A reputation for being a nuisance: frivolous lawsuits and fee shifting in a repeated play game

A Reputation for Being a Nuisance: FrivolousLawsuits and Fee Shifting in a Repeated

Play Game

AMY FARMER

Department of Economics, University of Tennessee, Knoxville, Tennessee, USA

and

PAUL PECORINO

Department of Economics, Finance, and Legal Studies, University of Alabama,Tuscaloosa, Alabama, USA

We analyze nuisance suits in a repeated play setting in which an attorney may developa reputation for proceeding to trial with a nuisance suit in the face of a refusal by thedefendant to accept the plaintiff’s pretrial offer. Such a reputation is necessary tomaintain a credible threat of trial in future periods. It is the value of this futurereputation that generates the credibility to pursue a case to trial in the current period.In the context of such a model, we find that fee shifting is effective in reducing costsassociated with nuisance suits. The results of the model are contrasted with Katz (1990).© 1998 by Elsevier Science Inc.

I. Introduction

One goal of legal reform is to reduce the cost associated with frivolous lawsuits. In thisvein, one frequently proposed reform is an increased use of fee shifting at trial.1 Inparticular, it has been suggested that the United States adopt the so called “Englishrule” under which the loser pays the attorney fees of both parties to the dispute. Thereare numerous important issues associated with the use of this type of rule, such asfairness and access to the judicial system. Even putting these issues aside, however, thereis the crucial question of whether such fee-shifting statutes will actually reduce costsassociated with nuisance suits.

The theoretical literature to date does not lend strong support to the use of the

We would like to thank Jim Ligon and an anonymous referee for helpful comments on the paper.1See, for example, the Wall Street Journal 4/13/95, p. A18; 4/25/95, p. A22; and 2/21/96 p. A15.

International Review of Law and Economics 18:147–157, 1998© 1998 by Elsevier Science Inc. 0144-8188/98/$19.00655 Avenue of the Americas, New York, NY 10010 PII S0144-8188(98)00003-9

English rule as a means of reducing costs associated with nuisance suits.2 In the Katz(1990) model of nuisance suits, total litigation costs are invariant to the use of theEnglish rule.3 His is a screening model in which the uninformed defendant makes atake-it-or-leave-it offer to an informed plaintiff. Ex ante, the defendant cannot distin-guish plaintiffs who are legitimately injured from those who are filing nuisance suits.The defendant must trade off the cost of settling nuisance suits against the cost of takinglegitimate cases to trial. In equilibrium, the defendant uses a mixed strategy underwhich plaintiffs receive a hard offer of zero with some probability.

Importantly, in the Katz model nuisance suits never reach trial; if a plaintiff pursuinga nuisance suit receives an offer of zero, she drops the case because she stands to gainnothing by pursuing the case to trial, and she will incur a positive cost in doing so. Thisaspect of the equilibrium is important in understanding the finding that fee shifting isineffective in reducing costs associated with nuisance suits. Because nuisance suits neverreach trial, persons pursuing such cases never have the defendant’s fees shifted to them.Also, nuisance suits succeed because they cannot be distinguished from legitimate suits.If the probability that a legitimate suit wins at trial is sufficiently high, then increased feeshifting will raise the equilibrium demands of those pursuing nuisance suits.

Another important contribution to the literature is by Rosenberg and Shavell (1985).In their model, the fact that a case is a nuisance suit is common knowledge, but aplaintiff can effectively “hold up” a defendant by filing a suit and making a settlementdemand. The defendant will win at trial with a high probability, but he must first incurthe cost of preparing a response to the initial charge. A failure to respond will result ina default judgment. Thus, the plaintiff can extract up to this initial cost of preparing adefense. Katz (1990) notes that the plaintiff in the Rosenberg and Shavell model doesnot have a credible threat to proceed to trial and that the cost of the initial response bythe defendant is likely to be quite low. He, therefore, argues that the Rosenberg andShavell model can only explain nuisance suits that settle for very small amounts.

