Jackpot Justice: The Value of Inefficient Litigation

Litigation seems to be a Pareto-ineffcient outcome of pretrial bargaining; however, this paper shows that litigation can be the outcome of rational behavior by a litigant and her attorney. If the attorney has more information than his client concerning the characteristics of the lawsuit, the client can use litigation as a way of extracting information. I show that, counterintuitively, litigation will occur only when the plaintiff is pessimistic about her prospects at trial. Even if the plaintiff could obtain a higher payoff from bargaining than from litigation-without-bargaining, bargaining may not occur in equilibrium. The plaintiff is more likely to sue if she is more pessimistic about winning damage in court and if litigation is more risky. Litigation is less likely to occur if the plaintiff receives third party financing for litigation

A Survey of Litigation in Corporate Finance

Purpose The purpose of this paper is to review research on litigation in corporate finance. Design/methodology/approach This paper surveys studies on the estimation of litigation risk, litigation costs, stock reaction to lawsuit announcement, and the effect of litigation on corporate financial policies and outcomes. Findings The first section presents a survey of studies that estimate litigation risk. The authors then discuss a set of studies that focus on the various costs associated with litigation. The third area of review is about studies which estimate the market reaction to a lawsuit announcement. The next section surveys studies that examine the relation between litigation and a variety of corporate policies, behaviors, and outcomes. The authors then discuss the emerging literature on how corporate political connections can influence the outcome of litigation. The survey concludes with a brief summary and a discussion of suggestions for future research involving corporate litigation. Originality/value By providing an extensive review of the literature on litigation in corporate finance, this survey can help researchers to identify recent trends in litigation research and select promising new avenues of investigation in the field

Seeking Rights, Not Rent: How Litigation Finance Can Help Break Music Copyright\u27s Precedent Gridlock

Since its inception, litigation finance has steadily grown in prevalence and popularity in the United States. While many scholars have examined its merits, few have considered litigation finance specifically in the context of copyright law. This is most unfortunate, for there, a vicious cycle has taken hold: high litigation costs discourage many market participants from taking cases to trial or summary judgment in order to vindicate their legal rights, even when they have strong cases. Thus, parties settle almost every case, which in turn prevents resolution of longstanding precedential questions in critical areas of copyright law. The legal uncertainty resulting from this precedential gridlock generates higher avoidance costs and poses more financial risks for market participants, particularly less-heeled or less-established parties. This Note proposes one way in which litigation finance could help break that cycle. Specifically, rights holders and defendants alike can use litigation finance to fund strategic-litigation campaigns to pressure the development of precedent. To illustrate how this might work, this Note examines litigation finance in the narrow context of music copyright, an area that perfectly illustrates the problems besetting copyright law writ large. In doing so, this Note flips a popular criticism of litigation finance on its head: while some scholars argue that litigation finance can distort litigation strategy by encouraging litigants to reject mutually beneficial settlements, it is normatively desirable to do so given the unsettled state of music copyright law

Privatizing Public Litigation

Government litigators increasingly use private resources—human and financial—to support their efforts in court. In some cases, government entities hire private lawyers to perform legal work on behalf of the government; in others, they draw on private donations to fund litigation; and in some cases they do both, relying on privately funded private lawyers to litigate cases in the government’s name. These mergers of public and private can be understood as part of broader trends toward the privatization of government services. This Article uses lessons from the privatization debates to illuminate the likely costs and benefits of bringing private actors into government litigation. It shows that privatization, often touted as a means of improving the efficiency of government services, may have the opposite effect in the context of litigation. Contracting with private lawyers may be more expensive than keeping the work in-house, and accepting private financing may encourage excessive, duplicative government litigation. Even where the advantages of privatization are most pronounced, significant costs remain. Private attorneys and financiers inject private interests and incentives into government litigation, transforming both the ends sought and the means used to achieve them. One cost of privatization, then, is that it can skew government litigation away from the public interest. That consequence is important in its own right, but it also suggests some of the longer-term risks of privatizing government litigation. Our law reflects the view that government litigation is—and should be—different from private litigation. In various ways, some subtle and others more overt, we privilege government litigation over equivalent suits by private parties. Privatization subverts those practices, allowing private attorneys and interest groups to take advantage of benefits typically reserved for government. While it empowers private interests, privatization simultaneously weakens government litigation, dulling its distinctive features and undermining the justifications for treating it differently. The stronger the resemblance between public and private actions, the harder it becomes to defend preferential treatment for government

Litigation Risk and Abnormal Accruals

In this paper, we examine the relation between auditor litigation risk and abnormal accruals over the 1989-2007 time period. We address potential endogeneity in prior studies by jointly modeling abnormal accruals and litigation risk in a simultaneous equation system. Our findings suggest that client-specific litigation risk affects auditor incentives to acquiesce to client demands for earnings management, i.e., the higher the risk of auditor litigation, the greater the auditor’s restraining influence on the abnormal accruals reported by the client. We also find evidence that abnormal accruals increase the likelihood of auditor litigation. We also document that the 1995 Public Securities Litigation Reform Act (PSLRA) lowered the client-specific risk of auditor litigation. Litigation reform remains a topic of ongoing interest. Our findings contribute to a better understanding of the effects of litigation reform (and related changes in legal exposure) on auditor incentives and earnings management.: Litigation risk, abnormal accruals, auditor incentives

