Death of a Settlement

Now it’s crunch time.

Until this moment the client has followed your advice. Now, suddenly, he refuses. He denies the existence of vulnerabilities that you thought he understood and accepted long ago. He insists that he has already compromised way too much. He won’t give up any more; in fact, he tells you to take back some important concessions already offered.

You know that the other side will cry bad faith—that backtracking now may well blow up the entire process, the whole prospect of settlement.

What’s going on?

When clients behave like this, the root cause likely lies in this basic reality: Despite the popularity of win-win bargaining, during settlement negotiations most litigants feel they are losing rather than sharing a win.

The perception of losing spurs powerful emotions, different in kind from others we see in the litigation process. They are intense, arise at awkward moments, and provoke dysfunctional tactics. And experience suggests they are perhaps the single most important reason settlement negotiations fail.

What causes this behavior? How can we lawyers respond to it? As we explore those questions, let’s consider these two cases:

First Case: A small New England town. A state trooper begins a high-speed chase of a drunk driver. Pursuing rapidly, the policeman runs a stop sign and hits a third car crossing the intersection. It’s a classic T-bone collision. The trooper is unhurt, but the driver of the third car dies instantly. He was just 17 years old.

The driver’s family sues the state, arguing that the trooper was negligent in ignoring the stop sign. A jury will decide whether the officer acted carelessly.

As counsel for the trooper, we begin to prepare his defense. We investigate, looking for facts to show that the victim had been drinking or irresponsible. Instead we learn that the boy was a model student who left behind a loving family. Still, the trooper, we will argue, showed initiative in giving chase to a dangerous driver. We know that local juries consistently have found for the police in similar circumstances. And state law caps liability at $150,000.

Two years later, as trial nears, we offer to settle at $100,000. The offer is rejected.

We wait a few weeks, then raise the offer to $120,000. Plaintiffs’ counsel says that she’ll recommend it to her clients. Yet, word comes back that the family has refused. They make no counteroffer and give no reasons.

Second Case: The chief financial officer of a start-up sues his former company, claiming that his interest in the company has been illegally diluted. Dilution—that is, a reduction in the percentage of a company’s stock held by an investor—is common in start-ups. As a venture prospers, the owners solicit additional funding, which they repay by issuing new stock.

The issuance of new stock lowers the percentage of stock held by the early investors. But the infusion of additional capital from outsiders and their show of confidence in investing it typically make the company much more valuable. The increase in the company’s value usually more than offsets the dilution, producing a net rise in the founders’ interests.

In this case, the former executive’s 2 percent stake in the company is now worth $6 million, far more than the value of the 5 percent share he’d had when he joined the company. He claims, however, that he received special assurances that as new stock was issued, his share percentage would not go down. Without dilution, his stock would be worth $15 million instead of $6 million.

Feelings of Loss

In each of these cases, feelings of loss posed challenges for settlement. What were they? And how did they play out?

Why is the feeling of losing in settlement so common? To avoid having a party feel any loss, a settlement has to restore the party to where he or she was before the dispute arose or place the party where he or she expected to be, absent the misconduct. In a sense, the common law provides for this, giving each prevailing tort victim an amount of money intended to compensate for what has been lost and granting contract plaintiffs damages equal to their reasonable deal-based expectations.

But common-law definitions of compensatory damages often are inadequate. An accident victim, for instance, may feel that even a “full” award of damages does not leave her as well off as before the injury, and a reasonable businessperson may view the legal definition of lost profits as much too narrow to cover his expectations. Even a defendant who prevails in court may similarly feel that a verdict of “not liable” does not begin to compensate for the damages the lawsuit has done to his business and reputation.

For most clients, simply being in litigation imposes other costs in the form of legal fees and disruption to their lives or businesses. To feel fully compensated, then, a litigant usually would have to obtain settlement terms that left him or her better off than before the dispute arose; for each side to avoid feeling loss in settling, both sides would have to be made more than whole.

But that’s nearly always impossible. Even when good negotiators use the best bargaining techniques, some feelings of loss in settlement are nearly inevitable.

