Empirical Research Confirms that Negotiated Results are Superior to Going to Trial

Recently, there was a report published of empirical research confirming that settlement is preferred to trial because the potential result is statistically found to be a better economic result. The newly released study reviews the results on a large number of cases that did not settle after mediation and eventually went to trial and addresses how those cases fared in comparison to the last settlement offer or demand.

The September 2008 Journal of Empirical Legal Studies (Vol. 5, No. 30, pp. 451-491), a joint venture of Cornell Law School and the Society of Empirical Studies, has published the results of a quantitative evaluation of “the incidence and magnitude of errors made by attorneys and their clients in unsuccessful settlement negotiations.” The study entitled, “Let’s Not Make a Deal: An Empirical Study of the Decision Making In Unsuccessful Settlement Negotiations,” was done by two faculty members and a graduate student from the Wharton School of Finance, University of Pennsylvania. The study analyzed 2,054 California cases in which the plaintiffs and defendants participated in settlement negotiations unsuccessfully and proceeded to arbitration or trial and compared the parties’ settlement positions with the award or verdict. As the study states, it “reveal[ed] a high incidence of decision-making error by both plaintiffs and defendants in failing to reach a negotiated resolution.

The study actually builds, as is noted below, on prior research in four studies so that the cases analyzed totaled 9,000 in the past 44 years. It compared the results in selected cases in which the parties exchanged settlement offers, rejected the offers of the other side, and proceeded to trial or arbitration. While the large group of cases were jury trials, court trials and arbitrations were included. The study was based on the report of results from California Jury Research (formerly California Jury Verdicts Weekly), which the authors found reliable.

As it states: “The parties’ settlement positions. . . [were] compared with the ultimate award or verdict to determine whether the parties’ probability judgments about trial outcomes were economically efficacious, that is, did the parties commit a decision error by rejecting a settlement alternative that would have been the same as or better than the ultimate award.”

Prior studies were reviewed and summarized as follows:

• Priest/Klien (1984-1985): Trials occur in “close cases,” and plaintiffs and defendants equally make mistakes; plaintiffs win about 50% of the cases that proceed to trial; this is referred to as the “fifty percent implication”;

• Gross/Syverud (1985-1986): 529 cases from June 1985 to June 1986 were studied; they questioned the validity of this type of research because the context of the negotiations and relationship of the parties and counsel affected the behavior of the parties;

• Gross/Syverud (1990-1991): Here, 359 cases were studied, and the results conflicted with the 50% distribution of “mistakes”; they found plaintiffs were more likely than defendants to reject a settlement opportunity that was more favorable than the result;

• Rachlinski (1996): He compared final settlement offers with jury awards in 656 cases. His findings were that plaintiff had a higher percentage of error (56.1% of the cases), but the average cost was $27,687, while defendants had a lower error rate (23%) but a greater risk of a bad result, with an average cost of $354,000. He concluded that plaintiffs were risk averse while defendants were risk seeking; that is, the risk of trial in these scenarios benefitted plaintiffs but it cost the defendants significantly.

Here is what the researchers found in the most recent study:

• Comparing the actual trial results to rejected settlement offers, the study found that 61% of the plaintiffs obtained a result that was not economically better than the settlement offer, i.e., it was either the same or worse than what was offered;

• In contrast, 24% of the defendants obtained a result that was not economically better;

• However, although the plaintiffs experienced more results that were not as economically good as the last offer, the risk of defendants rejecting the last settlement demand was higher.

• When the plaintiffs rejected an offer and went to trial, and did better, it was not that much better – an average of $43,100 over the last offer;

• However, when the defendants rejected the last demand and went to trial, and did worse, it was much worse – an average of $1,140,000 worse!

