Abstract:We review the literature on negative-expected-value suits (NEV suits)– suits in which the plaintiff would obtain a negative expected return from pursuing
the suit all the way to judgment. We discuss alternative theories as to why, and
when, plaintiffs with NEV suits can extract a positive settlement amount. In
particular, we explain how such a plaintiff can extract a positive settlement due (i)
asymmetry of information between the parties, (ii) divisibility of the plaintiff’s
litigation costs, (iii) upfront costs that the defendant must incur before the plaintiff
incurs any costs; (iv) expectation that the arrival of information during the course
of the litigation may turn the suit into a positive-expected-value one, (5)
reputation that enables the plaintiff to bind itself to going to trial if the defendant
refuses to settle; or (6) the plaintiff’s having a contingency fee or retainer
arrangement with its lawyer.