To Settle or Not to Settle
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Strategy Social Impact Economics Feb 1, 2010

To Set­tle or Not to Settle

Nego­ti­a­tions and attor­ney inter­ests in med­ical mal­prac­tice cases

Based on the research of

Yasutora Watanabe

There is an old say­ing that the only win­ners in law­suits are the lawyers. That is espe­cial­ly true in pro­tract­ed civ­il pro­ceed­ings, whether the par­ties decide to set­tle or go to tri­al. That fact is unlike­ly to change. But Yasu­to­ra Watan­abe (Assis­tant Pro­fes­sor of Man­age­ment & Strat­e­gy at the Kel­logg School of Man­age­ment), a spe­cial­ist in bar­gain­ing, has devel­oped a mod­el that quan­ti­fies how legal changes affect costs and time spent in set­tle­ment nego­ti­a­tions. He has also exam­ined the dilem­ma fac­ing lawyers involved in civ­il pro­ceed­ings: bal­anc­ing their clients’ inter­ests with their own. His analy­sis reveals ways to make the process less cost­ly and time-con­sum­ing. And he con­cludes that attor­neys gen­er­al­ly work in their own interests.

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Once a civ­il case goes to court, the legal costs rise expo­nen­tial­ly. In most cas­es, there­fore, the two sides par­tic­i­pate in a bar­gain­ing process aimed at an out-of-court set­tle­ment. How­ev­er, attor­neys’ fees con­tin­ue to rise as the nego­ti­a­tion pro­gress­es. Typ­i­cal­ly bar­gain­ing is cost­ly, and becomes more so the longer it lasts. So you have an incen­tive to reach a set­tle­ment as soon as pos­si­ble,” Watan­abe says. In real­i­ty, though, peo­ple take a long time.”

String­ing Out Negotiations Both plain­tiffs and defen­dants string out set­tle­ment nego­ti­a­tions for the same rea­son. Each par­ty thinks its chances of win­ning are bet­ter than the opposition’s,” Watan­abe explains. In addi­tion, the longer the process con­tin­ues, the more like­ly it becomes that new evi­dence will arrive. That’s a ben­e­fit of wait­ing which might ben­e­fit the indi­vid­ual or might not,” he con­tin­ues. But it ben­e­fits both par­ties as it makes set­tle­ment more like­ly.” Watan­abe sum­ma­rizes the thought process of par­ties involved in set­tle­ment talks: If I keep it going, there will be more legal cost, but there might also be a ben­e­fit of learn­ing,” he says. And that can point to an appro­pri­ate con­clu­sion to the process. When ben­e­fit of learn­ing over­takes the costs of con­tin­u­ing lit­i­ga­tion, set­tle­ment will occur,” he concludes.

Watan­abe out­lines the issue for both sides as one of con­tin­u­ous­ly deter­min­ing risk and ben­e­fit. The risk is that if I keep going to the very end, I might lose the tri­al,” he says. But the ben­e­fit is that as I go on, there is more and more infor­ma­tion — which could lead to a con­clu­sion ben­e­fi­cial to both par­ties.” In effect, he says, both par­ties are fight­ing, but they’re both in the same boat. It’s fight­ing, but it’s not.”

How hard and how long should they fight? That is unclear. The ben­e­fit of learn­ing has not been stud­ied very much,” Watan­abe says. So he decid­ed to devel­op a dynam­ic mod­el that would pro­vide a more detailed under­stand­ing of bar­gain­ing and would help him to assess the impact of sug­gest­ed tort reforms on the entire process.

I find that the high­er the rate at which new infor­ma­tion arrives in bar­gain­ing, the short­er the time to set­tle­ment and the low­er the legal costs.” — Yasu­to­ra Watanabe

As the foun­da­tion for his mod­el, Watan­abe used an objec­tive source of infor­ma­tion: data on 5,379 med­ical mal­prac­tice claims against physi­cians col­lect­ed by the Flori­da Depart­ment of Finan­cial Ser­vices between Octo­ber 1985 and July 1999. The rea­son for that choice: The Sun­shine state’s insur­ance reg­u­la­tions demand more infor­ma­tion on such claims than most reg­u­la­to­ry author­i­ties. In par­tic­u­lar, they include details on the amounts involved in set­tle­ments and defen­dants’ total legal costs.

Mod­el­ing the Dynam­ic Bar­gain­ing Game” In his work­ing paper Learn­ing and Bar­gain­ing in Dis­pute Res­o­lu­tion: The­o­ry and Evi­dence from Med­ical Mal­prac­tice Lit­i­ga­tion,” Watan­abe details the out­comes he expects his mod­el of this dynam­ic bar­gain­ing game” to pre­dict. These include the plaintiff’s deci­sion on whether to file a law­suit and if so, the time to file; whether or not the case will be set­tled out of court; the time to res­o­lu­tion; the legal costs incurred; and the terms of settlement.

