Some of the toughest questions a party and his or her attorney have to answer during the course of a case revolve around the issue of settlement -- whether to seek substantive settlement talks with the other side; when to pursue mediation or other forms of ADR; and how to value the case for the purposes of reaching resolution. While some clients seem to relish the idea of having their “day in court,” their attorneys must grapple with the idea of whether that really serves their clients’ best interests. In addition to the often enormous costs of litigation, as well as the significant time associated with taking a case through trial and subsequent appeals, is the client’s financial interest well served by foregoing settlement and proceeding to trial? A recent study published in the September 2008 issue of the Journal of Empirical Legal Studies seeks to answer that question.
This important study examined over 2,000 cases involving a variety of different claims during a three-year period by measuring the trial outcomes of those cases against the settlement alternatives that had been presented along the way. By comparing the amounts received at trial to the amounts offered in previous negotiations, the study’s authors found that there was a high rate of “decision error” among the parties who chose to take their chances at trial.
On the plaintiffs’ side, they committed decision error – i.e., they received an amount at trial that was less than or equal to a previous settlement offer from the defense – 61.2 percent of the time. The mean cost of the plaintiffs’ decision error was determined to be $43,100.
On the other hand, defendants committed decision error – i.e., the verdict or award was equal to or higher than the plaintiffs’ final settlement demand – in 24.3 percent of the cases. But the mean cost to defendants for that error was a staggering $1,140,000.
Thus, while the frequency of decision error was higher for the plaintiffs, the cost of getting that decision wrong fell more heavily on the defendants. Only in 14.5 percent of cases did the trial outcome actually fall between the plaintiff’s settlement demand and the defendant’s settlement offer. These findings were consistent with other earlier studies, which had compiled similar statistics over the course of 40 years.
As any litigator knows, heading to trial is not only expensive and time-consuming, it’s also a gamble with often unpredictable results. This recent study conducted by the Journal of Empirical Legal Studies confirms that parties frequently make the wrong choice when they decide to take their chances at trial. The incidence and magnitude of those mistakes are dramatic and make a negotiated settlement often the wisest financial choice the parties can make.
Erik Johnson is the founder of Creative Dispute Resolutions, LLC, a Maryland-based ADR group featuring a number of retired judges and prominent local attorneys.