Let’s Make a Deal By Kathy Perkins Settlement Savvy

It’s three months to trial and stances, the parties did better at trial than decision errors, which suggest ways to if they had settled. If not, how much did it strategize settlement with more savvy and you’re evaluating the latest cost a party to proceed to trial rather than to improve confidence that the last settle- to accept the last settlement offer from the ment proposal from the other side is the demand from the plaintiff. The defendant or demand from the plaintiff? As best deal possible. The researchers eval- described below, the researchers reported a uated decision error based on a number motion for summary judgment high incidence of “decision error,” defined as of variables described in the next section. when a party’s position after trial or arbitra- Cases were only included if information was denied so if there is no settlement, the tion was the same or worse than the rejected was available about each parties’ last set- case will be tried. You’ve assembled a lot offer—otherwise known as the “oops” phe- tlement position. The study did not include of data from outside counsel: the range nomenon. To determine and quantify deci- class actions or a few other types of cases in of possible verdicts and likelihood of out- sion error, a party’s additional attorneys’ fees which too many variables existed to draw comes within that range; attorneys’ fees; after the settlement discussions failed were conclusions about the settlement offers and out-of-pocket costs; jury information; the taken into account only to the extent that trial results. proclivities of the judge; and the friendli- they were awarded to a prevailing party. ness of the appellate court. Added to that Offers of Judgment list is the impact of a verdict on the com- Results of Study The factor that showed the greatest impact pany, publicity, precedent, transactional Overview on decision error was offers of judgment. time—yours and company witnesses— In only 15 percent of cases did both par- This study focused on California Code of and timing. How can you get the best pos- ties better their last settlement positions by Civil Procedure Section 998, that state’s sible deal from the other side? Is that better going to trial. For example, assume that the counterpart to Federal Rule of Civil Pro- than going to trial? Why did you think last offer from the defendant was $400,000 cedure Rule 68. The purpose of an offer of going in-house would be easier than the life and the lowest demand from the plaintiff judgment is to encourage the settlement of of the law firm litigator? Where can you find was $1,000,000. The jury returned a ver- lawsuits before trial by penalizing a party a completely clear crystal ball? dict of $650,000. Setting aside costs and who fails to accept a reasonable offer from A fascinating study of 2,054 Califor- fees for the moment, the defendant bettered the other party. Rule 68 permits a party to nia civil cases decided between 2002 and its last settlement opportunity by $350,000 serve an offer to the opposing party to al- 2005 provides a sobering report about and the plaintiff by $250,000. Assuming low judgment to be taken against that party the quality of settlement decision mak- monetary and non-monetary transactional with costs then accrued. If the offer is not ing. Randall L. Kiser, Martin A. Asher, costs—costs, fees, value of time related to accepted within 10 days and the ultimate and Blakeley B. McShane, Let’s Not Make a trial and appeal—did not wipe out the ben- judgment against the party making the of- Deal: An Empirical Study of Decision Mak- efit, both sides were better off with the trial fer ultimately is “not more favorable” than ing in Unsuccessful Settlement Negotiations, outcome than if they had taken the last deal the offer, the opposing party must pay the 5 J. Empirical Legal Stud. 551, 551–591 on the table. costs accrued after the offer was made. (Sept. 2008), http://www3.interscience.wiley. Overall, plaintiffs made a decision error Kisher, Asher, and McShane’s study com/cgi-bin/ fulltext/121400491/PDFSTART. The in 61.2 percent of cases at an average cost found that when a plaintiff or defendant study, which also reviewed other studies in of $43,000. Defendants fared better at trial made an offer of judgment, that party’s multiple jurisdictions and found consistent more often than plaintiffs—with decision decision-error rate and cost decreased, results, raises provocative questions about error only 24.3 percent of the time—but the with a corresponding increase in both for how lawyers and clients make decisions cost of being wrong was much greater, aver- the non-offering party. A plaintiff-only about settling versus going to trial. aging $1.14 million. offer improved the decision-error rate The purpose of the study was to deter- The study reveals that a number of fac- from 61 percent to 41 percent for plain- mine whether, and under what circum- tors can lead to more frequent or costly tiffs. Defendants reduced their odds of decision error with an offer of judgment to plaintiffs from 22 percent to seven per- N Kathy Perkins started her own workplace law and mediation firm, Kathy cent. When both parties made offers of Perkins LLC, in Lawrence, Kansas, in March 2008, after 25 years of law firm judgment, there was less deviation in the litigation practice, most recently with Constangy, Brooks & Smith LLP, where error rate compared with the “no offer” she is still of counsel. Ms. Perkins is an executive committee member of the decision-error rate. However, there was Management Labor & Employment Roundtable and on the board of the Heart- a striking decrease in the average cost of land Mediators Association. error for defendants—from $1.3 million

