LAWSUIT AND SETTLEMENT ADVICE

This is going to seem like a simple question.  One to which there is seemingly an obvious answer but lawyers see the principle involved violated over and over again.  Assume that you are the person with a claim for the financial loss incurred by you against someone else because you believe that they wrongfully injured you or somehow violated your rights. The question is: What to do, settle or go to trial?  In short, which is the better outcome?

(a) To obtain an expected judgment of $20,000 against your adversary (the defendant) and get a bill for $7,000 for the expected future legal fees to try the case in court; or

(b) To settle in advance of trial and get a cash payment of $15,000 from the defendant. However, you would incur no more legal fees.

From a financial perspective, the answer is obvious. Settling for $15,000 [or alternative (b)] is the better result because to choose (a) would mean your “net recovery” after paying your attorney is only $13,000.  And the analysis employed in arriving at this answer holds true in virtually every type of case, regardless of whether the underlying claim is one for breach of contract, for alimony, property settlement, a personal injury or any other type of legal case.

By contrast, and looking at the situation from the defendant’s perspective, if you are the person against whom a demand for payment is made, which is the better outcome?

(a) Having a judgment entered against you for $20,000 but with the expectation that you will also have to pay $7,000 in future legal fees to have the case fully litigated in court; or

(b) Paying a settlement amount of $22,000 in cash to the Plaintiff, however by doing so, you avoid paying any more attorney’s fees.

The answer to this question is sometimes more difficult for defendants to understand and accept because they typically don’t want to pay the higher claim amount. But still, from a strictly financial perspective (b) is the correct answer.  This is because, when determining the best course of action (whether to pursue trial to its conclusion or to settle) defendants must “gross up” their total future legal fees and other costs and add them to the principal amount of the claim that they expect to pay if the case goes to trial. (Note that this grossing up (or adding) calculation by defendants contrasts with the “netting” calculation (the subtracting of future attorney’s fees from the expected recovery used by plaintiffs in their decision-making process.) In the above case the defendant expects to pay the $20,000 principal amount of the claim plus the $7,000 in expected future attorney’s fees to fully try the case. That sum ($27,000) should then be compared by the defendant to the proposed settlement payment of only $22,000.  The $22,000 settlement is a better alternative for the defendant simply because to that $22,000 figure nothing is added.  This is because settlement stops the accrual of additional attorney’s fees.

Why then do folks not always make the correct decision?  There are a variety of reasons.  Some legitimate, others are more questionable. Hard-headedness, pride and/or fighting over principle are big ones.  Those lawyers who are being paid on an hourly basis, tend to make a fair amount of money when the litigants fight over these things. This often results in the parties paying ever increasing legal bills. So, is fighting worth it?  That’s up to the litigants. The type of fee agreement that they have with their lawyers will have a significant effect on case settlement decision-making. Regardless of anything else, however, if litigants want to make the best decision they should be knowledgeable and objective about what they are doing and know why they are doing it.

What many folks do not understand is that the legal system is not always fair and doesn’t always award money for damages and claims that folks think they are entitled to. Prospective plaintiffs who’ve been damaged may not be legally compensated for every dollar that they’ve paid out as a result of what the defendant has caused.  Remote damages are not compensable.  Damages that are not “proximately caused” by the Defendant  are not recoverable by the Plaintiff.  Defining “proximate causation” is a complex subject that is beyond the scope of this article.  However, if the injury or damages were not directly caused by the Defendant then there’s going to be a lot of legal guesswork (albeit hopefully educated) regarding the recoverability of moneys to compensate the Plaintiff for those damages or injuries. Much depends on whether the particular injuries sustained by the Plaintiff were “foreseeable” given the Defendant’s activities and the surrounding facts.  If the type of injury sustained by the Plaintiff was not reasonably foreseeable, then the Plaintiff cannot recover moneys for those injuries.

