Some thoughts about the economics of settlement

Fordham Law Review

Volumn 78, Issue 3, 2009, Pages 1129-1141

  Bronsteen, John ^a  

^a LOYOLA UNIVERSITY CHICAGO   (United States)

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[No Author keywords available]

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EID: 75649132277     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (84)

1. Owen M. Fiss, Against Settlement, 93 YALE L. J. 1073, 1076 (1984).
2. Id. at 1076 & n. 11.
3. See generally Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399 (1973);
4. George L. Priest, Regulating the Content and Volume of Litigation: An Economic Analysis, 1 SUP. CT. ECON. REV. 163 (1982);
5. Steven Shavell, Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative Methods for the Allocation of Legal Costs, 11 J. LEGAL STUD. 55 (1982).
6. E.g., Marc Galanter, The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts, 1 J. EMPIRICAL LEGAL STUD. 459, 462 tbl.1 (2004).
7. Cf. John Bronsteen, Against Summary Judgment, 75 GEO. WASH. L. REV. 522, 526 (2007) (questioning the widespread assumption that "the system would be crushed under the weight of innumerable trials if summary judgment disappeared"). The title is, of course, an homage to Fiss's essay, the subject of this symposium.
8. Compare, e.g., George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. LEGAL STUD. 1, 4 (1984) ("The most important assumption of the model is that potential litigants form rational estimates of the likely decision....")
9. with Russell Korobkin & Chris Guthrie, Psychology, Economics, and Settlement: A New Look at the Role of the Lawyer, 76 TEX. L. REV. 77, 79-80 (1997) ("The list of reasons litigants might not behave in accordance with the [classic economic] model's predictions is impressively long: Litigants litigate not just for money, but to attain vindication; to establish precedent; 'to express their feelings'; to obtain a hearing; and to satisfy a sense of entitlement regarding use of the courts...." (footnotes omitted) (quoting Austin Sarat, Alternatives in Dispute Processing: Litigation in a Small Claims Court, 10 LAW & SOC'Y REV. 339, 346 (1976))).
10. Relatedly, see also Russell Korobkin & Chris Guthrie, Psychological Barriers to Litigation Settlement: An Experimental Approach, 93 MICH. L. REV. 107 (1994) [hereinafter Korobkin and Guthrie, An Experimental Approach];
11. Jeffrey J. Rachlinski, Gains, Losses, and the Psychology of Litigation, 70 S. CAL. L. REV. 113 (1996).
12. Cf. Ward Famsworth, The Taste for Fairness, 102 COLUM. L. REV. 1992 (2002) (reviewing LOUIS KAPLOW & STEVEN SHAVELL, FAIRNESS VERSUS WELFARE (2002)).
13. See, e.g., John Bronsteen, Christopher Buccafusco & Jonathan S. Masur, Hedonic Adaptation and the Settlement of Civil Lawsuits, 108 COLUM. L. REV. 1516 (2008).
14. Fiss, supra note 1, at 1089.
15. Cf. DANIEL M. HAYBRON, THE PURSUIT OF UNHAPPINESS: THE ELUSIVE PSYCHOLOGY OF WELL-BEING 34 (2008) (describing this category of normative theory as "preference satisfaction" or "desire- fulfillment").
16. Fiss, supra note 1, at 1089.
17. Owen M. Fiss, The Allure of Individualism, 78 IOWA L. REV. 965, 979 (1993).
18. JOHN RAWLS, A THEORY OF JUSTICE 30 (1971);
19. cf. Michael S. Moore, Torture and the Balance of Evils, 23 ISR. L. REV. 280, 331-32 (1989).
20. Louis Kaplow & Steven Shavell, Fairness Versus Welfare, 114 HARV. L. REV. 961, 968 (2001). They explain, "[O]ur critique is limited to notions of fairness that give weight to factors unrelated to individuals' well-being...."
21. Id. at 968 n. 5.
22. MATTHEW D. ADLER & ERIC A. POSNER, NEW FOUNDATIONS OF COST- BENEFIT ANALYSIS 53 (2006).
23. See, e.g., William M. Landes, An Economic Analysis of the Courts, 14 J. L. & ECON. 61 (1971);
24. Posner, supra note 2.
25. It should be noted that the early law and economics scholars provided reasons to account for the phenomenon of trials-i.e., to explain what would otherwise be a curiosity. Indeed, that was their primary project in the context of applying economics to litigation. Some of these reasons are discussed infra.
26. For a description of this mode of analysis, see Bronsteen, Buccafusco & Masur, supra note 7, at 1519-22;
27. Russell Korobkin, Aspirations and Settlement, 88 CORNELL L. REV. 1, 7 (2002);
28. and see also Samuel Issacharoff & George Loewenstein, Second Thoughts About Summary Judgment, 100 YALE L. J. 73, 101-03 (1990).
29. Fiss, supra note 1, at 1076-78.
30. One type of reason Fiss gives-that the poorer party will be less able to pay for discovery and trial-would harm that party at trial as well as in settlement and could therefore be characterized by an economist as being part of the expected value of the litigation. (Of course, Fiss is criticizing precisely this view that such expected value constitutes the relevant worth of the lawsuit.) Another type of reason Fiss gives-that an indigent plaintiffs "need is so great that the defendant can force him to accept a sum that is less than the ordinary present value of the judgment, "
