PRE

-TRIAL BARGAINING

(from final exam, Fall 2007)

An accident has occurred, causing $10,000 in harm to the victim. The amount of harm done is undisputed

and easy to prove; punitive damages

are not applicable, so any damage award would be for exactly

$10,000.

This type of accident is governed by strict liability, so the injurer is legally responsible, but it may be

difficult to prove in court that he caused the harm. The victim can hire a lawyer for $3,000 and go to trial,

in which case he would have a 40% chance of winning. He could also hire an expert witness to testify.

This would ensure victory at trial, but would cost an additional

$10,000, for a total of $13,000. Going to

trial cos

ts the defendant (injurer) $5,000, regardless of whether the plaintiff (victim) hires an expert

witness. Assume that neither party pays any legal expenses if an out

-of-court settlement is reached.

First, consider the usual

American rule

where each party

pays its own legal fees.

(a)

If the case goes to trial,

will the plaintiff hire an expert witness

or not?

(b)

Given your answer to (a), calculate

i.

each party’s

threat point

during pre

-trial negotiations (which is its noncooperative

payoff if the case goes to tri

al)

ii.

the

gains from cooperation

if a pre

-trial settlement is reached

iii.

the

settlement

that would occur if the two parties agreed to

divide the gains from

cooperation evenly

(c)

In this scenario, would the American rule lead to

over

-, under

-, or efficient precaut

ion

on the

part of the injurer?

Next, consider the usual

British rule

where the losing pa

rty pays both sides’ legal fees (including the cost

of the expert witness, if he was hired).

(d)

If the case goes to trial, will the plaintiff hire an expert witness?

(e)

Given your answer to (d), answer the same three questions as before: calculate

i.

each party’s

threat point

ii.

the

gains from cooperation

iii.

the

settlement

that would occur if gains from cooperation were divided evenly

(f)

In this scenario, would the British rule lead

to

over

-, under

-, or efficient precaution

on the part

of the injurer?

Finally, consider the following

cost

-shifting rule

, similar in spirit to Federal Rule 68. If the case goes to

trial and no damages are awarded, each side pays its own expenses. If damages are awarded and are

lower than a settlement offer the plaintiff (victim) refused, the plaintiff pays both sides’ expenses. If

damages are higher than a settlement offer the defendant (injurer) refused, the defendant pays both sides’

expenses.

(g)

What will happen if the case goes to trial

after the

defendant offers to settle for $10,001

? Is the

plaintiff better off accepting this offer or going to trial?

(h)

What will happen if the case goes to trial

after the plaintiff offers to settle for $9,999

? Is th

e

defendant better off accepting this offer or going to trial?

(i)

What do you expect to happen in pre

-trial negotiations?

(j)

In this scenario, would this cost

-shifting rule lead to

over

-, under

-, or efficient precaution

on

the part of the injurer?