University of Florida Levin College of Law UF Law Scholarship Repository Faculty Publications Faculty Scholarship 1-2008 Tort Arbitrage Robert J. Rhee University of Florida Levin College of Law, [email protected] Follow this and additional works at:http://scholarship.law.ufl.edu/facultypub Part of theDispute Resolution and Arbitration Commons, and theTorts Commons Recommended Citation Robert J. Rhee,Tort Arbitrage, 60 Fla. L. Rev 125 (2008),available athttp://scholarship.law.ufl.edu/facultypub/490 This Article is brought to you for free and open access by the Faculty Scholarship at UF Law Scholarship Repository. It has been accepted for inclusion in Faculty Publications by an authorized administrator of UF Law Scholarship Repository. For more information, please [email protected]. TORT ARBITRAGE Robert J. Rhee* Abstract The economic models of bargaining and tort law have not been integrated into a coherent theory that reflects the empirical world. This Article models the interaction of settlement dynamics and the economic theory of negligence. It shows that tort claims are systematically devalued during settlement relative to the legal standard. Central to this thesis is a proper conception and accounting of cost. Cost is typically viewed as the transaction cost of litigation processing. Cost, however, encompasses more than this. Each dispute has a cost of resolution, defined as the discounting effect of risk on legal valuation. A spread between the parties' respective costs of resolution creates an arbitrage opportunity in which the bargaining process presents superior pricing to that of the public forum. In the typical tort context, this cost advantage belongs to the defendant. As long as settlement is the primary method of dispute resolution, tort law is structurally incapable of maintaining the efficient standard of care to which courts aspire. Under this analysis, the fault standard is both an instrument of valuation and a cost-shifting mechanism. The theory of negligence, then, devalues the litigation asset, thus reducing the defendant's liability, and settlement is the result. The effect is to promote a system of self-regulation of accidents in the shadow of uncertain government pricing. These functionalities connect the historical origins of negligence to its "unexpected persistence" today. Negligence maintains the essentially private nature of tort law even as it touches social policy and public conscience. * Associate Professor of Law, University of Maryland School of Law. I thank Jennifer Arlen for her comments and Franklin Allen, David Ross, and Aswath Damodaran for their insights into financial economics and valuation. An early draft of this paper was presented to the faculties of the University of Maryland School of Law and Stetson University College of Law. I thank the participants for their helpful comments. FLORIDA LAWREVIEW (Vol. 60 I. INTRODUCTION ..................................... 126 II. TORT AND BARGAINING THEORIES ..................... 129 A. Tort Law in the Shadow of Settlement ................ 129 B. Positive Economic Theory of Negligence ............. 131 C. Economic Theory of Legal Bargaining ............... 134 D. Common IntellectualH eritage ...................... 136 1Il. PRICING LEGAL DISPUTES ............................ 139 A. Hedging Risk ................................... 139 B. Risk-Adjusted Pricing ............................ 143 C. Cost of Resolution ............................... 149 D. Settlement Pressure .............................. 150 IV. TORT ARBITRAGE .................................. 154 A. Pro Forma Model Assumptions ..................... 154 B. Pro Forma Model Outputs ......................... 161 C. Cost Accounting ................................. 165 V. NEGLIGENCE IN THE HISTORICAL CONTEXT .............. 170 V I. CONCLUSION ...................................... 181 I. INTRODUCTION This Article advances an economic theory that links the dispute resolution process and the negligence standard. Despite the predominance of settlements, we lack an integrated economic theory.' This void in the literature is peculiar because scholars have explored the relationship between bargaining and other substantive fields.' Fundamental questions 1. A check of the leading works shows no cross-fertilization between the economic theories of tort law and bargaining. Some leading articles on the economics of bargaining are Robert Cooter, Stephen Marks & Robert Mnookin, Bargaining in the Shadow of the Law: A Testable Model of Strategic Behavior, 11 J. LEGAL STUD. 225 (1982); John P. Gould, The Economics of Legal Conflicts, 2 J. LEGAL STUD. 279 (1973); Richard A. Posner, An Economic Approach to Legal Procedurea nd JudicialA dministration, 2 J. LEGAL STuD. 399 (1973) [hereinafter Posner, Legal Procedure];G eorge L. Priest & Benjamin Klein, The Selection of Disputesf or Litigation, 13 J. LEGAL STUD. 1 (1984). Some leading works on the economics of torts are GuDo CALABRESI, THE COSTS OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS (1970); WILLAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT LAW (1987); STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW (1987); Richard Posner, A Theory of Negligence, 1 J. LEGAL STUD. 29 (1972) [hereinafter Posner, Negligence]. 