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Economic Analysis of U.S.

Civil Procedure
Vimal Jain
Sem-7
BBA-L.L.B (2013-18)
ABSTRACT
Civil procedure is the body of law that sets out the rules and standards that courts follow
when adjudicating civil lawsuits. These rules govern how a lawsuit or case may be commenced,
what kind of service of process (if any) is required, the types of pleadings or statements of
case, motions or applications, and orders allowed in civil cases, the timing and manner
of depositions and discovery or disclosure, the conduct of trials, the process for judgment,
various available remedies. The economic analysis of procedure is that optimal procedure
requires minimization of the sum of direct costs and error costs. The following paper seeks to
address the ideal cost that should be incurred.

Introduction
Civil procedure contains the rules by which courts conduct civil trials. "Civil trials" concern the
judicial resolution of claims by one individual or group against another. A procedural system
provides the mechanism for applying substantive law to real disputes. Such a system sets
guidelines as to what information the judge or jury receives, how that information is to be
presented, and by what standards of proof (e.g., "beyond a reasonable doubt," "by clear and
convincing evidence," "by a preponderance of the evidence") the information will be adjudged.
An effective procedural system ensures that similar cases will be treated similarly by the courts.
Although the majority of suits filed in the United States are settled before trial through
negotiated settlements or arbitration, "civil procedure" strictly defined applies only in formal
courts of law.
Under the U.S. "common law" system, the initial burden is on the complaining party (the
"Plaintiff") to file suit in court. The Plaintiff also has the initial burden of demonstrating that she
has a legitimate claim. In the U.S., civil procedure usually takes the form of a series of rules and
judicial practices. The federal courts follow the Federal Rules of Civil Procedure (FRCP); the
state courts follow their own state rules of civil procedure. In federal courts, evidentiary rules are
governed by the Federal Rules of Evidence. The state courts follow their own state rules of
evidence.1
Civil procedure is the body of law that sets out the rules and standards that courts follow
when adjudicating civil lawsuits. These rules govern how a lawsuit or case may be commenced,
1 https://www.law.cornell.edu/rules/frcp

what kind of service of process (if any) is required, the types of pleadings or statements of
case, motions or applications, and orders allowed in civil cases, the timing and manner
of depositions and discovery or disclosure, the conduct of trials, the process for judgment,
various available remedies.2
The economic analysis of procedure is that optimal procedure requires minimization of the sum
of direct costs and error costs. Direct costs are attorney fees and other litigation expenses, and
error costs are inefficient behavior resulting from inaccurate adjudication. While other
approaches to procedure consider a welter of incommensurable values, such as fairness, cost,
accuracy, speed, dignity, and participation3 the economic approach can analyze most procedural
issues with just two terms direct costs and error costs.4 In addition, those two terms can, at least
in principle, be measured empirically and expressed in money or as components of a social
welfare function. While a benefit of economic analysis is that it provides a predominant
framework for tradeoffs among many traditional factors such as cost, accuracy, and speed a
potential criticism is that it tends to ignore other values, such as dignity and participation. To
understand direct costs and error costs, first consider a perfect legal system. Such a system would
cost nothing and implement substantive law with 100% accuracy. Obviously, such an ideal
system is impossible. All legal systems deviate from the ideal by consuming real resources,
principally the time of skilled workers, such as lawyers and judges. Those costs, often called
litigation costs, are direct costs.
In addition, no legal system is perfectly accurate. Errors cause the legal system to fall short of
achieving the goals of the substantive law. For example, economic analysis argues that the aim of
tort law is the minimization of the sum of preventive measure, accident, and administrative costs.
When the legal system makes errors in tort cases the result is likely to be suboptimal
expenditures on precautions and an excessive number of accidents. Similarly, errors in
contractual adjudication are likely to result in inefficient effort by contracting parties who
anticipate that the legal system will not sanction inadequate effort. Accidents caused by failure to
take efficient precautions and the deviation from efficient contractual effort are error costs,
and, in principle, they can be measured in monetary or social welfare terms. Error costs can
result from three types of mistakes: false negatives, false positives, and the miscalculation of
damages.5 False negatives are the failure to impose liability when it is appropriate and, as has
2 https://en.wikipedia.org/wiki/Deposition_(law)
3 (FRCP 2014, Mashaw 1976, Michelman 1973),
4 The Economics of Civil Procedure by Daniel M. Klerman. Available at
http://law.bepress.com/usclwps-lss/151
5 The Economics of Civil Procedure by Daniel M. Klerman. Available at
http://law.bepress.com/usclwps-lss/151

