Deterrence Effects Under Twombly: On the Costs of Increasing Pleading Standards in Litigation

Abstract

We develop a stylized game theoretic model of litigant behavior to study the effects of increased pleading standards on incentives to engage in illegal activity. Such a model is necessary to build intuition about the potential costs associated with the procedures set forth by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), which increase the standard of plausibility that lawsuits must meet before being allowed by a judge to proceed to discovery and trial. We show how increasing pleading standards tends to increase illegal activity, and can increase litigation costs. These negative effects should be accounted for when setting a pleading standard. Our results provide a counterpoint to the U.S. Supreme Court’s argument that increased plausibility requirements will decrease the costs of litigation.

Keywords: pleading, plausibility, deterrence, enforcement, motion to dismiss, Ashcroft v. Iqbal, Bell Atlantic Corp. v. Twombly, Rule 8(a)(2), Rule 12(b)(6)

JEL Classification: D61, K41