The FINAL VERSION of this paper will be published in the November, 1994 Santa Clara University Law Review. .
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This section analyzes how the different rules affect the likelihood of settlement. We first examine the disincentive for defendants to settle individually under the contribution with settlement reduction rule. This disincentive to settle occurs even when the defendants and the plaintiff have the same beliefs as to the outcome at trial.[141] However, this disincentive to settle does not exist if all defendants settle at once or condition their settlement on others settling. The conclusion of this subsection was originally shown by Easterbrook, Landes and Posner,[142] and by Polinsky and Shavell.[143]
Next, the paper shows that when the plaintiff and defendants have asymmetric information and beliefs, it is unclear as to whether the contribution with claim reduction rule or the no contribution rule will be more likely to lead to complete settlement. The analysis will focus on situations where the defendants and the plaintiff have different beliefs as to their likelihood of winning at trial. Under the no contribution rule, the plaintiff will settle with all but one defendant. But the last outstanding defendant may be less likely to settle under the no contribution rule than a similar defendant under the contribution with claim reduction rule. Yi also showed that neither rule would always lead to more complete settlement.[144] He demonstrated this conclusion with the case where the plaintiff had private information regarding its injury. Although the analysis of this subsection is different from Yi's analysis, the conclusion is the same.
The contribution with settlement reduction rule will give defendants a disincentive to settle individually even if the defendants and the plaintiff have symmetric information and beliefs.[145] If a defendant and the plaintiff agree on the expected outcome of a trial, one would normally expect them to settle and thus save litigation costs. But under the contribution with settlement reduction rule, a settling defendant might still have to pay contribution to another defendant that later loses at trial.[146] Without a settlement-bar to contribution, a defendant that settles will have higher expected damages than simply its settlement amount. In fact, where contribution can be obtained with certainty, a defendant will be unwilling to settle with the plaintiff for any positive amount.[147] This can be seen by examining a numerical example.
Suppose that two equally liable defendants cause total damages of $100, and the defendants and the plaintiff believe that each defendant will lose at trial to the plaintiff with probability 0.5. Given symmetric information, under the contribution with settlement reduction rule, the expected damage payment of each defendant is $25.[148] We can now show the defendant's disincentive to settle under the contribution with settlement reduction rule.
First, suppose that defendant A settles with the plaintiff for $25, defendant A's expected damages if the plaintiff sues defendant A.[149] The plaintiff will bring suit against defendant B for the remaining $75 in damages, and the plaintiff's expected damage award payment from the trial will be $37.50. However, defendant B will not be willing to settle with the plaintiff for $37.50. If defendant B settles with the plaintiff for $37.50, then defendant B will be unable to seek contribution from defendant A, as $37.50 is less than defendant B's share of the damages of $50.[150] But if defendant B loses at trial to the plaintiff, and pays the plaintiff $75 in damages, defendant B will seek contribution from defendant A of $25. This will leave defendant B with a net damage payment of $50 if it loses at trial. Thus, defendant B has an expected damage payment before trial of $25 as there is only a 50% chance the plaintiff will prevail at trial. However, defendant A will have an expected damage payment of $37.50. This is equal to the $25 from the initial settlement plus a 50% chance of having to pay defendant B contribution of $25.[151]
Now suppose that neither defendant A nor defendant B settles with the plaintiff. The plaintiff has a 50% chance of winning at trial, and thus each defendant will have a 50% chance of having to pay its share of the damages of $50. Each defendant will have an expected damage payment of $25. Because $25 is less than $37.50, which is defendant A's expected total damage payment if defendant A initially settled for $25, defendant A is better off not settling first individually. Similarly, defendant B is better off going to trial than settling first individually.
In fact, defendant A will not be willing to settle with the plaintiff for any positive amount under the contribution with settlement reduction rule.[152] Suppose defendant A settled with the plaintiff for $1. By paying the plaintiff $1 in an early settlement, defendant A only reduces its expected liability by 50¢. The plaintiff can still sue for $49 of defendant A's damages by suing defendant B. Defendant B will obtain contribution from defendant A if it loses at trial for the $49 in damages. Because defendant B has a 50% chance of losing at trial to the plaintiff, and we are assuming defendant B is able to obtain contribution from defendant A with certainty, defendant A will have a 50% chance of having to pay an additional $49 in damages. This will give defendant A an expected contribution payment of $24.50, for a total expected damage payment of $25.50. If defendant A had not settled with the plaintiff, then defendant A would have had a 50% chance of paying $50 in damages, and a total expected damage payment of $25. Since $25 is less than $25.50, defendant A is better off refusing to settle with the plaintiff than settling with the plaintiff for $1 in damages.
