Why Barring Settlement Bars Legitimate Suits

Abstract:     
Professors David Rosenberg and Steven Shavell recently proposed granting defendants an "option to bar settlement" to discourage frivolous suits filed for a mere "nuisance"-value settlement. By exercising the option, a defendant prevents judicial enforcement of any ensuing settlement agreement between the parties. Rosenberg and Shavell contend that if settlement were foreclosed, a plaintiff would drop its nuisance-value suit, because its costs of litigating to judgment would exceed its expected benefits. They conclude that because defendants would only exercise the option if faced with a nuisance-value suit, adopting it would be socially beneficial. Although an option to bar settlement is an innovative proposal and an important scholarly contribution, this article shows that it could be highly problematic. First, a defendant would often exercise the option in small-stakes, high-cost, meritorious suits, which would decrease social welfare. Second, the option would fail to prevent many high-stakes, low-cost, frivolous suits. Moreover, Rosenberg and Shavell's analysis depends on a problematic definition of "nuisance suit," questionable simplifying assumptions, and speculative empirical assertions. In sum, without additional investigation, it would be folly to adopt an option to bar settlement.

Keywords: nuisance suits, frivolous suits, negative expected value suits, settlement, uncertainty, litigation

JEL Classifications: D8, K41

Accepted Paper Series