The study also found that the cost of “decision errors” in failing to accept the opportunities to settle increased between 1964 and 2004. In 1964, plaintiffs obtained worse results at trial than were available through settlement in 54% of the cases, while in 2004 it rose to 64% of the cases. During that same period, the range for defendants went from 19% in 1964 to 26% in 1984 and then declining to 20% in 2004. And, the cases in which neither party committed a decision error decreased from 27% in 1964 to 14% in 2004. Adjusted for inflation, the researchers found that a plaintiff’s decision errors increased 3 times, but a defendant’s errors were much more costly – increasing 14 fold.

Another interesting aspect of the study is the effect that statutory offers and cost shifting procedures had on the eventual results in cases going to a final decision making process. In California, under Code of Civil Procedure section 998, either party may make an offer of settlement which, if rejected by the other, can shift certain costs, including those of experts to the other if the result is less favorable than the statutory offer of judgment. The researchers found that instead of encouraging parties to consider settlement because of the cost shifting consequences of statutory offers, these offers had an opposite effect – instead, the parties were more likely to take aggressive settlement positions, resulting in “financially adverse outcomes,” than the other parties in the study. The “decision errors” for plaintiffs who rejected these statutory offers was 83% compared to the 61% plaintiffs who were not subject to such. Defendants made “decision errors” in 46% of the cases when facing a statutory offer, whereas the rate was 22% who were not faced with such.

Another finding that may not be surprising is that in cases in which litigants were represented by attorneys who had mediation training and experience, the parties experienced lower rates of “decision error.” Indeed, plaintiffs in these cases had a “decision error” of 21%. The authors suggested more research in this area.

It is quite apparent that the most recent study has dispelled the notion that the “fifty percent implication” rules applies. It has established a new dimension of risks for both plaintiffs and defendants in rejecting opportunities to settle. Plaintiffs risk the further costs of litigation and a result that is not that much better, which likely does not justify the investment of time and money in taking a case “to the mat.” Defendants, on the other hand, have a huge downside by risking large verdicts against them if they do not appreciate the opportunity they have by a negotiated closure.

The 40 page review of the study’s results is worth careful reading. It may also be important in reviewing the advantages of settlement versus trial with our clients.

The New Lawyer - How Settlement Strategies and Opportunities Have Affected the Responsibilities and Functions of Litigation Counsel

Anyone who has been involved in the dispute-resolution mechanism knows what a laborious and often mysterious process it can be. Mediation allows the parties involved in the dispute to sidestep the litigation process, while also getting results. Because of the mediator’s neutrality, the settlement resolution is more likely to be perceived as just. Mediation is a defined process that is recognized by attorneys and judges. It is a voluntary, non-binding forum in which the parties agree to conduct negotiations using a neutral intermediary who guides the parties through the legal process. The mediator has no decision-making authority. Rather, it is the mediator’s duty to work with the parties to agree on the terms for conflict resolution.

During mediation, the attorney’s responsibility is both as an advocate and counselor to the client. When advocating an issue, the skills used by an attorney are different than the approach used in a courtroom. An attorney also counsels the client on issues during the mediation.

Mediation helps litigants achieve settlement. When compared to the expense of prolonged litigation, mediation may be the best deal. The client has present use of funds, rather than the hope of financial recovery later, while also saving money on pre-trial and trial costs, as well as possible appeal. Litigation costs often surprise clients, particularly if expert testimony is needed. The fees for experts are quite high, usually involving several hundred dollars per hour. During the amount of time experts need to prepare, testify at deposition and appear in court, several thousands of dollars in costs may be incurred quickly. Thus, at an early mediation, a major factor in considering whether to settle is the future expense of proceeding without settling.

If possible, it is important to work toward mediation as early as possible so that the client may reach his or her goals. Bear in mind that the client is not going to push early mediation. It is the attorney’s responsibility to recognize the advantages of an early mediation and resolution for the client. Most courts, however, distributed alternate dispute resolution materials shortly after a case is filed and either urge counsel to pass the materials on to the client or require them to do so. However, unless the attorney couples this will some counseling on the availability and value of mediation, it is questionable if receiving this material has much impact on the client.

