible inference, which the jury may draw or refuse to draw, unless the facts are so compelling that no reasonable man could reject it.");
122. see also Robert J. Rhee, Probability, Policy and the Problem of Reference Class, 11 INT'L J. EVIDENCE & PROOF 286, 290-91 (2007) (arguing that "systemic error" from interaction of procedural and substantive laws can require "normative correction" in substantive law).
123. This is the reason why substantive laws cannot be subject to election, for it is difficult to imagine how parties could negotiate the terms of rights after the injury had already occurred, when there had not been an initial assignment of the right. However, this does not mean that substantive rules are not subject to ex ante contract analysis. See infra note 170.
124. There are some game theoretic possibilities when a party rejects joint disclosure, but the strategies and outcomes are contextual and not subject to general observation. For example, without knowing the context, it is impossible to deduce how a party would or should construe the opposing party's refusal to enter into a joint disclosure of nonelection. The possibilities are that the
125. Of particular concern is satellite litigation over whether a party should be allowed to change his mind. Cf. George Cochran, The Reality of "A Last Victim" and Abuse of the Sanctioning Power, 37 LOY. L.A. L. REV. 691, 693 (2004) (noting that fee shifting under Rule 11 creates incentives for satellite litigation). Satellite litigation seeking to undo a bad choice is precluded if an election is irreversible as a matter of law.
126. See FED. R. CIV. P. 49(a)-(b) (allowing special and general verdict forms).
127. See supra notes 26-27 (providing examples of use of heightened standard in various contexts).
128. See supra Part I.B.
129. See, e.g., Keel v. Hainline, 331 P.2d 397, 400-01 (Okla. 1958) (holding that defendants who aided or abetted harmful act are liable).
130. Even a two-party litigation could involve issues of res judicata and collateral estoppel if there is a potential party not involved in the litigation.
131. Economists have noted that the transaction costs of negotiating an outcome increase as the number of participants increases. See Demsetz, supra note 30, at 354-55 ("Negotiating costs will be large because it is difficult for many persons to reach a mutually satisfactory agreement, especially when each hold-out has the right to work the land as fast as he pleases.").
132. But see infra note 118 (noting that some scholars hold that egocentric interpretation of facts by parties will cause beliefs to diverge rather than converge).
133. See Posner, supra note 35, at 419 n.29 ("There is empirical evidence that higher stakes do increase the likelihood of litigation.").
134. We can represent this algebraically. For a plaintiff, an election to the heightened standard would result in the following: The value changes from the American rule, as represented by V = PL - T, to a one-way fee shifting scheme of V = P'(L + T)-T, where V is the new net value under the lower probability P' attributable to a heightened standard." A plaintiff would only elect if the new net value is greater than the old net value, such that V' > V. Substituting terms, we get the following inequalities: P'(L + T) - T > PL - T, or equivalently P'T > L(P - P'). This last inequality says that election is expected when the anticipated gain in transaction costs P'T is greater than the reduction in expected value L(P- P').
135. See Rhee, supra note 38, at 653-61 (providing example and analysis of how weight of, variance of, and confidence in one's probability assessment can influence party's choice and strategy).
136. See Priest & Klein, supra note 61, at 16-19 (providing model showing that probability and variance are important to each party's expectation of outcome and case value).
137. See Rhee, supra note 38, at 635 n.67 (providing numeric example of Priest and Klein's concept).
138. See supra notes 92-96 and accompanying text.
139. Some of the most important economic concepts of the past thirty years have been information dispersion and uncertainty. Interview with Prof. Kenneth Arrow, Stanford University, in Three Nobel Laureates on the State of Economics, CHALLENGE, Jan.-Feb. 2000, at 6, 13, 19-20.
140. See supra note 61. Too often, scholars, policymakers, and judges apply a hindsight bias to difficult decisions when they have no stake in the value, cost, and risk. "Once the outcomes are observed, it usually is easy to say what would have been the best decision."
141. HARRINGTON & NIEHAUS, supra note 63, at 35. Likewise, in a casino or the capital markets, it is easy to assess strategies of value, cost, and risk when there is nothing at stake other than one's own mental accounting of what one would have done.
