A comment on John J. Donohue III\u27s article on the effects of fee-shifting rules on the rate of settlements in lawsuits is presented. The article bears out the idea that something may work fine in practice but it remains to be proven if it will work in theory

Boggs, Danny

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COMMENT ON DONOHUEDANNY BOGGS*Professor Donohue's article on the effects of fee shifting on settlement,'which is perhaps the most abstruse article in this symposium, certainly bearsout Dean Calabresi's statement that some hold the attitude that "somethingmay work fine in practice, but we have to show that it will work in theory." 2 Isuppose I have been chosen to try to deal with it because of my sin ofpretending to understand what George Priest was trying to teach some federaljudges about economics at a conference last year.3The topic Professor Donohue addresses is a good example of HarryKalven's doctrine that the law is "analytically dense." Kalven meant this inthe sense that the term "mathematically dense," when applied to a set ofnumbers, means that you can place another number between any twonumbers in the set.4 Thus, for example, the set of integers is not dense,because you cannot put another integer between 2 and 3. The set of all realnumbers, however, is dense because you can find another number betweenany two real numbers, no matter how small their difference. In the legalcontext, there usually exists a complication or an additional fact between anytwo concepts or rules that seem to cover a situation that creates a newsituation requiring additional thought. Professor Donohue's article is a goodattack on an extremely dense subject.My remarks will be a true "comment" on Professor Donohue's article. Ido not intend to debate him, but rather to raise additional questions anddiscuss the implications of what he has written. Too often the "CoaseTheorem" 5 is invoked to mean that the legal rule simply makes no difference.Professor Donohue does not make this mistake, but does not explicitlycountermand it either. The Coase Theorem says that, with the ability tocontract (and no transaction costs!), independent parties should reach thesame decisions on productive processes under any rule of law. Thus thenumber of railroads and the amount and nature of wheat farming should notbe affected by who bears the cost of fires started by railroad sparks. This doesCopyright © 1991 by Law and Contemporary Problems* Judge, United States Court of Appeals for the Sixth Circuit, Louisville, Kentucky.1. JohnJ. Donohue, The Effects of Fee Shifting on the Settlement Rate: Theoretical Observations on Costs,Conflicts, and Contingency Fees, 54 L & Contemp Probs 195 (Summer 1991).2. Remarks of Guido Calabresi, Dean of Yale Law School, delivered as an introduction to thissymposium, "Modern Civil Procedure: Issues in Controversy," conducted at Yale Law School, June15-16, 1990.3. George Mason University School of Law, Law & Economics Center, "Advanced Course forFederal judges on Economics of Risk, Injury & Liability," Feb 3-9, 1990.4. Richard Courant & Herbert Robbins, What is Mathematics? An Elementary Approach to Ideas andMethods 58 (Oxford U Press, 1941).5. Ronald H. Coase, The Problem of Social Cost, 3 J L & Econ 1 (1960).LAW AND CONTEMPORARY PROBLEMSnot mean, however, that there are no wealth or allocative effects. Under a rulefavoring railroads, for example, railroads will be richer and farmers poorer.Thus the rule adopted is not a matter of indifference to legislators, socialphilosophers, or the individuals affected.Professor Donohue constructs his article in the context of settlements attrial. Courts across the country have noted that the proportion and number ofcases being appealed has continued to rise, although the number of cases filedin district courts has shown signs of leveling off. Nationally, appeals haverisen seven-fold since 1963, whereas cases filed in district courts have risenonly three-fold. 6 Appeals filed in 1990 constituted 14 percent of 1989'sdistrict court filings, while appeals filed in 1964 numbered only 6 percent of1963's district court filings. 7Despite what the theories presented imply, an increasing number of casescan be, and are being, settled. Professor Donohue and other theorists ofsettlement argue that people settle because the cost of proceeding further isgreater than the "uncertainty band" of outcomes. 8 In the Sixth Circuit Courtof Appeals, about 10 percent of the docket settles with staff assistance but withno court interaction. This settlement rate amounts to about 20 percent of ouroral argument docket and 43 percent of the cases in which settlement isattempted by the court staff. Unless there is reduced uncertainty on appealdue to respect for the professional advice of lawyers, the low cost of appealshould mean that fewer settlements would occur. If anything, the increasingnumber of appellate judges (and the perception that recent presidents havechosen judges from diverse points on the legal spectrum) theoretically shouldlead to more uncertainty and less settlement. This point of viewunderestimates risk aversion. Although he treats it somewhat in passing,Professor Donohue does mention that, independent of all other factors, thehigher the level of risk aversion, the more likely settlements are.9At the other extreme, there are virtually no settlements at the SupremeCourt level. This may be due to a stronger commitment to principle at thislevel of adjudication as well as to the importance of a fixed rule to all parties,both before the Court and elsewhere.The operation of the British rule of fee shifting ' ° in Britain, as opposed toits potential application in America, may occur with lower litigation costs forprocedural and economic reasons. Under the Donohue theories, ceterisparibus, low cost will result in fewer settlements independent of any other rule.This could account for a fair number of the differences in the actual resultsunder the two systems.6. Annual Report of the Director of the Administrative Office of the United States Courts 2, 7,12 (Administrative Office of the U.S. Courts, 1989).7. Annual Report of the Director of the Administrative Office of the United States Courts 96,107, 145 (Administrative Office of the U.S. Courts, 1970).8. See Donohue, 54 L & Contemp Probs at 197-98 (cited in note 1).9. Id at 208.10. Under the British rule, the losing party pays the winning party's legal fees.