The Effect of Decoupling Punitive Damages on Filing Lawsuits: Court Error Model of Meritless Lawsuits

Abstract

In this article, we analyze meritless lawsuits and the decoupling system wherein some part of the punitive damages plaintiffs would otherwise receive is paid to the state government. We define “meritless lawsuits” as cases wherein plaintiffs do not suffer a loss but file suits in the hope of gaining damages by court errors. We create a model that deals with court errors endogenously by considering the parties’ efforts in the trial under the adversarial system. We find that the introduction of decoupling reduces plaintiffs’ equilibrium expected gain and discourages them from filing suits. It has this effect not only on meritless suits but also on meritorious suits. The amount of decrease in plaintiffs’ equilibrium expected gain caused by the introduction of decoupling is larger in meritorious suits than in meritless suits. This holds true even in cases wherein we consider settlement negotiations. We also find that the defendant engages in harmful activity more easily under decoupling than under coupling. Moreover, as plaintiffs’ share of punitive damages becomes smaller, it becomes more difficult to increase the deterrent effect on the defendants through increasing the punitive damages multiplier. These findings suggest some unintended side effects of decoupling.