142. See Rhee, supra note 38, at 653-61 (discussing interplay of parties' confidence regarding projections and settlement decisions),
143. KNIGHT, supra note 63, at 233-34.
144. This condition would represent a state of perfect information, that is, a state of perfect knowledge by all exchangers of products. Id. at 86. "If intercommunication is actually perfect, exchanges can take place at only one price."
145. Id. at 82.
146. "It can never be assumed that parties should try to accurately predict the decision of the deliberative body because this assumes a level of predictive power beyond the credible allowance of a rational person." Rhee, supra note 38, at 664;
147. see also supra note 61 (discussing rational expectation model).
148. FED. R. CIV. P. 9(b), 23.1(b)(3).
149. FED. R. CIV. P. 8(a), (b)(3), (b)(5).
150. FED. R. CIV. P. 8(a)(2), (b)(1)(A).
151. FED. R. CIV. P. 8(d)(3).
152. FED. R. CIV. P. 11(b).
153. See generally Charles M. Yablon, The Good, the Bad, and the Frivolous Case: An Essay on Probability and Rule 11, 44 UCLA L. REV. 65 (1996) (arguing that frivolous cases under Rule 11 are not necessarily meritless, but instead are generally believed by plaintiffs ex ante to be reasonable "long shots" with low, but not zero, probability of success).
154. See Rhee, supra note 38, at 676-78 (showing effects of progress of litigation on parties' level of uncertainty).
155. See id. at 676 & n.246, 677 (showing that with limiting assumptions, valuational impact of new information is subject to declining marginal utility curve).
156. For example, the parties anticipate deposing a witness whose proposed testimony is unknown to the parties. This unknown factor cannot affect probability because the parties cannot assign it a value. Id. at 654.
157. Id. at 664-66.
158. See Priest & Klein, supra note 61, at 17 ("In litigation, as in gambling, agreement over the outcome leads parties to drop out.").
159. See Rhee, supra note 33, at 240 ("Confidence is intimately linked to the perception of risk.");
160. Rhee, supra note 38, at 653-55 (explaining that confidence and risk are correlated in that low risk results in higher confidence in one's expectation).
161. See JENSEN, supra note 11, at 5 ("[P]eople will not act in the interest of others (their principals or partners) to the exclusion of their own preferences.").
162. See id. (noting that rational self-interest is frequently misinterpreted to mean pathological selfishness with no leeway in preference for well-being of others).
163. See infra Part III.B (providing more analysis of impact of election scheme on high probability, low value suits).
164. See George Loewenstein & Don A. Moore, When Ignorance Is Bliss: Information Exchange and Inefficiency in Bargaining, 33 J. LEGAL STUD. 37, 37 (2004) ("[S]hared information, if open to multiple interpretations, is likely to be interpreted egocentrically by the disputants, which can cause beliefs to diverge rather than converge.").
165. See supra Part II.C.
166. The problem of deterring frivolous lawsuits is much discussed in the literature. See generally Robert G. Bone, Modeling Frivolous Suits, 145 U. PA. L. REV. 519 (1997) (proposing model of sanctioning frivolous litigation);
167. A. Mitchell Polinsky & Daniel L. Rubinfeld, Sanctioning Frivolous Suits: An Economic Analysis, 82 GEO. L.J. 397 (1993) (same).
168. See Valerie P. Hans & William S. Lofquist, Jurors' Judgments of Business Liability in Tort Cases: Implications for the Litigation Explosion Debate, 26 LAW & SOC'Y REV. 85, 96 (1992) (noting that research revealed "the widespread impression among jurors that the civil litigation system is overburdened by claimants seeking awards in meritless cases").
169. But see Deborah L. Rhode, Frivolous Litigation and Civil Justice Reform: Miscasting the Problem, Recasting the Solution, 54 DUKE L.J. 447, 459 (2004) ("Although excessive litigation is the pathology dominating public discussion and policy agendas, systematic research reveals that the more serious problems are undercompensation of victims and overcompensation of lawyers.").