Research shows that a key factor in litigants’ willingness to use mediation is the recommendation and encouragement of their attorneys. For example, “a majority of parties in domestic relations cases (68 percent men and 72 percent women) who chose to use mediation said their attorneys had encouraged them to try it, whereas less than one-third (32 percent men and 18 percent women) of those who rejected mediation had been encouraged by their attorneys to use it.” (R. Wisler, When Does Familiarity Breed Content? A Study of the Role of Different Forms of ADR Education and Experience in Attorneys’ ADR Recommendations, 2 Pepp. Disp. Resol. L.J. 199, 204.)

Mediation involves an objective intermediary who negotiates with the parties to avoid or end the highly confrontational and tension-filled process of litigation. From the plaintiff’s perspective, it is a means of essentially selling the lawsuit to a defendant, who buys off the expensive and exposure of ongoing litigation. It involves an exchange of offers and counteroffers made in more of an informal business environment, rather than a formal courtroom.

Hostility, anger, finger pointing and accusations are not part of the mediation process. Diplomacy, salesmanship and patience are the bywords. The parties and their lawyers may be firm, tough and even hard-nosed at times, but they need to do it politely and diplomatically. The parties need to be prepared for mediation by having the appropriate attitude before attending the mediation. Unlike a deposition, this is where the client enters the business process of resolving disputes and essentially steps outside of the courtroom.

It is advisable to have a pre-mediation conference several days before the mediation occurs. This is two fold process: The mediator may conference (by phone usually) with counsel for the parties, either one on one or together to discuss the mediation, insure that the parties are ready, and that mediator has what he or she needs to make the process work. Counsel should also meet with the client to discuss the process, cover important aspects and get the client ready for the negotiation and decision making process of attempting to reach a resolution of the dispute.

Three aspects are important to stress; First of all the client needs to know that this is not a binding process; there is no third party who is going to decide the case and impose that decision on the client. It is client’s decision to settle. Second, the client should understand that this is not a confrontation. No one is going to testify. It involves an exchange of information so that the parties can be informed and negotiate. Third, the client must understand that what takes place at the mediation is confidential. It may not be brought up during a court trial.

The client should also be encouraged to keep an open mind as the process takes place. Many times, the client’s perspective on settlement will change as the mediation progresses. That is good because the client hears what the other side has to say and can consider the points and counter-points of the case and factor those into the decision making process. It is important for both counsel and the client to listen to what the other side says and also to the mediator’s comments. The mediator will often comment on issues and give his or her views on each side’s case. The mediator may offer the pros and cons of settlement versus proceeding further. This provides an objective, third-party view of the matter, which may be very valuable.

As the future unfolds, more and more courts will be creating ways for litigants to enter the mediation process at an early stage. The San Francisco Superior Court recently instituted an early mediation program. The San Francisco Bar Association also has a program for early mediation. The federal court has a program of early mediation and “early neutral evaluation” for several years. The future litigation process will rely more on courts and counsel directing litigants to a mediation alternative to litigation – and the earlier the better.

One concern I have is that I am seeing some reluctance of counsel to guide a case toward the mediation process because of the economic motive of being able to continue to bill a case and earn revenues. Frankly, I have seen evidence of this with opposing counsel in some of our cases. I have also heard this concern expressed by my trial lawyer colleagues and some mediators. It is indeed troublesome when counsel will not communicate with me about mediation even after I have offered to work together to get a discovery plan, or an exchange of information so that we can each have access to what we need to evaluate the case before we discuss resolution. In these troubled economic times, when law firms are folding or letting staff go, there is a concern that the motivation for economic survival will override the professional obligations to work towards a timely and efficient resolution of a dispute.

There is nothing to lose by mediation and only much to gain, and it is our duty as lawyers to see that a case is tested in that process. Who knows, a good result on both sides may mean more business rather than less.