Bebchuk (1996) considers the credibility of the threat to proceed to trial when aplaintiff has a suit with a negative expected value (i.e., the expected gain by the plaintiffat trial is less than the total cost incurred in bringing the case to trial). He finds that iflegal costs are spread out over time, a plaintiff’s threat to proceed to trial can be madecredible even if, ex ante, the suit had a negative expected value. Bebchuk is notconsidering nuisance suits per se, in that the cases he considers may have merit, but thejudgments involved may be small compared with the legal expense of proceeding totrial. Because we consider pure nuisance suits, plaintiffs would never have a crediblethreat to proceed to trial in a one-shot game, even if legal costs are spread out over time.

In Section II, we develop a model of nuisance suits in a repeated play setting in whichattorneys may develop reputations for proceeding to trial once the defendant hasrefused to accept the plaintiff’s pretrial offer.4 Such a reputation is necessary tomaintain a credible threat to proceed to trial in future periods. It is the value of this

2Polinsky and Rubinfeld (1996) show that increasing the penalty on losing suits while raising the awards of successfulsuits will decrease the number of low-return suits while maintaining a desirable degree of deterrence. They suggest thatthe English rule may be one step in achieving this result. Also see Polinsky and Rubinfeld (1993).

3Also see Bebchuk’s (1988) model of nuisance suits. Katz’s analysis differs from Bebchuk’s by explicitly consideringfiling costs for nuisance suits. Miceli (1993, 1994) has extended the Katz model to consider the roles of contingency-feecontracts and repeated play by the defendant.

4Miceli (1993) has previously considered repeated play in a model along the lines of Katz (1990). In his paper,defendants are the party that engages in repeated play, and, under some circumstances, they may refuse to settle suitsto deter future nuisance suits.

148 Frivolous lawsuits and fee shifting

future reputation that generates the credibility to pursue a case to trial in the currentperiod.

In contrast to Katz, in our model it is common knowledge that the case being pursuedis a nuisance suit, in the sense that it has a zero probability of succeeding at trial. If thethreat to proceed to trial is credible, nuisance suits succeed by “holding up” thedefendant for up to his full costs at trial. Thus, we can explain nuisance suits that settlefor significantly greater amounts than in the Rosenberg and Shavell (1985) model. Wefind that fee shifting will reduce the number of nuisance suits by reducing the returnto engaging in this activity. It does this by reducing the ability of a plaintiff to extractpayment from a defendant. Under full cost shifting, if the case is brought to trial, thedefendant wins and bears zero costs. Thus, the threat to trial by the plaintiff is entirelyineffectual. This result is analogous to one found in Rosenberg and Shavell (1985). Inthe case of partial fee shifting, the amount that the defendant is willing to pay to settlea nuisance suit decreases in the percentage of fees that are to be shifted.

By lowering the amount for which a defendant is willing to settle, fee shifting reducesthe value of maintaining a reputation for pursuing nuisance suits. As a result, fewerattorneys can accept such suits with a credible threat to proceed to trial.5 Even thoughno nuisance suit ever reaches trial, fee shifting is effective in lowering the number ofnuisance suits filed. In Section III we extend the model to incorporate asymmetricinformation concerning the defendant’s willingness to settle. This leads to trials inequilibrium. Even in the face of a refused offer, the plaintiff’s attorney may proceed totrial to maintain a credible threat in future periods. Fee shifting makes it more costly tomaintain a reputation because fees are shifted (with some probability) to the plaintiff’sattorney in the equilibrium of the model. As a result, fewer attorneys will undertakenuisance suits. Fee shifting reduces the value of maintaining a reputation while itincreases the cost of doing so. Thus, within this model, fee shifting receives strongsupport as a method of reducing the number of nuisance suits as well as the costsassociated with such suits.