170. See generally Neal H. Klausner, Note, The Dynamics of Rule 11: Preventing Frivolous Litigation by Demanding Professional Responsibility, 61 N.Y.U. L. REV. 300 (1986) (arguing that greater professional standards should mitigate frivolity).
171. See Bebchuk & Chang, supra note 57, at 371-72 (proposing that courts should have power to shift fees based on adjudicated "margin of victory");
172. Nathalie D. Martin, Fee Shifting in Bankruptcy: Deterring Frivolous, Fraud-Based Objections to Discharge, 76 N.C L. REV. 97, 103 (1997) (proposing that bankruptcy courts should have power to impose fees for improper objection to discharge).
173. Cf. FED. R. CIV. P. 11(b) (stating that by presenting pleading to court, attorney or unrepresented party is certifying that "the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery" (emphasis added)).
174. See, e.g., Chambers v. NASCO, Inc., 501 U.S. 32, 33 (1991) (expressing concern over "extensive and needless satellite litigation" in Rule 11 inquiry); Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 408 (1990) ("Moreover, including appellate attorney's fees in a Rule 11 sanction might have the undesirable effect of encouraging additional satellite litigation.").
175. This is an outcome that resonates with most scholars, judges, and policymakers. See Gross & Syverud, supra note 39, at 3 (noting American judicial system's premise that "[t]rial is a disease, not generally fatal, but serious enough to be avoided at any reasonable cost").
176. The scheme advanced here is not effective if the penalty has no deterrent effect. A judgment-proof frivolous plaintiff is problematic in the abstract. In reality, however, it is an open empirical question as to how much frivolous litigation actually is brought by such plaintiffs. The judgment-proof plaintiff conjures up the image of assetless, opportunistic, and perhaps desperate people whose subsistence is to feed off the litigation system and innocent (typically corporate) victims. For this author, this stereotype, perhaps engen dered by ideology and politics, seems cartoonish and does not rise to the quality of a general observation of the litigation system. Ordinary people do not like litigation; they have some assets and garnishable wages; and they are risk averse. These are the realistic aspects of our world, and reality disposes of the vast majority of the small minority of cases in which the cartoon in fact does come to life.
177. see Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) ("The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights." (quoting Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997))).
178. See FED. R. CIV. P. 23 (outlining numerous legal hurdles to clear in order to certify class actions).
179. See, e.g., In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298-1300 (7th Cir. 1995) (Posner, J.) (analyzing pricing pressures in class actions);
180. Rhee, supra note 41, at 150-54 (same).
181. See generally Richard A. Nagareda, Aggregation and Its Discontents: Class Settlement Pressure, Class-Wide Arbitration, and CAFA, 106 COLUM. L. REV. 1872 (2006) (discussing class settlement pressure).
182. See, e.g., Rhode, supra note 121, at 459 (noting problem of lawyer overcompensation). More generally, contingent fees have been criticized.
183. See generally Bruce L. Hay, The Theory of Fee Regulation in Class Action Settlements, 46 AM. U. L. REV. 1429 (1997) (analyzing principal-agent problem in class action settlements);
184. Task Force on Contingent Fees, Tort Trial and Insurance Practice Section of the American Bar Association, Report on Contingent Fees in Class Action Litigation, 25 REV. LITIG. 459 (2006).
185. See also JENSEN, supra note 11, at 85-87 (discussing economic theory of agency cost);
186. cf. Bruce L. Hay, Contingent Fees and Agency Costs, 25 J. LEGAL STUD. 503, 504-05 (1996) (applying agent-principal model to analyze proper fee levels).
187. See, e.g., Ortiz v. Fibreboard Corp., 527 U.S. 815, 864 (1999) (denying class certification based on failure to satisfy Rule 23(b)(1)(B) under theory of limited funds); Amchem, 521 U.S. at 628 (holding that requirement of commonality of issues of fact and law and adequacy of representation were not met in settlement-only class certification).
