Illuminating secrecy: a new economic analysis of confidential settlements.

• Author: Moss, Scott A.

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 that are 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 could promote early settlements. No ban could effectively cover settlements reached before litigation, so any ban would incentivize parties to settle confidentially prefiling--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 would decrease litigation uncertainty, helping parties settle and deterring frivolous lawsuits. Fourth, more data would also reveal 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. Contrary to the traditional economic story, we cannot predict the net effect of all these competing effects. Economics thus does not counsel against a confidentiality ban. 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. 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.

TABLE OF CONTENTS INTRODUCTION: A CONFIDENTIALITY CONTROVERSY IN NEED OF ECONOMIC ANALYSIS I. THE ECONOMICS OF LITIGATION AND SETTLEMENTS, CONFIDENTIAL AND OTHERWISE A. The Economics of Litigation Settlement: Why Cases Do and Don't Settle 1. The Basic Economic Model: Why Cases Should (and Usually Do) Settle 2. The Basic Economic Model with Divergent Beliefs: Why Some Cases Don't Settle Quickly B. The Basic Economic Model with Confidentiality: Confidentiality Increases the Settlement Range Because It Is Valuable to Defendants II. A NEW ECONOMIC ANALYSIS OF CONFIDENTIAL SETTLEMENTS: ACCELERATING SETTLEMENT, DECREASING FRIVOLOUS LITIGATION, AND OTHER UNINTUITIVE EFFECTS OF BANNING CONFIDENTIALITY A. Prefiling vs. Postfiling Settlements: Settlements Occurring Earlier Because Confidentiality Will Remain Available Only for Prefiling Settlements 1. The Inability of a Confidentiality Ban to Reach Prefiling Settlements Effectively 2. The Beneficial Aspect of a Confidentiality Ban Being Limited to Postfiling Settlements 3. The Broader Phenomenon: Insufficiently Comprehensive Regulation Producing Unintuitively Skewed Effects B. Low-Value vs. High-Value Cases: Settlement Incentives Varying Based on the Value of the Case C. More Information on Settlement Values: Decreased Uncertainty Leading to More Early Settlements and Less Frivolous Litigation 1. Less Divergence in Parties' Initial Beliefs 2. Less Incentive to File Negative-Value Suits D. More Information on Settlement Values: Remedying Information Shortcomings That Induce Sub-Optimal Market Choices 1. Remedying Self-Perpetuating Occupational Segregation 2. Remedying the "Second Best" Problem of Tort Liability 3. The Benefits of Information Disclosure: A Closer and Broader Look CONCLUSION INTRODUCTION: A CONFIDENTIALITY CONTROVERSY IN NEED OF ECONOMIC ANALYSIS

Lawsuits are tales that begin with great fanfare and suspense, with fire-and-brimstone pleadings telling dueling stories of injustice and lies, followed by contentious pretrial battles. Yet most lawsuits are tales that end abruptly, with a whimper of a one-page "voluntary dismissal" that ends the dispute without explanation, making it appear "that the plaintiff simply gave up." (1) "[S]ettlement terms are usually not reflected in court documents," (2) instead appearing only in settlement documents broadly forbidding the parties from discussing their allegations, evidence, or settlement amount. (3) Public settlements are the exception, common in only a few types of cases such as class actions (4) and some cases with governmental defendants (5) or plaintiffs. (6)

Courts regularly allow confidentiality provisions; indeed, under existing law, they cannot force parties to disclose settlement terms they had agreed to keep confidential. (7) A few jurisdictions restrict confidentiality (8) in the small number of confidential settlements filed in court under seal, (9) but none broadly ban settlement confidentiality, (10) and proposals for broader restrictions have not yet succeeded. (11) Most courts accept this state of affairs not reluctantly but eagerly, disclaiming any power over settlement (12) and praising "'[s]ecrecy of settlement terms ... [as] a well-established American litigation practice.'" (13)

With so many lawsuits beginning with allegations of grievous social harm but ending with the legal equivalent of "never mind," confidential settlements have drawn increasingly fierce criticism recently, attacked as ways defendants conceal serious misdeeds such as dissemination of hazardous products, (14) discrimination, (15) pollution, (16) or sexual abuse. (17) These critiques build upon the broader view "Against Settlement" (the title of the famous article) that settlement sacrifices many virtues of our justice system on the altar of convenience. (18)

Defenders of confidential settlements offer a range of arguments. From the free-market right-to-contract perspective, confidentiality facilitates mutually beneficial settlement deals: defendants value and pay for confidentiality; plaintiffs gladly accept money for their silence. (19) From the judicial economy perspective, judges candidly admit supporting any prosettlement practice that lightens their dockets,(20) and disclosing settlements could spur more lawsuits by making defendants look like easy targets. (21) From the legal ethics perspective, parties hire lawyers to resolve their disputes on the best terms, not to serve a broader social good by rejecting advantageous money-for-silence offers. (22)

On all sides of the debate, however, the economic logic has been surprisingly shallow as to how confidentiality affects parties' settlement incentives. (23) The pro-confidentiality economic analysis is just that bad publicity is a non-monetary cost defendants pay to avoid and that settlements decrease litigation costs. The anti-confidentiality view usually is cast in moral terms (24) but sometimes is explained economically: confidentiality leaves unredressed the social harms that led to the lawsuit (e.g., toxic dumping), imposing negative externalities, (25) costs borne by third parties. (26) Though logical, both sides' economic slogans fail to depict the far more nuanced, complex reality of litigation and settlement.

This Article seeks to fill the void in the economic thinking about confidential settlements. It aims to improve upon the largely superficial economic debate so far--"efficiently increasing settlement" versus "inefficiently imposing externalities"--and, in doing so, reaches quite different findings about the incentive effects of a confidentiality ban. Part I reviews the traditional economic model of when cases settle and its view that confidentiality increases the incentive to settle. Part II then presents novel economic analyses that depict a reality more complex than, and often contrary to, those of the traditional model.

Sections II.A and II.B note two key distinctions absent from the traditional model. Section II.A shows how banning confidentiality actually may promote settlements: a ban could not effectively cover settlements reached before litigation, so a ban reaching only postfiling settlements would yield more confidential prefiling settlements. This pre-/postfiling distinction is an example of unintuitive, unintended consequences resulting from a regulation having gaps in its coverage. Section II.B then analyzes how 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.

Sections II.C and II.D discuss two informational benefits of increased settlement disclosure. Section II.D notes litigation benefits: knowing prior cases' settlement amounts would help parties determine their own settlement value, and decreasing litigation uncertainty could decrease frivolous lawsuits. Section II.D notes benefits in labor, consumer, and investment markets: more information about which companies pay more in settlements could lessen the problem of those who are under-informed rationally "over avoiding" jobs, goods, or investments that might be dangerous. Avoiding a whole industry because of a few bad apples, people may shift to inferior alternatives, all because of an information problem--inability to determine which of the apples are good and which are bad--that more settlement disclosure would help remedy.

Overall, Part II shows that a confidentiality ban's effect of decreasing postfiling settlements would be offset by more prefiling settlements. Even if settlements decreased (on the net), prefiling...