31. id. at 1076-is specific to settlement and arguably separates the monetary sum of a settlement from the expected value (as expressed simply in a dollar amount) of an adjudication.
32. E.g., id. at 1086-87.
33. See Steven Shavell, The Fundamental Divergence Between the Private and the Social Motive To Use the Legal System, 26 J. LEGAL STUD. 575 (1997). I bracket here the canonical impediments to settlement-e.g., hard bargaining, information asymmetry, and agency costs-that could prevent a mutually beneficial settlement from being offered or accepted. For a discussion of these impediments, see generally, for example, ROBERT G. BONE, CIVIL PROCEDURE: THE ECONOMICS OF CIVIL PROCEDURE (2003).
34. Fiss, supra note 1, at 1089.
35. 347 U. S. 483 (1954).
36. E.g., Shavell, supra note 21;
37. Kathryn E. Spier, A Note on the Divergence Between the Private and the Social Motive To Settle Under a Negligence Rule, 26 J. LEGAL STUD. 613, 614-16 (1997);
38. see also A. Mitchell Polinsky & Daniel L. Rubinfeld, The Deterrent Effects of Settlements and Trials, 8 INT'L REV. L. & ECON. 109 (1988).
39. Ezra Friedman & Abraham L. Wickelgren, No Free Lunch: How Settlement Can Reduce the Legal System's Ability To Induce Efficient Behavior, 61 SMU L. REV. 1355 (2008).
40. Id. at 1361-70.
41. Id. at 1373.
42. Fiss, supra note 1, at 1085.
43. The best examples of such clarification are appellate decisions and written opinions issued by trial judges. But even a jury verdict could signal to potential defendants whether certain conduct that they are considering engaging in would be adjudicated unlawful.
44. David M. Trubek et al., The Costs of Ordinary Litigation, 31 UCLA L. REV. 72, 104 (1983).
45. Bronsteen, supra note 4.
46. Id. at 530-32.
47. Id. at 539-43.
48. SeeFiss, supra note 1, at 1075.
49. Priest & Klein, supra note 5, at 5.
50. E.g., Landes, supra note 15, at 61;
51. Posner, supra note 2, at 417-18;
52. Priest & Klein, supra note 5, at 4.
53. E.g., Posner, supra note 2, at 418.
54. See Bronsteen, Buccafusco & Masur, supra note 7, at 1521;
55. Korobkin, supra note 17, at 7.
56. See Robert Cooter et al., Bargaining in the Shadow of the Law: A Testable Model of Strategic Behavior, 11 J. LEGAL STUD. 225 (1982);
57. see also Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 YALE L. J. 950, 972-73, 975-76 (1979).
58. Daniel Kahneman & Amos Tversky, Choices, Values, and Frames 39 AM. PSYCHOLOGIST 341, 344 (1984);
59. Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONOMETRICA 263, 268-69 (1979);
60. Amos Tversky & Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, 211 SCIENCE 453, 453 (1981).
61. Rachlinski, supra note 5, at 118-19.
62. See id.
63. Werner Güth & Reinhard Tietz, Ultimatum Bargaining Behavior: A Survey and Comparison of Experimental Results, 11 J. ECON. PSYCHOL. 417, 447 (1990);
64. Martin A. Nowak et al., Fairness Versus Reason in the Ultimatum Game, 289 SCIENCE 1773, 1773 (2000).
65. Korobkin & Guthrie, An Experimental Approach, supra note 5, at 110-11;
66. George Loewenstein, Samuel Issacharoff, Colin Camerer & Linda Babcock, Self-Serving Assessments of Fairness and Pretrial Bargaining, 22 J. LEGAL STUD. 135, 139 (1993) ("[S]ubject disputants seemed more concerned with achieving what they considered to be a fair settlement of the case than maximizing their own expected value.").
67. Korobkin & Guthrie, An Experimental Approach, supra note 5.
68. Cf. RAWLS, supra note 12, at 3 ("Justice is the first virtue of social institutions, as truth is of systems of thought.").
69. See generally MARC D. HAUSER, MORAL MINDS: HOW NATURE DESIGNED OUR UNIVERSAL SENSE OF RIGHT AND WRONG (2006);
70. ROBERT WRIGHT, THE MORAL ANIMAL: WHY WE ARE THE WAY WE ARE (1994).
71. See Samuel R. Bagenstos & Margo Schlanger, Hedonic Damages, Hedonic Adaptation, and Disability, 60 VAND. L. REV. 745 (2007);
72. Jeremy A. Blumenthal, Law and the Emotions: The Problems of Affective Forecasting, 80 IND. L. J. 155 (2005);
73. Bronsteen, Buccafusco & Masur, supra note 7;
74. Cass R. Sunstein, Illusory Losses, 37 J. LEGAL STUD. S157 (2008).
75. Sunstein, supra note 48.
76. Bronsteen, Buccafusco & Masur, supra note 7. The text is actually a slight oversimplification, because our claims in that article are supported by two independent explanations of the empirical studies, only one of which is that litigants value fairness. The phenomenon we identify, and the predictions we make, would be unchanged if a plaintiffs settlement decision making were characterized entirely in terms of gain/loss framing rather than in terms of an attachment to fairness.
77. Id. at 1525.
78. BRUNO S. FREY & ALOIS STUTZER, HAPPINESS AND ECONOMICS: HOW THE ECONOMY AND INSTITUTIONS AFFECT WELL-BEING 143, 149-50 (2002).
79. Drawing these sorts of inferences is complicated, admittedly, by the fact that Bruno Frey and Alois Stutzer find the right to participate to be far more important than actual participation.
80. See id. at 167.
81. Id. at 153.
82. Id. at 154.
83. This is Frey and Stutzer's core finding, as discussed above.
84. Fiss, supra note 1, at 1075.