© 2009 DRI. All rights reserved. In-House Defense Quarterly N Summer 2009 N 23 without offers to $300,000 regardless of uct liability, premises liability and med- fendants and dropping for by 20 points for whether offers were made by defendants ical malpractice cases. On the defense plaintiffs. In arbitrations, defendant deci- or plaintiffs. side, decision-error rates were highest in sion error was comparable to bench tri-

RENDS Interestingly, although the purpose of cases in which insurance coverage is gen- als, while for plaintiffs it dropped to 28.9

T an offer of judgment is to encourage set- erally not available, such as contract or percent. But in 25.8 percent of arbitrations tlements, the researchers opine that this fraud. They noted an inverse relationship there was no decision error: both parties technique may actually induce risk-taking between plaintiff decision-error and win achieved a result more favorable than the by parties and, paradoxically, provoke the rates; that is, high decision error in cases last settlement offer. gambling mentality that it is intended to curb. One question that Kisher, Asher, and N Type of Damages McShane’s study raises is whether a stat- Cases were also classified by types of dam- LITIGATIONutory offer of judgment actually height- In every single type of case, ages: current, defined as injuries and dam- ens risk-seeking behavior by the receiving ages already sustained; future, defined party. The researchers compared 998 offers defendants’ mean cost as prospective losses; and punitive. The to “loser pays” systems, evaluated by Jef- researchers were interested in whether the frey Rachlinski, which found that “by rais- of error vastly exceeded results would support a behavioral eco- ing the stakes at trial, the loser-pays system nomics theory that a party is more likely makes litigation itself more valuable and that of plaintiffs. to recover actual losses already sustained can discourage settlement.” Kisher, Asher, than lost future profits or other remote and McShane, at 575 (quoting Jeffrey Rachi- N damages. The results, though, were incon- linski, Gains, Losses and the Psychology of clusive about distinctions in decision error Litigation 70 S. Cal. L. Rev. 113 (1996)). with historically low win rates, such as involving claims for current or future dam- medical malpractice and product liability. ages or both. The most interesting con- Type of Case, Fee Arrangements The opposite was true for defendants: their clusion was that decision-error rates were and Insurance highest decision- error rates were in cases significantly affected by punitive dam- Cases were categorized by Kisher, Asher, with high win rates for plaintiffs, e.g., con- ages claims. Defendant decision error rose and McShane as contract (including real tract and fraud. by five percent when punitive damages estate), employment, fraud, intentional were involved, while plaintiff decision error tort, medical malpractice, personal injury, Who’s Your Lawyer? decreased by about 14 percent. premises liability, eminent domain, prod- The study identified the following for at- uct liability, and negligence (other than torneys representing the parties: gender, We’re Getting Worse! personal injury). The table on page 25 sum- firm size, years of experience, the academic With the increasing emphasis on sophisti- marizes some of the researchers’ findings and diversity rank of their law school, and cated risk analysis, litigants should be get- by type of case. Id. at 578. whether they were trained as a mediator. ting better at deciding when to hold and Plaintiffs’ decision-error rates exceeded The only significant identity-related factor when to fold. But comparing Kisher, Asher, their overall mean of 61 percent in cases was attorney-mediator. Both plaintiffs and and McShane’s results to other studies sug- involving negligence, premises liability, defendants represented by an attorney with gests that parties are making increasingly intentional tort, product liability, and med- mediation training had somewhat lower de- worse decisions about when to go to trial ical malpractice. Their decision-error cost cision-error rates than those who were not. rather than settle. Both frequency and cost was highest in contract cases—$144,900— In personal injury cases—the largest sam- of decision error was greater in 2004 than followed closely by fraud at $134,400. ple available—plaintiffs’ decision error in 1964, despite vastly greater resources and Defendants, on the other hand, had the dropped from 53 percent to 45 percent and data. The study provides us with the oppor- highest decision-error rates in employ- defendants’ from 26 percent to 17 percent. tunity to reflect on the reasons why cases do ment, fraud, contract, and eminent domain not settle and the costs and benefits asso- cases. In every single type of case, defend- Forum ciated with those decisions. Here are a few ants’ mean cost of error vastly exceeded When decision error was evaluated based observations about how corporate counsel that of plaintiffs. The high was $4.1 million on the forum, remarkable differences might make better settlement decisions. in fraud cases, and only in cases of emi- emerged among jury trials, bench trials, nent domain, personal injury, intentional and arbitration. Because 90 percent of cases Strategies for Obtaining a tort and medical malpractice was the cost in the study were tried before a jury, those Realistic Settlement Evaluation of error below a million dollars. results were, of course, similar to the over- Invite the Bad News with the Good The researchers observed that plain- all results. When cases were tried before a Some clients send a message—either tiffs had higher decision-error rates in the judge rather than a jury, defendant- and directly or indirectly—that they expect types of cases in which contingency fee plaintiff-decision error were identical, 42.6 their lawyer to win the case. Realistic arrangements are common, such as prod- percent, increasing by 20 points for de- assessment of bad facts or risk of liability