188. See, e.g., Theodore Eisenberg & Geoffrey Miller, The Role of Opt-Outs and Objectors in Class Action Litigation: Theoretical and Empirical Issues, 57 VAND. L. REV. 1529, 1532 (2004) (presenting empirical findings showing that "on average, less than 1 percent of class members opt-out").
189. See generally RESTATEMENT (THIRD) OF TORTS: LIABILITY FOR PHYSICAL HARMS §3 (Proposed Final Draft No. 1, 2005) (providing definition of negligence). 136 Rhee, supra note 41, at 172.
190. See id. at 171-72 (noting that negligence standards, for example, are "difficult to fix or predict," leading to uncertainty).
191. See supra Part III.A. .
192. It should be noted that in special circumstances, when courts hold a certain behavior negligent as a matter of law, even negligence is said to be clear and without controversy. See, e.g., Martin v. Herzog, 126 N.E. 814, 815 (N.Y. 1920) ("We think the unexcused omission of the statutory signals is more than some evidence of negligence. It is negligence in itself.");
193. Theisen v. Milwaukee Auto. Mut. Ins. Co., 118 N.W.2d 140, 144 (Wis. 1963) (holding that falling asleep while driving is negligence per se).
194. See generally John C.P. Goldberg, Twentieth-Century Tort Theory, 91 GEO. L.J. 513 (2003) (discussing various theories of tort law).
195. Cf. Gary T. Schwartz, Mixed Theories of Tort Law: Affirming Both Deterrence and Corrective Justice, 75 TEX. L. REV. 1801,1834 (1997) ("As tort objectives, then, corrective justice and deterrence can be recognized as collaborators rather than competitors.").
196. See generally Rhee, supra note 41, at 170-81 (arguing that negligence persists because it promotes private resolutions of tort disputes);
197. G. Edward White, The Unexpected Persistence of Negligence, 1980-2000, 54 VAND. L. REV. 1337, 1341, 1344 (2001) (observing that negligence has not been replaced with more public scheme of enterprise liability).
198. See Keith N. Hylton, Litigation Costs and the Economic Theory of Tort Law, 46 U. MIAMI L. REV. 111, 114 (1991) ("A tort victim's cost of litigating consumes roughly thirty percent of the average damage award.");
199. see also Rhee, supra note 41, at 164 ("Deductions from compensation are a structural feature of the tort system. The most obvious factor is the American rule of attorney fees. But a less obvious structural feature ... is the riskadjusted discount in settlement value." (footnote omitted)).
200. It has been argued that the decision to settle versus litigate in the tort context does not affect the goal of efficient deterrence. See POSNER, supra note 32, at 48 (arguing that even though most cases settle, this does not affect efficiency of tort law because parties have incentive to collect information and reach "a reasonable settlement").
201. But see Rhee, supra note 41, at 168 ("Tort law is not efficient, as efficiency has been defined by the economic model, because courts are largely irrelevant in the instrumental function of determining value.").
202. Rhee, supra note 41, at 127.
203. Id. at 158-60.
204. Id. at 160.
205. Id. at 167.
206. Britt v. Taylor, 852 So. 2d 1128,1133 (La. Ct. App. 2003) ("Expert testimony is not required to meet the burden of proof in a medical malpractice case involving an obvious careless act from which a lay person can infer negligence, such as . . . amputation of the wrong limb------"); Young v. Key Pharms., Inc., 770 P.2d 182,189 (Wash. 1989) ("Nonexpert testimony is sometimes admissible . . . [w]here the determination of negligence does not require technical medical expertise, such as the negligence of amputating the wrong limb------").
207. See supra note 139.
208. FED. R. CIV. P. 23.1(b)(3) (requiring particularized pleading in shareholder derivative actions).
209. See generally Rhee, supra note 38 (anayzing "the complexities of the selection between settlement and litigation within the framework of economic efficiency").