Between the time a case starts and the time a party enters settlement negotiations, the party’s benchmarks for measuring gain or loss often change. Good lawyers counsel clients about the high costs and limited remedies available in litigation, as well as the risk of losing. Their advice may cause a client to lower his or her expectations. In effect, litigants who listen to good legal advice go through at least some of the process of adjusting to loss before they enter into settlement negotiations.

Often, though, parties cling to an unrealistic benchmark or expectation. Litigants may read in the media about a dramatic case that inflates their expectation for their own outcome. Stories that grab publicity and attention are by definition exceptional, however, and do not reflect the modest results that are vastly more likely. The phenomena known as availability bias and vividness bias—the tendency of the human mind to notice and give special weight to striking events—play an important role here. They lead clients to give extreme examples exaggerated significance in their decision-making.

As a result, people consistently overestimate how often exceptional legal outcomes actually occur. Even when parties concede that their case is not identical to a dramatic one and try to adjust for the difference, they typically fail to adjust enough.

Human beings also suffer from other forces that distort their judgment. A simple example is the above-average effect. Most people believe, for instance, that they will live longer than the average of their high school class. Even sophisticated professionals are subject to this distortion. Doctors for example are four times as likely to overestimate the life expectancy of their terminally ill patients as to underestimate it.

Lawyers are subject to cognitive forces as well. Eighty percent of surveyed lawyers, for instance, rated their personal ethical standards as higher than average. And even if both you and your client are able to escape these influences, the people on the other side of your case probably cannot.

Litigants with unrealistic goals and expectations are guaranteed to feel loss as they bargain. What standards did the parties in the auto accident and stock dilution cases use to measure the settlement proposals they received? In the accident case, no amount of money could replace the family’s beloved son, and it seems likely that other forces were in play as well. In the stock dilution case, the plaintiff presumably had been advised to discount his claim to reflect the risk of losing, but for him the case had other significance too.

Loss and Decision-Making

What effect does the perception of losing have on decision-making? Daniel Kahneman and Amos Tversky, who pioneered the field of behavioral economics—Kahneman won a Nobel Prize for that work—proved that people consistently take the risk of sustaining large losses in the future to avoid the certainty of taking smaller losses in the present, even when doing so will on average cost more, a phenomenon they called loss aversion. Their work also showed that people are more prone to accept an unreasonable risk to avoid a larger loss than a smaller one.

These findings have significance for legal negotiations because the possibility of settlement often requires parties to make a choice between accepting an immediate loss by settling or continuing in litigation with the hope of avoiding loss entirely but with the risk of losing much more. Loss aversion helps explain why litigants so often opt for a larger, unreasonable risk of losing at trial to avoid a smaller-but-certain loss in settlement.

Loss aversion distorts decision making even when humans are calm. What happens when a party also becomes upset? Suppose, for example, that a potential settlement appears to let an opponent buy her way out of improper conduct by merely paying money. Kahneman and Tversky found that when someone sees a decision as having an unfair or immoral result, loss aversion is much stronger. Losing a dollar unfairly, researchers report, feels like losing $2.50–$2.75, not $1.00, while unexpectedly gaining a dollar has a psychic value of only 70–75 cents. In other words, a loss that appears unfair outweighs an equivalent gain by a ratio of nearly 4 to 1. That’s a powerful variance.

Humans’ strong reactions to loss were first reported by psychiatrists in the context of people suffering personal tragedies, such as the death of a loved one. Bereaved persons, it was observed, feel internally torn between their wish to deny the loss and the knowledge that it has occurred. Sigmund Freud described such patients as similar to litigants. Their protestations resembled legal “plaints,” he wrote, and recovery required a patient to work out a compromise between the wish to deny the loss and reality. Freud expressed surprise over how difficult and painful this process of mental compromise can be.

