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A Comprehensive Theory of Civil Settlement

85 Pages Posted: 19 Jul 2015 Last revised: 16 May 2016

J.J. Prescott

University of Michigan Law School

Kathryn E. Spier

Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

Date Written: April 2016

Abstract

A settlement is an agreement between parties to a dispute. In everyday parlance and in academic scholarship, settlement is juxtaposed to trial or some other method of dispute resolution in which a third-party factfinder ultimately picks a winner and announces a score. The “trial versus settlement” trope, however, represents a false choice; viewing settlement solely as a dispute-ending alternative to a costly trial leads to an anemic understanding of how dispute resolution should and often does work. In this article, we describe and defend a much richer concept of settlement, amounting in effect to a continuum of possible agreements between litigants along many dimensions. “Fully” settling a case, of course, appears to completely resolve a dispute, and if parties to a dispute rely entirely on background default rules, a “naked” trial occurs. But in reality virtually every dispute is “partially” settled. The same forces that often lead parties to fully settle — joint value maximization, cost minimization, and risk reduction — will under certain conditions lead them to enter into many other forms of Pareto-improving agreements while continuing to actively litigate against one another. We identify three primary categories of these partial settlements: award-modification agreements, issue-modification agreements, and procedure-modification agreements. We provide real-world examples of each and rigorously link them to the underlying incentives facing litigants. Along the way, we use our analysis to characterize unknown or rarely seen kinds of partial agreements that nevertheless seem to us theoretically attractive, and we allude to potential reasons for their scarcity within the context of our framework. Finally, we study partial settlements and how they interact with each other in real-world adjudication using new and unique data from New York’s summary jury trial program. Patterns in the data are consistent with parties using partial settlement terms both as substitutes and as complements for other terms, depending on the context, and suggest that entering into a partial settlement can reduce the attractiveness of full settlement. We conclude by briefly discussing the distinctive welfare implications of partial settlements.

Keywords: Settlement, Pretrial Bargaining,Trial, Litigation, High-Low Agreements, Partial Settlement, Contracts, Summary Jury Trial

JEL Classification: K41

Suggested Citation

Prescott, J.J. and Spier, Kathryn E., A Comprehensive Theory of Civil Settlement (April 2016). NYU Law Review, Vol. 91, pp. 59-143 (April 2016). Available at SSRN: https://ssrn.com/abstract=2632612

J.J. Prescott (Contact Author)

University of Michigan Law School ( email )

3170 South Hall
701 S. State St.
Ann Arbor, MI 48109
United States
734-763-2326 (Phone)

Kathryn E. Spier

Harvard University - Law School - Faculty ( email )

1575 Massachusetts
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Cambridge, MA 02138
United States
(617) 496-0019 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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