Quality, not quantity: an analysis of confidential settlements and litigants' economic incentives.

AuthorLothes, Alison

INTRODUCTION

The recent rise of "sunshine" legislation, which prohibits or reduces secret settlements of civil lawsuits, highlights public unease with confidential settlements. Recurring, highly publicized, dangerous events expose the costs of confidentiality: the Bridgestone/Firestone tire scandal and the Catholic Church sex abuse scandal are the most recent. (1) Litigation regarding the Dalkon Shield, the Ford Pinto, and other consumer products or environmental toxins has brought to public attention cases of businesses keeping dangerous secrets. (2) With the increased prevalence of state sunshine laws, it now seems that courts and the public have had enough.

This topic typically engenders normative and theoretical discussions of confidentiality in general. Usually, authors try to determine whether the courts should be private dispute resolution centers or public truth-seeking services. In this Comment, I will address these ideas as background in order to familiarize the reader with the basic arguments on both sides. I will then discuss how the current regime governing confidential settlements of judicial discretion has failed to recognize and address the real problem underlying confidentiality provisions: the divergence between societal and individual costs and benefits created by litigation. In order to resolve the confidentiality debate, we need to understand the incentives of litigants and how confidentiality provisions affect those incentives in order to align them with societal goals.

Currently, two competing frameworks predict the economic costs and benefits secret settlements generate for society. These frameworks generate opposite recommendations: one suggests a regime allowing confidential settlements will be more efficient, while the other suggests a regime restricting such settlements will be more efficient. In this Comment, I will reconcile these two frameworks and argue that all open settlements are not created equal because of the different types of information they may contain. The information contained in some open settlements provides the valuable benefits of deterring wrongdoers and compensating victims, while other information tends to encourage nuisance suits. Thus, by comparing how types of information incentivize future litigants, I provide my own explanation of when society benefits from confidentiality. Lastly, I apply my explanation and conclusions to evaluate existing laws that prohibit physicians from confidentially settling malpractice suits. While the debate on confidentiality provisions has focused primarily on how much sunshine is required, I will explain that the more appropriate question is what kind of sunshine is required.

  1. BACKGROUND

    Courts may sanction confidentiality in three ways: protective orders on discovery materials, sealing orders on court records, or confidentiality provisions in settlement agreements. I focus exclusively on confidentiality provisions in settlement agreements. These are especially complicated because they are (1) private contractual agreements between the parties in which the court has a less significant role, and (2) final documents which terminate litigation and present significant cost savings to the courts.

    Secret settlements can occur in several ways. First, the parties may come to an agreement during the litigation process and ask the judge to approve the settlement and its confidentiality, essentially creating a court order of secrecy. Alternatively, the parties may make the secret settlement contingent on the plaintiff dismissing the lawsuit and dropping the case against the defendant. In this scenario, the court generally has no control over the agreement, as the parties settle out of court.

    Settlement and confidentiality have their proponents and opponents. I will summarize below the main advantages, disadvantages, and theoretical underpinnings of each school.

    1. Anti-Confidentiality

      Against Settlement by Owen M. Fiss is the classic article condemning settlement. (3) Although Fiss's article focuses on settlements in general rather than confidentiality provisions, his criticisms are relevant to confidential settlements as well as open ones. He argues that settlements often involve imbalances of power between the negotiating parties, and are thus a result of coercion rather than an exercise of free will. (4) Fiss argues that the imbalance of power forces the stereotypically poor plaintiff to settle because she is at an informational disadvantage, prefers accelerated payment (because a lesser, immediate settlement payout may be worth more than a larger, delayed payout), and seeks to avoid litigation costs. (5) In this view, since the confidentiality provision is part of the agreement, it is a result of a flawed process like any other portion of the agreement. Such a process argument weighs against confidentiality.

