Despite the rising costs of settlement agreements, taking a case to trial still exceeds the price of cutting a check.
Although every case differs, attorneys say that opting to settle will shave at least one-third, and frequently more, off the expense of a lawsuit. Attorneys’ fees, insurance coverage and the risks of a jury verdict often supersede the desire to prove who’s right.
“If the difference is in the hundreds of thousands of dollars, almost any sophisticated business litigator will say, ‘If the parties work hard, we should be able to settle this case,'” said Jeffrey Riffer, a partner of Jeffer Mangels Butler & Marmaro LLP. “In the long run, it’s economics.”
The highest cost in trying a case is attorneys’ fees. At $300 to $400 per hour, paying a lawyer can account for hundreds of thousands of dollars of an overall trial cost.
“The attorneys’ costs are so huge today it’s almost insane,” said Joel Grossman, former deputy general counsel of Sony Pictures Entertainment Inc. and now at ADR Services Inc., a private arbitration and mediation firm. “There’s no way to intelligently litigate a case where there’s less than a couple of hundred thousand dollars involved. It doesn’t make any sense.”
In divorce cases, emotional issues often cloud decisions about settling. But once the dust has settled, taking the case to trial often proves too costly even for the wealthiest of clients.
Manley Freid, a partner at Freid & Goldsman who has represented both the wage-earner and the spouse seeking support in divorces, said he often convinces the paying spouse to settle because it makes more financial sense.
“I’ll say to the husband, it’ll take you $10,000 to $30,000 (to settle),” he said. “She gets one bite of the apple. You replenish your war chest of savings, and in six to 12 months, you won’t feel it remember it. You want to get this over with, get rid of the emotions, pay the extra bucks and move on.”
The fees increase as attorneys get beyond a case’s initial filings and begin preparing more time-intensive motions, such as discovery requests or a summary judgment that may cost $20,000 each based on an attorney’s hourly rate, said Connie Michaels, an employment partner at Littler Mendelson PC. Once a client has invested $1,500 into a motion, he is more likely to take the case forward, she said.
Lawyers often cost defendants more than they do plaintiffs, whose counsel occasionally takes cases on a contingency basis. Also, defendants who lose their case run the risk of paying the plaintiffs’ fees, as well. Then there are experts, depositions and videotapes that may run hundreds of thousands of dollars in additional expenses.
Plaintiff attorney Browne Greene, a partner at Greene Broillet Panish & Wheeler LLP, said one of the first questions he asks a defendant after filing suit is how much of the deductible has been paid and how much coverage is available.
“Insurance coverage makes a huge, huge impact,” he said. “If you have a case worth $5 million and they have only $2 million in insurance and pay the $2 million, what can you do? You can sue individually and get a judgment, but more likely than not they can always go bankrupt.”
Insurance affects the decision-making for corporate defendants, too, said Paul Braun, managing director of Aon Risk Services in Los Angeles. Typically, companies pay their attorneys up to their deductible, which is called a “retention amount” on commercial insurance claims arising from litigation. The amount varies from thousands of dollars to more than $1 million, with most corporate defendants opting for policies with lower premiums and higher deductibles.
In many cases, probability and statistics help guide a defendant. For instance, if juries in similar cases have found a defendant liable 80 percent of the time and 50 percent of the time the damage award comes near $3.5 million a settlement offer of $6 million may not seem worthwhile. But factor in the additional risk of punitive damages, which in similar cases have a 50-50 chance of dumping another $5 million against a defendant, and the offer appears better.
“What you’re basically doing is trying to assess the probability of a series of things and that turns into a number,” said Robert Dawson, a complex litigation partner at Fulbright & Jaworski LLP. “It’s a little bit like a doctor in a clinical judgment: A lot of it is, ‘How good is your lawyer in assessing cases?'”
Finally, there are indirect or non-monetary costs that factor into a settlement agreement.
Corporate defendants are often concerned about future lawsuits, as well as the impact on customer relations, morale in the office and time spent pulling executives away from their jobs. Plaintiffs face the daily stress of worrying about their livelihood while looking for or maintaining a job.
Still, not every case should be settled. For a plaintiff who has a good chance of obtaining large damages, trying a case is worth a lawyers’ investment. “The first $1 million verdict that happened in L.A. was in the late ’60s and early ’70s,” Greene said. “It was $1 million for someone who was paralyzed. That case today would be worth 20 times that.”