II. A Model of Attorney Reputation

Suppose a plaintiff desires to file a nuisance suit solely for the purpose of obtaining asettlement offer. Obviously the intent would be to extract the defendant’s trial costs.However, for this strategy to succeed, the plaintiff must have a credible threat to pursuethe case to trial.6 Because plaintiffs lose with certainty at trial if they are pursuing a purenuisance suit, and because proceeding to trial is costly, the credibility of the threat toproceed to trial is the critical factor in the model.7

Plaintiffs are not repeat players in this game, but we assume that attorneys are, andwe therefore focus on the reputation of the attorney. In each period, attorneys have theopportunity to screen cases and to decide whether to accept a nuisance suit. A decisionto accept such suits will necessitate building and maintaining a reputation for pursuingfrivolous cases to trial. Because under our assumptions attorneys can establish reputa-

5Shavell and Spier (1996) consider threats (extortion) in an infinite-horizon game. A key difference with our paperis that in their model, the game ends if the threat is carried out. In addition, the extortionist’s problem is to commit,not to carry out, a threat in the event that a payment is made.

6See Nalebuff (1987) for an analysis of the issue of the credibility of pretrial offers.7As in Rosenberg and Shavell (1985), we could explicitly model some small probability that the plaintiff will prevail

at trial, but for the sake of simplicity, we have not done so. Note that such an addition would make the credibilityconstraint less binding but would not change our basic results.

149A. FARMER AND P. PECORINO

tions and clients cannot, for a client’s case to succeed, she must turn the case over to theattorney with regard to the decision to proceed to trial. The client pays the filing cost,but the attorney bears all other costs, including shifted fees, and receives a contingencyfee for payment. If the client must pay the shifted fees, the attorney and client cancontract around this constraint when the contingency fee is set.8

The defendant and his attorney are treated as a single agent. Our goal then is toestablish conditions under which the attorney’s past actions and her need to maintaina future reputation will allow her to credibly threaten to pursue a nuisance suit to trial.The attorney plays a repeated game in which the stage game is as follows:

1. Attorney i chooses whether to accept a nuisance suit or to pursue other activitiesthat give a return wi.

2. If a nuisance suit is accepted, the attorney files the case. The client pays the filingfee k.

3. The plaintiff makes a single take-it-or-leave-it offer to the defendant.4. The defendant accepts or rejects the offer.5. If the offer is rejected, the attorney chooses whether to drop or to continue the case.6. If the case is pursued, trial occurs and the payout to the plaintiff is 0. The defendant

pays a percentage 1 2 g, of his trial costs, CD, while a percentage g of the costs areshifted to the plaintiff’s attorney.

We assume that all defendants face identical costs of proceeding to trial, CD.We make a few simplifying assumptions concerning the market for attorneys. First, we

do not explicitly model the alternative activities of attorneys, but we assume that theseactivities are summarized by an opportunity wage. Attorney i has an opportunity wageof wi, with the opportunity wage of all attorneys described by a cumulative densityfunction F(w). This assumption will allow us to derive an upward sloping supply curveof attorneys who are willing (and able) to enter the market for nuisance suits. For themoment, we will take as given u, the contingency percentage, but we will discuss itsdeterminants later when we introduce the demand for nuisance suits.

Defendant’s Strategy to Accept or Reject

Working backward to solve the equilibrium of this game, the outcome of trial (Stage 6)is common knowledge. Thus, to determine whether the defendant will accept or rejectthe offer (Stage 4) it is essential to consider the defendant’s beliefs concerning theattorney’s decision to pursue the case in the face of a rejection (Stage 5). The pasthistory of an attorney’s play is observable by the defendant, as is the attorney’s oppor-tunity wage, wi. Both of these pieces of information are important in determining thecredibility of the plaintiff attorney’s offer. A defendant will not believe that an attorneywill proceed to trial if that attorney previously has been observed to drop a case in theface of a refused offer. If the attorney has never been observed to drop a case, and if the