Parties who have not come to terms with losing in settlement are likely to behave much like Freud’s patients. As they consider making concessions, they are embroiled in two negotiations. One is the explicit bargaining process that occurs between the two sides in a settlement negotiation. The other is a purely internal struggle that goes on in a party’s heart and mind, to work out a compromise between the persistent demand to avoid any loss and the reality of what is achievable.

The internal and external negotiations go on concurrently, often leading parties to make contradictory decisions or preventing them from making a decision at all. Adding to the confusion, the affected person is often not aware that the internal negotiation is occurring at all.

Sometimes the problem goes even deeper. A case itself may carry special emotional or psychological significance, and when that happens, settlement on any terms is a loss. The widow of a 9/11 victim, for instance, delayed in applying for financial compensation, though she had no dispute with how much she would receive. “It’s hard,” she said. “There’s a finality about it. . . . When we sign, then it’s done. He’s really gone.” She knew of course that her husband had died, but keeping the claim open allowed her to avoid some of her feelings of losing him.

Similarly, I watched a woman who had gone through years of bitter litigation with her children finally reach agreement to settle on favorable terms, but then she raised one obstacle after another to implementing the settlement. It seemed that, as miserable as the lawsuit was, its existence represented her only remaining connection to her children, and she did not want to end it. When a case itself has meaning to a litigant, settling on almost any terms feels like a loss.

Delayed Loss Reaction and Client Behavior

There are other levels of reaction to loss. Imagine a client who behaves reasonably during most of a negotiation process but, as it approaches a conclusion, suddenly explodes with emotion and makes dysfunctional decisions. What causes what might be called a delayed loss reaction?

This behavior is also most poignantly observed in the context of purely personal losses. Psychiatrists have reported that some patients who suffer a loss do not show a normal level of grief, apparently because they take refuge in a fantasy in which the loss has not occurred. Thus, for example, when hundreds died in a tragic nightclub fire in Boston, some family members claimed that their loved one had left the club before the fire broke out and was wandering with amnesia. As long as survivors clung to such fantasies, they did not feel as much grief over their loved one’s death. Eventually, however, sometimes only after months or years, the fantasy collapsed and the feelings of grief that others had faced much earlier suddenly rushed in.

Some parties use their legal case to avoid feeling loss in a similar way. A terminated employee may insist, for instance, that the court will award him full compensation, even restore his job. A defendant may express complete confidence that she will be vindicated at trial. Parties are especially likely to deny reality in that way when a dispute threatens their personal identity—for instance, as a competent employee, decent boss, or caring parent.

As long as the litigation continues, such parties can cling to their fantasy and deny much of their loss. But when in the course of negotiations it becomes clear that they won’t be fully compensated or vindicated, they suddenly feel the pain they had avoided until then.

When that happens, litigants may, in the middle of a negotiation, display the stages of grief that Elisabeth Kübler-Ross famously described in patients with terminal illnesses: denial, anger, unrealistic bargaining, depression, and acceptance. Others have noted that individual reactions vary greatly: A victim may skip over a stage or repeat it—for example, going from denial to anger and then back to denial.

As parties to lawsuits realize they are facing the death of a claim or defense, they often behave in ways remarkably similar to the terminally ill. Lawyers report such behavior most commonly in divorce cases. That’s not surprising because divorce litigants often feel they are losing important parts of their identity as a spouse, a parent, or a member of the community.

Equally intense reactions arise in cases based on other important relationships, such as employment, partnerships, and family businesses. The phenomenon even occurs in corporate disputes—for example, when an executive feels that a settlement threatens his core identity.

Parties going through this kind of delayed loss reaction may fail to perceive—or refuse to acknowledge—the significance of evidence that would force them to accept an unwelcome result. They may also become angry as they confront the likelihood of losing. A plaintiff who makes an insulting first settlement demand, for instance, may be proclaiming in effect, “If the system were fair, that amount would be cheap for this case!” And a defendant who refuses to make a concession may be saying, by implication, “I spit on your demand!”

Disputants feeling sudden loss also make unrealistic bargaining decisions. Depressed litigants may obsess over decisions or be unable to decide whether to make a concession at all, paralyzing the bargaining process. And a disputant who vacillates back and forth between stages of grieving is likely to change tactics unpredictably.

