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How Probable is “Plausible”? by Daniel A. Epstein

See Mr. Epstein’s article in the Online Journal here

The federal pleading threshold is probably the most confronted, least understood, threshold in American law. We know that to survive a Rule 12(b)(6) motion to dismiss in the post-Twombly and -Iqbal world, a pleading must state a claim to relief that is “plausible” on its face. But what does that mean? It’s totally ambiguous. Contrast that with the best understood threshold in American law, the preponderance of the evidence (POE) threshold. Jurists know so precisely what that means that there is a discrete probability assigned to it: greater than 50%. Can we define the plausibility threshold as precisely as we’ve defined the POE threshold? In other words, can we figure out how probable is “plausible”? That’s the question my article answers. Or, perhaps more accurately, it answers how probable “plausible” should be in order to minimize error. And to do that I start with a closer look at the POE threshold.

We’ve known that the POE threshold was “greater than 50%” for a very long time. But we didn’t know why until very recently. It wasn’t until the 1980s that Professor David Kaye proved that the POE threshold is optimally located to minimize error (i.e., that overall it minimized the number of dollars being erroneously paid). That seminal discovery by Kaye gave me a foothold to locate the plausibility threshold, except that I started where he finished and worked backwards. Kaye knew the POE threshold’s location and discovered the justification. I did the reverse: I assumed that (just like with the POE threshold) the plausibility threshold is optimally located to minimize error and then I derived the formula that allowed me to find its location.

The mathematical derivation is laid out in the article, but for the purposes of this piece it’s sufficient to understand that in the formula I derive (which I refer to as the pleading-phase error minimizing (or “PPEM”) model) the plausibility threshold equals expected continuation costs divided by estimated judgment value, plus the probability of erroneously finding liability, plus the probability of erroneously finding no liability. And, fortuitously, we actually have empirical data for some of those variables, meaning we can make an empirically based estimate of the location of the plausibility threshold. Data from the National, Case-Based Civil Rules Survey can be used to estimate that the ratio of continuation costs to estimated judgment size is about 0.122:1. Unfortunately, I wasn’t able to find a way to estimate the probability of false findings of liability and no liability, so I couldn’t complete the formula, but that 0.122 number is still useful as a lower bound estimate of the plausibility threshold. So, using that number, I conclude that in order to minimize error, courts should on average grant Rule 12(b)(6) motions to dismiss when they perceive the likelihood that the defendant is truly responsible to be less than 12.2 percent. As far as I’m aware, that’s the first time anyone has been able to make a reasoned numerical estimate of the plausibility threshold.

In addition to the empirics, the theoretical implications of the formula are interesting (and non-intuitive). One example I offer in the article is the following: A plaintiffs’ attorney initiates two federal class action suits against a single company. One suit is filed in Illinois and the other in Wisconsin. The law in both cases is identical, the pleadings are identical, and the motions to dismiss (MTD) are identical. The only difference is the size of the classes: the Wisconsin class has 100 claimants, and the Illinois class has 2000 claimants. The Wisconsin MTD is granted, but the Illinois MTD is denied. The plaintiff appeals the Wisconsin case and the defendant appeals the Illinois case. The Seventh Circuit receives both appeals, which have to be considered de novo. It is tempting to think that exactly one of the decisions was in error, but the PPEM model offers another option: that the size of the class—and therefore the size of the judgment relative to the estimated cost of continuation—can be a dispositive factor. And therefore, even though cases that were identical on the merits were oppositely decided, both lower court decisions could be correct, or both could be incorrect. In other words, the fact that the Illinois judgment value is likely to be 20 times larger than the Wisconsin judgment value is potentially a dispositive distinction, leading to the proper dismissal of one claim and the proper continuation of its fraternal twin.

Another neat aspect of the model is that it unifies the normative justification underpinning pleading-phase and verdict-phase rules of decision (i.e., using error-minimization as the goal of both the pleading and verdict thresholds). But why stop there? To make it a trifecta, I apply the same logic to discovery-phase rules of decision and set forth what I call the discovery-phase error minimizing (or “DPEM”) model. That model can be used to determine whether specific discovery should be allowed or denied, and balances the cost of obtaining the discovery against the amount by which it decreases the expected value of a false verdict—which, interestingly, bears a striking resemblance to the recently revised FRCP 26(b)(1).

The instant benefit of using the DPEM model is that it could be used to prevent discovery that’s not cost justified. The wider benefit is that we could promote more honest litigation by using the PPEM and DPEM models in concert. For example, consider instances when, in arguing for an MTD, defendants play up their expectation that discovery costs will be extortionately large; but then when the time comes to determine the scope of discovery, those same defendants flip-flop and argue for a scope that is far smaller than the terrifying one they argued would be inevitable at the pleading phase. In both phases, the defendant has an incentive to posit a discovery scope that diverges from what an honest assessment would suggest is appropriate. Unifying the pleading-phase and discovery-phase rules of decision by adopting the PPEM and DPEM models would highlight the absurdity of defendants’ flip-flopping and may incentivize them to posit more honest assessments, lest they risk losing credibility. Or you could even imagine a policy innovation whereby pleading-phase arguments that hinge on a specific scope of discovery presumptively lock the litigant into that posited scope at the discovery phase. So the defendant who in their MTD argues that dismissal is justified because the scope of discovery will be vast if the case continues would in effect waive the discovery-phase argument that vast discovery would be unjustified. The defendant might therefore have an incentive to posit an honest scope of discovery at the pleading phase. That could be helpful to courts, since the defendant is oftentimes in the best position to determine ex ante what the universe of responsive information actually looks like. For example, it may help in cases in which courts have to determine MTDs based on pleadings that are relatively threadbare because defendants have exclusive control of critically responsive information. In those instances, although defendants would have exclusive control of responsive information, they may also have an incentive to provide an honest assessment of the scope of that information, which could help courts make MTD decisions from a more informationally advantaged position.

On the surface this article is about defining “plausibility.” But in a deeper sense I think it’s about applying rigor to the question of why we have given thresholds at all. What purposes are they supposed to serve? Are they achieving those purposes? Do the words that courts use to express these thresholds match up with their purposes? And if not, is the mismatch causing recurring failures in our justice system? I think that those questions are kind of the music I hear when I read Kaye’s work—when I contemplate how shocking it is that we went so long with the POE threshold without really understanding what it was. I hope that same music resounds when others read my article—and maybe one day in the future a reader will be similarly shocked that we didn’t always know the meaning of “plausible.”

Mr. Epstein is an attorney at Jenner & Block LLP

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