210. See Rhee, supra note 33, at 226 ("In the absence of market pricing, each lawsuit is a market onto itself, and each party is forced to be a 'market-maker' for the other...[T]he pricing of transactions within this micro-market determines settlement and litigation values.");
211. see also Jonathan T. Molot, A Market in Litigation Risk, 76 U. CHI. L. REV. (forthcoming 2009) (manuscript on file with the New York University Law Review) (arguing that litigation markets could be erected to price suits more efficiently).
212. In the academic and policy debates, the two processes are often portrayed in stark black and white-in terms of good and bad-reflecting the polar nature of these processes. Scholars, judges, and policymakers overwhelmingly prefer private resolution. See, e.g., In re Warner Commc'ns Sec. Litig., 618 F. Supp. 735, 740 (S.D.N.Y. 1985) (observing "the familiar axiom that a bad settlement is almost always better than a good trial"), affd, 798 F.2d 35 (2d Cir. 1986);
213. Gross & Syverud, supra note 39, at 3 ("Trial is a disease, not generally fatal, but serious enough to be avoided at any reasonable cost." (footnote omitted));
214. Russell Korobkin & Chris Guthrie, Psychological Barriers to Litigation Settlement: An Experimental Approach, 93 MICH. L. REV. 107,107-08 (1994) (noting that most commentators believe "trials represent mistakes-breakdowns in the bargaining process-that leave the litigants and society worse off than they would have been had settlement been reached").
215. Indeed, courts actively discourage disputants from opting for public adjudication. See, e.g., Marek v. Chesny, 473 U.S. 1,10 (1985) ("In short, settlements rather than litigation will serve the interests of plaintiffs as well as defendants.");
216. G. Heileman Brewing Co. v. Joseph Oat Corp., 871 F.2d 648, 664 (7th Cir. 1989) ("Settling litigation is valuable, and courts should promote it."). Learned Hand's famous attitude toward litigation reflects the sentiment of many judges: "[A]s a litigant I should dread a lawsuit beyond almost anything short of sickness and death."
217. Learned Hand, The Deficiencies of Trials To Reach the Heart of the Matter, Address Before the Association of the Bar of the City of New York (Nov. 17, 1921), in JAMES N. ROSENBERG ET AL., LECTURES ON LEGAL TOPICS, 1921-1922, at 89,105 (1926).
218. See supra note 41 (noting that many meritorious claims go unprosecuted).
219. The law recognizes forgiveness as a form of private ordering. See, e.g., CAL. EVID. CODE §1160 (West Supp. 2008) (providing evidentiary shields for benevolence and expressions of sympathy);
220. ASS. GEN. LAWS ANN. ch. 233, §23D (West 2000) (same);
221. TEX. CIV. PRAC. & REM. CODE ANN. §18.061 (Vernon 2008) (same).
222. Rhee, supra note 41, at 127;
223. see also id. at 168-69 (arguing that settlement reduces standard of care, as predicted by basic law and economics model of tort law).
224. See, e.g., 29 U.S.C. §1370(e)(1) (2006) (giving courts discretion to award fees to prevailing party);
225. ARIZ. REV. STAT. ANN. §12-341.01(A) (2003) (same).
226. See supra Part LA (discussing widespread imposition of inalienable procedural rules in public adjudication).
227. Cf. Rhee, supra note 38, at 621 n.2 (citing sources regarding preferability of settlement to litigation in court).
228. See Larry Kramer, Consent Decrees and the Rights of Third Parties, 87 MICH. L. REV. 321, 327 (1988) ("Settlement is more efficient for the parties, giving them more of what they hoped to gain at less cost.");
229. David M. Trubek et al., The Costs of Ordinary Litigation, 31 UCLA L. REV. 72,122 (1983) ("[B]argaining and settlement are the prevalent and, for plaintiffs, perhaps the most cost-effective activity that occurs when cases are filed.").
230. See supra note 33.
231. Accordingly, some scholars, swimming upstream perhaps, have criticized the view that settlement is normatively superior to litigation. See Owen M. Fiss, Against Settlement, 93 YALE L.J. 1073,1075 (1984) ("I do not believe that settlement as a generic practice is preferable to judgment or should be institutionalized on a wholesale and indiscriminate basis.");
232. Rhee, supra note 38, at 625 ("The axiomatic belief that settlement is inherently superior is regrettable, for it is far from clear that as a general rule, settlement-more precisely, settlement independent of litigation-provides the least costly economic transaction in contested actions.").