[Vol. 54: No. 3Page 223: Summer 1991CFurthermore, a few percentage points difference in the percentage of casesthat settle may have a much greater than expected difference in the numberthat go to trial. Although it may appear trivial if the percentage of casessettled can be increased from 90 to 93 percent, this increase would representa 30 percent decrease in the number of cases that go to trial.Since 90 to 95 percent of all cases already settle, the question is notwhether they were settled, but when and at what cost. A number of tentativesteps have been made in the direction of allocating the parties' responsibilityfor their pleadings, such as sanctions under Civil Rule 11 and Appellate Rule38, and fee shifting under Civil Rule 68."1 The Equal Access to Justice Act12and section 1983 of Title 42 of the United States Code may also shift costs,although they are a form of "one-way" fee shifting because they rarely, if ever,can be applied in favor of the government. The courts have shown continuedreluctance to push in this direction.' 3The British rule or some other device that discourages suits altogethershould be thought of as the ultimate in quick, early, and cheap settlementbecause it happens before the suit is even filed, takes no time, terminates thelitigation, and causes no cash outlay. This method of settlement occurs whenrisk aversion is a dominant factor, since the plaintiff is in effect betting someof his own money in undertaking the suit.Several of Donohue's figures14 indicate that pessimistic plaintiffs would bemore likely to settle under the British rule than under the American rule andthat this difference increases with the pessimism of the plaintiff. The figuresalso indicate that the likelihood of pessimistic plaintiffs settling under theBritish rule increases with the confidence of the defendant. However, thesedifferences can mean that the small or unsophisticated plaintiff is prejudiced.The fact that lawsuits may not be filed at all when they have little merit doesnot necessarily mean that in the aggregate meritorious claims will be correctlyassessed and compensated. If many plaintiffs each have a 10 percent chanceof winning ("winning" meaning having a meritorious claim and having it soadjudicated), then a rule resulting in none of these cases being filed (though insome sense the correct outcome in each case) means that none of the plaintiffswill be compensated, although by definition 10 percent of their claims aremeritorious.The ability to contract around the costs and strictures of the currentsystem represents an avenue for experimentation. In many cases, the partiescan contract in advance to use arbitration and other means of alternativedispute resolution, and there is no reason that fee-shifting rules cannot beincorporated into such agreements. Parties already must bear the11. FRCP 11; FRAppP 38; FRCP 68.12. 28 USC § 2412 (1988).13. See, for example, Shaw v Delta Airlines, 463 US 85 (1983) (on Rule 68); Christianburg GarmentCo. v EEOC, 434 US 412 (1978) (expressing extreme reluctance to impose costs on civil rightsplaintiffs); Lotz Realty Co. v US Dept of Housing, 717 F2d 929 (4th Cir 1983) (same).14. Donohue, 54 L & Contemp Probs Figures 3-5 at 220-21 (cited in note 1).COMMENTLAW AND CONTEMPORARY PROBLEMSinstitutional cost of the arbitrator or "rent-a-judge," and this allocation ofcost represents at least a leaning in the direction of the British rule.As an aside, I would mention a possible idea for encouraging settlementsfrom the world of game theory, the concept of the "Schelling Point,"' 5 namedfor Professor Thomas Schelling of Harvard. Under this concept, theprominence of certain facts or features may facilitate agreement. Forexample, two parties may be unable amicably to divide a featureless plain ordesert, but could agree to a division if a river line divides it. Two tourists inParis are more likely to be able to agree to meet at the Arc de Triomphe thanat any random location on a street grid. Legal rules that could help establishsuch points might make outcomes of some disputes more certain andsettlement more likely. In one sense, some common law rules, such as the oldadmiralty rules of "divided damages"1 6 and "general average,"' 7 or a rule ofequal division of fault when there is contributory negligence, could be seen asexamples of the Schelling concept.All ideas and analysis helpful to the process of settlement need to bepursued vigorously. Professor Donahue's article is a valuable contribution tothat effort.15. Thomas C. Schelling, The Strategy of Conflict 53-58 (Harvard U Press, 2d ed 1980).16. The divided damages doctrine provided that whenever two or more parties involved in amaritime accident were both guilty of contributory fault, the damages were allocated equally to theparties, regardless of the relative degree of their fault. The Schooner Catharine v Dickson, 58 US (17How) 170, 177-78 (1854), overruled by United States v Reliable Transfer Co., 421 US 397, 411 (1975).17. "General average" applies when some portion of a ship's cargo must be jettisoned to savethe ship. Owners of cargo not jettisoned must pay the lost cargo's owner in proportion to the valueof the surviving cargo, to the extent of the cargo owner's loss. United States v Atlantic Mutual Ins. Co.,343 US 236, 246 n15 (1952).226 [Vol. 54: No. 3

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