19 March 2010

Pre-Trial As Trial In Complex Litigation

A new article on big ticket civil litigation by Richard Nagareda of the Vanderbilt University School of Law provides a good sense of what is going on in this area:

Settlement, rather than trial, has emerged as the dominant endgame. As a result, in functional terms, the pre-trial phase effectively operates as the trial. . . . Two big-picture points emerge from this literature: first, costs (especially, the ability to impose costs on one’s opponent) matter greatly to the choice whether to continue litigation or to settle; and, second, risk (or, more specifically, variance) matters in the pricing of civil claims via settlement, above and beyond calculations of expected value. . . . [T]here is a lingering – but, often, undertheorized – sense that procedure itself is having an undue and even deleterious effect on the pricing of claims via settlement.

Simply put, if you have what it takes to make a lawsuit expensive for your opponent in litigation, this matters more than the actual merits of your case, especially if there is the least bit of uncertainty in the outcome.

The article compares the current situation to the situation in 1938, when a major overhaul of the system replaced technical rules regarding what can be contained in papers filed to begin a lawsuit with the early version of the current system.

There were "trials in roughly 18.9 percent of federal civil cases circa 1938" but are now trial in only 1.8 percent of cases. The holy grail in civil procedure these days is to get us to a point where "claim merit, in light of governing substantive law, should matter vastly more to the resolution of civil claims than whether counsel has said the right words to invoke the appropriate form of action."

As Nagareda accurately describes the process, in settlement discussions, defendants counseled by their lawyers consider the additional attorneys' fees and costs likely to be incurred by going to trial, "the expected value of the
underlying claim" and "a premium for the offloading of the risk." The increasing concern is that the litigation costs and risk premium are overshadowing the underlying merits of the case.

Courts aren't very good at regulating discovery costs. So, alternatives are considered:

The law might, in short, seek to address the information problem associated with third-party judicial regulation of cost imposition through alternative mechanisms designed to elicit information about the anticipated value of discovery to the requesting party. A second alternative consists of a shift in the tools deployed by third-party judicial regulation – specifically, the possibility of informing the settlement process not exclusively through motions framed as dispositive “stop” or “go” signals on the road to trial but, conceivably, in addition, through more direct informing of the claim pricing process itself.

As an example of the first approach:

[T]he law might provide for the shifting of discovery costs post-pleading and pre-summary-judgment in the event that the court ultimately grants summary judgment for the responding party. Absent summary judgment, the cost of discovery would remain where it is now: on the responding party. . . . [T]he elaborated literature on cost shifting in litigation generally suggests that such an approach with respect to discovery likely would have two countervailing effects.
As to the initial decision to sue, one should expect the addition of a contingent possibility of a discovery cost shift against the plaintiff to have the predictable effect, at the margin, of discouraging suit. In effect, the prospect of a discovery cost shift would add to the uncertainty already associated with claiming. In Europe, where a general loser-pays rule predominates, the contingent risk of a cost shift has taken a real-world form: a market whereby litigants may purchase insurance against that risk. . . .

The effect upon the initial decision to sue would not be the only complication here. In those instances when litigation is commenced, cost-shifting approaches tend toward an escalation of expenditures on both sides. Specifically, each side stands to bear its own expenditures, discounted by the probability that a cost shift might later occur. In effect, each side stands to garner one dollar of benefit from litigation expenditure for less than one dollar in expected cost. The predictable tendency will be toward increased expenditure, in the manner of a one-third-off sale at a department store. A more limited shifting of discovery costs would portend similar difficulties.

Now, consider together the dampened initial incentive to sue and the escalation of expenditures in those suits that are brought. The net effect is far from clear in systemic terms. The civil litigation system could end up spending even more money on fewer cases. This concern is not merely theoretical. An important 2009 report on civil litigation costs in the United Kingdom finds that the general loser-pays rule in that jurisdiction “tends to drive up the costs of litigation” and that there are, at the very least, “conflicting effects . . . upon access to justice.”

A second approach, similar to one that I have advanced in the past, as as follows:

Geoffrey Miller . . . sketches a framework whereby parties could request, and courts could provide, what he describes as a “preliminary judgment” – that is, the court‟s own “provisional judgment on the merits of the case based on the information provided by the parties.” Under this approach, such a preliminary judgment “would convert into a final judgment after the expiration of a reasonable period of time,” during which any party against whom the preliminary judgment is issued may object. In the event of such an objection, the preliminary judgment “would be vacated” and the case returned to the ordinary posture of judicial regulation under the conventional pretrial motions.

European civil procedure uses this approach by weakening the rules of finality. A trial court decision is effectively reviewed de novo, on points of both fact and law, on a first appeal, and can consider new evidence.

The evaluation of the case on the facts and the law, early in a case, would influence the parties to settle closer to the value of their cases on the merits, because the settlement would be informed by a formal third party evaluation of the case on the merits that would reduce the bias and uncertainty involved in having parties trying to evaluate their own claims.

In particular, this kind of evaluation would give courage to parties involved in cases where there is a genuine dispute regarding a material fact, but the likely resolution of that dispute is fairly clear.

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