One of the earliest questions a defendant must face when litigating a class action is whether to fight or settle. Most lawyers worth their salt would advise their clients to look at the costs of litigating the case, and balance that against the expected payout (damages discounted by the probability of losing), perhaps taking into account the likelihood that the settlement will encourage the particular plaintiffs' firm to sue again. In a recent article titled Law in the Shadow of Bargaining: The Feedback Effect of Civil Settlements, Duke Law School professor Ben Depoorter suggests a few other reasons why defendants might think twice before settling large cases.

Depoorter identifies many of the same settlement pressures that we know defendants already face.

For instance, idiosyncratic settlements are more probable when a disputant is concerned with maintaining a professional reputation. A party may be able to exploit a defendant’s need to avoid the negative attention of court proceedings and induce settlement offers that exceed legally available remedies. Concerns with the “headliner effect” of a dispute may thus lead to settlement outcomes that are above the expected value of the case at trial.

What Depoorter points out is that settlements themselves create precedent.

First, prior settlements exert “peer pressure” on similarly situated parties, effectively weakening their position in comparable disputes. Innovative settlements serve as benchmarks to ambitious lawyers, making plain- tiffs in future disputes more demanding and thus more reluctant to accept settlements below those that parties in prior settlements received.

Second, due to their noncoercive nature, settlements may frame the normative outlook on particular claims or disputes. A novel legal claim for tort compensation might be considered outrageous at first, but will be perceived as less extraordinary if it has been gratified by a prior concession in a settlement agreement. As a settlement precedent reduces the apparent unreasonableness of any claim, it becomes harder for similarly situated parties to contest similar claims in future cases. Judges, for instance, may interpret settlement precedents as expressive statements regarding the appropriateness of compensation. Once a novel legal claim for tort compensation has been gratified by a similar concession in a private settlement agreement, parties will perceive future claims as less extraordinary.

 

How do lawyers find out about other settlements? People talk, and they observe. It's human nature. So, given large law firms (where, leaving aside firewalls, lawyers can share shoptalk safely) and the extensive informal networks plaintiffs use, news of settlements can disseminate more quickly than it did even ten years ago. Technology helps, too. Organizations like the plaintiffs' bar's American Association for Justice will report on public settlements, and even blogs critical of sweetheart settlements (like this one, Russell Jackson's, or the Center for Class Action Fairness) report on individual settlement agreements, including the amounts the class receives and the amounts the lawyers got paid.

What does this mean for defense lawyers? It means that it's always a good idea to consider settlement offers within the larger context of the client's goals. There is often strong pressure on defendants to settle a given case--as many courts have recognized, class actions create a skewed incentive to settle. But unless the client is truly a company facing a single, one-off case, its settling one class action on favorable terms may very well create leverage for the next plaintiffs to file a complaint.