It seems bothersome that even though all parties agree about the expected outcome at trial, they remain unable to reach an agreement and save litigation costs. Under the contribution with settlement reduction rule, if parties are able to reach multi-party agreements, or are able to condition agreements on the settlements of other defendants, then there may not be the disincentive to settle as when defendants settle individually.[153]
To see this in the above example, suppose defendant A agrees to settle with the plaintiff for $25 conditioned on defendant B also settling. Defendant A has no disincentive to sign such an agreement because if defendant B does settle, defendant B will be unable to seek contribution from defendant A. If defendant B does not settle, then defendant A has not settled and thus will be in no worse of a position than if there is no agreement. Similarly, defendant B will have no disincentive to sign such an agreement. The plaintiff will conditionally settle with each defendant and the settlements will take effect at the same time. Thus, through these contingent agreements and group settlement, litigation costs are saved.
Where all parties have symmetric information and beliefs of the probabilities of loss at trial, there will be a disincentive for defendants to settle individually under the contribution with settlement reduction rule. If both defendants are not willing to simultaneously settle, then neither defendant will settle first and both defendants will go to trial. The result is that if just one defendant is unwilling to settle a case, all of the defendants will have an incentive to remain parties at trial against the plaintiff.[154]
Easterbrook, Landes and Posner showed that under the no contribution rule the plaintiff will always settle with all but one of the defendants.[155] They did not, however, examine the likelihood of trial with the last outstanding defendant. It may be that, for this last outstanding defendant, there will be a trial under the no contribution rule where there would have been settlement under the contribution with claim reduction rule. Of course, the opposite may also be true. It is the last outstanding defendant's characteristics that determine which rule will be more likely to lead to complete settlement. This is shown by Yi for the case where the plaintiff has private information concerning its amount of damage.[156]
We will examine the case where defendants and the plaintiff agree on the amount of damage the plaintiff has suffered, but disagree as to the chances of the plaintiff winning at trial. We can compare the no contribution rule with the contribution with claim reduction rule by examining the difference between the plaintiff's demands and defendants' offers for settlement. The smaller the difference between the plaintiff's settlement demand and a defendant's settlement offer, the more likely there will be a settlement.[157] Examples comparing the two rules will show how the different settlement outcomes depend on the characteristics of the defendants.
Suppose there are two defendants, total damages are $100, and each defendant believes the plaintiff will win the trial with probability 0.5. However, assume the plaintiff believes it will win the trial with probability 0.6.
First, assume that each defendant is liable for 50% of the damages under the contribution with claim reduction rule. In this case, the contribution with claim reduction rule is more likely to lead to more complete settlement than the no contribution rule.
Under the no contribution rule, the defendants will offer to settle for $33.33, as this is what they believe the equilibrium settlements will be (based on their beliefs of losing to the plaintiff at trial with probability 0.5).[158] The plaintiff will initially demand that each of the defendants settle for $37.50, as this is what the plaintiff believes the equilibrium settlements will be (based on its beliefs of winning at trial with probability 0.6).[159] However, the plaintiff will settle with one defendant based on the defendant's beliefs because the plaintiff is better off settling with one defendant, and suing the other, than refusing to settle with either defendant and suing both defendants.[160]
After settling with the first defendant for $33.33, the plaintiff will sue the outstanding defendant for $66.67. We now have a single defendant case where at trial the plaintiff will expect to receive damages of $40,[161] while the defendant will expect to pay damages of $33.33.[162] The difference between the plaintiff's and the last outstanding defendant's expected outcome of the trial is $6.67.[163]
Under the contribution with claim reduction rule, each defendant will offer to settle for $25.[164] The plaintiff will demand that each of the defendants settle for $30.[165] Under the contribution with claim reduction rule, the difference between the plaintiff's demand and each defendant's offer is $5.
For the plaintiff and defendant to settle under the no contribution rule, it must be that their total litigation costs are greater than $6.67. However, under the contribution with claim reduction rule, a defendant and plaintiff need only have total litigation costs of $5 in order to settle. Since the difference between the settlement demands and the offers of the defendants under the contribution with claim reduction rule is less than the settlement demand and offer of the last outstanding defendant under the no contribution rule, complete settlement is more likely under the contribution with claim reduction rule.[166]
Now let us modify the example such that defendant A is liable for 90% and defendant B is liable for 10% of the damages under the contribution with claim reduction rule. The analysis under the no contribution rule will be the same as where liability was equally allocated under the contribution rules. The plaintiff will settle with one defendant for $33.33, and sue the other defendant for $66.67. As before, the difference between the plaintiff's and the last outstanding defendant's expected outcomes at trial will be $6.67.[167]
Under the contribution with claim reduction rule, the proportion of damage a defendant is liable for affects the defendant's expected damage payment. Thus, we will have different results in this example than where damages are equally allocated.
