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Legal Trends: Early Settlement

HR Magazine, November 2004

Consider the merits of an early settlement approach to employment litigation.

To settle or not to settle, that is the question. When employees threaten to or actually do file employment-based lawsuits, how should employers respond? HR professionals frequently face this question as advisers to management and in working with their organizations legal counsel.

This article discusses the modern spectacle of employment litigation and presents current approaches to generating and taking advantage of early settlement opportunities. It includes information to help you and other executives come to grips with the economic realities of employment litigation, debunks myths about the consequences of settlement and offers concrete strategies for early claim resolution.

Minor Claim, Fiscal Fiasco

The following story is based on fact and reveals the fate employers may suffer when they fail to give serious consideration to early settlement, even when an employees claim seems unfounded.

Simon, a longtime employee of ABC Securities Co., devised an unlawful stock-trading scheme, evidence of which was uncovered by a Securities and Exchange Commission (SEC) audit. On the basis of information that Simon provided to ABCs lawyers, the company reported to the SEC that nothing unusual or improper had occurred.

But the SEC dug deeper and provided ABC with documents contradicting what Simon had told company lawyers. The SEC gave notice of its intent to interview Simon, but he refused, citing his Fifth Amendment right against self-incrimination.

ABC launched its own investigation and ultimately concluded that Simon had lied and violated securities laws. ABC fired Simon and ended up paying a $3 million SEC fine that was based largely on his conduct.

Shortly after Simons termination, his attorney contacted ABC offering to waive his clients whistle-blower claim in exchange for severance payments worth $30,000. The company couldnt believe such chutzpahthe man was a liar and a law-breaker, not a whistle-blower. It rejected Simons offer.

In response, Simons lawyer filed a 16-count civil lawsuit in California. After three years of intense, acrimonious litigation, the court dismissed 15 of the 16 counts, leaving only the whistle-blower claim for trial. At this point, Simons lawyer offered to settle the case for $300,00010 times the original offer. The company indignantly refused.

The case went to trial a year later, when Simon was 60 years old and without comparable employment. As the lawyers for the parties mounted the courthouse steps to begin trial, plaintiffs counsel made one more offer: $500,000. The company again refused.

At trial, ABC suffered a series of evidentiary setbacks. The SEC refused to testify on the companys behalf. The court admitted into evidence testimony from Simons unemployment hearing in which company managers made inconsistent statements. And the court refused to let the company tell the jury that Simonthe supposed whistle-bloweractually had refused to cooperate in the federal investigation and had invoked his Fifth Amendment right.

As a result, the jury awarded Simon $5 million. ABCs own litigation expenses substantially exceeded $1 million, so ABC ended up spending in excess of $6 millionmore than 200 hundred times Simons original settlement offer.

Sooner Costs Less Than Later

Any employment lawyer will tell you that the vast majority of employment cases eventually settle. The question is simply when and at what price. To get a better grip on what this actually means in practice, one companyAmerican Express Co.conducted a study of 82 employment lawsuits it had settled over a four-and-a-half-year period ending in May 1998.

The cases were grouped according to whether they were settled within one, two or three years. Cases settled in two years cost nearly twice as much in attorneys fees and settlement amounts as those settled in one year. Cases settled in three years cost two-and-a-half times as much as cases settled in one year.

Why did costs escalate so dramaticallyway beyond any remotely reasonable rate of interest or inflation? Heres what American Express found:

  • Plaintiffs attorneys fees continued to increase and were factored into the settlement position.
  • The companys own legal fees mounted.
  • Plaintiffs and their counsel became more committed to the case as the discovery process unfolded. Various problems, inconsistencies and other issues emerged that tended to be more helpful to the plaintiff than the defendant, thus eroding the employers early advantage in having better access to the facts.
  • Like Simon, plaintiffs typically had weak post-employment earnings; the longer the earnings gap persisted, the greater the claim for lost income damages.
  • Plaintiffs leverage increased as the trial date approached, especially when one or more of their claims survived a motion for summary judgment.
  • Management and HR became more and more fed up with demands on their time and energy, leading to a desire to settle no matter how high the price.

Reasons for Resistance

Despite such realities, many employers resist early settlement and wait until the pain becomes acute, if not mortal. Why? These are typical reasons:

  • Sense of injustice.
  • Need for vindication.
  • Fear of opening the floodgates to more claims.

Lets probe each of these a little.

Sense of injustice. The company did nothing wrong, and management should spend whatever it takes to prevent a dishonest employee from perpetrating an injustice.

