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.