8The solution for the contingency fee in equation (6) would be affected, but the nature of the equilibrium wouldremain unchanged. A more serious issue concerns the ability of the client to credibly turn the case over to the attorney,because a client facing shifted fees would prefer to drop the case once the plaintiff refuses settlement. This raises theissue of who truly controls the case. Hay (1996) assumes that the attorney has control because informational barriersprevent the client from monitoring the case. If, however, it is believed that the client does control the case, this issuewould tend to be mitigated if there is some probability that the nuisance suit will succeed at trial. To the extent thatthis issue persists, fee shifting is more effective than our results suggest, though the mechanism is somewhat different.See Miller (1987) for a discussion of the issue of attorney control and related agency problems.


credibility condition discussed in the third part of Section II is satisfied, then thedefendant believes that the attorney does have a credible threat to proceed to trial.9

Given this description of his beliefs, the defendant’s strategy in Stage 4 is straight-forward. No type of defendant will be willing to settle at any amount with an attorneywho has been observed to drop a case in the past. This type of attorney does not havea reputation for pursuing nuisance suits to trial, and the defendant can assume that thecase will be dropped in the face of a refusal to settle. Similarly, the plaintiff’s attorneymust satisfy the credibility constraint developed in the third part of Section II. If theattorney satisfies these two conditions, the defendant may be willing to settle to avoidpaying court costs. In particular, the defendant will accept any settlement offer S suchthat S ¶ (1 2 g)CD, where 1 2 g reflects the proportion of costs borne by the defendantin the event of a trial, and g is the percentage shifted to the plaintiff. Any offer, S . (1 2g)CD is rejected by the defendant.

Attorney’s Decision to Screen Suits (Stage 1)

Given the defendant’s strategy to accept or reject offers outlined above, consider theattorney’s initial decision to accept a nuisance suit in Stage 1. Recall that the attorneywill receive a contingency fee percentage of u and that the client will pay the filing costsof k. If the attorney chooses to accept the case, she will make the maximum demandacceptable to the defendant, S 5 (1 2 g)CD (Stage 3).10 Thus, accepting the case leadsto the payout,

~1 2 g!uCD. (1)

For an attorney to be willing to file a nuisance suit ex ante, it must be the case that thepayout from doing so, given in equation (1), exceeds the opportunity wage that anattorney may earn in other activities. This condition is given by,

~1 2 g!uCD > wi. (2)

If a continuum of opportunity wages exists, determined by, among other things,differential abilities and skills, then there exists a critical wage rate that creates indif-ference on the part of the attorney defined by (1 2 g)uCD 5 wi. All attorneys withopportunity wages higher than this value will never accept a nuisance suit.11

Ex Post Credibility to Continue to Trial

The condition in equation (2) applies in an ex ante sense. For a nuisance suit to succeed,however, the threat to proceed must be credible ex post, i.e., after an offer has beenrefused. If the threat to proceed to trial is not credible, then all defendants will refusethe plaintiff’s offer. In the face of a rejected offer, an attorney must decide whether tocontinue to trial knowing that the payout that period will be zero. A choice not toproceed will allow the attorney to earn the remainder of her opportunity wage for that

9As usual with repeated-play games, other equilibria may be supported by different sets of beliefs.10We assume that the plaintiff makes a single take-it-or-leave-it offer to the defendant. Adding more offers to the

model will not affect the character of the results as long as the plaintiff makes the last offer before trial. If the defendantmakes the last offer, then the problem for the plaintiff’s attorney is to establish a reputation for refusing offers belowsome cut-off (e.g., the defendant’s cost of trial). This is an interesting topic for future research.