2. See, e.g., Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Action, 43 STAN. L. REV. 497 (1991); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L.J. 615 (1990); Robert H. TORTARBITRAGE have not been answered. Does settlement affect the efficiency of tort law? Do courts and private parties apply the same valuational framework? If not, can the claim of economic efficiency hold? Is there a connection between a theory of value and the historical development and persistence of the theory of negligence? In the latter half of the twentieth century, the debate on tort theory has been rich.3 But in the pursuit of "grand theories,"4 scholarship on the theory of tort law has insufficiently accounted for the messy operational processes of the justice system. Theories of tort law assume that the judicial system sets the aspiration and works toward this goal, but the assumption is myopic because most cases settle.5 Settlement, it is said, occurs "in the shadow of the law."6 Like a submerged iceberg, settlement is the unseen part of the tort process that should not be ignored. Thus, the tort system, it can be better said, exists in the shadow of bargaining. Its efficiency aspiration can be achieved only within a system that settles most disputes. Economic theory says that courts maximize social wealth by deterring conduct that imposes net social costs. This claim rests on an unstated assumption that the dispute resolution process is irrelevant to the structure of tort law. The reason is simple: standard bargaining theory posits that Mnookin & Lewis Kornhauser, Bargainingi n the Shadow of the Law: The Case of Divorce, 88 YALE L.J. 950 (1979); Robert E. Scott & William J. Stuntz, Plea Bargaininga s Contract, 101 YALE L.J. 1909 (1992). Scholars have analyzed procedural process and transaction cost issues in the context of tort law. See Keith N. Hylton, Litigation Costs and the Economic Theory of Tort Law, 46 U. MIAMI L. REv. 111 (1991); Samuel Issacharoff& John Fabian Witt, The Inevitability ofAggregate Settlement: An InstitutionalA ccount ofAmerican Tort Law, 57 VAND. L. REv. 1571 (2004); Jonathan T. Molot, How U.S. ProcedureS kews Tort Law Incentives, 73 IND. L.J. 59 (1997). 3. See G. EDWARD WHITE, TORT LAW IN AMERICA: AN INTELLECTUAL HISTORY 211-43 (expanded ed. 2003) (discussing the emergence and impact ofneoconceptualism in tort scholarship of the 1970s); John C.P. Goldberg, Twentieth-Century Tort Theory, 91 GEO. L.J. 513 (2003) (analyzing five dominant theories of twentieth-century tort law). 4. WHITE, supra note 3, at 284. 5. See PRICE V. FISHBACK & SHAWN EvERETT KANTOR, A PRELUDE TO THE WELFARE STATE: THE ORIGINS OF WORKERS' COMPENSATION 33 (2000) ("Given that so many cases were settled out of court, the de facto operation of the negligence liability system potentially was quite different from the de jure descriptions that the law and economics and legal literatures provide."); LAWRENCEM. FRIEDMAN, AHSTORYOFAMERICAN LAW 357,363 (3d ed. 2005) (emphasizingthat appellate literature, in studying tort law, "can be quite misleading" because it is "the tip of a huge iceberg of cases"); Steven Hetcher, The Jury's Out: Social Norms' Misunderstood Role in Negligence Law, 91 GEO. L.J. 633, 633 (2003) (explaining that tort theories "badly skew our understanding of the actual legal practices by which the negligence standard receives its content"); Issacharoff& Witt, supra note 2, at 1575 ("[T]he private systems of aggregation in our tort system exist in a far-flung, decentralized, and under-the-radar world that rarely come to the attention of tort jurists."); Michael J. Saks, Do We Really Know Anything About the Behavior of the Tort Litigation System-and Why Not?, 140 U. PA. L. REv. 1147, 1212 (1992) ("The focus on trials is somewhat misplaced, because the great majority of cases are settled, not tried."). 