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Study Shows That Settlements Result in Better Outcomes for Both Parties

By Christopher Annunziata

A few weeks ago, I noted in passing that I had mediated several cases in a row in which the plaintiff walked away from reasonable settlement offers, only to have the court find in favor of the defendant.  It turns out that this is actually a common occurrence.  The New York Times reports that a study to be published in the Journal of Empirical Legal Studies finds 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.”

The basic premise of the article seems elementary to me.   Everyone is convinced they (or their position) are unique and that others will see their position exactly as they see it. As the article notes,

?Most clients think they are completely right,? Michael Shepard, a lawyer at Heller Ehrman in San Francisco. A good lawyer has to be able to tell clients that a judge or jury might see them differently.

And it is not limited to clients - there are apparently naive, self-deluded lawyers “dismissive of the study, noting that the statistics mean nothing when contemplating a particular case, with its specific facts and legal issues, before a specific judge.”  So, the fact that people pass up perfectly reasonable settlement options didn’t seem like earth shattering news.

The two things that really made my eyebrow arch were  1) the percentage of plaintiffs who pass up settlement and “lose”, i.e., are awarded less money than they were offered.  [And yes, as a former defense counsel for various insurers, be certain that even though the defendant is still writing a check, they consider this a "win"]; and 2) the discrepancy between what happened when a plaintiff passed on a settlement and what happened when the defendant passed on it.

According to the article:

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.

That means that nearly two-thirds of all plaintiffs are offered more than they are awarded at trial.   That seems staggering.  Until you factor in the other half of the argument - the amount of that “error.”

The article states:

On average, getting it wrong cost plaintiffs at about $43,000; the total could be more because information on legal costs was not available in every case. For defendants, who were less often wrong about going to trial, the cost was much greater: $1.1 million.

This seems ridiculously out of proportion to me.  I would like to see more of the data or have these numbers expressed as percentages in order to determine whether which is more significant.  Which error hurt which side more?  Did the plaintiff receive $57,000 when they were offered $100,000?  Did the defendant get popped for $10 million claim when the plaintiff would have taken $9 million?  Hard to say.

Even so, it seems that while defendants are wrong only 24% of the time, their “mistakes” are far more costly.

The answer?  Well, I’m not sure there is a one-size-fits-all approach.  Like Vickie Pynchon suggests, you can’t very well tell people to take the last offer on the table.  This is, however, where a qualified, skilled, professional mediator can help the parties make pragmatic, informed decisions to resolve the issues before them.

Full post as published by CKA Mediation and Arbitration Services Blog on August 13, 2008 (boomark / email).