11We assume that skill in other legal activities is unrelated to success in pursuing nuisance suits.


period. Denote this percentage to be C. Dropping the suit will result in a loss ofreputation; if this occurs, her future earnings are constrained to be her opportunitywage. Thus, the attorney will continue the suit if:

Cwi 1 (t51

`

dtwi < 2gCD 1 (t51

`

dt~1 2 g!uCD, (3)

where d is the attorney’s discount rate, and the term 2gCd reflects fees that will beshifted to the attorney if she pursues the case to trial this period. Thus, the left-hand siderepresents the present discounted value of the attorney’s opportunity wage should shechoose to drop the case. The right-hand side then represents the value from continuing.This includes paying shifted fees in the current period plus the present discountedvalue of maintaining a reputation. Notice that as long as C . 0, or g . 0, this credibilityconstraint automatically will be violated for the marginal attorney whose opportunitywage just equals the expected value of a suit in equation (2), i.e., (1 2 g)uCD 5 wi.Thus, the set of attorneys who can credibly threaten to bring a nuisance suit is less thanor equal to the set of attorneys for whom such suits are profitable in an ex ante sense.12

From equation (3), we can obtain a cut-off value of the opportunity wage w* such thatonly attorneys with an opportunity wage wi ¶ w* can maintain a credible threat toproceed to trial. This is given by,

w*i 5CD@du 2 g~1 2 d~1 2 u !!#

C~1 2 d! 1 d. (4)

The number of attorneys who will engage in nuisance suits is then given by F(w*(u,g)). It is possible that no attorney has opportunity wages low enough to satisfy equation(4), in which case no nuisance suits are filed. In particular, if there is full cost shifting(i.e., g 5 1), then the right-hand side of equation (4) is negative. Full cost shifting undera loser-pays provision is commonly known as the English rule. To the extent that somecosts to the defendant are implicit, such as time costs, then full cost shifting will notoccur even under the English rule.13 Under the American rule, each side bears theirown costs, so that g 5 0. In considering intermediate cases, 0 , g , 1, it is clear fromequation (4) that w* is decreasing in g, the percentage of fees subject to shifting. Thisimplies that the number of attorneys F(w*) who pursue nuisance suits is a decreasingfunction of g. Each of the attorneys who satisfy equation (4) will offer S 5 (1 2 g)CD,which is accepted by the defendant and trial is avoided.

Equilibrium Determination of the Contingency Percentage

The contingency percentage u serves as the relevant price for equating supply anddemand in the market for nuisance suits. The greater is u, the greater is w* fromequation (4), and, therefore, the greater is the number of attorneys who can credibly

12This means that there is a group of lawyers who would like to pursue nuisance suits, but who cannot credibly doso. In a game in which opportunity wages are not directly observable, these lawyers might attempt to pursue nuisancesuits until (by dropping a case in the face of a refused offer) they reveal that they do not truly have a credible threatto pursue the case to trial. This would be an interesting extension of the current model.

13This point is made by Hause (1989), p. 162.


threaten to proceed to trial (i.e., F(w*)).14 Conversely, the greater is u, the smaller arethe returns to pursuing nuisance suits among potential plaintiffs. We assume that thegroup of potential plaintiffs who have a minimal basis for filing a suit is very large, butthat a potential plaintiff will not file suit unless the expected value of doing so will justifythe opportunity cost of time plus the filing fee incurred in pursuing such a case.

If we assume that potential plaintiffs’ opportunity costs of time are distributed bysome function G(z), it would be possible to derive a demand for nuisance suits that isdownward sloping in u. To keep matters as simple as possible, however, we will assumethis distribution is degenerate with the opportunity cost of all potential plaintiffs givenby W# . In addition, the plaintiff must pay the filing cost k. Thus, the contingencypercentage must satisfy,

~1 2 g!~1 2 u !CD 5 W# 1 k, (5)

where the right-hand side represents total costs to the plaintiff. Solving for the equilib-rium contingency percentage gives,

u* 5 1 2W# 1 k

~1 2 g!CD

. (6)

Therefore, u is determined solely by demand-side factors, with the number of attorney’sengaging in nuisance suits found by substituting u* in equation (4) to find w*. Fromthis, we can find F(w*), the number of attorneys engaged in nuisance suits. This ispictured in Figure 1. The number of attorneys who can meet the credibility constraint

14We are assuming that the determination of the contingency percentage for a nuisance suit is independent of thecontingency percentage for legitimate suits, i.e., that the contingency percentage is free to vary based on case quality.

