To Settle or Not To Settle: That Is the Question

Obermayer Rebmann Maxwell & Hippel LLP
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Obermayer Rebmann Maxwell & Hippel LLP

Consider the following (common) scenario: your company has been served with a lawsuit by a former employee claiming they were wrongfully terminated. Legal counsel advises you that, while the employee is making what appears to be an obscene settlement demand, you should nonetheless have an internal discussion to determine your company’s settlement position. This internal discussion requires analysis of numerous factors that drive a case’s settlement value.

What are the advantages of settlement?

A settlement’s biggest advantage is that it provides certainty. Trying a case to verdict and through appeal is a strictly win/lose proposition. You could win and get a defense verdict and successfully defend that verdict on appeal, or you could face a costly and embarrassing plaintiff’s verdict, which in some cases could include significant emotional distress and punitive damages, and be further liable for the plaintiff’s attorney’s fees. Settlements temper this dichotomy with the employer paying a smaller amount than a possible plaintiff’s verdict, but more than the $0 that the employer would pay in the case of a defense verdict. Settlement amounts are typically confidential, so the press and other employees will not know what you paid. You also save on attorney’s fees because the case will be resolved sooner.

Settlements also have other practical benefits. You avoid the time-consuming process of having to respond to discovery and have your employees sit for depositions. Not only does discovery take time away from productive work, but depositions tend to erode healthy workplace boundaries and result in broader awareness amongst your employees that one of their former co-workers is suing the company. It is also sometimes possible to include various non-monetary provisions in a settlement agreement, such as a non-disparagement clause, to protect the company that are not possible when a case is tried to verdict.

How much is a reasonable settlement?

This will depend on the particulars of the case. Your attorney can advise you on the worst-case scenario, the amount of the largest potential verdict. It is human nature that the employee will likely agree to a significant discount in order to trade the possibility of a verdict in the distant future for the certainty of a quick settlement payment. How much you can get the employee to discount will depend on their individual motivation to settle, which is emotionally driven in large part.

Your attorney will also advise on the likelihood that you will prevail at trial based on the facts of the case. A case with strong evidence favoring the employee will naturally settle for more than one where the evidence favors the employer.

When should I settle?

This also depends on the case. It is generally less expensive to settle earlier. The employee is incentivized to settle earlier because there is more uncertainty early in the process, and a longer time for the employee to wait before they have any chance of collecting a dime in court. The employee’s attorney’s fees also increase as litigation progresses, thus increasing your exposure, not to mention that you will also spend more on your own attorney’s fees as the case moves forward.

Employees are often motivated to settle in pre-litigation settlements in order to avoid filing a public lawsuit that could impede their future career goals.

That said, it takes two to tango. It may be necessary to litigate at least for a time to wear down the employee’s resolve if they have an outsized expectation about what their case is worth. Sometimes, it can be helpful to take the plaintiff’s deposition, especially where there are credibility issues or your counsel believes that the plaintiff may make admissions that will damage their case.  In other cases, early mediation can be an opportunity for both parties to soften their positions.

When is it better not to settle?

Employers tend to eschew settlement on general principle because they are afraid of the moral hazard that settlement will embolden other employees to sue. Strong confidentiality provisions can neutralize this risk to some degree, but they can be difficult to enforce. On the other hand, your employees can become emboldened to sue if a colleague wins a public verdict. Even if you win, the cost of winning can sometimes far exceed the cost of any settlement you would have paid.

Strict “no settlement policies” therefore make little sense for most employers. It is in the best interest of most employers to settle when there is a reasonable chance of a plaintiff’s verdict and an employee who is willing to accept a reasonable settlement. You can also make an educated assessment of the likelihood that another employee would be motivated to sue based on your company’s number of employees and work dynamic. You can find a reasonable middle ground by delaying settlement until later in the proceedings if you have reason to believe that your company will be seen as a “mark” by employees and their attorneys.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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