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Trade is good: settle your lawsuit
Note to victims of accidents, medical malpractice, broken contracts and the like: When you sue, make a deal.
That is the clear lesson of a soon-to-be-released study of civil lawsuits that has found that most of the plaintiffs who decided to pass up a settlement offer and went to trial ended up getting less money than if they had taken that offer.
...Defendants made the wrong decision by proceeding to trial far less often, in 24 percent of cases, according to the study; plaintiffs were wrong in 61 percent of cases. In just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.
Here is the story. The good news is that 80 to 92 percent of cases do in fact settle. The bad news is that, over time, poor decisions to go to trial have become more rather than less frequent.
Posted by Tyler Cowen on August 8, 2008 at 07:21 AM in Law | Permalink
Comments
I don't have access to the article, but from a rational standpoint it's OK to make mistakes as long as the potential upside from going to trial is sufficiently large (except for a very risk averse individual). Assuming decision makers face some uncertainty, this ex post analysis says little about the quality of their decisions. The more interesting comparison is between the average return when going to trial and the rejected settlement. Only if the former is less than (or not much above) the latter are these really `mistakes.'
Posted by: H. Pylori at Aug 8, 2008 8:58:03 AM
Trend over time could reflect tort reform ideas and growing prejudice against contingency fee lawyers - in the minds of judges.
The courtroom is not a black box,
after all.
Most likely garbage in garbage out
issues. Settlement offers and demands are
not published, generally, and trial results
can change after post-trial motions and
appeals. What one spends on trial is normally not
published.
Trial consulting firm (study author) has an incentive to
overestimate the quality of the data it has
to work with. How often are they wrong? I assume they argue, implicitly, less often than lawyers.
Posted by: cfw at Aug 8, 2008 9:01:50 AM
Wouldn't an increase in tendency to settle over time result in smaller settlement offers?
Posted by: MS at Aug 8, 2008 9:14:26 AM
The article (in the newspaper- I don't know about the journal article) wasn't clear about whether additional legal fees were considered in the gains or losses of going to trial or not. If not, the difference between trial and settlement is even greater. In my experience the biggest deterrent to settlement in civil cases is the idea that a civil penalty is a sort of punishment and the desire to see the "bad" people punished. People think that if they settle they are saying the other side isn't "bad" and they don't want to do this. But, a civil penalty isn't meant to be a punishment and approaching it this way will almost always make people worse off. Better lawyers would make this clear to their clients but I'm not holding my breath on it.
Posted by: matt at Aug 8, 2008 9:19:27 AM
One should also factor in the value of having a public judgement in your favour, something that a settlement with the norm being a confidentiality clause, doesn't provide.
Posted by: David Rotor at Aug 8, 2008 9:35:00 AM
A driving force in this has to be the obscene profits that lawyers make. Maybe we should institute a windfall profites tax on lawyers? Of course as long as lawyers are running our country don't expect them to tax their buddies.
Posted by: Jay at Aug 8, 2008 9:47:16 AM
Just a semi-informed guess, but I think defendants are likely to be smarter than plaintiffs.
Posted by: Yancey Ward at Aug 8, 2008 10:03:07 AM
In just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.
Not sure this makes any sense. The whole process is negative sum (allowing for legal fees) so how can both sides be right to go to trial? Wouldn't it be better for one side or the other to have made a more conciliatory offer? That is, defendant wants $100K, plaintiff offeres $50K. No settlement, case goes to trial and defendant gets $75K.
Regardless, I wonder if this outcome may be driven by the fact that the plaintiff is more likely to be emotional than the defendant. The plaintiff is the damaged party, after all, and maybe will be more inclined to let anger - "I'll show those bastards" - influence his judgment about settlement offers.
Just conjecture.
Posted by: Bernard Yomtov at Aug 8, 2008 11:24:00 AM
I don't get why going to trial is generally viewed as a failure of the two sides to come to an understanding. Why doesn't the mechanism of a trial count as a peaceful way to settle disagreements?
Posted by: John Mansfield at Aug 8, 2008 12:01:23 PM
From the description in the story, the study massively underestimates how often plaintiff's a wrong in refusing to settle. Specifically, it does not seem to include cases where a plaintiff rejects a settlement offer, and then loses on a motion to dismiss or (more commonly) a motion for summary judgment. In my practice (management-side employment law) at least, this is not at all uncommon.
Posted by: justin at Aug 8, 2008 12:03:06 PM
As has been pointed out, this could have a lot to do with altruistic punishment.
Posted by: themightypuck at Aug 8, 2008 12:22:46 PM
This math is just plain bad. The percentages of who gained or lost mean nothing. You have to look at expected value. I don't have a high opinion of lawyers, but I can't believe that trial lawyers are so stupid in aggregate to work such cases on contingency and systemically screw up maximizing their returns.