The legal system does not dispense perfect justice. Cases that should be won are lost, and vice versa. Whether an employer wins or loses may turn not on whether judges or juries truly believe a plaintiffs claim, but on whether they feel the employer acted fairly. HR professionals in large companies should be especially skeptical if counsel says you have great odds of winning at trial. While juries tend to be unpredictable, they often have a built-in bias against large companies. As for a confident prediction of victory on a motion for summary judgment (a ruling for the defense that avoids trial), be skeptical of that as well. In most cases, these motions arent easy to win because they require the judge to assume that what the plaintiff says is true and nevertheless rule that the case is so one-sided in favor of the defense that the employee loses her right to trial by jury.

Need for vindication. The managers personally involved in the challenged decisions want to be vindicated. They arent bigots, and they dont believe their actions were discriminatory, harassing, retaliatory or otherwise unlawful.

Even when employers successfully defend an employment lawsuit, they are not vindicated. Winning a suit means simply that the judge or jury chose to believe the employer instead of the plaintiff. This does not mean the decision-maker found that the employer managed the situation fairly, justly and wisely. It simply means that no matter how imperfectly the employer handled the situation, it did not break the law.

Moreover, where is the vindication in spending tens or hundreds of thousands of dollarsand many hours of valuable management timeon a project that does not advance the companys mission or goals?

Opening the floodgates. If we open our wallet here, we will have to keep it open forever.

Sound familiar? A popular myth persists that if you settle cases too quickly, everybody will sue you. The fear of opening the floodgates has become a rallying cry for plowing ahead through expensive, time-consuming litigation that only makes it more expensive to settle the case later.

Sometimes management takes this approach to send a messagebut to whom? The discharged employee, who wont be around anyway? The plaintiffs bar? Other employees, who are only dimly aware of the case?

In rare cases, fighting a particular claim to the bitter end may make economic sense in relation to other claims waiting in the wings. In most instances, however, settling the case will not increase the likelihood of additional claims.

Indeed, the opposite will be true if you take advantage of lessons learned by strengthening policies, practices and procedures; improving employee relations; and developing safeguards to ensure that termination processes are handled appropriately, such as by leveraging severance payments to secure a release. (For more information on these subjects, see the Legal Trends columns in the December 2003 through February 2004 issues of HR Magazine.)

Steps Toward Early Settlement

Deciding to settle a claim early in the process may involve balancing many factors, most of which relate to the potential costs of litigating a claim in court. But not all complaints carry equal risks of litigation.

For example, most people who file administrative claims with the Equal Employment Opportunity Commission, analogous state agencies or in-house dispute resolution programs never end up filing lawsuits, even if their employer refuses to make a monetary settlement. Such individuals may come to understand that their claim is weak, may lack the necessary persistence or ability to secure an attorney, or may simply become discouraged and give up.

As a result, it often makes sense to limit significant monetary settlements to pre-litigation claims that will be difficult to defend or that show clear signs they are headed to court if not settled quickly.

When a claim that is earmarked for court crosses your desk, however, you should pull out all the stops and act quickly to get it off the Armageddon track. Understanding some of the following tools, techniques and strategies for achieving early settlement will help you orient management and steer outside counsel toward preventing the claim from generating a life of its own.

Secure internal alignment. HR and other management officials need to be on the same page. If managers express a sense of injustice, need for vindication or fear of opening the floodgates, address those reactions directly. They will need to hear that the employers willingness to settle the case is based not on the belief that management violated the law, but on a pragmatic decision to avoid the unpredictability of litigation and the huge cost of even a successful defense.

Have a meeting of the minds with counsel. Communicate your expectation of achieving an early, cost-effective settlement if at all possible, and secure counsels commitment to support the employers philosophy and desires. Make sure counsel understands that you have no desire to invest in scorched earth litigation. Explain that you have learned the correlation between physics and legal economics: For each and every attorney action, there is an equal and opposite attorney reactionand this means paying a bundle!

Pick up the phone. When you receive a settlement demand or notice of a lawsuit, a good first move is to instruct counsel to speak directly to plaintiffs counsel before positions get carved into granite.

Dont worry about making the first move; once negotiations are under way, it wont matter. Even if the claim is utterly baseless and you have no intention of paying money to settle, it still helps to pick up the phone and offer an opportunity to present your understanding of the facts and law to give the other side the opportunity to avoid wasting time and money.

Explore early mediation. At some point during litigation, the court will encourage and even push the parties toward mediation. However, there is usually no reason to wait for the system to act. Early mediation offers several advantages:

  • At that point, the employer has greater access to information about the case.
  • Plaintiffs counsel will have invested relatively little and may be more apt to take a quick payment and move on.
  • Plaintiffs counsel could be concerned about controlling a high maintenance ex-employee and may see early settlement as an opportunity to avoid problems later.
  • A neutral mediator can be especially helpful at this stage in convincing a stubborn plaintiff to settle.