FIG. 1. Equilibrium determination of the number of nuisance suits.


in equation (4) is an increasing function of the contingency percentage u, whereas thepotential demand for attorneys’ services in pursuing nuisance suits is infinitely elastic atu*. These can be thought of as supply and demand curves, although the supply curveis derived from a credibility condition rather than simply reflecting opportunity costs.

Increases in g shift the demand curve down from equation (6), and they shift back thesupply curve from equation (4). Both of these shifts act to reduce the number ofnuisance suits as depicted in Figure 2. As g rises, u must fall to encourage a plaintiff tofile suit, whereas an attorney of given ability requires a larger value of u to makeaccepting the suit worthwhile. Intuitively, a rise in g decreases the total pie available tothe attorney and plaintiff, and, consequently, both desire a larger share. Also note fromequation (6) that increasing the filing fee k will reduce the number of nuisance suitsfiled by shifting down the demand curve, thereby lowering the equilibrium contingencypercentage.

III. An Equilibrium with Trials

One aspect of the model from Section II is that nuisance suits never reach trial. Thisresult is held in common with Rosenberg and Shavell (1985) and Katz (1990). In amodel with attorney reputation, this feature is not required. As noted in the Katz model,nuisance suits never reach trial, but they impose costs by causing other cases to proceedto trial to establish their legitimacy. In a modified version of our model, nuisance suitsproceeding to trial can themselves represent part of the social cost of nuisance suits.15

In the simpler model, the defendant’s strategy was straightforward. In the face of a

15This is in addition to filing fees, which are a social cost in both models (to the extent that they reflect trueeconomic costs).

FIG. 2. The effect of increased fee shifting.


credible threat to proceed to trial, the defendant was willing to accept any offer, S ¶(1 2 g)CD, his expected cost of trial. Suppose that defendants may face a cost of settlinga case, which we denote CS, and that the defendant’s willingness to settle is unknown atthe time the plaintiff’s attorney accepts the case. A defendant’s type is characterized byhis settlement costs. Among other factors, these settlement costs may reflect a defen-dant’s moral outrage at having to settle a suit without merit. As a result, settling anuisance suit may impose psychic costs.16

As developed below, this assumption that costs of settlement exist and differ acrossdefendants will generate rejections of plaintiff demands in equilibrium and, therefore,trials. Moreover, it will allow us to introduce these rejections in a very simple fashion.This could also be accomplished in a somewhat more complex fashion by assuming thatplaintiffs do not observe CD (the defendant’s cost of trial) with certainty.

Suppose the attorney offers the defendant a settlement of S. If the defendant accepts,he will pay S 1 CS. If he rejects the offer, the defendant will pay (1 2 g)CD. Thus, thedefendant will accept an offer such that S 1 CS , (1 2 g)CD, or CS , (1 2 g)CD 2 S.For any given S, this yields a critical value of CS, such that defendants with settlementcosts in excess of (1 2 g)CD 2 S will refuse the offer, and trial ensues.