6. Mnookin & Kornhauser, supra note 2, at 997. FLORIDA LAW REPIEW [V/ol. 60 settlement is struck at the expected value of judgment net of transaction cost.' The private and public valuations yield the same results on liability assignment. This tidy logic explains why law-and-economics scholars have not mined the intersection of bargaining and tort theories. The two theories are facially complementary, and thus they pose no perceived need to harmonize. The economic story would end here, but a valuational framework focusing on expected value and transaction cost is a fallacy as a matter of positive theory." The framework fails to account for the valuational effect of risk-not just the effect of individual risk preference-but the overall risk profile:9 What is the variance of the expected outcome? What are the parties' attitudes toward risk? How does the prospect of a risky outcome affect the circumstance of each party? In the empirical world, risk has a price. Under asset pricing principles, uncertain cashflows are subject to a risk-adjusted discount, which determines real economic value. A risk- adjusted discount contradicts the efficiency claim, which assumes that deterrence is achieved through probabilistic allocation of cost. Under a theory of value that incorporates risk, private resolution may offer better pricing than the public forum if a party has a lower cost of resolution than the opponent's, which results in superior valuation. Commentators have long recognized the possibility that settlement may deviate from efficient outcomes, thus imposing social cost.' Yet the 7. Robert J. Rhee, A Price Theory of Legal Bargaining:A n Inquiry into the Selection of Settlement and Litigation Under Uncertainty, 56 EMORY L.J. 619,631 (2006) [hereinafter Rhee, Price Theory]. 8. Id. at 620-21; Robert J. Rhee, The Effect ofRiskon Legal Valuation, 78 U. COLO. L. REV. 193, 194-95 (2007) [hereinafter Rhee, Effect ofR isk]. 9. In this Article, "risk," "uncertainty," and "variance" are used interchangeably. The economic literature sometimes distinguishes risk and uncertainty in that risk consists of future outcomes that have a known distribution while uncertainty describes those that have unknown distributions. FRANK H. KNIGHT, RISK, UNCERTAINTY AND PROFIT 233-34 (Harper & Row 1965) (1921). This distinction is not made here because applicable probability distributions do not exist for most legal actions. See Rhee, Price Theory, supra note 7, at 638-46. The problem is one of reference class. In any given action, the probability distribution would change depending on the reference class used. Indeed, there is no objective probability as to the merits of this action, if probability truly refers to this specific action as opposed to a proposition on the class of similarly situated actions. Accordingly, probability as an objective measure is illusory. 10. See Alexander, supra note 2, at 505-23 (arguing that settlements in securities actions deviate from the expected outcome of trial); Bruce L. Hay & Kathryn E. Spier, Settlement of Litigation, in 3 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW: P-Z 442, 447 (Peter Newman ed., 1998) (noting that lower settlement values may be "socially wasteful"); Note, Settlingf or Less: Applying Law andE conomics to PoorP eople, 107 HARV. L. REv. 442, 444-51 (1993) (arguing that the poor tend to settle for less than the expected trial outcome); John A. Siliciano, CorporateB ehavior and the Social Efficiency of Tort Law, 85 MICH. L. REv. 1820, 1835-53 (1987) (arguing that the realities of corporate behavior undermine the efficiency goal of tort law); Kathryn E. Spier, A Note on the Divergence Between the Private and Social Motives to TORTARBITRAGE possibility has not been analyzed through an integrated economic theory of negligence. The central thesis of this Article is that the dispute resolution process systematically undervalues claims qua the judicially prescribed valuation. The theory of negligence is structurally incapable of setting the standard of care as described by the positive economic theory of tort law. Efficiency, as defined, is impossible because the structure of the fault system creates an arbitrage opportunity for the party who has the lower cost of resolution. This arbitrage connects the historical choice of negligence, which reduced (intended or not) the liability of a burgeoning industrial enterprise, to the current "unexpected persistence" of the fault standard," which has resisted challenges from alternative ideas. Negligence maintains its viability today, in part at least, because it is cheaper for industry. More than any other competing idea, it creates the greatest degree of risk-uncertainty of outcome. 