Several years ago, Randall L. Kiser, Martin A. Asher and Blakeley B. McShane authored a study, titled “Let’s Not Make A Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations” [Journal of Empirical Legal Studies, Vol. 5, Number 3, 551-591, September 2008], which should be required reading for every trial attorney.
The study analyzed 2054 civil cases in California which had gone to trial or arbitration following unsuccessful settlement negotiations and found, among other things:
- 61.2% had resulted in a verdict or award in which plaintiff failed to obtain a better outcome than the best offer plaintiff had rejected;
- 24.3% had resulted in a verdict or award in which defendant failed to obtain a better outcome than the lowest demand defendant had rejected
- The remaining 14.5% had resulted in outcomes in which both sides could claim victory – i.e., a verdict or award in favor of plaintiff that was more than defendant had offered, but less than plaintiff had demanded.
The finding that plaintiffs would have done better, more than 60% of the time, if they had accepted defendant’s final offer should certainly give pause to the plaintiffs’ bar, but another finding should be of even greater concern to the defense bar.
Although defendants obtained better outcomes in more than 75% of the cases in which they had rejected plaintiff’s lowest demand and opted, instead, to proceed to trial or arbitration, they paid a staggering price in the nearly 25% of the cases in which the outcome proved to be worse.
When plaintiffs failed to obtain a better outcome, the verdict or award — on average — was $43,100 less than the highest offer they had rejected. When defendants failed to obtain a better outcome, the verdict or award — on average — was an astonishing $1,140,000 more than the lowest demand they had rejected. Put another way, when defendants undervalued a claim it was a mistake that proved to be 26 times more costly — on average — than when plaintiffs overvalued a claim.
Perhaps the most important lesson to be gleaned from the study is that litigants place too little weight on the potential downside — and too much on the potential upside — of trial or arbitration. Whenever the potential risk significantly outweighs the potential reward, litigants proceed to trial or arbitration at their own peril.
Unless the gap between the final offer and final demand is so large that both sides are confident they will obtain better outcomes by going to trial or arbitration, a negotiated resolution is almost certain to be a significantly better option for one party or the other.
In other words, unless you can predict — with the utmost confidence — a more favorable outcome, recommending that your client opt for trial or arbitration could prove to be a very costly error.
As always, It would be my pleasure to assist you and your clients in the dispute resolution process. Please don’t hesitate to contact me if I can be of service.
Floyd J. Siegal