24 N In-House Defense Quarterly N Summer 2009 leads to doubts about whether the law- Win Rates, Decision Errors, and Cost of Error yer is any good or is aggressive enough. Plaintiff Percentage Mean Cost If you’re reading this article, you proba- Case Type Win Rate No Error of Error of Error bly aren’t that client, but it is worth tak- Overall 14.5% ing a step back to look at the culture that Plaintiff 61.2% $43,100 has developed around your organization’s Defendant 24.3% $1,140,000 relationship with outside counsel. Are you demanding and rewarding realistic analy- Eminent Domain 100.0% 25.0% sis that includes bad news? Plaintiff 41.7% $72,100 Defendant 33.3% $523,600 Seek Different Viewpoints Contract 62.6% 11.5% Most successful lawyers vet their case Plaintiff 44.3% $144,900 with seasoned practitioners to gain a bal- Defendant 44.3% $1,528,700 anced view. When counsel seeks only like- Fraud 61.4% 12.3% thinking colleagues, they tend to receive an Plaintiff 47.4% $134,400 overly optimistic view. It may be comfort- Defendant 40.4% $4,086,200 ing in the short run but ultimately not help- Personal Injury 60.9% 20.5% ful. In cases with a lot at stake, it can be cost Plaintiff 53.2% $32,200 effective to retain trial or jury consultants Defendant 26.3% $622,000 to run a mock trial or focus group or pro- Employment 51.1% 16.5% vide other expert advice on the facts, wit- Plaintiff 51.1% $64,800 nesses, and other evidence. However, even Defendant 32.4% $1,417,700 a small investment, such as hiring an attor- Negligence (non PI) 42.6% 14.9% ney who typically practices on the other Plaintiff 66.0% $82,100 side of an issue—for instance, a plaintiff’s Defendant 19.1% $1,597,000 employment lawyer—to review documents or listen to a summary presentation can pay Premises Liability 36.9% 13.8% off in the long run. Plaintiff 68.7% $46,100 Defendant 17.5% $2,378,000 Is the Principle Worth Its Weight in Gold? Intentional Tort 35.2% 9.5% But it’s the principle! Of course a party Plaintiff 69.3% $43,400 is entitled to make a decision that they’d Defendant 21.2% $859,400 rather lose than pay a dime to settle. If you Products Liability 30.2% 11.3% are in-house counsel, your job is to make Plaintiff 71.7% $72,600 sure to provide your internal clients with Defendant 17.0% $1,327,300 a pragmatic assessment of what that will Medical Malpractice 19.5% 4.1% cost. And if you are outside counsel, your Plaintiff 80.8% $15,200 job is to provide in-house counsel with the Defendant 15.1% $986,200 necessary information so that he or she can Journal of Empirical Studies, Volume 5, Issue 3, 551–91,September 2008 titled “Let’s Not Make provide that pragmatic assessment to his or a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations,” by her internal clients. We all know that set- Randall L. Kiser, Martin A. Asher and Blakeley B. McShane. It can be found at http://www3. tlement decisions are based on many fac- interscience.wiley.com/cgi-bin/fulltext/121400491/PDFSTART. tors other than pure economics. Extrinsic motivators—e.g., desire for just conflict resolution or “vindication,” support for price tag. Other benefits to a company can gests that a variety of factors may impact management decisions, necessity of mini- mitigate that loss, but it is rare that those the settlement decision-making process. mizing additional potential claims, effects benefits are adequately evaluated, quanti- If a company is a defendant, consider the of publicity, need to send a market signal— fied, and allocated. In-house and outside high cost associated with erring in decid- may cause parties to sacrifice the optimal counsel will have varying degrees of influ- ing not to settle. Even if your jurisdiction economic outcome in favor of a compelling, ence over the ultimate decision-maker, but has lower verdicts than California, Kisher, non-economic need. at the very least, they can advise and hope Asher, and McShane’s results have gener- There is nothing inherently wrong with their client will listen. ally been consistent with data compiled considering factors external to the risk or from other jurisdictions. Have you over- cost of a particular case, as long as it is clear Expand Your Horizons looked evidence that might turn a jury that pursuing them may have a substantial The Kisher, Asher, and McShane study sug- against your company? Defendant decision-