2 One obvious result, it is fairly observed, is a costly pricing mechanism that requires the parties to seek information about the value of the case. But there is another facet to the fault system that is seen through the prism of bargaining theory. By increasing uncertainty, the cost structure of negligence promotes settlement under terms favorable to the party who has the lower cost of resolution. In this respect, negligence persists because it balances the public ordering of tort law with the essentially private ordering of a tort dispute. II. TORT AND BARGAINING THEORIES A. Tort Law in the Shadow of Settlement Most resolutions of disputes are invisible to academic and judicial eyes because they are settled without a lawsuit.13 These disputes tend to be simple and are not worth the transaction cost of litigation or the social cost of disrupting the community peace. Social norms and other factors, irrelevant to liability in the strictest sense, often influence settlements. In '4 this invisible world, it is questionable whether the resolution of tort disputes resembles the claim of efficiency in tort models. No one disputes that legitimate claims go undiscovered or are not pursued for one reason Settle Under a Negligence Rule, 26 J. LEGAL STUD. 613, 614-16 (1997) (discussing the possibility of divergence between settlement and social efficiency). 11. See WHITE, supra note 3, at 244-90. 12. See infra notes 197-99 and accompanying text. 13. See H. LAURENCE Ross, SETTLED OUT OF COURT: THE SOCIAL PROCESS OF INSURANCE CLAIMS ADJUSTMENTS 141 (1970); Marc A. Franklin et al., Accidents, Money, and the Law: A Study of the Economics of PersonalI njury Litigation, 61 COLUM. L. REv. 1, 10 (1961); see also ROBERT C. ELLICKSON, ORDER WITHOUT LAW: How NEIGHBORS SETrLE DISPUTES 4 (1991). 14. ELLICKSON, supra note 13, at 4-8; Ross, supra note 13, at 113. FLORIDA LAW REVIEW [Vol. 60 or another, though we may never know the extent of this phenomenon.5 Moreover, bankruptcy protection and the limited-liability shield of various types of business entities ensure that a certain portion of tort liability is judgment proof.'6 Thus, there is an invisible corner of the tort system where defendants "internalize far less than the full cost of losses they inflict."'7 This Article analyzes only the visible part of the tort system-filed civil actions. Even here the degree of transparency varies. Trials and appeals are transparent through public records, but settlements within the legal system are less so. Because settlements are private, the behavioral and economic details of how settlements are struck are only partially known," but there are aggregate statistical data. Among filed actions, juridical resolutions play a small role. Only a small percentage of filed cases ever reach trial.'9 A substantial minority of cases are dismissed through nontrial adjudication.2° A substantial majority settle."' Although 15. See DEBORAH R. HENSLER ET AL., RAND, THE INST. FOR CIvIL JUSTICE, COMPENSATION FORACCIDENTAL INJURIES IN THE UNITED STATES 142 (1991) ("[C]laiming is a statistically unusual behavior: many more injured people decline to claim--or never even consider claiming-than attempt to activate the legal process."); see also TOM BAKER, THE MEDICAL MALPRACTICE MYTH 68-69 (2005); Franklin et al., supran ote 13, at 10; Goldberg, supran ote 3, at 554; Saks, supran ote 5, at 1183. 16. See Henry Hansmann & Reinier Kraakman, Toward UnlimitedS hareholderL iabilityfor Corporate Torts, 100 YALE L.J. 1879, 1916-23 (1991) (arguing that the corporate liability shield should be abolished for tort liability); Siliciano, supra note 10, at 1838-40 (noting the effects of bankruptcy protection for corporate entities); David W. Leebron, Limited Liability, Tort Victims, and Creditors,9 1 COLUM. L. REv. 1565 (1991) (analyzing the effect of limited liability on tort victims). 17. Saks, supra note 5, at 1283 n.533; accord Hylton, supra note 2, at 113-14. 18. See FRIEDMAN, supra note 5, at 357 ("About the rest of the system-settlements and claims adjustment, for example--even less is known."). 19. See Marc Galanter, The Vanishing Trial: An Examinationo f Trialsa nd RelatedM atters in Federala nd State Courts, 1 J. EMPIRICAL LEGAL STUD. 459, 462-63 tbl. 1 (2004) (listing that from 1962 to 2002, civil trial rates in federal court declined from 11.5% to 1.8%); id.at 507 tbl.4 (listing that in a composite of twenty-two state courts, trials decreased from 36.1% in 1976 to 15.8% in 2002); Posner, Negligence, supran ote 1, at 35 (noting that about 2% of accident claims are tried); Saks, supra note 5, at 1212-13 (noting that less than 10% of cases reach trial); Franklin et al., supran ote 13, at 10 (explaining that about 3.6% of injury claims in New York City reach trial each year); see also Issacharoff & Witt, supra note 2, at 1582-83 (showing a historical trend of increasing settlements in the course of the nineteenth and twentieth centuries). 