Hav­ing devel­oped the mod­el and proved that it fit all aspects of the data, Watan­abe used it to elu­ci­date the basic cri­te­ria for nego­ti­a­tions. I find that the high­er the rate at which new infor­ma­tion arrives in bar­gain­ing, the short­er the time to set­tle­ment and the low­er the legal costs,” he writes. Fur­ther­more, low­er expect­ed jury awards and less opti­mistic ini­tial beliefs short­en settlement.”

Next, he applied the mod­el to three poli­cies that var­i­ous par­ties have sug­gest­ed to reform the med­ical lia­bil­i­ty sys­tem and reduce its costs. These were a cap of $250,000 on jury awards in med­ical mal­prac­tice cas­es; elim­i­nat­ing the con­tin­gency fee approach, under which plain­tiffs pay noth­ing if they lose their cas­es but pay their lawyers a sub­stan­tial por­tion of any set­tle­ment or court award; and the so-called Eng­lish rule, which requires the los­er in lit­i­ga­tion to pay all the legal costs of the case. I find that cap­ping jury awards or elim­i­nat­ing the con­tin­gency fee arrange­ments sig­nif­i­cant­ly short­ens the expect­ed time to res­o­lu­tion and low­ers the expect­ed total legal costs,” Watan­abe con­cludes. ldquo;On the oth­er hand, los­er-pay-all allo­ca­tions of legal fees delay res­o­lu­tion and increase costs.”

Watan­abe empha­sizes that he does not intend to answer nor­ma­tive ques­tions or to con­duct wel­fare analy­sis on tort reform.” Rather, he states, my paper pro­vides a build­ing block on nor­ma­tive ques­tions about tort reform by devel­op­ing a tool to quan­ti­fy how changes in the law affect costs and time spent in litigation.”

Clash of Interests In a fol­low-up work­ing paper, Esti­mat­ing the Degree of Expert’s Agency Prob­lem: Case of Med­ical Mal­prac­tice Lawyers,” Watan­abe applies the mod­el to a spe­cif­ic issue relat­ed to lawyers work­ing under con­tin­gency fee arrange­ments. The issue: How hard will those lawyers real­ly work on behalf of their clients when their own finan­cial inter­ests clash with their clients’?

Lawyers under con­tin­gency fee arrange­ments in dis­pute res­o­lu­tion cas­es — where they receive a frac­tion of the recov­ered pay­ment as com­pen­sa­tion but bear the legal costs — are at odds with their clients’ inter­ests. Lawyers will be less will­ing to pur­sue a case than their clients due to the bur­den of the legal costs and the rel­a­tive­ly small pay­ment that results from a set­tle­ment. That is because the longer the set­tle­ment nego­ti­a­tions con­tin­ue, the high­er the legal costs and thus the low­er the net fees the lawyers will receive.

But does that pref­er­ence trans­late into prac­tice? After all, attor­neys must con­sid­er fac­tors oth­er than max­i­miz­ing their rev­enues. In par­tic­u­lar, Watan­abe explains, they have rep­u­ta­tion issues over the long term. They risk los­ing future clients if they are per­ceived as bar­gain­ing only for their own benefit.”

Rel­a­tive Benefits Watan­abe applied his mod­el to the Flori­da mal­prac­tice cas­es with the goal of deter­min­ing the rel­a­tive ben­e­fit offered to plain­tiffs and their lawyers by ana­lyz­ing the amount of time tak­en to reach a set­tle­ment or drop a case along with the actu­al pay­ments when set­tle­ments were agreed. I tried to give esti­mates between zero and one [with zero mean­ing activ­i­ty entire­ly in the client’s favor and one mean­ing deci­sions com­plete­ly to the lawyer’s advan­tage] to find exact­ly where the lawyer’s objec­tive is,” he notes. I tried to esti­mate the weight­ing between the two.”

Accord­ing to Watanabe’s analy­sis, The plaintiff’s lawyers work more in their short-run inter­est than in the best inter­est of their clients.” While oth­er fac­tors such as rep­u­ta­tion­al con­cern, pro­fes­sion­al lia­bil­i­ty, work­load, and altru­ism may play a role in how med­ical mal­prac­tice lawyers approach cas­es, Watanabe’s study shows these do not play as strong a role as the short-term interests.

In oth­er words, the analy­sis sug­gests that med­ical mal­prac­tice lawyers are gen­er­al­ly work­ing in their own inter­est, set­tling cas­es much ear­li­er than they would if they were work­ing self­less­ly for their clients. In par­tic­u­lar, Watan­abe says, the lawyers are not work­ing as hard as they would if they had them­selves for clients.”

Featured Faculty

Yasutora Watanabe

Member of the Strategy Department faculty until 2014

About the Writer

Peter Gwynne is a freelance writer living in Sandwich, Mass.

About the Research

Watanabe, Yasutora. 2006. Learning and bargaining in dispute resolution: Theory and evidence from medical malpractice litigation. Working paper, Kellogg School of Management.

Watanabe, Yasutora. 2009. Estimating the degree of expert’s agency problem: Case of medical malpractice lawyers.” Working paper, Kellogg School of Management.

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