In-House Defense Quarterly N Summer 2009 N 25 error rates increase in cases with high win Litigators go to CLEs on deposition tech- ferences among cases settled in either one, rates. Have you realistically assessed the niques, cross-examination techniques, two, or three years. Including attorneys’ chances and costs of losing? Knowing that offering evidence, voir dire, and closing fees, “cases settled in two years cost nearly

RENDSplaintiff decision error is higher in contin- arguments. Although almost all cases will twice as much… as those settled in one

T gency fee cases than cases without contin- settle, attorneys generally have less train- year. Cases settled in three years cost two- gency fees suggests focusing on evaluating ing in dispute-resolution advocacy, negoti- and-a-half times as much…” Id. at 136. the interests of the opposing attorney to ation skills, and risk analysis. According to the study, factors affecting consider their effect on case analysis and Stan Davis is a business litigator at cost escalation included: decision making. While many factors can s ! PLAINTIFFS ATTORNEY FEES GENERALLY lower decision- error rates for defendants in N awardable in an employment case) con- cases likely to have been insured—includ- tinuously grew LITIGATIONing higher settlement rates—perhaps there It may be that those extrinsic s !MERICAN%XPRESSFEESROSE is an evaluative model utilized by the insur- s !S DISCOVERY PROGRESSED A PLAINTIFFS ance industry that could improve decision factors that caused resistance commitment to the case grew, as did that making. of his or her attorney, and the employer As noted, defendants’ decision-error to settlement early on seem lost the advantage of “better access to rates increased substantially in cases with the facts” punitive damages claims. The researchers much less important later. s 4HEPASSAGEOFTIMETENDEDTOINCREASE opine that this “diminished predictive ca- lost wages pacity” suggests that defendants either ig- N s !PLAINTIFFSEFFECTIVENESSBECAMEAUG- nore the claim altogether or “erroneously mented as the trial date loomed, particu- draw problem-solving analogies” between Shook, Hardy & Bacon in Kansas City, Mis- larly when a summary judgment motion cases without a punitive damage claim and souri, and a former law professor. He still failed those with. Or perhaps, the outcome of cases teaches trial practice programs to attor- s -ANAGERShBECAMEMOREANDMOREFED involving punitive damages awards are sim- neys at firms all over the country. Mr. Davis up with demands on their time and ply too irrational to predict. In any event, a has incorporated negotiation and media- energy” and thus more willing to settle. company defending against a punitive dam- tion skills into his training: “Junior litiga- Id. at 136–37. age claim should separately consider cases tors cannot adequately conduct discovery, We’ve all heard the inner voice saying in the jurisdiction in which punitive dam- develop or analyze a case without under- “if only…” after settling a case near trial ages were awarded for comparison pur- standing evidence and trial strategy. But for an amount far greater than a plain- poses. Look realistically at the facts that where the possibility of actually trying tiff’s original demand—not even count- support an award of exemplary damages. a case seems more and more remote it’s ing defense costs and fees. This is not to sometimes difficult to motivate their par- suggest that you should settle all cases, Strategies for Obtaining More ticipation in a trial skills program. Adding but rather to suggest that you do your best Favorable Settlements dispute resolution training makes it more to utilize resources wisely. It may be that Demand and Cultivate Dispute- relevant to their day to day activities.” those extrinsic factors that caused resis- Resolution Skills tance to settlement early on seem much As briefly mentioned, the one character- The Early Bird Gets the Worm less important later. Are they really worth istic of litigators that affected the quality The Kisher, Asher, and McShane study pro- that much money? What are the chances of settlement- decision making in Kisher, vides no information about the thousands that your case will improve as discovery Asher, and McShane’s study was whether of California cases between 2002 and 2005 proceeds? Or are there facts or documents or not they had been trained as media- that did not go to trial. Some would have you will have to produce that will serve to tors. Many attorneys approach a negotia- been resolved legally; some may have been energize the other side? How will your wit- tion or mediation in full advocacy mode, abandoned. The majority of these cases nesses hold up under the scrutiny of a dep- present some version of their closing argu- were settled and, since many were subject osition? Can you get the executives you ment, thus polarizing the opposing party, to confidentiality agreements, data was not need to testify to spend the time necessary and miss an opportunity to move a case available. to adequately prepare? to a reasonable settlement. Perhaps they That said, another study suggests that behave this way because it’s how they are early settlements cost less than those later Maximizing the Role of the Neutral trained and what they believe—rightly or in the process. American Express Com- Parties and their attorneys often miss an wrongly—their clients expect of them. Cor- pany examined 82 employment of its law- opportunity to get the greatest possible porate counsel can communicate expecta- suits settled over a four-and-a-half year benefit from a mediator. Understand that tions that outside counsel develop effective period. John Parauda and Jathan Janove, the mediator’s commitment is to help the negotiating skills and use them when called Settle for Less, 40 HRMagazine 135 (Nov. parties reach an agreement. Select a medi- upon to do so. 2004). Parauda and Janove reviewed dif- Settlement Savvy à page 74