20. See Gillian K. Hadfield, Where Have All the Trials Gone? Settlements, Nontrial Adjudications, and StatisticalA rtifacts in the Changing Disposition of Federal Civil Cases, 1 J. EMPIRICAL LEGAL STUD. 705, 730 tbl.7 (2004) (noting that 23.3% of contested federal civil cases in 2000 were disposed through nontrial adjudication); David M. Trubek et al., The Costo f Ordinary Litigation, 31 UCLA L. REV. 72, 89 (1983) (noting that 22.5% of the cases in the study were dismissed or received judgment on the merits without a trial). 21. Alexander, supra note 2, at 525 (noting that rate of settlement is likely 60% to 70% of filed cases); Hadfield, supra note 20, at 730 tbl.7 (noting that 68.7% of federal civil cases in 2000 were settled). TORTARBITRAGE appellate decisions are the empirical fodder of tort theory,22 they constitute a minute fraction of filed actions. Given the predominance of settlement, one could argue that a weak form of the Coasean vision of the law's irrelevance exists.23 That said, judicial administration of tort law cannot be marginalized on the basis of statistical infrequency. Cases settle within the legal framework of the litigation process.24 Conversely, the settlement process cannot be viewed as a unidirectional law and effect. Settlements affect the law or its efficacy. Because trial is a rarity, tort theory must address the reality that even with filed cases the costs of accidents are priced and allocated in the opaque realm of private agreements.25 B. Positive Economic Theory of Negligence The positive economic theory of tort law is well known. In A Theory of Negligence, Richard Posner argued that negligence is grounded in economic efficiency and that liability assignment depends on a cost-benefit analysis.26 The centerpiece of this analysis is the Hand Formula, noted as PL > B.27 Discounting (multiplying) the cost of an accident if it occurs by the probability of occurrence yields a measure of the economic benefit to be anticipated from incurring the costs necessary to prevent the accident. The cost of prevention is what Hand meant by the burden of taking precautions against the accident. It may be the cost of installing safety equipment or eliminating the activity. If the cost of safety measures or curtailment-whichever cost is lower-exceeds the benefit in accident avoidance to be gained by incurring that cost, in economic terns society would be better off to forgo accident prevention.28 22. See, e.g., Posner, Negligence, supran ote 1, at 29 (analyzing a sample of 1,528 appellate cases). 23. See R. H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 15 (1960) (arguing that the factors on which court decisions turn are irrelevant to economists and that it is always possible to modify legal rights through market transactions). 24. See Mnookin & Kornhauser, supran ote 2, at 950; see also Franklin et al., supra note 13, at 13 (stating that about 84% of claimants achieved some recovery). 25. FISHBACK & KANTOR, supra note 5, at 22 ("A better understanding of the de facto operation of the negligence system, therefore, serves as the basis for more accurate theoretical discussions of the relative efficiency of negligence and no-fault legal systems."). 26. Posner, Negligence, supra note 1, at 34. 27. United States v. Carroll Towing, 159 F.2d 169, 173 (2d Cir. 1947). In Hand's formula, P equals probability, L equals injury, and B equals burden. Id. The Hand Formula has achieved iconic status in tort law, thanks in large part to Posner, and it has been the muse of an enormous volume of commentary. See Benjamin C. Zipursky, Sleight of Hand, 48 WM. & MARY L. REV. 1999, 2000-01 (2007). 28. Posner, Negligence, supra note 1, at 32. FLORIDA LA W REVIEW [Vol. 60 In The Economic Structure of Tort Law, Posner and William Landes provided a formal economic model of tort law.29 The model recognizes that uncertainty is the governing condition of a dispute. Consequence from action is uncertain: upon an accident, the liability boundary is uncertain; upon suit, the juridical outcome is uncertain. A meritorious lawsuit is neither certain to lose nor to win. According to Posner and Landes, uncertainty is accounted for through the concept of expected utility, calculated as the sum of the probability distribution of mutually exclusive states of outcome.3" Because risk neutrality is assumed, risk is not a factor of value.3' Value is calculated as the expected value of the future juridical outcome.32 With expected utility defined, a supply-demand model is constructed to determine the most efficient standard of care.33 The demand curve PL is downward sloping and decreases at a marginal product of care. The supply curve B is upward sloping and increases at a marginal cost of care.34 The intersection of the supply-demand curves yields the lowest total cost corresponding to the optimal standard of care.35 Stated differently, the liability boundary is the point at which the marginal cost of the accident equals the marginal cost of precaution. Thus, the Hand Formula, revised as a marginal cost analysis, is the "correct economic 36 standard of negligence., The Hand Formula factors, viewed in isolation, are subject to rational assessments. First, probability is subjective,37 but for the purpose of 29. LANDES & POSNER, supra note 1. 