Bargaining Impediments and Settlement Behavior

Bargaining Impediments and Settlement Behavior

Description

TThere is considerable popular support for two propositions: too few disputes settle, and too many that do settle drag on for too long. There is likewise a widespread tendency to hold lawyers largely, if not exclusively, responsible for both problems. The popular belief—reflected in the Republican Contract With America, the Attorney Accountability Act, the Manhattan Institute proposal to reform contingent fees, the pronouncements of conservative commentators, and the remarks of then Vice-President Quayle to the American Bar Association--is that lawyers foment controversy and prolong litigation because they make money by doing so. The logic is simple and, for many politicians and voters, it is compelling. Although academics may be less inclined than the general population to blame lawyers for these problems, some, especially those involved in the development and implementation of alternative dispute resolution techniques, endorse the popular wisdom about the protractedness of litigation and the frequency of trials. For these scholars, it is almost an article of faith that litigation occurs too often, lasts too long, and costs too much. The numbers enable them to make a credible case. For example, an insurance industry publication indicates that 12 percent of every dollar of earned premium from private passenger automobile insurance is spent on lawyers' fees, with plaintiffs' attorneys and defense lawyers dividing the spoils in nearly equal shares (Mooney 1994). Another striking example can be found in a famous Rand study of asbestos litigation, which determined that claimants netted only 37 cents of every dollar spent by both sides, the remaining 63 cents being consumed as litigation costs. The numbers are not entirely one-sided, however. Studies suggest that trials occur in only a tiny fraction of tort disputes, that the majority of disputes that make their way into the legal system settle fairly quickly and with little or no discovery, and that exceptional cases in which trials occur or extensive discovery is undertaken tend to be complicated, high-dollar, multi-party affairs. These studies suggest that an alternative economic logic is at work, one linking the level of resources devoted to litigation to the amount in controversy and the complexity of a dispute. Economists of law have also considered why lawsuits proceed to trial. According to the most widely-accepted economic model, litigation is a negative-sum game for litigants. The longer play continues, the less the participants' aggregate wealth because they must expend on litigation money they could save by settling. Even if five percent or fewer of all controversies that make it into the courts ever get to trial, it is a puzzle to explain why so many disputes reach the point of litigation and why so many lawsuits are tried. Economists and others who have applied the model offer a variety of explanations for the frequency of protracted litigation and trials. One view is that trials occur because disputants make errors when estimating their chances of winning, especially when the alleged wrongdoer's level of culpability is near the level at which liability will be imposed. Although this view continues to have supporters, an empirical study of tried cases casts its validity in doubt. Another possibility is that because the legal system systematically under-produces information about legal norms, parties make mistakes identifying applicable legal standards and are unable to agree on likely trial outcomes as a result. Economists have also supplied an answer that echoes the popular wisdom about lawyers. Some scholars argue that protracted litigation and trials occur because lawyers are compensated on the basis of the amount of time they spend on a case. This opinion puts at least some of the blame on opportunistic lawyers. A different view that holds lawyers responsible but not blameworthy is that litigation involves parties in economically wasteful “Prisoner's Dilemmas”. Each party finds it rational to employ a lawyer-agent because doing so improves a party's expected outcome in litigation. However, when both sides are represented, neither gains a net advantage because the efforts of the opposing lawyers cancel out. This explanation is delightfully perverse. In contrast to the preceding explanation, which argues that litigation costs are high because lawyers disserve their clients, this explanation suggests that lawyers are responsible because they serve their clients too well. If clients gained no advantage from having lawyers, the dominant strategy of obtaining representation would break down and the problem of high litigation costs would disappear. In all likelihood, trials and protracted litigation occur for many reasons, only some of which have been touched upon. In this chapter we will offer our views on certain aspects of the forces that lead to litigation and summarize the results of some on-going empirical work on settlement. Our purpose will be to shine light into the black box that is the economic model of the decision to settle or sue and to suggest ways in which the model may need to be made more complex. The model leads one to wonder why protracted lawsuits and trials occur partly because it addresses neither the way participants in litigation process information about expected trial outcomes nor the dynamics of the bargaining games participants must play before settlements can be worked out. Empirical evidence, including experiments performed by one of the authors, suggests that participants in lawsuits often use information in faulty, biased ways, so that their estimates of trial outcomes make settlement less likely. Economic reasoning suggests that settlement games can have complex dynamics even in relatively simple disputes. It is easy to see that lawsuits may often become protracted and perhaps fail to settle when these dynamics are understood. Empirical study of settlement practices sheds further light on why settlements sometimes fail to occur. When discussing the dynamics of settlement, we will also suggest that lawyers are as much responsible for the high rate of settlement that prevails as they are for the frequency of trials and protracted litigation. Our experience studying disputes and the legal profession leads us to think that it is at least as accurate to describe litigating lawyers as settlement engineers or “friends of the deal” as it is to characterize them as pit bulls. Each of us is familiar with many, many instances where lawyers worked hard to settle complicated, multiparty disputes that posed extremely difficult questions of liability and damages. They did not always succeed, but their willingness to work hard for settlement is worth noting. A real difficulty is accounting for their failure. If lawyers are at least partially motivated to settle, and if litigation is a negative-sum game for litigants, how can settlement not occur? We hope to shed light on this and related questions below. In the first section of this chapter, we will summarize evidence bearing on the manner in which people process information about issues in contested litigation. The economic model bases the likelihood of settlement on the expectations of the parties. The processes by which these expectations form are more complicated than one might suspect, and they are worth studying in depth. In the second section, we talk in general terms about the dynamics of settlement games. These games must be played even when parties' expectations align. They can be quite involved, even in relatively simple disputes. By discussing a single example in some detail, we hope to convey a sense of that complexity and to suggest that lawsuits may often become protracted, despite the participants' willingness to settle, because settlement games are difficult to play. Finally, in the last section, we will summarize the results of an empirical study of settlement practices that tests the accuracy of the economic model of settlement.

Source Publication

Dispute Resolution: Bridging the Settlement Gap

Source Editors/Authors

David A. Anderson

Publication Date

1996

Bargaining Impediments and Settlement Behavior

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