New Paper on Confidential Settlements (mine)

I’ve recently posted on SSRN an article that’s sort of half employment discrimination, half civil procedure, and half economic analysis: Illuminating Secrecy: A New Economic Analysis of Confidential Settlements, 105 Mich. L. Rev. __ (2007).   The reason I think of it as (at least partly) an employment discrimination piece is that when I was in employment law practice, I was disturbed that virtually all settlements in such cases are confidential, which means that the incidence of discrimination is badly hidden from public view.

However, my paper isn’t a “confidentiality is bad” piece –though I agree with such pieces, like Minna Kotkin’s excellent (and excellently titled!) Invisible Settlements, Invisible Discrimination).   Rather, my paper analyzes what the effects of banning confidentiality would be on parties’ incentives to settle — and it concludes that many analysts are wrong to assume that banning confidentiality would inhibit settlement and otherwise would be economically inefficient.   Here’s the abstract:

Even the most hotly contested lawsuits typically end in a confidential settlement forbidding the parties from disclosing their allegations, evidence, or settlement amount. Confidentiality draws fierce criticism for harming third parties by concealing serious misdeeds like discrimination, pollution, defective manufacturing, and sexual abuse. Others defend confidentiality as a mutually beneficial pay-for-silence bargain that facilitates settlement, serves judicial economy, and prevents frivolous copycat lawsuits. This debate is based in economic logic, yet most analyses have been surprisingly shallow as to how confidentiality affects incentives to settle. Depicting a more nuanced, complex reality of litigation and settlement, this Article reaches several conclusions quite different from the economic conventional wisdom – and absent from the existing literature.

First, contrary to the conventional wisdom that banning confidentiality would inhibit settlement, a ban may promote early settlements. No ban could effectively cover settlements reached before litigation, so any ban would incentivize parties to settle confidentially pre-filing – and such early settlements save more litigation costs. Second, a ban would affect high- and low-value cases differently, depending on whether publicity-conscious defendants worry more about one big settlement or several small ones. Third, more settlement data could help parties settle and also, by decreasing litigation uncertainty, deter frivolous litigation. Fourth, more settlement data could reveal which companies engage in unlawful practices, yielding more efficient decisions by consumers, workers, and investors who otherwise engage in over-avoidance when unable to distinguish hazardous from safe goods.

In sum, a confidentiality ban would decrease settlements of cases already in litigation but it would have many countervailing positive effects: increasing pre-filing settlements; deterring frivolous lawsuits, and improving product and job market decisions. We cannot predict the net effect of all these competing effects, however, contrary to the traditional economic story. Economics thus does not counsel against a confidentiality ban; jurisdictions adopting a ban would be undertaking a worthy experiment with a promising but uncertain policy.

This analysis typifies the schism between traditional economic analyses, which reach definite conclusions by simplifying complex realities, and many contemporary economic analyses, which are realistically nuanced but do not yield categorical conclusions. Ultimately, the latter brand of economics is sounder and still can clarify important matters such as parties’ incentives, rules’ costs and benefits, and the tradeoffs and competing effects of a policy like a confidentiality ban.

– Scott Moss