Defendant A is liable for $90 in damages and has a belief that it will lose at trial with probability 0.5. Thus, defendant A will make a settlement offer of $45, an amount equal to its expected damages at trial.[168] The plaintiff, however, believes that it will win at trial with probability 0.6. Thus, the plaintiff will demand that defendant A pay $54, the plaintiff's expected damage award from defendant A at trial.[169] The difference between defendant A's settlement offer and the plaintiff's settlement demand is $9.
Defendant B is liable for $10 in damages and has a belief that it will lose at trial with probability 0.5. Thus, defendant B will make a settlement offer of $5 equal to its expected damages at trial.[170] The plaintiff believes that it will win at trial with probability 0.6. Thus, the plaintiff will demand that defendant B pay $6, the plaintiff's expected damage award from defendant B at trial.[171] The difference between the defendant B's settlement offer and the plaintiff's settlement demand is $1.
In this case, complete settlement is more likely under the no contribution rule. For the plaintiff and the last outstanding defendant to settle under the no contribution rule, they must have total litigation costs greater than $6.67. However, under the contribution with claim reduction rule, defendant A and the plaintiff need to have total litigation costs of $9 in order to settle. As the difference in the settlement demands and offers of the last outstanding defendant under the no contribution rule is less than the settlement demand and offer of defendant A under the contribution with claim reduction rule, complete settlement is more likely under the no contribution rule.
Neither the no contribution rule nor the contribution with claim reduction rule will always be more likely to lead to complete settlement. What drives the result is the amount of damage for which the last outstanding defendant is liable for under the two rules. When the plaintiff and defendant disagree about the outcome of trial, the absolute amount of their disagreement will be larger when the defendant is liable for more of the damages. If there is not a defendant that is liable for a large proportion of the damages under the contribution with claim reduction rule, then contribution with claim reduction rule is more likely to lead to complete settlement than the no contribution rule. If liability is allocated per capita among the defendants, then the contribution with claim reduction rule is more likely to lead to complete settlement than the no contribution rule.
The advantage the no contribution rule holds over the contribution with claim reduction rule is that there will tend to be fewer defendants outstanding if a trial does actually take place. When a trial does occur under the contribution with claim reduction rule there may be many non-settled defendants.
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If Mary Carter agreements are allowed between the defendants and plaintiff, then the defendants will not have a disincentive to settle under the contribution with settlement reduction rule. See infra Return to text
[A] "no-bar" rule . . . would quite clearly inhibit the policy of encouraging settlements. A defendant has nothing to gain by entering into a settlement that does not effectively terminate, or for that matter even reduce, further financial exposure. . . . Indeed, a defendant has everything to lose by so doing. Even in the strongest of actions, there is always the possibility of a defense verdict and, thus, a required payout of zero. At the very least, by remaining in the action a defendant can defend himself and attempt to reduce his proportionate share of liability. Since the upper-end risk is not reduced in the slightest by a partial settlement, a rational defendant may as well "roll the dice," pursuing the matter to trial and hoping for a favorable verdict.
Nelson v. Bennett, 662 F. Supp. 1324, 1334 (E.D. Cal. 1987) (citation omitted). Return to text
A tortfeasor who enters into a settlement with a claimant is not entitled to recover contribution from another tortfeasor whose liability for the injury or wrongful death is not extinguished by the settlement nor in respect to any amount paid in a settlement which is in excess of what was reasonable.
Unif. Contribution Among Tortfeasors Act ¤ 1(d), 12 U.L.A. 63 (1955).
But, if a defendant settles for an reasonable amount that is more than its share of the damages, then it will be able to seek contribution from other defendants. Unif. Contribution Among Tortfeasors Act ¤ 1(d) cmt., 12 U.L.A. 65 (1955). However, even if a defendant is allowed to seek contribution when it settled for more than its share of the damages, the defendant will still have a disincentive to settle, because if the defendant loses at trial, it will be able to seek more in contribution from other defendants than if it settles for the expected damages at trial.