Moreover, and just as importantly, the question to be asked is always: What is the law?  What is fair and just is a largely subjective notion upon which there is often disagreement in a particular case. As such, judges and jurors are not supposed to focus on what they subjectively think is fair and just unless doing so is consistent with what the applicable law is. As such, in a certain sense, what is fair and just is really, at best, only a secondary consideration and may not be relevant at all if what is fair and just is inconsistent with the applicable law. This is often difficult for clients to accept.  Judges and juries, in theory at least, are supposed to apply the law as it is, and they are not concerned about what the law should be. What the law should be is for the legislature to decide.

For example, plaintiffs cannot assume that a judge will award them compensation for the attorney’s fees that they’ve paid to their lawyer.  In many, if not most, cases judges are not allowed to grant such an award or judgment, unless a specific statute permits a judge to order the defendant to pay plaintiff’s attorney’s fees. And many times, plaintiffs find, to their dismay, that there is no such statute.

For example, assume Driver D picks up an unknown hitchhiker H. D approaches an intersection going too fast and hits the rear of driver P’s car, which is stopped at a red light at an intersection.  P gets out of his car and goes back to D’s car to obtain insurance and other relevant information.  At this point, without any prompting from D, H suddenly, and without warning, jumps out of the passenger side and runs around D’s car, tackles P and landing on top of him begins mercilessly punching P in the face. P is knocked unconscious and suffers serious fractures to his face.  Let’s further assume that H had, just prior to being picked up by D, escaped from a mental institution and that he has no money.

The point here is that in the vast majority of instances, if P sues D, he is not likely to obtain any compensation for the fractures and other injuries to his face, brain or other parts of his body caused by H.  P can, if he can prove it, get compensation for possible whiplash caused by the rear end collision itself. The reason for this is that the non-whiplash injuries sustained by P were not directly caused by D, nor were they the foreseeable result of D’s negligent driving.  It’s not foreseeable that driving too fast would cause a passenger to get out of the car and, without warning, start beating up another driver.

The result in the traffic example above may be obvious, but in some cases, the line between recoverability and non-recoverability is much more nebulous.  For example, suppose H was D’s son, who D knew was a psychotic sociopath with a long history of violence?  This is a good law school question, but P and P’s lawyers will have sleepless nights wondering whether they can get compensation for P’s injuries under those particular facts. This is because, although the non-whiplash related damages incurred may have been foreseeable (and even that may be a stretch) they clearly were not directly caused by D.

The foregoing example, however, does illustrate another point. Defendants also have to be concerned about what the applicable law is and avoid the temptation of making settlement and litigation decisions based on what they subjectively think is fair and just. To use the above example, if there was an existing statute or prior case law that squarely held that drivers were legally responsible for all damages to third parties caused by the action of their passengers who happened to be their children, then the fact that D had nothing to do with what D’s son had done is irrelevant and D would be held liable for the injuries his son caused.

The point here, however, is that maintaining objectivity and a strict focus on what the law is are crucial to good decision-making about a legal case. Equally important are: (a) the necessity of making an objective determination as to what the likelihood of getting an actual recovery are given the parties’ financial circumstances; and, (b) the fact that clients need to ask their lawyers periodically what the expected future attorney’s fees and litigation costs are likely to be to take the case to trial. This last point may not be as much of a concern if the lawyer is  being paid on a contingent fee basis, but it is very relevant if the lawyer is being paid hourly. However, there are also future court reporter, expert witness and other possible future litigation costs to consider.  Those too can often be avoided by settling early.

In any event, lawyers will probably only be able to give educated guesses and/or ballpark figures to most of the above questions.  In this regard, remember that sometimes the law is not clear, the other side may do the unexpected and that the judge or jury may simply have a bad day and do the unexpected, all of which renders all prediction-making somewhat  speculative. Litigation is inherently uncertain.  No one has a crystal ball. Thus, everything comes down to probabilities. However, asking these questions periodically throughout the course of the case is useful and promotes objectivity and therefore good decision-making.

David D. Lentz   © Copyright 2022; All Rights Reserved.           February 23, 2022

Revised 11/19/23