The Stock Dilution Case

That is what occurred in the stock dilution case. After three years of litigation, the case went to mediation. It began with an opening session. The parties then adjourned to private caucuses. The plaintiff demanded $9 million to settle. The company offered $500,000.

The bargaining moved forward slowly from there. At 5:00 p.m., the plaintiff lowered his demand from $7 million to $6.5 million. The company responded by increasing its offer from $2 million to $2.25 million. Then the bargaining stalled.

The plaintiff insisted he’d given up too much already. He attacked the chief executive officer (CEO) as an ungrateful twerp who had forgotten the crucial guidance that had enabled him to grow from college nerd to chief executive of a successful company. For the CEO to begrudge him a fair share of the bounty was, in his view, outrageous.

The mediator listened respectfully, then mentioned that the defense had produced emails in which, they argued, the plaintiff had agreed to give up his anti-dilution protection in return for an enhanced bonus. The plaintiff, however, rejected the emails as meaningless chatter, unworthy of consideration.

Eventually, the plaintiff agreed to drop to $6.25 million and the mediator left to deliver the offer. As the mediator was talking with the defense team, the plaintiff’s lawyer interrupted to tell him that the client had changed his mind and now insisted on staying with his earlier $6.5 million demand.

Returning to the plaintiff’s room, the mediator found the executive very agitated. He exclaimed angrily that the company could pay him what he knew his claim was worth, or see what happened when they got to trial. The mediator noted that he’d already presented the new $6.25 million demand and raised the concern that the company would react badly if the plaintiff now withdrew that number. The plaintiff remained adamant, however.

As expected, the defense team labeled the plaintiff’s move bad-faith reneging and walked out. The mediator remained hopeful of reviving the process but was not sure how it could be done.

The Special Impact of Loss Reactions

The dilution plaintiff’s eruption, apparently prompted by the collapse of his hopes for “fair” compensation, is typical of a delayed loss reaction. Such responses pose special problems for settlement in part because of when they appear. Most lawyers begin a negotiation at extreme positions, in an effort to influence the opponent’s expectations and set up a favorable compromise. Clients, however, may hear an opening offer as confirmation of their unrealistic expectations.

At some later point, the lawyer must ask for authority to make serious concessions. The attorney sees this as part of a familiar process, but it forces a client who has been indulging in fantasy to confront for the first time the reality of losing. Not surprisingly, such clients often react emotionally, sometimes showing Kübler-Ross behaviors.

At that point in the process, however, other participants are often impatient to get to a deal, and even a mediator may think that the listening-to-feelings phase is, or should be, over. The fact that delayed loss reactions so often occur late in the settlement process magnifies their disruptive impact.

In addition to intensity and timing, loss reactions pose a special problem because they so closely resemble the tactics used by adversarial bargainers. When a party going through a loss reaction suddenly refuses to make more concessions, for instance, an opponent is likely to interpret the behavior as tactical stonewalling. If an upset litigant retracts an offer already made, he or she risks being seen as purposefully reneging, acting out of bad faith rather than emotion. When a lawyer thinks an opponent is intentionally using hardball or bad-faith tactics, the lawyer is tempted to respond in kind, further escalating the problem.

Dealing with Clients Suffering Loss

So how should one deal with a client suffering from strong feelings of loss? First—and by far the most important—is to understand that what is driving a party’s dysfunctional behavior, or an opponent’s apparent bad faith, may be strong feelings rather than conscious strategy.

Second, having identified the problem, the next step is to resist the temptation to try to fix it. We lawyers are valued for our ability to solve problems. We might, for example, instinctively try to minimize what has happened or point out the advantages of settling. But people who have not fully processed feelings about losing will usually reject any suggestion that there is a brighter future or another way of looking at their situation.

Better instead to acknowledge the client’s perception that the situation is bad and cannot be fully remedied, and let the client experience those feelings. “What has happened,” we might say, “is truly awful. Nothing can really make up for what you have gone through.”

