But the question often is not as straightforward as it seems. If you forego an early settlement, will the company incur significant defense costs only to settle for a larger amount later? Will a settlement with one employee invite similar claims from others? Which cases merit a full-throated defense as a matter of principle?
While it is common to approach each case on an ad hoc basis, legal departments would be wise to invest the time to develop a more comprehensive strategy for when to settle, and when to go to the mat in litigation, that is in line with the company’s broader goals and values.
Here are 10 steps to develop such a strategy.
1. Identify key goals.
The legal department should begin by identifying a set of key goals for the company around litigation and settlement. For example, key goals for many businesses include reducing overall defense costs, reducing overall spend on settlements and judgments, and protecting reputational interests.
2. Involve critical stakeholders.
In setting a strategy around settlement of employment claims, it is wise for the in-house legal team to involve critical stakeholders up front. For example, legal may wish to involve human resources and leaders of the major business units or departments. Doing so helps ensure that the major constituencies have bought into the strategy and avoid later conflict or territorial struggles over individual claims.
Listening to the perspectives of the different stakeholders — who may have different cost centers, financial incentives or business pressures — may also result in a strategy more finely tuned to the overall company’s interests.
3. Review metrics.
A critical starting point is to review metrics on the company’s past settlements and litigation. For example, in the past five years, what has been the range of settlements paid out, and what is the average settlement paid? At what stage of litigation were such settlements paid?
For cases that have not been settled, what was the success rate in litigation, and what was the average cost of defense and/or judgment? If there was a period in which the company settled more claims, did the overall number of claims brought go up, stay the same, or go down?
4. Set a goal for an average resolution cost.
Consider setting a dollar figure that is the goal for the average cost to resolve a claim. Review of historical data may help assess what the average cost has been, and what it should be going forward.
Give thought to whether there is a dollar amount under which the legal department can settle claims with notice to, but without pre-approval by, the business unit or HR. This helps achieve the targeted average cost and provides efficiencies in the process.
5. Identify a set of “core” cases to defend most vigorously.
Some in-house departments find that human resources or internal clients are more amenable to settling some claims if there is reassurance that those claims that require a vigorous defense as a matter of principle will not be as readily settled.
For example, a client may decide that certain cases deemed “core” cases will be taken out of the ordinary process for resolution of claims. For consistency, it is important to decide in advance what will constitute a “core” case.
For instance, the company might decide that a “core” claim is one that threatens the reputation of the company; is brought by a former employee who committed certain egregious misconduct; or accuses an executive of wrongdoing.
6. Practice early case assessment.
A core best practice of any settlement strategy is early assessment of cases. The company should consider which factors it will regularly review, or ask its outside counsel to review, for each new claim. Factors might include, for instance:
- The nature of the legal claims and strength of legal defenses.
- The factual summary. Here, it is useful to ask: “Is the one-minute summary of this case favorable or unfavorable to the company?” The answer to this question is a good predictor of how a claim would ultimately fare with a jury.
- The potential damages. What are the potential compensatory damages? Are multiple or punitive damages available? What is the range of awards, settlements and verdicts for comparable claims in the last few years?
- The forum. Is the assigned investigator, judge or jury pool favorable or unfavorable?
- Availability and strength of witnesses. Do the witnesses still work for the company? Are the witnesses on good terms with the company or the plaintiff? Will they come across well in testimony?
- Impact of litigation on the business or work of the company. Litigation takes time and attention from the business. Is the business willing and able to invest that time? What witnesses and business operators will be needed to assist in the defense of the case? Are high-level executives likely to be deposed?
- Amenability of the claims to a dispositive motion, based on the nature of the claims and the facts known to date. For example, factor in that certain types of claims, such as those that rely exclusively on motive, can be difficult to resolve on summary judgment.
- Estimated budget to defend the claims through dispositive motion or trial. Given the number of plaintiffs, defendants and claims, and the likely scope of discovery, how much will it cost to defend the case?
- Potential proliferation of claims. Is litigating or settling likely to invite other similar claims?
- Reputational concerns. Is the plaintiff likely to seek to publicize the matter? Will the case draw media interest? Does the publicity factor weigh in favor of confidential settlement or vigorous defense?
7. Consider the stage of litigation.
It is important to consider carefully the stage of litigation in an overall settlement strategy. If outside counsel offers defense of administrative charges on a flat-fee basis, it may make sense to err on the side of defending claims (unless there is obvious liability) when they are in the EEOC or stage agency stage, on the theory that many can be won at low cost at that stage.
On the other hand, the company may decide to take advantage of the built-in conciliation process offered or required at the agency level very early on in the case, to keep defense costs to the barest minimum.
Review of historical data can provide insight into the extent to which the settlement value of a case increases as the litigation continues.
8. Strategy around confidentiality.
An integral part of an overall settlement strategy is consideration of best practices around confidentiality. It is common to include a confidentiality provision in any settlement, but there are ways to strengthen such provisions to add to the deterrent effect. For example, an agreement can include liquidated damages provisions for each breach of the non-disclosures.
Having an array of options for confidentiality protections available can help assuage concerns that the fact of settlement will encourage new claims.
9. Measure success.
Once a strategy is in place, consider how success will be measured and at what intervals. For example, the company might decide to review the relevant metrics (such as average settlement cost, legal spend and litigation success rate) annually or semi-annually. Doing so helps ensure that the strategy is producing the desired results, and also can offer all stakeholders assurance that the strategy will be tested and modified as needed.
10. Partner with outside counsel.
Find the right outside counsel to partner with the company in developing a strategy. Look for outside counsel with a proven track record in helping clients achieve efficiencies, and who offers the technological tools to track and analyze the company’s historical settlement and litigation metrics and measure the success of a new settlement strategy.
Ask outside counsel to help recommend a strategy that will reduce defense costs, average settlement value, and otherwise meet the company’s goals.
Given the many demands on the in-house team’s time, outside counsel can be an invaluable partner in setting a smart course for the future, periodically evaluating whether the strategy is working, and recommending future improvements based on hard data.
Dawn R. Solowey is senior counsel at Seyfarth Shaw in Boston.