In one accidental injury cases I was close enough to, I know that the plaintiff's attorney explained to the plaintiff that accepting the settlement is was the safe bet, but that that the plaintiff was a sympathetic enough figure for juries that they ought to take it as close to trial as they could as a negotiating tactic.
Posted by: BoscoH at Aug 8, 2008 12:46:04 PM
The risk adversity should be higher for the plaintiff [who has just the one case, probably won't get any more, and in a meritorious case is in worse shape financially than is hir norm] than for the lawyer [who has a percentage interest in each of the many cases in house and will get more in the future].
Is it any surprise that the situation is being handled in ways that favor the lawyers?
Defense lawyers do not work on a contingency basis and there are repeat cases against defendants, so this principle does not apply.
-dk
Posted by: Dick King at Aug 8, 2008 1:29:17 PM
"lawyers have an incentive to try to collect fees that are contingent on winning in court or simply to bill for all the hours required to prepare and go to trial"
Settling may be better for you. That doesn't mean it's better for your lawyer (and it probably isn't).
"“The interesting thing about it is the errors the defendants make are much more costly.”
That's because plaintiffs take no risk in filing a suit. It could be remedied pretty easy: If you sue someone and lose, you owe them every penney they spent defending themselves. If you can't pay, your lawyer owes them. If neither of you can pay, you both go to prison.
"years of experience, rank of a lawyer’s law school and the size of a law firm were less helpful in predicting the decision to go to trial"
Yet another dataset establishes that graduation from an extremely selective school proves that the graduate is...very good at going to school, and not much else.
Posted by: J at Aug 8, 2008 1:51:02 PM
MS made the astute observation - "Wouldn't an increase in tendency to settle over time result in smaller settlement offers?"
Indeed, if we consider this from a game theoretic perspective, it appears that the equilibrium outcome is one in which plaintiffs will accept all settlement offers that cover their costs (possibly including the real net loss incurred that prompted the suit), and defendants would offer exactly this amount. In the current outcome described, plaintiffs who go to trail are simply increasing the payoffs for other plaintiffs who settle. Defendants are forced to offer higher settlements because they have observed and expect irrational behavior from plaintiffs, and presumably have no way of knowing if the plaintiff in their case is the irrational type. This is not an equilibrium outcome.
My guess is that the equilibrium outcome is not approximated in reality simply because the decision maker is often the lawyer, facing different incentives entirely, and not the plaintiff. I don't know how lawyer pay works in cases like this, but if lawyers get paid for their time (in working the case) in addition to a cut of the award, it's possible that when we consider the lawyers as players in this game, we do have an equilibrium.
Posted by: Devon Steven Phillips at Aug 8, 2008 2:02:43 PM
MS made the astute observation - "Wouldn't an increase in tendency to settle over time result in smaller settlement offers?"
Indeed, if we consider this from a game theoretic perspective, it appears that the equilibrium outcome is one in which plaintiffs will accept all settlement offers that cover their costs (possibly including the real net loss incurred that prompted the suit), and defendants would offer exactly this amount. In the current outcome described, plaintiffs who go to trail are simply increasing the payoffs for other plaintiffs who settle. Defendants are forced to offer higher settlements because they have observed and expect irrational behavior from plaintiffs, and presumably have no way of knowing if the plaintiff in their case is the irrational type. This is not an equilibrium outcome.
My guess is that the equilibrium outcome is not approximated in reality simply because the decision maker is often the lawyer, facing different incentives entirely, and not the plaintiff. I don't know how lawyer pay works in cases like this, but if lawyers get paid for their time (in working the case) in addition to a cut of the award, it's possible that when we consider the lawyers as players in this game, we do have an equilibrium.
Posted by: Devon Steven Phillips at Aug 8, 2008 2:04:26 PM
"Settling may be better for you. That doesn't mean it's better for your lawyer (and it probably isn't)."
In my experience, lawyers know better than the clients that settlement is likely a better outcome for the client. Contrary to popular belief, most lawyers are ethical and strive for the best outcome for their clients, by strongly recommending settlement in almost all cases, excepting those where the other side's offer is clearly insufficient. It is usually the client, and not the lawyer, who is against settlement, even though the lawyer often has a financial incentive not to settle.
"That's because plaintiffs take no risk in filing a suit. It could be remedied pretty easy: If you sue someone and lose, you owe them every penney they spent defending themselves. If you can't pay, your lawyer owes them. If neither of you can pay, you both go to prison."
There are certain circumstances in which a losing plaintiff will be liable for the defendants' attorneys' fees, and certain circumstances where they will not be liable for the defendant's attorneys' fees. These rules have been crafted over the last two hundred years by very smart men, who have considered extensive arguments laid out by other smart men both for and against the imposition of fees in each specific context. The funny thing is, most of the people who argue that the rules should be changed do not even know when a plaintiff is or is not liable for attorneys fees, and cannot articulate the rationales that courts have given in favor of the rules as they now stand.
