Posted: 23 Mar 2017 Last revised: 21 Sep 2017
Date Written: March 4, 2017
Courts often take the plaintiffs’ chances of winning the lawsuit into account when deciding to allow a class action to proceed, halting cases that appear unlikely to be won by the plaintiffs. Settlement pressure — or the concern that allowing the case to go forward will allow the plaintiffs to extort “blackmail” or “in terrorem” settlements from the defendant — is the key justification for this behavior, rationalizing a set of doctrines that push inquiries into the merits of the case to very early stages of the litigation. Class actions are leading examples of these doctrines as courts routinely decide whether those cases can proceed based on a preliminary assessment of their merits, and the Supreme Court endorsed an expanded, stringent version of this doctrine in its Wal-Mart Stores, Inc. v. Dukes decision. The issue is pervasive, however: the heightened pleading standards instituted by Twombly and Iqbal are similar and are also based on settlement pressure.
Settlement pressure is essential to these doctrines because without it, “weak” cases that the plaintiffs are, for some reason, unlikely to win present only one problem — litigation costs — a problem which these early merits inquiries are ill-equipped to solve. This Article questions the established logic of settlement pressure. For all the influence that the concept has exerted, the reasoning behind settlement pressure remains unclear.
I show that settlement pressure is the product of the defendant’s risk aversion or other characteristics that lead the defendant to act as if it were risk averse. These form a problematic basis for wide-ranging civil procedure doctrine. Making the perceived merits of the case a crucial determinant as to whether the case can even be brought has the perverse results of making the litigation depend on the defendant’s idiosyncrasies, such as its tastes and preferences or its particular business model. It also entails enlisting the courts in helping corporate managers hide their activities from shareholders and, more generally, in concealing potentially vital information from the public, sometimes putting them at risk. None of these are appealing grounds for legal rules. Furthermore, the central implications of settlement pressure have been misconstrued. In cases where settlement pressure exists it more closely resembles litigation insurance than blackmail. Settlement is actively encouraged by courts and the law does not treat litigation insurance as suspect.
The doctrines based on settlement pressure, therefore, lack a sound foundation, and the phenomenon itself is not a dire threat that the law must step in to counteract. Even in the context of class actions, where settlement pressure has figured most prominently, a case that appears relatively unlikely to prevail should be permitted to go forward so long as the plaintiffs can make out a coherent, not outlandish claim. Instead of considering the persuasiveness of the plaintiffs’ case, courts should focus on its structure. While class actions post distinct challenges, the doctrine should concentrate on them rather than the false problem of settlement pressure.
Keywords: class actions, agency problems, Wal-Mart v. Dukes, settlement pressure, corporate behavior, law and economics
Suggested Citation: Suggested Citation
Almendares, Nicholas, The False Allure of Settlement Pressure (March 4, 2017). Available at SSRN: https://ssrn.com/abstract=2938716