Clients in that situation need to undertake a process of grieving for what they are losing by settling. It is in fact a form of mourning, a kind of funeral for the death of the client’s hopes and dreams for the case. If holding a funeral feels like too much, then simply think of it as like comforting a bereaved friend or relative, attending a wake, or making a condolence call.

It’s also important not to become defensive. Terminally ill patients often lash out indiscriminately at their doctors and nurses, and clients sometimes blame their lawyer—or their mediator—for what is happening. When that happens, it’s helpful to remember that the angry party is usually not denying the truth of what has been said but, rather, is trying to avoid the feelings it evokes.

As we work with clients going through loss, it’s also necessary to keep the larger settlement process on track. That is especially important because parties’ loss-induced behaviors are easily subject to misinterpretation by the other side. To the extent possible within the constraints of confidentiality, it’s helpful to alert an opponent to what is happening so they don’t react in an unhelpful way (“My client found your last offer very upsetting. It’ll take some time before we have an answer for you.”). We also may need to slow down or suspend the settlement process—for example, by suspending a negotiation or mediation to give a distraught client time to work through difficult feelings.

In the stock dilution case, I met with the plaintiff and his lawyer a few days after the mediation and asked him to tell me more about his early days at the company. He described having begun as a consultant and then gradually becoming closer to the CEO. It was a chance to go far beyond his usual work and become a key player in an exciting venture. He became, he said, a mentor to the young executive, a role that gave him great satisfaction. The plaintiff felt the loss of his role in the company deeply. It also felt agonizingly unjust to be discarded just as the venture was showing its possibilities. He had invested too much, he said, to take a mediocre deal.

When he finished, I said that it was impossible to really understand what he’d gone through, but I realized that his was much more than a simple contract claim. He felt he’d been betrayed by someone he’d been close to and shabbily treated by a person he’d helped to succeed. I could only begin to imagine, I said, how hurtful that must be.

As we talked, the plaintiff gradually became calmer. Eventually, I asked him to think about resuming the negotiation.

A few days later, I called the defense lawyer with a new settlement proposal. She said, however, that the company was no longer interested in settling. Two years later, the local legal newspaper reported that the company, having been abandoned by its young clientele, had filed for Chapter 11 protection. There was no indication whether the case was still going on.

With hindsight, I wish I had probed the plaintiff’s feelings earlier and helped him work through them. Failing that, I should have adjourned the mediation when he became agitated, rather than pressing him to make an offer that he then revoked.

In the traffic fatality case, the plaintiff’s lawyer called back two weeks after rejecting our offer, to say that the family wanted to meet informally with the trooper. Initially, we were resistant: What was the point of having hurt and angry people rehash the facts, given that the evidence was largely undisputed? Eventually, though, we agreed.

The meeting was extraordinary. The victim’s mother, father, and sisters came. They talked not about the case, but about their lost son and brother. The mother read a poem to the trooper describing the hopes she had held for her son and the life they never would be able to share.

The officer surprised everyone. Although he maintained that he had not been negligent, he emphasized how awful he felt about what had happened. He was the father of three sons, and he had thought over and over about how he would feel if one of them were killed. He’d asked to be reassigned to desk work, he told the family, because he could not risk being involved in other high-speed chases.

After the meeting, the lawyers tried to turn the discussion to settlement, but the family said they could not think in terms of money, and the parties adjourned. As she left, the victim’s sister said, “It’s been three years since my brother died, and now I feel he’s finally had a funeral.”

A week later, their lawyer called to say that they accepted the last defense offer, and the case settled.

We must remember this: As they pursue settlement, clients often feel that they are giving up vital hopes and goals. We lawyers must be alert to the possibility that a litigant who behaves irrationally is reacting to feelings of loss provoked by a deeply difficult decision, rather than engaging in tactical or strategic maneuvers. By helping people grieve for what they cannot obtain, we can help clients in their most vulnerable moments and protect settlement negotiations from unnecessary failure.

_{Copyright © 2020, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).}