Double-Sided Moral Hazard, Efficiency Wages and Litigation

We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse

The Tobacco Wars - Global Litigation Strategies

The Framework Convention on Tobacco Control (FCTC) identifies civil and criminal litigation as a public health strategy and promotes international cooperation (reporting, technical assistance, and information exchange). Holding the tobacco industry accountable through civil and criminal liability serves a number of public health objectives: punishes companies for hiding known health risks, manipulating nicotine content, and misleading the public; deters and preve nts future harmful behavior; compensates individuals and stake-holders for health care and other costs associated with smoking and exposure to environmental tobacco smoke (ETS); raises prices, resulting in lower tobacco consumption; increases disclosure of health risks, through labeling and advertising restrictions; and promotes transparency, by compelling discovery of internal industry documents. Tobacco litigation frequently has been used as a method for promoting tobacco control in the United States. Litigation is less common outside the United States, but increasingly advocates have brought innovative lawsuits abroad. This commentary explores global tobacco litigation strategies, with 4 key elements: compensation/recovery, advertising restrictions, criminal liability, and public interest writ litigation. The commentary argues that perhaps the most important effect of tobacco litigation has been to transform public and political perceptions about risk and responsibility in smoking, making clear what manufacturers knew, how they concealed this knowledge, and how they manipulated consumers. Tort law has reframed the debate from personal to corporate responsibility. However, the industry still manages, at least in the political realm, to alter the discourse to one involving freedom of choice for the smoker, the evils of big government, unfair taxation, and the influence of trial lawyers. Furthermore, now that the tobacco industry is aggressively seeking new markets in the poorest, least-regulated countries, litigation will take on new importance. The most promising strategies will use a human rights framework, arguing that tobacco is so detrimental that it violates the rights to health, life, and a sanitary environment

A Realist Defense of the Alien Tort Statute

This Article offers a new justification for modern litigation under the Alien Tort Statute (ATS), a provision from the 1789 Judiciary Act that permits victims of human rights violations anywhere in the world to sue tortfeasors in U.S. courts. The ATS, moribund for nearly 200 years, has recently emerged as an important but controversial tool for the enforcement of human rights norms. “Realist” critics contend that ATS litigation exasperates U.S. allies and rivals, weakens efforts to combat terrorism, and threatens U.S. sovereignty by importing into our jurisprudence undemocratic international law norms. Defenders of the statute, largely because they do not share the critics‟ realist assumptions about international relations, have so far declined to engage with the cost-benefit critique of ATS litigation and instead justify the ATS as a key component in a global human rights regime. This Article addresses the realists‟ critique on its own terms, offering the first defense of ATS litigation that is itself rooted in realism—the view that nations are unitary, rational actors pursuing their security in an anarchic world and obeying international law only when it suits their interests. In particular, this Article identifies three flaws in the current realist ATS critique. First, critics rely on speculation about catastrophic future costs without giving sufficient weight to the actual history of ATS litigation and to the prudential and substantive limits courts have already imposed on it. Second, critics‟ fears about the sovereignty costs that will arise when federal courts incorporate international-law norms into domestic law are overblown because U.S. law already reflects the limited set of universal norms, such as torture and genocide, that are actionable under the ATS. Finally, this realist critique fails to overcome the incoherence created by contending that the exercise of jurisdiction by the courts may harm U.S. interests while also assuming that nations are unitary, rational actors. Moving beyond the current realist ATS critique, this Article offers a new, positive realist argument for ATS litigation. This Article suggests that, in practice, the U.S. government as a whole pursues its security and economic interests in ATS litigation by signaling cooperativeness through respect for human rights while also ensuring that the law is developed on U.S. terms. This realist understanding, offered here for the first time, both explains the persistence of ATS litigation and bridges the gap that has frustrated efforts to weigh the ATS‟s true costs and benefits

Trading and Enforcing Patent Rights

We study how the market for innovation affects enforcement of patent rights. Conventional wisdom associates the gains from trade with comparative advantage in manufacturing or marketing. We show that these gains imply that patent transactions should increase litigation risk. We identify a new source of gains from trade, comparative advantage in patent enforcement, and show that transactions driven by this motive should reduce litigation. Using data on trade and litigation of individually-owned patents in the U.S., we exploit variation in capital gains tax rates as an instrument to identify the causal effect of trade on litigation. We find that taxes strongly affect patent transactions, and that reallocation of patent rights reduces litigation risk on average, but the impact is heterogeneous. We show that patents with larger potential gains from trade are more likely to change ownership, suggesting that the market for innovation is efficient, and the impact of trade on litigation depends on characteristics of the transactions.