THE TERMS OF SETTLEMENT: IMPLICATIONS FOR THE DESIGN OF OFFER-OF-SETTLEMENT RULES 2

dosudebnoe_uregulirovanie_sporov1As we have shown, one way to get settlements equal to the expected judgment is to require one of the parties to make a special offer with two-sided cost-shifting. As long as the cost-shifting includes all litigation costs, and is two-sided, this rule would produce an expected settlement equal to the expected judgment, whether the rule requires the plaintiff or the defendant to mate the offer. An alternative that yields the same outcome is to give each party an option to mate a special offer.  Note that Rule 68 as it stands currently is quite different from the any of the rules that, under the identified circumstances, would ensure settlements that mimic the expected judgment. Under the existing Rule 68, (i) only the defendant may mate a special offer, yet this offer is optional, (ii) the cost-shifting is one-sided, and (iii) the cost-shifting is only partial and does not include attorneys’ fees.

While the potential use of offer-of-settlement rules to move settlement terms closer to the expected judgment is an interesting possibility, we wish to emphasize that we are at this stage far from being in a position to mate any recommendations concerning such use of these rules. To start with, thus far we have shown how to ensure settlement terms equal to the expected judgment only in the situation in which the judgment is equally likely to be higher or lower than its expected value. Disputes over damages alone may come close to this situation, but cases that include a dispute over liability are unlikely to do so. To produce settlements equal to expected trial outcomes in cases of disputed liability, offer-of-settlement rules would have to be more complex; we leave this subject to future research.

Second, the effect that an offer-of-settlement rule has on settlement terms is not the only effect of the rule that should be taken into account in evaluating its merits. It would be important to consider also the rule’s effect on the likelihood of settlement. To focus on settlement terms, we assumed symmetric information which ensured that all cases will settle (with the only question being for how much). It should be noted, however, that, using a model with asymmetric information, Spier (1994) has demonstrated that, in the case in which the parties dispute only damages and the judgment is equally likely to exceed or to foil below its mean, a certain two-party offer-of-settlement rule with two-sided cost-shifting will actually maximize the likelihood of settlement.