Fair Settlements in Multidefendant Torts
Posted: 14 Nov 2015
Date Written: November 12, 2015
We study the fairness of legal rules for computing damages in cases with multiple defendants. Specifically, we develop a bargaining model of multidefendant litigation and compare the equilibria under different offset rules -- rules that adjust the plaintiff's trial award depending on which defendants settle. We find that the most common offset rule, the pro tanto rule, is always unfair because (1) the plaintiff recovers more than the expected value of her claim and (2) each individual defendant's expected payout bears no relation to the harm she actually caused. In contrast, the proportionate share rule (which a minority of states currently use) is always fair. We further show that the proportionate share rule has the added benefit of eliminating the strategic aspect of settlement negotiations: Co-defendants' settlement negotiations affect each other under the pro tanto rule but not under the proportionate share rule. We briefly discuss efficiency implications and conclude that states should switch to the proportionate share rule.
Keywords: Multiple defendants, offset rules, joint and several liability
JEL Classification: K13, K41, C72
Suggested Citation: Suggested Citation