already been discussed, they reduce deterrence. False positives are the imposition of liability
when none is appropriate. If false positives were truly random, they would have little negative
effect. Instead, they would be roughly equivalent to a head tax, which would have little or no
effect on primary behavior and thus little effect on welfare. On the other hand, to the extent that
certain activities such as running a railroad or manufacturing consumer goods make it more
likely that the person conducting those activities will be sued and that liability will be mistakenly
imposed, false positives act as a tax on those activities and may cause reductions in beneficial
activities.
While the economic analysis of litigation often assumes that cases either settle or go to trial,
many cases are resolved by motions to dismiss or summary judgment. In fact, in federal court,
about thirteen-percent of all cases end in such dispositive motions, whereas trials occur in less
than four percent of cases .Motions to dismiss for failure to state a claim, called 12(b)(6) motions
in federal court, are made soon after a case is filed and are granted if the plaintiffs complaint is
insufficient. That is, the judge looks only at the plaintiffs allegations (not the evidence) and
dismisses the case if the allegations are legally insufficient. Summary judgment motions are
typically filed when discovery has been completed, but before trial takes place. A judge is
supposed to grant a summary judgment motion only if there is no genuine dispute as to any
material fact. Although both plaintiff and defendant can move for summary judgment, this
article will generally assume that the defendant is the party requesting summary judgment,
because it is much more common for defendants to do so. Dispositive motions present a
relatively clear tradeoff between direct costs and error costs. By terminating cases early, they
reduce direct costs, such as the cost of discovery and trial. Whether they increase error costs
depends on the standards used. If motions are granted only when the probability that the plaintiff
would prevail at trial is zero or very low, then motions increase error costs by little or nothing.
The standards for motions to dismiss and summary judgment could be interpreted, at least until
recently, as assuring that such motions would be granted only when the they would not increase
error costs. That typically meant that federal judges granted motions to dismiss only when the
validity of the complaint depended on an erroneous interpretation of the law.6 Similarly, even
today, summary judgment is not supposed to be granted unless the parties have had full
opportunity to gather relevant facts and then only if no reasonable jury could decide in favor of
the party opposing summary judgment.7On the other hand, Supreme Court decisions in the 1980s
and 2000s suggest that motions are now sometimes granted when the plaintiff might have a
meritorious case, and thus that error costs may be significant. Of course, even if the error costs
induced by making these motions easier to grant are significant, they might still be justified by
decreases in direct costs. In three cases in 1986, often called the trilogy, the Supreme Court
6 Civil Procedure: General Economic Analysis by Bruce H. Kobayashi, Jeffrey S.
Parker, George Mason University School of Law, Encyclopedia of Law and
Economics, Boudewijn Bouckaert and Gerrit de Geest, eds. (Edward Elgar, 2000)
7 Anderson v. Liberty Lobby 1986, p. 251.

