Does Settling the Case Make Sense?

The third in a series of articles about how to reduce litigation costs while getting better results.  The following is adapted from Chapter I.D of Bensen & Myers on Litigation Management.

If done properly, one of the most significant methods of reducing litigation costs over time is a systematic approach to evaluating settlement opportunities.  The reality is that 90% or more of all cases settle before going to trial.  While it is easy to get caught up in the day-to-day management of a given case, the importance of a systematic approach to evaluating settlement opportunities at certain stages of the litigation process should not be overlooked. 

Two factors complicate the decision to settle.  The first factor is emotional:  The lure of resoundingly prevailing over an adversary at trial has a powerful appeal.  That emotion will only grow once a lot of money is sunk into litigation expenses.  As a result, there is a natural inclination to put off serious consideration of settlement, sometimes until after a good opportunity has passed. 

A systematic approach to settlement may help keep those emotions in check and help avoid missing good settlement opportunities.  Thus, each litigation should be evaluated for the possibility of settlement at regular intervals.  Of course, an opponent may raise the possibility of settlement at other times, and a party can use the same evaluation methodology that we describe here as those additional opportunities to evaluate the possibility of settlement arise.

The other factor complicating the decision to settle is the inherent uncertainty of a litigation.  Obviously, in any settlement negotiation, a party has to consider the possibility that it will receive more (or pay less) if it goes to trial instead of settling.  Like the emotional aspects of settlement, that uncertainty will often result in settlement being delayed, sometimes until it is too late to take advantage of a good settlement opportunity. 

There are four critical points in a litigation where it should take time to evaluate the possibility of settlement:

  1. At the outset of the litigation;
  2. after a significant amount of discovery is taken;
  3. after the close of discovery in the pre-trial phase, i.e., the "eve of trial"; and,
  4. after trial

As the litigation progresses, more information will emerge from the fact and legal investigation permitting a party to better understand its position.  However, its opponent will be better informed as well.  Thus, it is prudent to consider settlement early and revisit the possibility at each of these points in the litigation. 

Evaluating settlement prospects at each stage will require both quantitative and qualitative analyses.  One part of the quantitative analysis is the plaintiffs' maximum recovery, which with respect to damages can be taken directly from the Complaint (ignoring any claims dismissed from the action).  Where injunctive relief is sought, this analysis is more complicated given that the value of an award of an injunction will not always be translatable into a dollar figure.  Where such an injunction would relate to the sales of a product however, the anticipated profits on those sales (from the defendant's perspective) or the additional profits that can be expected once the competing product is off the market (from the plaintiff's perspective) can be used.

The other part of the quantitative analysis is the remaining attorneys fees that will be incurred if the litigation proceeds through trial and appeal.  This number can be taken from a revised budget that considers only the fees associated with work to be done from the time of the settlement evaluation through to the end of the litigation.

The qualitative analysis involves discounting the plaintiffs' maximum recovery by the possibility that the plaintiff will prevail.  That is, if the plaintiff's maximum recovery is $10,000,000 and the likelihood that the plaintiff will succeed is 25%, for settlement purpose, the plaintiff's estimated maximum recovery is $2,500,000.  The information available to perform the qualitative analysis will be provided by factual and legal analyses.   The determination of the odds that the plaintiff will succeed should be, at this stage of the analysis, as objective as possible.

With the plaintiff's estimated maximum recovery in hand, the plaintiff will anticipate a net likely recovery of that amount less its remaining attorney's fees while the defendant will anticipate a likely exposure of the maximum recovery plus its remaining attorneys fees.  Of course, both parties will attribute a different likelihood of success to the plaintiff's claims, so both the plaintiff's anticipated recovery and the defendant's anticipated exposure will be individualized and not known by the opponent.  However, each party's conclusion will provide it with a reasonable basis to enter into settlement negotiations.

The tools needed to evaluate settlement opportunities along with concrete methodologies and tools to address case evaluation, budgeting, the decision to bring suit, staffing issues, document collection, review and production, privilege review, trial preparation and other facets of the litigation process are provided in Bensen & Myers on Litigation Management.

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