For example, suppose defendant A is liable for 90% and defendant B is liable for 10% of total damages of $100, and that each defendant has a probability of losing at trial to the plaintiff of 0.5. Suppose that the plaintiff brings suit against defendant B for the total damages of $100.
If defendant B settles with the plaintiff for the plaintiff's expected damage award payment at trial of $50, then defendant B, as it is liable for $10 of the damages, will be able to seek $40 in contribution from defendant A. Thus, defendant B's expected damage payment from settling with the plaintiff, and then seeking contribution from defendant A, will be $10.
But if defendant B refuses to settle with the plaintiff, then there will be a 50% chance that defendant B will win at trial and will pay nothing and a 50% chance that the plaintiff will win $100 in damages at trial. But if defendant B loses at trial and pays the plaintiff its $100 in damages, defendant B can seek contribution from defendant A for $90 of the damages. Thus, defendant B will have a net payment from loss at trial of $10 and defendant B's expected damages will thus only be $5. Therefore, defendant B is better off going to trial with the plaintiff than settling with the plaintiff. Return to text
Any single defendant who refuses to settle, for whatever reason, forces all other defendants to trial. Anyone foolish enough to settle without barring contribution is courting disaster. They are allowing the total damages from which their ultimate share will be derived to be determined in a trial where they are not even represented.
Id. at 1408. Return to text
This is assuming that the probabilities of the plaintiff winning at trial against the various defendants are positively (exactly) correlated. See infra Return to text
Yi sets up a situation where a plaintiff has private information concerning its injury that can either be high damage or low damage. The defendants form a probability assessment of whether the injury to the plaintiff is high damage or low damage. The defendants then offer either a high or a low settlement depending on their probability assessment of the plaintiff's level of injury. If a defendant offers a high settlement, the plaintiff will accept it regardless of which type it is; while if a defendant offers a low settlement, then there is a possibility of a trial.
For defendants that are equally liable under the contribution with claim reduction rule, Yi demonstrates that a defendant's probability belief that the plaintiff suffered high damage, for which the defendant offers a high settlement, is lower for the contribution with claim reduction rule than for the no contribution rule. That means for some probability assessments, the defendant will make a high settlement offer under the contribution with claim reduction rule where it might have made a low settlement offer under the no contribution rule. Because a plaintiff will always accept the high settlement offer, while it may or may not accept the low settlement offer, for a range of the defendant's probability assessment of the plaintiff's type there is more likely to be settlement under the contribution with claim reduction rule than under the no contribution rule.
What drives this result is that the difference between the high and low settlement offers under the no contribution rule is larger than the difference between the high and low settlement offers under the contribution with claim reduction rule. For the case where defendants are liable for the same proportion (or nearly the same proportion) of the damage, a defendant has more to gain if a low settlement offer is accepted under the no contribution rule than if it is accepted under the contribution with claim reduction rule. Because the value of having a low settlement offer is greater under the no contribution rule, the defendant is more likely to make a low settlement offer, even though making a low settlement offer will increase the risk of a trial and the litigation costs associated with it.
Yi's analysis shows that if defendants are liable for (nearly) equal proportions of the damage, then the contribution with claim reduction rule will lead to more settlement than the no contribution rule. He also shows that if the defendants are liable for different proportions of the damage, it is possible that the difference between the high and low settlement offers are smaller under the no contribution rule than under the contribution with claim reduction rule for some defendants (defendants liable for a high proportion of the damage). Therefore, trials may be more likely under the contribution with claim reduction rule than under the no contribution rule (as the defendants that caused a high proportion of the plaintiff's damage will have more to gain from a low settlement offer under the contribution with claim reduction rule than under the no contribution rule).
My analysis above does not assume that defendants lack knowledge regarding the plaintiff's injury. Instead, the assumption I make is that the plaintiff and the defendants disagree on the probability of the defendant winning at trial. My analysis more closely follows that of the typical one plaintiff, one defendant settlement models with asymmetric information as to the probability of trial outcome, but common knowledge of what each party's beliefs are and the amount of damages caused. Return to text
Now suppose the plaintiff settles with one defendant for $33.33. Given the plaintiff's beliefs, the plaintiff will have an additional expected damage payment at trial against the second defendant of $40. $40 = (0.6) x ($66.67). The plaintiff will have a total expected damage award of $73.33. $73.33 = $33.33 + $40.
Thus, the plaintiff is better off settling with the one defendant, as the plaintiff was able to receive $33.33 with certainty rather than $33.33 with a 0.6 probability, which leads to the increase of $13.33 in the total expected damage payment. Return to text