made it easier for parties, especially defendants, to get summary judgment8. Although these cases
left the no genuine dispute and no reasonable jury standards intact, they altered the
evidentiary burdens and more generally indicated that summary judgment is not a disfavored
procedural shortcut. In doing so, these cases are often interpreted as encouraging federal judges
to grant summary judgment when the plaintiffs case is weak, even if it is still possible that a
reasonable jury might decide for the plaintiff.9
Discovery is a distinctive feature of American litigation. Since the early twentieth century, a
litigant in an American court has had the power to force his opponent to reveal information
before trial. A litigant can request documents, pose specific questions (interrogatories), inspect
land and other things in the opponents possession, and even require a party to subject himself to
a physical or mental examination by a doctor chosen by the requesting party. In addition, lawyers
can depose (interview under oath) persons who might have information about the disputes.
Most of this discovery activity is done without the participation, supervision, or even
particularized permission of the judge. In general, judges are only involved when a party fails to
comply with a discovery request and the requesting party seeks judicial assistance. The principal
alternative to American-style discovery is the civil law system, of which German procedure
provides a paradigmatic and much studied alternative10. Under the German system, there is no
distinction between discovery and trial, and the judge, rather than the parties, conducts the fact
finding across as many hearings as the case requires. The judge can request documents and
interview witnesses, but the parties have no right to do so. In general, German judges are less
aggressive in investigating civil cases than American lawyers. In part, this reflects the fact that
judges have limited time. It also reflects greater cultural sensitivity to privacy concerns and the
idea that private litigation is not generally the appropriate means by which to ferret out hidden
wrongdoing.
The Economic Model of Litigation11
The elementary economic model of litigation has two parties, a plaintiff (p) that has a probable
claim against the defendant (d). The plaintiffs approximation of the net expected value (NEV) of
the claim equals his approximation of the probability (P) that he or she will prevail (Pp)
multiplied by the expected reward (Dp), net of the marginal costs to the plaintiff of proceeding to
the next stage of litigation (Cp). The defendants independent function for estimating expected
8 Anderson v. Liberty Lobby, Celotex v. Catrett, Matsushita v. Zenith
9 The Economics of Civil Procedure by Daniel M. Klerman.
10 Langbein 1985; Murray & Sturner 2004
11 Civil Procedure: General Economic Analysis by Bruce H. Kobayashi, Jeffrey S.
Parker, George Mason University School of Law, Encyclopedia of Law and
Economics, Boudewijn Bouckaert and Gerrit de Geest, eds. (Edward Elgar, 2000)

loss (EL) is developed in parallel fashion, as equaling the defendants approximation of the
probability the plaintiff will prevail (Pd) times the expected reward (Dd) plus the defendants
marginal costs of proceeding to the next stage of litigation (Cd). In the more developed models,
several of the variables may be endogenously determined. For example, both litigants selections
of C may affect their estimates of the outcome, and one litigants choice of C may affect the
other litigants estimate of its own cost of proceeding to the next stage. Most analyses use
sequencing models, for which the definition of marginal cost given in the text is the most general
case. In the most basic models, this cost is conceptualized as the marginal cost of trial over
settlement, though obviously it can be generalized to any of the multiple stages of litigation,
and can refer to cooperative, decisional, or unilateral withdrawal outcomes, as developed by
Cornell (1990). In processes without discrete formal stages, such as the American discovery
process and some Continental trial processes, the most general case will be continuous updating
of NEV and EL as each new item of information (for example, each witness or investigation)
becomes available. In addition, the litigants can be influenced by effects external to the current
litigation - for example, by the precedential or preclusive effects of the judgment in the current
litigation on future litigation. In such cases, a current plaintiffs judgment will produce an
external gain to the plaintiff (Gp) while the defendant will suffer external loss (Ld). Likewise, a
defendants judgment will produce external gain (Gd) while the plaintiff will suffer an external
loss (Lp). The NEV and EL are the primary determinants of the incentives given to litigants in
the economic model, including the amount of effort expended during litigation, the
trial/settlement decision, the decision to file a suit, and the decision to avoid behavior that would
give rise to legal liability. Because procedural rules alter the NEV and EL, these rules will have a
central role in determining litigation incentives and outcomes. Because decisions made at earlier
stages of litigation are dependent upon the parties expectations of the outcomes (and their own
and opposing parties decisions) during later stages of the litigation, economic analysis begins
from the last stage of trial and judgment, and proceeds by backward induction. Thus, we list and
discuss topics in reverse chronological order.12
Pp J -C +S> Pd J+ C S
One side of the inequality represents the plaintiffs minimum demand, and the other side,
represents the defendant's maximum offer. The simple intuition of this inequality is that there
will be litigation if the minimum amount the plaintiff demands is greater than the maximum
amount the defendant offers. On the other hand, if the defendant is willing to pay in settlement
more than the reservation price demanded by the plaintiff, or equal to the minimum amount the
plaintiff will accept, then they will settle the case. Pp refers to the plaintiffs estimate of the
likelihood of success, that is, the likelihood, in the plaintiff's mind, that the plaintiff will win the
case. J refers to the expected judgment or stakes of the case. C is litigation costs. The plaintiff
12 Civil Procedure: General Economic Analysis by Bruce H. Kobayashi, Jeffrey S.
Parker, George Mason University School of Law, Encyclopedia of Law and
Economics, Boudewijn Bouckaert and Gerrit de Geest, eds. (Edward Elgar, 2000)