233. See cases cited supra note 154.
234. See, e.g., FED. R. CIV. P. 68 (establishing offer of judgment procedure and presenting potential negative consequences of rejecting settlement offers).
235. Coase, supra note 8, at 2-7, 15.
236. In his parable of the farmer and cattle raiser, Coase showed that, in the absence of transaction costs of bargaining and in conditions of perfect competition, parties who are engaged in mutually harmful activity would achieve a bargain that maximizes economic production irrespective of the initial assignment of the entitlement. Id. at 2-6. Of course, there is a wealth effect of the initial assignment of rights to the parties involved in the activity.
237. Id. at 15-16.
238. Id. at 16.
239. For years, courts have used the analytic heuristic of an ex ante bargain or deliberation to determine the most efficient rule of law. See, e.g., Rodi Yachts, Inc. v. Nat'l Marine, Inc., 984 F.2d 880, 888-89 (7th Cir. 1993) (Posner, J.) ("[T]he market itself fixes a standard of care that reflects the preferences of potential victims as well as of potential injurers and then the principal function of tort law, it could be argued, is to protect customers' reasonable expectations [of]... the standard of care customary in the industry..." (citing U.S. Fid. & Guar. Co. v. Jadranska Slobodna Plovidba, 683 F.2d 1022, 1029 (7th Cir. 1982))); Bamford v. Turnley, (1862) 122 Eng. Rep. 27, 33 (Exch.), rev'g (1860) 122 Eng. Rep. 25 (Q.B.) (analyzing nuisance case from hypothetical decision of individual owner of properties in question);
240. see also Richard A. Epstein, A Theory of Strict Liability, 2 J. LEGAL STUD. 151,157-58 (1973) (arguing that Vincent v. Lake Erie Transportation Co., 124 N.W. 221 (Minn. 1910), applied ex ante bargaining analysis to determine whether there should be liability for damages in case of private necessity).
241. Coase, supra note 8, at 17-18.
242. Nor is arbitration the answer. It requires an ex ante contract or a legislative mandate, and it still is founded on adjudication by a third party.
243. See supra Part LA (discussing widespread imposition of inalienable procedural rules in public adjudication).
244. See supra notes 15-23 (discussing various fee rules).
245. Bebchuk & Chang, supra note 57, at 371-72.
246. Id. at 374.
247. There are instances in which courts disfavor or view with suspicion certain kinds of cases for various policy reasons. In these matters, the favored procedural device is the particularized pleading. See, e.g., FED. R. CIV. P. 23.1 (b)(3) (providing for particularized pleading in shareholder derivative suits);
248. DEL. CH. R. 23.1 (same). See generally Christopher M. Fairman, Heightened Pleading, 81 TEX. L. REV. 551, 574-77 (2002) (observing that heightened pleading developed in part to deter frivolous claims).
249. See Herbert M. Kritzer, The English Rule, A.B.A. J., Nov. 1992, at 57 ("If the amount at stake were $10,000 or $25,000, most middle-income individuals still would be reluctant to put $5,000 to $10,000 on the line to pursue even a strong case.").
250. See John W. Wade, On Frivolous Litigation: A Study of Tort Liability and Procedural Sanctions, 14 HOFSTRA L. REV. 433, 494 (1986) ("What is needed is a conscious effort to coordinate the procedural and tort law, so that the trial can be handled as simply as possible without the interference of frivolous litigation abuses and without inconsistent results in the original and second trials."). Additionally, legal analysis tends to compartmentalize rules of law according to their traditional taxonomy.
251. See Robert J. Rhee, A Principled Solution for Negligent Infliction of Emotional Distress Claims, 36 ARIZ. ST. L.J. 805, 865 (2004) ("Judicial and scholarly analyses have tended to compartmentalize rules of liability and damage, and have created an intellectual inertia, hindering critical analysis.").