occurs. The primary problem is that litigants are often confused as to whether their positions are meritorious. This is further complicated by litigants making a significant emotional investment in litigation that tends to undermine rational settlement. As Paul explains, “The very fact that you have lawsuits among you means you have been completely defeated already.”1 The question is not whether a litigant will lose, but how much the litigant will lose. When plaintiffs win, they are unlikely to recover the full valuation of their case. Even when defendants win, every action involves labor hours, attorney fees, and inventory holding costs. This chapter provides a framework for answering that question, which is pursued at the level of individual actions in subsequent chapters. The Federal Rules of Civil Procedure are used here, though many of these concepts exist at the state level as well.
At a high level, there are four principal phases of trial. At the pleading phase, litigants test one another’s allegations. At the discovery phase, litigants discern whether allegations are supported by competent evidence. At the trial phase, litigants seek to overcome their burdens of proof and persuasion to get a trier of fact to rule in their favor. At the appeal phase, litigants seek to have a portion of the other phases reversed or redone. The important aspect for the manager is that cases that can be disposed of at the pleading phase pose a low risk to the firm. Cases that can be disposed of at the discovery phase pose a moderate risk to the firm. Cases that require a trial for disposition pose a high risk to the firm. Thus, the procedural phases enable the manager to discern the cost risk of various kinds of causes of actions that will be discussed in later chapters.
The Pleading Phase
The only action in Federal Court for a civil remedy is a civil action.2 The civil action begins with filing a complaint with the court.3 The complaint must be filed for the plaintiff and then served on the defendant.4 Generally, the complaint must include well-pleaded factual allegations that show that relief is plausible on its face. General conclusory allegations are insufficient.5 A party alleging fraud or mistake must do so with particularity of the circumstance indicating the time, place, and content of acts along with the identity of the actors.6
A defendant can end a lawsuit filed by a plaintiff at the pleading stage by filing a motion to dismiss. Under FRCP 12, there are seven ways to prevail with such a filing: 1) lack of subject-matter jurisdiction, 2) lack of personal jurisdiction, 3) improper venue, 4) insufficient process, 5) insufficient service of process, 6) failure to state a claim upon which relief can be granted, and 7) failure to join a party under FRCP 19.
Subject matter jurisdiction requires at least either federal question or diversity of parties. Federal question jurisdiction requires a federal statute to authorize filing of a case in Federal court.7 Diversity jurisdiction requires that all of the plaintiffs be residents of different states than all of the defendants and that the amount in controversy exceeds $75,000.8
Personal jurisdiction comes from the Due Process Clause of the 14th Amendment. In order for the court to have personal jurisdiction over the defendant, either 1) the defendant must be served with process in the state where the court resides, 2) the defendant must have minimal contacts with the forum state such that the defendant could foresee being taken to court, or 3) the defendant must consent.
It is possible that personal jurisdiction could be present, but venue is not proper. A civil action can be brought in 1) a judicial district where a defendant resides, 2) judicial district in which a substantial part of the cause of action occurred, or 3) in the absence of 1 or 2, any jurisdiction where there is personal jurisdiction. If it is not brought there, the action lacks venue.9
Process is the summons and complaint; if either is missing the process is inadequate. Service of process normally requires an agent of the plaintiff to hand the summons and complaint to the defendant. However, sometimes defendants play games with this, thinking that if they hide well enough, they can never be sued. That is not in fact the case. Leaving the process at the defendant’s house with a person of adult age and responsibility, mailing it, or electronic transmission (if it in fact arrives) are adequate.10
A failure to state a claim upon which relief can be granted occurs when the allegations fail to show that relief is plausible on its face. For instance, when a lawsuit has been filed after the statute of limitations had passed. Alternately, claim preclusion and issue preclusion can bar actions that have already been litigated from being litigated a second time. Issue preclusion prevents a litigant from re-litigating an issue in a subsequent lawsuit that a court has decided in a previous lawsuit, when the issue was necessary for judgment to be rendered.11 Claim preclusion prevents a litigant from filing a subsequent suit on a matter that was not raised in a previous suit when it could have been raised.12 Most commonly, however, the plaintiff simply doesn’t allege an essential element of claim.
All necessary and indispensable parties to obtaining a judgment to an action must be joined in the action. If parties are missing, the suit can be dismissed until the parties are joined.
It is very inexpensive for a defendant to file a motion to dismiss. As a result, settlement is unlikely if the defendant thinks the court will dismiss the case.
Case Problems
William Twombly and others sued Bell Atlantic for engaging in anti-competitive behavior in violation of the Sherman Act. The Sherman Act prohibits entering into a “contract, combination, or conspiracy” that impermissibly restrains trade. According to Twombly’s allegations, Bell Atlantic and other large telecommunications companies did not communicate with one another directly, but rather operated in parallel to avoid competing against one another in certain areas. Bell Atlantic moved to dismiss, stating that these allegations (even if true) did not indicate that it was plausible that an antitrust violation occurred. Twombly responded that it was possible that a violation occurred, but that he would need to engage in discovery to figure it out. Has Twombly stated a claim upon which relief can be granted?13
Harry Robinson bought a car made by World-Wide Volkwagen Corp. in New York State. He then proceeded to drive to Arizona. En route, a car collision in Oklahoma caused his fuel tank to ignite, causing burns to Robinson. Robinson sued World-Wide Volkwagen Corp. in Oklahoma state court, where the trial court judge was Charles S. Woodson. World-Wide Volkwagen Corp. sued Judge Woodson in the Oklahoma Supreme Court, asking that the case be dismissed for a lack of personal jurisdiction as none of the parties were residents of Oklahoma. Robinson argued that since the event happened in Oklahoma, personal jurisdiction was appropriate in Oklahoma. Did Judge Woodson have personal jurisdiction over World-Wide Volkwagen Corp.?14
John Sheehan sued Deil Gustafson for breach of contract in Federal court in Minnesota. Sheehan was a resident of Nevada, but Gustafson’s situation was more complicated. Gustafson had bank accounts, investment accounts, a corporation, real property, and an office in Minnesota. He also had labeled his tax returns as a Nevada resident where he had lived with his parents for over a decade. He used that address on his driver’s license and passport. Did diversity jurisdiction exist in this case?15
Gaynell Reyno was appointed administratrix for