30. Id. at 55. 31. See id. at 56-57. 32. See id at 55-56. 33. Id. at 59-60. 34. Id. at 60. 35. See id. 36. Id. at 87. Landes and Posner noted: "Hand was purporting onlyto make explicit what had long been the implicit meaning of negligence." Id. at 85. Other economic theories of tort law are consistent in the application of cost-benefit analysis. See, e.g., SHAVELL, supra note 1, at 19-21. However, the efficiency claim is not without its critics. Posner and Landes respond that their interest is "in explaining, rather than defending, the common law of torts." LANDES & POSNER, supra note 1, at 9. This claim has been criticized as hiding a normative preference for wealth maximization. See J. M. Balkin, Too Good to Be True: The Positive Economic Theory of Law, 87 COLuM. L. REv. 1447, 1448-59 (1987) (book review). Critics and proponents agree, however, that the efficiency claim cannot be empirically verified. LANDES & POSNER, supra note 1, at 20; see FISHBACK & KANTOR, supra note 5, at 18 (explaining that attempts to measure the relative efficiencies "have fallen well short of expectations"); Michael D. Green, Negligence = Economic Efficiency: Doubts >, 75 TEX. L. REV. 1605, 1607 (1997) ("It is also exceedingly difficult to contradict or disprove this positive economic theory."); see also Anita Bernstein, Whatever Happened to Law and Economics?, 64 MD. L. REv. 303, 319-22 (2005) (noting that law-and- economics theories suffer from a lack of predictive power and empirical confirmation). 37. LANDES & POSNER, supra note 1, at 55. Posner and Landes did not explore the TORTARBITRAGE argument here, the assumption, unless otherwise stated, is that the parties share similar views of expected value and this view is consistent with an assumption of rational expectation." Second, with respect to loss, courts routinely assign value to loss at trial, and thus loss value is based on the expected juridical outcome. Finally, the cost of precaution is perhaps the most assessable factor. Each discrete level of precaution is typically measurable through market pricing of materials and labor, subject to foreseeability of the harm and feasibility of the precautionary method. For example, there are commoditized prices for rescue efforts at sea,39 bargees in boats,40 radios in tugboats,41 lifeguards at hotel pools,42 fuel tank designs,43 electric power lines serving railway cars," and fences in cricket 45 yards. The problem is that value is determined relative to some governing conceptual framework held either by the parties or the broader society. Where market price is available, one's value assignment is compared against the market price to determine whether one wants to transact. But where market pricing is absent and the parties are coerced to transact, as in a lawsuit, the market benchmark is lacking and relative valuation assumes greater importance because a transaction must ultimately occur. In a legal dispute, there are three participants who determine value: plaintiffs, defendants, and courts. Absent a private agreement on value between the parties, courts are the default arbiters of value. Herein are important unsettled questions. Do the perceptions of value among these heterogeneous participants differ? If so, what is the impact on the standard of care? And, who really sets the price of deterrence? The economic model of tort law does not explicitly address these questions, but by its silence, the implied answer must be that the process of dispute resolution is irrelevant. implication of inductive probability. See Rhee, Price Theory, supra note 7, at 642-50 (discussing the implication of the subjective nature of probability on legal analysis). 38. Most economic models assume rational expectation, which means that "expectations contain no systematic bias, that is, the subjective expectations correspond to the objective frequencies of the random event." Robert Cooter, The Cost of Coase, 11 J. LEGAL STUD. 1, 22 (1982). 39. See Gardner v. Nat'l Bulk Carriers, Inc., 310 F.2d 284, 286 (4th Cir. 1962). 40. See United States v. Carroll Towing, 159 F.2d 169, 174 (2d Cir. 1947). 41. See The T.J. Hooper, 60 F.2d 737, 740 (2d Cir. 1932). 42. See Haft v. Lone Palm Hotel, 478 P.2d 465, 467 (Cal. 1970). 43. See Grimshaw v. Ford Motor Co., 174 Cal. Rptr. 348, 377-78 (Dist. Ct. App. 1981). 44. See Adams v. Bullock, 125 N.E. 93, 93-94 (N.Y. 1919). 45. See Bolton v. Stone, [1951] A.C. 850 (H.L.) (U.K.).