      Fiss also claims that while litigation and court adjudication achieve the dual goals of justice and peace, settlement can only satisfy the latter. (6) Referring to Brown v. Board of Education, he powerfully concludes that "[t]he settlement of a school suit might secure the peace, but not racial equality." (7) Adjudication, in his view, is critical to exposing tough issues and forcing society to be self-aware and self-critical. (8) This argument is especially compelling in areas of civil rights and constitutional law, where litigation can serve as a tool to develop and explicate the law.

      Confidentiality provisions pose additional problems beyond Fiss's criticisms of the general settlement process, as the public may have an interest in the content of the litigation. Open litigation has often divulged health and safety hazards. Conversely, secrecy threatens to perpetuate unexposed danger, imposing costs upon others who are unaware of that danger. (9) Public access advocates argue that the public has a right to information that divulges a risk to the public; the private parties' rights to confidentiality are subordinate to the public's interest in safety. (10)

      David Luban has refined Fiss's position attacking settlements by stating that while some settlements are problematic, (11) secret settlements are especially so. (12) Luban articulates Fiss's arguments as a "public life" perspective. (13) Under this view, the court itself is a public institution, with a public-service function independent of being merely a "servant" of the parties in its courtroom: (14) that function is typically to "give meaning to our public values." (15) Thus, if courts are "instruments of the public" and judges are "guardians of the public," the court may have a duty to prevent a secret settlement that risks the health or welfare of the public, or restricts vital public debate, regardless of the private interests of the litigants. (16) Such an expansive view of judicial function is central to the anti-confidentiality viewpoint.

      Ethical problems with confidentiality are not restricted to the court's duties to the public. Plaintiffs' lawyers may face a dilemma when defendants' lawyers propose a secret settlement that is lucrative for plaintiffs but potentially hazardous to the public. In fact, plaintiffs' lawyers have supported bans on confidential settlements in order to avoid this difficult ethical dilemma. (17) As will be discussed below, (18) some legal experts propose an ethical rule prohibiting participation in any agreement that would restrict the availability of public information implicating a substantial danger to public health or safety. (19)

    2. Pro-Confidentiality

      On the other hand, pro-confidentiality scholars emphasize the costs savings from settled cases and the importance of litigants' rights to privacy and autonomy. Arthur Miller and Richard Marcus are probably the most prominent advocates of secret settlements. (20) While Fiss finds the negotiating process to be inherently flawed, pro-settlement and pro-confidentiality scholars view settlement as a classic example of the freedom to contract. These scholars argue that the litigant's autonomy is not only an important right, but also a traditional tenet of our civil justice system. (21) The "party-initiated, party-centered, and party-controlled system regards litigant autonomy as a value in itself" and "'installs preferences of the parties as the best measure of fairness available.'" (22) In this school of thought, settlement itself is considered an individual right (23) as well as the most efficient solution to disputes. (24)

      In addition, Arthur Miller provides crucial arguments for protecting confidentiality on account of the information content. He emphatically contends that "[l]itigants do not give up their privacy rights simply because they have walked, voluntarily or involuntarily, through the courthouse door." (25) In his view, litigants have privacy rights and property rights in keeping certain information confidential; these rights are seriously threatened by the public's compulsion for voyeurism. (26) Privacy and property rights may be valuable to both the individual rights-possessor and society, as they incentivize efficient business. (27) Lastly, Miller questions the assumption that the types of confidential information at issue are likely to be directly relevant to public health and welfare concerns. (28)

      Pro-confidentiality scholars restrict the judicial function to resolving private party disputes. Luban describes the "problem-solving conception" of the judicial function as one that is rooted in distrust of interfering on behalf of the public interest. (29) In sharp contrast to the "public-life" scholars, (30) Richard Marcus argues vehemently that the court has no role in shaping public values. (31) In addition, Miller also argues that the administrative branch may be better suited than the judicial branch to be a public watchdog. (32) Thus, according to Miller and Marcus, public funding does not alter the court's fundamental mission to serve private parties.

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