So who should we trust? The judges who have crafted these rules over hundreds of years after being presented both sides of the argument in fair adversary proceedings, on countless occasions, in countless different factual contexts, or some guy who says that doing it his way will solve everything?
Posted by: Doug at Aug 8, 2008 2:28:09 PM
So who should we trust? The judges who have crafted these rules over hundreds of years after being presented both sides of the argument in fair adversary proceedings, on countless occasions, in countless different factual contexts, or some guy who says that doing it his way will solve everything?
On the Internet, Doug, the answer is obviously "some guy who says that doing it his way will solve everything."
Posted by: Bernard Yomtov at Aug 8, 2008 2:48:04 PM
"Indeed, if we consider this from a game theoretic perspective, it appears that the equilibrium outcome is one in which plaintiffs will accept all settlement offers that cover their costs (possibly including the real net loss incurred that prompted the suit), and defendants would offer exactly this amount. "
This simply is not how people think. There are a lot of plaintiffs with a "make them pay" attitude, whose settlement number is not based on how much they perceive they are damaged, but on how much they believe is an adequate punishment. (I'm not saying that's the correct measure of damages, just how they judge whether or not an offer is fair). Likewise, there are a lot of defendants who will pay $1,000,000 to defeat a $10,000 claim out of principal, and in order to discourage future lawsuits.
"In the current outcome described, plaintiffs who go to trail are simply increasing the payoffs for other plaintiffs who settle."
Not if they get less than the defendant offered. In that case they are decreasing the payoffs for other plaintiffs who settle.
"Defendants are forced to offer higher settlements because they have observed and expect irrational behavior from plaintiffs, and presumably have no way of knowing if the plaintiff in their case is the irrational type. This is not an equilibrium outcome."
This is true to some extent, but even then, a defendant's offer will not exceed the sum he believes he is likely to be held liable for, plus the cost of defense. Also, there is often as much irrationality on the defense side as there is on the plaintiff's side.
"My guess is that the equilibrium outcome is not approximated in reality simply because the decision maker is often the lawyer, facing different incentives entirely, and not the plaintiff."
As I noted above, lawyers usually push for settlement even when it is against their immediate financial incentives. This is in line with the ethical codes governing lawyers, and, in any event, most lawyers perceive it to be in their best interests to get the best result for their client, and gain referrals and repeat business, rather than to extract as many billable hours as possible out of each case.
"I don't know how lawyer pay works in cases like this, but if lawyers get paid for their time (in working the case) in addition to a cut of the award, it's possible that when we consider the lawyers as players in this game, we do have an equilibrium."
Lawyers usually get either an hourly fee or a percentage of the recovery, not both.
Posted by: Doug at Aug 8, 2008 2:56:22 PM
Doug is correct that lawyers push settlement, though it has little to do with ethics and more to do with long-term incentives and who the decision-maker is on each side.
As the article notes, 80 - 92% of cases settle. This is a good situation for plaintiff attorneys, who typically work on a contingency fee basis and can recover something from just about every case they file, without all the hard work of sorting meritorious cases from frivolous ones. Although the Party, not the lawyer, has sole settlement authority, most plaintiffs are one-time players, who will tend to defer to their attorneys. (Though as noted many plaintiffs do hold out, irrationally, for punitive reasons).
Defense counsel, on the other hand, bill hourly, and only have a limited stake in the ultimate outcome. (Mostly reputational, though this is a very real stake). This creates a strong incentive to prolong. However, defendants are typically corporate entities (or insured individuals) and repeat players, and settlement decisions are generally made by corporate employees (often salaried in-house attorneys) with no personal (emotional) involvement in the underlying event. The defendant's incentive is to settle for X, where X = cost of defense + expected judgment. X is often substantial, even when the expected judgment is essentially nothing.
Defendants also have a long-term interest in not settling, which should lead to plaintiffs' attorneys taking fewer frivolous cases, but due to the obvious collective action problem, this is not often acted upon.
Posted by: JP at Aug 8, 2008 3:55:52 PM
Also, Doug's account of the "loser pays" rule is misleading. In the U.S., unlike most developed countries, the default rule is that the parties bear their own costs. There are very rare, and usually codified, scenarios under which a successful defendant can recover defense costs (and even more cases, thanks to lobbying by the former ATLA, where successful plaintiff's can recover attorneys fees). This is a matter of lawyers making rules that protect lawyers, and public choice theory-style narrow interest group lobbying, not carefully crafted judicial decision-making in an adversarial system.
Posted by: JP at Aug 8, 2008 4:02:51 PM
"On the Internet, Doug, the answer is obviously "some guy who says that doing it his way will solve everything.""