For simplicity, we will assume a specific distribution of defendant types. Note that thiswill not affect the character of the model’s results, but the magnitude of the settlementwill differ as the distribution changes. Assume that some percentage a of defendantshave settlement costs of 0, whereas the remaining 1 2 a have costs CS . (1 2 g)CD. Thelatter defendants will reject any positive demand. Thus, any offer less than or equal to(1 2 g)CD will be accepted with probability a whereas an offer in excess of (1 2 g)CD

is rejected with probability 1.The expected ex ante return from taking on a nuisance suit is a(1 2 g)uCD 2 (1 2

a)gCD, and so an attorney will only consider doing so if,

a~1 2 g!uCD 2 ~1 2 a!gCD > wi. (7)

The term (1 2 a)gCD on the left-hand side reflects the ex ante probability that an offerwill be rejected times the amount of the defendant’s shifted legal costs, gCD. Becausenuisance suits lose with certainty at trial, fees are shifted whenever the plaintiff’s offeris refused, and the case proceeds to trial. Clearly, a smaller set of attorneys will satisfyequation (7) compared with equation (2).

Again however, it is the ex post credibility condition that is crucial. If this fails to hold,then all defendants will refuse the plaintiff’s offer, knowing that the case will notproceed to trial. This condition becomes,

Cwi 1 (t51

`

dtwi < 2gCD 1 (t51

`

dt~a~1 2 g!uCD 2 ~1 2 a!gCD!. (8)

This may be solved for w*i, giving,

w*i 5CD@adu 2 g~1 2 ad~1 2 u !!#

C~1 2 d! 1 d. (9)

16In their model of extortion, Shavell and Spier (1996) also consider the possible importance of emotionalmotivations.


Obviously, the fact that a , 1 lowers the profitability of pursuing nuisance suits. Lowervalues of a mean that fewer offers are accepted.17 Also, because trials occur in theequilibrium of the model, fees are shifted on a regular basis, and this raises the costs ofmaintaining a reputation. Comparing equation (9) with equation (4) reveals that feeshifting now has a larger impact on w*i.

18 The regular shifting of fees at trial representsan additional avenue (relative to the model presented in Section II) through which feeshifting reduces the incidence of nuisance suits.

In Katz’s (1990) model, fee shifting does not reduce costs associated with nuisancesuits, in part because nuisance suits never reach trial, so that fees are never shifted toplaintiffs filing such suits. However, even in our simple model from Section II in whichall cases settle before trial, fee shifting can lessen the social costs of nuisance suits. Feeshifting reduces the number of attorneys who can credibly threaten to bring cases totrial by reducing the settlements these attorneys can extract from defendants. In thissection the model has been extended so that some nuisance suits proceed to trial inequilibrium. Given that some cases will be pursued to trial, a greater reliance on feeshifting increases attorneys’ costs of maintaining a reputation; this further reduces thenumber of nuisance suits filed.

IV. Conclusion

We have presented a simple model of nuisance suits based on lawyer reputation in arepeated play game.19 In the context of such a model, fee shifting is highly effective inreducing the number of lawyers engaged in nuisance suits. Increased fee shifting lowersthe amount of money the plaintiff can extract from the defendant, and raises the coststo an attorney of maintaining a reputation for pursuing such cases to trial. We cannotdetermine on theoretical grounds alone whether the mechanism by which nuisancesuits succeed is better described by this paper or by Katz (1990), where nuisance suitssucceed because they cannot be distinguished from legitimate suits. In the Katz (1990)model, fee shifting is ineffective in reducing the social costs of nuisance suits.

It is quite possible that both mechanisms are of some importance. The notion thatattorneys can obtain and maintain a reputation seems plausible and potentially impor-tant. In the formal model, we give lawyers an infinite horizon, but we could reinterpretthe model as one where attorneys have a finite career of an uncertain length. Inaddition, law firms would have longer horizons than individual lawyers. Finally we knowfrom Kreps et al. (1982) that a reputation can be maintained in a finite game if thereis a small probability that some players are irrational.

At this point, however, we need to be cautious about policy implications. The effectsof fee-shifting arrangements are wide ranging, and we have abstracted completely fromlegitimate lawsuits in our model. In the Shavell (1982) and Bebchuk (1984) models, amove to the English rule increases the probability of trial. In Hause (1989), fee shiftingreduces the probability that a case will be brought to trial, but it results in increasedlegal expenditure on those cases that do reach trial. In addition, the English rule will

17This becomes apparent after combining all terms in the numerator of equation (9) containing a, which yieldsa[d(1 2 g)u 1 gd] . 0.