26 N In-House Defense Quarterly N Summer 2009 Settlement Savvy  page 26 focuses on business, employment, profes- is accepted? For an excellent resource, see ator with a proven resolution track record. sional liability, and injury cases, “The best Teresa Rider Bult, Practical Use and Risky It may be helpful to have a mediator with dispute resolution advocates come to medi- Consequences of Rule 68 Offers of Judgment, knowledge of the jurisdiction, particular ation ready to learn something new and to 33 Litigation 26, 26–30 (Spring 2007). area of the law, or the attorneys involved thoughtfully analyze cost, risk, opportu- in the case. nity, and non-economic factors. S/he is a Conclusion A good mediator will reach out to the counselor. Their clients are prepared to see Given that the vast majority of cases filed do parties in advance of the mediation and their lawyers play a different role than they ultimately settle, it’s time to improve your guide them through the process. Media- would at trial and they are ready to appre- settlement savvy. Expand your expectations tors often ask the parties to provide confi- ciate it.” of advocacy to include better settlement dential statements of their positions, case evaluation and negotiation techniques, history, and prior settlement discussions in Use Offers of Judgment Wisely invite outside counsel to provide realistic advance. Take the extra step to discuss with Kisher, Asher, and McShane’s study sug- assessments and not just posturing. Place the mediator observations about imped- gests that a party can reduce decision- a realistic value on principle to ensure that iments to settlement, such as personal- making error rates and costs by effectively you don’t miss an opportunity to settle ities or other issues between the parties using offers of judgment. Perhaps the pro- a case that you know should be resolved that might be land mines. Your mediator cess of evaluating and making an offer of early. It is also important to educate inter- can help you to work with an internal cli- judgment improves a party’s ability to pre- nal clients about the nature of litigation ent who is having a hard time balancing dict the ultimate outcome at trial. and the risks and the costs of those extrin- the trade-offs. The offer of judgment should be made sic considerations that they may value more During mediation, use the mediator as with a clear understanding of the rules, as than warranted by a pure risk analysis. a sounding board, to get neutral feedback well as the consequences. Not only have Sometimes that education can come only about aspects of your evidence or the case, states codified and applied the concept dif- with experience. When a case settles at the to assess the credibility of the representa- ferently, there is variation among the local last moment or the company gets a bad jury tive for the other party, and to explore cre- rules of the federal district courts. Does verdict, take the opportunity to conduct a ative solutions that might even be outside the offer cut off attorney fees or only costs? post-mortem analysis with executive man- the strict boundaries of the litigation. Has it been worded to include costs, and agement. Hindsight helps you to evalu- According to Susan Hammer, a medi- fees, if awardable, then-accrued? Have you ate what went right, what went wrong, and ator based in Portland, Oregon, who considered the consequences if the offer what could have been a better decision.

74 N In-House Defense Quarterly N Summer 2009