Well, that's true in this case anyway. If I were king...
"These rules have been crafted over the last two hundred years by very smart men, who have considered extensive arguments laid out by other smart men both for and against the imposition of fees in each specific context"
Of course other legal systems (pretty much all of them), including the one ours is largely based on and which was crafted over a considerably longer period of time, also by presumably very smart men, have come to the opposite conclusion. Now, I'd be the last to argue that that in and of itself was an irrefutable argument against the way we do things now, but it's a consideration. As is basic fairness.
Posted by: J at Aug 8, 2008 5:59:35 PM
True, the "default" rule is that parties bear their own attorney's fees (though not costs). But this just means that where there is no specific rule or agreement to the contrary, parties bear their own fees. I would not call the exceptions to that rule "very rare" or even "rare." It is very common to see contractual attorneys fee clauses these days, and at least in California, whenever a contract calls for fees, it applies both to successful plaintiffs and successful defendants. In addition, SLAPP motions are extremely common these days, and such motions award defendants attorneys fees. Furthermore, there are various rules that impose sanctions, including fees for frivolous suits and motions.
I am not all that familiar with the reality of how courts function in England or other European countries today, but I know that in this country, a default rule awarding fees to successful defendants would give insurers and large companies a nearly insurmountable advantage in most cases, even where the plaintiff has a valid claim. Unfortunately being in the right is often not enough to win a lawsuit. Until it is, I would oppose any default rule to impose fees (let alone prison time, as J suggested) on unsuccessful plaintiffs.
Posted by: Doug at Aug 8, 2008 8:36:13 PM
What about prison time for unsuccessful defendants and their counsel? Just kidding.
I suspect a large part of the trend against plaintiffs and plaintiffs' lawyers (and I suspect that is the trend) is because the best and the brightest are leaving law schools and piling in to defense firms. The judges are coming mostly from the offices of prosecutors and defense firms. Procedural ways of ending lawsuits are getting more and more favored (summary judgments, motions to dismiss, in limine motions). The rules about awards of fees are a huge mess (in the US and England), making advising clients what to do in a case with a fees clause or fees statute a virtual impossibility. In CA, probably 25% of the published cases are at least in part focused on sorting out fees questions.
The study is also perhaps questionable in not sorting out default issues - how many awards are actually collected. How many settlements accepted are actually collected. In both cases, less than 100%. In business cases without insurance, the collectability issue is often huge.
One must also factor in the time to resolution. With large cases spread out over 5-10 years, and judges and legislatures and agencies getting more and more conservative (especially over the last 8 years or so), the law can change against the plaintiff. Most of those changes are retroactive, when they work against civil plaintiffs.
I predict we will see a glut of civil defense and plaintiffs lawyers, followed by a shakeout. In fact, I suggest we have had a shakeout in civil defense and plaintiff's lawyers over the last 15 years, with incomes flat or declining. People get confused by the $160k folks at biglaw in NYC, not realizing (a) that is a small and declining headcount (with 80-90% of the new jobs ending in under 5 years) and (b) 60% of that work is not litigation and (c) what biglaw litigation there is focuses on a small number of clients and cases (perhaps 100 cases of note at most for a 1000 person law firm in any given year - with such cases going on for years without dying or getting resolved). And biglaw litigation is getting more and more automated, so total biglaw litigation headcounts (reduced through mergers and layoffs) are down and trending down.
Is it a good thing that your average middle class plaintiff cannot hope to get a prompt and reliable trial in a decent sized case? Probably not. Leads us more into a 1984 society where we are at the mercy of large private institutions and government.
Posted by: cfw at Aug 9, 2008 9:34:22 AM
I am a civil attorney who has worked in insurance defense for 4 years. JP at 3:55 has it right. Large corporations generally just want to spend the least amount of money, so they often settle for the cost of defense, even on claims with very little merit. Many plaintiffs' attorneys will take a case only on the word of their client that some negligence occurred, without doing any independent investigation, because they know they are likely to get _something_ in the end. Many cases are settled before a lawsuit is even filed.
The civil liability system in the US is not what it is written up in most law journals to be - a way to right wrongs and have defendants bear the costs of their negligence. Instead, it is generally a form of distributive justice, funneling money from "rich" corporations and middle-class people with insurance to the poor. You will often see lower-class people who have been in 5-10 car accidents before middle age, as well as have had workers comp claims and a slip and fall lawsuit or two. If you live on the margin of poverty, it means nothing to you to file a lawsuit in which you only may end of collecting $1,500 or $2,000 after attorneys fees are taken out.
The system really is broken. The fact that nearly all cases settle is not necessarily a good thing.
Posted by: insurance defense atty at Aug 9, 2008 1:04:18 PM