knows that the net return is going to be less than the expected amount he can win at trial because
there are litigation costs, whether it is a percentage or an absolute amount. These amounts, of
course, may not be trivial. There may also be some costs of settlement, S. Conversely, the net
expected cost of litigation to the defendant is the defendant's expectation of the probability of
success, Pd, times the judgment, J. In this inequality that the two estimates of the amount at stake
are the same. That is usually not true, which is important for the analysis. If the case goes to trial,
the defendant will have to pay litigation costs, so the net cost to the defendant includes what the
defendant's litigation costs are going to be, minus settlement costs. There is a savings if the
parties settle.
By some very simple algebra made possible by having this J constant, the equation can be
reorganized:13
(Pp -Pd)J>2(C -S).
This is the same inequality as above: that is, there will be litigation rather than settlement when
the difference between the parties' settlement offers, times the stakes of the case, is greater than
the difference between the costs of litigation, C, and the cost of settlement, S. This is the savings
in litigation costs from settling, rather than litigating, the case. The point of this economic model
of when cases litigate rather than settle is, if the differences in the parties' expectations of
success, times the amount at stake, are greater than the savings in costs from settling rather than
litigating, then the parties will litigate. On the other hand, if this inequality is reversed and the
cost savings from settlement are greater than the difference between the parties' expectations of
success, they will settle. There are a number of different implications of this model. Obviously,
one is that the plaintiffs expectation of success has to be greater than the defendant's, that is, the
plaintiff has to be more optimistic than the defendant to justify litigation as long as these costs
are positive. If Pp were less than Pd the left term would be a negative number, so it would not be
greater than costs because we know litigation costs are greater than settlement costs. As a general
matter, and this is an obvious intuition, parties fail to settle cases where plaintiffs are more
optimistic than defendants about the expectation of recovery.
Litigation resembles a market just like the buying and selling of commodities or services. It
resembles a market in the sense that there are two parties interacting and there may be a way for
them to maximize their returns. One way they can maximize their returns is by settling, that is,
when they settle a case, they save litigation costs. We all know how costly litigation is. We all
know, furthermore, that as an empirical matter a very small number of cases are actually
litigated.14
Conclusion
13 The Simple Economics of Civil Procedure by George L. Priest, Yale Law School.
14 Pg. no. 391, The Simple Economics of Civil Procedure by George L. Priest, Yale
Law School.

Economic analysis has shed considerable light on procedural issues. Reducing the evaluation of
procedural rules to tradeoffs between direct (litigation) costs and error costs (accuracy) has
provided clarity to normative analysis and has allowed rigorous modeling of many procedural
issues. Unfortunately, theoretical analysis is usually ambiguous and suggests that the optimal rule
depends on the magnitude of direct and error costs.

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