Speak softly, carry a big stick. Try to secure early resolution even of claims that are so weak or problematic that your company wont pay anything to settle and ultimately would take its chances in court. Doing so can keep small issues from developing into larger, more expensive ones. In these situations, take the Teddy Roosevelt approach: Speak softly, but carry a big stick.

In response to the demand letter, lawsuit or other form of claim, work with counsel to craft a strong but civil response to employees counsel that does the following:

  • Thanks them for the information shared.
  • Acknowledges that the plaintiff feels aggrieved.
  • Sets forth the applicable law and the facts, offering them the opportunity to confirm for purposes of evaluating whether to drop the claim.
  • States that the claim lacks foundation in fact or in law, and that counsel have been instructed to litigate it to a conclusion if necessary and to seek reimbursement of attorneys fees and costs.
  • Invites them to share anything they think you have missed, and promises to consider and respond to any new information.
  • Concludes by suggesting that it would be appropriate for counsel to advise their client that there is no viable claim and that they should let the matter go.

Consider nonmonetary terms. Particularly in cases where the employer wont pay anything, other types of settlement consideration sometimes will help bridge the gap. These may include:

  • An apology (worded appropriately with an eye to future claims).
  • An honest job reference.
  • An agreement allowing employees to keep items of equipment they have been using, such as a laptop.
  • COBRA coverage without premiums for a limited time.
  • A mutual release when the company has viable claims against the employee.
  • An agreement to review policy or conduct training on subjects related to the plaintiffs claims.

Consider monetary solutions not payable to the plaintiff. Options may include a charitable donation to a nonprofit organization selected by the plaintiff, or an agreement to cover some or all of the plaintiffs legal expenses.

  • Unconditional reinstatement offer. In a discharge case, sometimes an unconditional offer of reinstatement will throttle down the litigation and put it on track to early settlementregardless of whether or not the employee accepts the offer. This approach, originally developed under Title VII of the Civil Rights Act, has been applied by state and federal courts in a number of different contexts.
  • Heres how it works: If the employer offers the terminated employee re-employment at the same position, wages and benefits as before, without requiring a release of claims, and the plaintiff unreasonably refuses the offer, the court may cut off any claim to back pay, reinstatement or front pay from the date of the offereven if the employee ultimately wins the case.
  • An unconditional offer of reinstatement can be a smart tactical move in cases where the employers defense may have holes, the employee was not a bad performer, or the employee quit but asserts constructive discharge.
  • In most cases, plaintiffs will reject such an offer, or accept it at first and later decide they do not wish to return. Regardless, the offer will give you settlement leverage and will increase the likelihood of your settling sooner and on cost-effective terms. Of course, if the employee accepts the offer, you have to follow through. However, this does not mean carte blanche status for the returning employee; she must still perform to expectations and can be held accountable as you would other employees. Work closely with employment counsel on this process.
  • Offer of judgment. Rule 68 of the Federal Rules of Civil Procedureand state law equivalentscreate early settlement incentives by imposing painful consequences on unreasonably litigious plaintiffs.
  • Heres how the concept works: Rule 68 allows a defendant to make an offer of judgment to the plaintiff. If the plaintiff rejects the offer and goes on to win the case, but does not obtain a judgment higher than the offer, the defendant is entitled to costs. Rule 68 and its state equivalents have been applied to grant defendants out-of-pocket costs such as filing and witness fees, deposition transcript costs, and, in some cases, even the defendants own attorneys fees; they also have helped cut off further claims to attorneys fees by a successful plaintiff.
  • Offers of judgment can be worded in such a way to avoid an admission of wrongdoing. In almost all cases where such offers lead to settlement, the parties end up negotiating a few additional terms and settle the case with a conventional written agreement followed by dismissal of the lawsuit.

Take It from Abe

You, your management team and counsel already may think along the lines we have suggested in this article, but there is an equally good chance that is not the case. If all we have offered so far is not convincing, maybe Abraham Lincolns words from Notes for a Law Lecture will be just what it takes to seal the deal:

Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loserin fees, expenses and wasted time. As a peacemaker, the lawyer has a superior opportunity of being a good man. There will still be business enough.

Authors note: This article is not intended as legal advice; for specific factual situations, please seek qualified employment counsel.

John Parauda is managing counsel of American Express Co. He oversees employment-related claims and litigation involving American Express 35,000-member workforce. Jathan Janove is a principal in the Salt Lake City-based employment law firm Janove Baar Associates LC, an affiliate of the Worklaw Network. His book, Managing to Stay Out of Court: How to Avoid the 8 Deadly Sins of Mismanagement , will be available in January through the SHRM Bookstore


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