18This can be seen by the larger coefficient on 2g in equation (9).19Future extensions of the model might include explicitly modeling legitimate lawsuits side by side with nuisance

suits and incorporating reputational possibilities for repeat defendants.


affect the mix of cases that are filed.20 The overall desirability of such a rule needs to beevaluated in a much larger framework than the one provided here. However, our modeldoes provide a context in which it is possible to rationalize the belief that fee shiftingis effective in reducing both the number of nuisance suits as well as their associatedcosts.

In our model, we assume that lawyers are compensated via a contingency fee. Themodel can be easily adapted to the assumption that lawyers are paid a flat fee. However,to the extent that such a fee is paid at trial, but not before, this could lead to a credibilityproblem relating to client control of the case.21 In the face of a refusal by the defendantto settle, the client would rather drop the case than proceed to trial where they wouldincur the cost of the lawyer fee. In practice, the use of contingency fees may make iteasier for attorneys to pursue nuisance suits, thus providing one possible explanationfor the prevalence of these compensation schemes.

References

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BEBCHUK, LUCIAN ARYE. (1988). “Suing Solely to Extract a Settlement Offer.” Journal of Legal Studies17:437–450.

BEBCHUK, LUCIAN ARYE. (1996). “A New Theory Concerning the Credibility and Success of Threats toSue.” Journal of Legal Studies 25:1–25.

HAUSE, JOHN C. (1989). “Indemnity, Settlement, and Litigation, or I’ll Be Suing You.” Journal of LegalStudies 18:157–179.

HAY, BRUCE. (1996). “Contingent Fees and Agency Costs.” Journal of Legal Studies 25(2):503–533.KATZ, AVERY. (1987). “Measuring the Demand for Litigation: Is the English Rule Really Cheaper?” Journal

of Law, Economics, and Organization 3:143–176.KATZ, AVERY. (1990). “The Effect of Frivolous Lawsuits on the Settlement of Litigation.” International

Review of Law and Economics 10:3–27.KREPS, D., P. MILGROM, J. ROBERTS, AND R. WILSON. (1982). “Reputation and Imperfect Information.”

Journal of Economic Theory 27:253–279.MICELI, THOMAS J. (1993). “Optimal Deterrence of Nuisance Suits by Repeat Defendants.” International

Review of Law and Economics 13:135–144.MICELI, THOMAS J. (1994). “Do Contingent Fees Promote Excessive Litigation?” Journal of Legal Studies

23:211–224.MILLER, GEOFFREY P. (1987). “Some Agency Problems in Settlement.” Journal of Legal Studies 18:157–179.NALEBUFF, BARRY. (1987). “Credible Pretrial Negotiation.” RAND Journal of Economics 18:198–210.POLINSKY, A., MITCHELL, AND DAVID RUBINFELD. (1993). “Sanctioning Frivolous Suits: An Economic

Analysis.” The Georgetown Law Journal 82:397–435.POLINSKY, A., MITCHELL, AND DANIEL RUBINFELD. (1996). “Optimal Awards and Penalties When the

Probability of Prevailing Varies Among Plaintiffs.” RAND Journal of Economics 27:269–280.ROSENBERG, DAVID, AND STEVEN SHAVELL. (1985). “A Model in Which Suits Are Brought for Their

Nuisance Value.” International Review of Law and Economics 5:3–13.SHAVELL, STEVEN. (1982). “Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative Methods

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20See Shavell (1982) and Katz (1987) for more on how a move to the English rule affects the mix of cases that arefiled.

21This is in addition to the issues raised in note 8.


A reputation for being a nuisance: frivolous lawsuits and fee shifting in a repeated play game

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