Limited Legal Precedent
One of the understated issues with an out of court settlement is that it does not create a binding legal precedent. With a court decision, the law is established by a test case that has been thoroughly analyzed by the courts as well as the caselaw which has been created by the appellate judges. In the case of an out of court settlement, however, there is no formal jurisprudence because the matter is dropped without a substantive ruling. The result is an absence of a legally binding example when it comes time to bring about new claims in a related situation. For instance, if people settle their claims for a particular issue that is similar to another legal situation that is in the works , the results of that first case do not have the same binding effect on the second case upon which it is similar. The result is that the lack of jurisprudence and caselaw takes away from the ability to alter the decisions in a predetermined direction when a dispute again arises. It is this lack of court precedent that creates a lack of consistency in the whole legal system. If everyone disagrees that this particular legal issue exists, and that previous rulings have confirmed its merits, then further litigation on the subject is likely to result in a great deal of additional misery.
Restricted Discovery and Evidence
The plaintiff has much to lose in terms of the ability to conduct discovery and present evidence.
The plaintiff is at risk in out of court settlements because the plaintiff is giving up something of great value – the right to conduct discovery and to present expert testimony and other evidence at a trial.
When a defendant is deemed to have liability and tax penalties are calculated, and then the taxpayer, presumably the defendant, settles without litigation by way of an "out of court" settlement, the plaintiff has given up the right to cross-examine the other side in an adversarial process. An adversarial trial where each side is presenting the best evidence and arguments on opposing sides is the best way to reach a true and accurate result.
If the taxpayer were to lose a trial, he or she could appeal. In addition, if the defendant, presumably the taxpayer, loses, or even wins, it might have cause or basis to bring third party claims under state law, as against those who caused the tax deficiency, for example. In that process, he or she could conduct discovery and present the evidence.
In many cases, the Federal Government, often through the Department of Justice, wants the taxpayer to settle. That is often in the interest of the government because the government has limited funds and resources and does not want to devote them to long and protracted litigation. There is nothing unusual about seeking a settlement before or during the litigation process. That is what federal and state governments do as their routine course. It is different, however, when the government is the one suing and is seeking to have the parties settle. Here, the government has an inherent and biased interest in obtaining a "settlement" on its terms. While of course, the government has an interest in settling cases that the private taxpayer(s) do not, the government has an interest in settling with those defendants only. The government has no interest in settling with the plaintiff.
The defendant has no incentive to accept a settlement if he or she is going to have the time and expense of a trial anyway. That is probably why this sort of back-end settlement usually only happens with out of court settlements on the front end of litigation.
Potentially Reduced Compensation
Out of court settlements may end up compensating the aggrieved party less than taking it to court. The amount of money offered in settlement can sometimes be lower than what a judge or jury would order. Not only does this happen, but the non-financial elements of a judgment could be much more satisfactory to the injured party than a settlement. An example of this is a business competitor that is infringing on a patent held by someone else. They may not be able to prove damages in just a few years of infringement, and therefore may think the best they can get if they go to court is just an injunction to stop the practice. But the injunction could be worth millions to the person who owns the patent. The infringer might agree to quit his current practices and pay the plaintiff a small amount as the settlement. Although this means that the plaintiff has been partially compensated, he is now at risk that the defendant will do it again once they see it only cost them less than a million dollars to stop.
Privacy and No Public Record
The confidentiality of out of court settlements is just that, a private agreement as to how the matter is resolved. No one else need know what happened or listen to the reasons why the case settled, it all happens behind a closed door. This is often an advantage for the defendants but there are situations where the lack of public record or issue with perceived accountability may cause a case to stay alive long after it might have been resolved had a jury listened to the evidence.
Confidentiality makes it difficult to acknowledge the wrong. A defendant who was negligent, who caused injury to the plaintiff, walks away with an insurer payment. Largely due to confidentiality requirements, the defendant may go back to business as usual. The lessons that might be learned may not be learned. There is no public record to learn from.
Everett Sudanese Association v. State of Washington Western District of Washington Cases involving government entities and public issues can be difficult to settle because the public, through its taxes, will fund any settlement reached. To some, the transparency expected of a verdict by a jury may resolve the issues of liability or wrongdoing. The public is often dissatisfied with an out of court settlement because they are not privy to what actually happened. Everett Sudanese Association v. State of Washington involved a traffic stop of a group of Sudanese individuals who were on their way to the Everett Armory, to vote on a referendum on the Darfur genocide . The group would also be attending a conference of the Washington Education Association, an organization opposing the referendum on the grounds that is was less about genocide and more about racial conflict.
In an effort to determine why the state police would detain the group, the plaintiffs sought discovery of police reports and video footage of the traffic stop.
The state argued that releasing the videos and the reports, would, in effect, be denying the officers an "implied immunity" from prosecution. Since the 1979 United States Supreme Court Case association of American physicians v. record case foundation, it has been recognized that the doors to courtroom do not need to be thrown open and that settlement does not need to mean admission of liability or wrongdoing. Specifically, release of reports and video might jeopardize law enforcement practice if criminal investigations were compromised by the disclosure of those recorded statements. In 2006, courts recognized an important rationale for the finding that settlement does not need to amount to an admission of liability or wrongdoing.
The fear of disclosing evidence that is understood as being confidential to the greater community does prevent some cases from resolving.
Regarding a settlement negotiated in a high profile case, Judge Pechman, senior federal district judge, said she recognizes that in these cases, a settlement is not synonymous with guilt. But the lack of public information has a tendency to make the settlement the plaintiff regrets because, as Pechman noted, "there is no apparent benefit in knowing there was a settlement and that the parties involved continue business as usual."
Disparity in Negotiating Power
Power imbalances are all too common in negotiations. Depending on the facts of a case, you may find yourself with disproportionate power to the other party or facing a serious power disadvantage (or one where it is difficult to quantify who has a more favorable negotiating position). Where you have the power, negotiations may proceed relatively smoothly, at least without obvious obstacles. Where you or your lawyer are in a weaker negotiating position, however, it can be difficult to know what to do.
Power imbalances can turn out to be significant in family law matters, especially in cases involving domestic violence. What occurs quite often in these matters is that a settlement is struck that heavily favors the other party, at the expense of one that is fair to both parties. Take for example the person who faces a power imbalance – who is the victim of domestic violence in the relationship – who is forced into the role of maintaining the marital home for the children. That person may have been denied access to marital funds during the marriage, which then leaves them in a position of financial disadvantage and vulnerability. Because they are fearful even to face the other party in an open negotiation, they may agree to terms that are not just.
The imbalance of power between the parties can serve to deny a fair settlement to the party who has less power in the relationship or during negotiations. This is an unfortunate situation, but it occurs nonetheless. In these circumstances, you should ask yourself whether it may be preferable to go to court rather than negotiate or seek settlement outside of court.
No Judicial Review
The absence of judicial scrutiny associated with out of court settlement of any dispute, including divorce, child custody and parent time disputes, is a significant drawback to out of court settlement. While the parties may be content with the agreement they reached on their own, that does not mean that an impartial judge might not have improved the fairness of the agreement in several ways. An impartial judge will advise the parties as to the specific issues that need to be addressed to achieve a fair and equitable resolution of the issues.
Many out of court settlements possess material defects that will ultimately generate future litigation. Real estate settlements are particularly susceptible to problems over title and other third party issues. In family law cases such as divorce, the parties need to advise the judge what issues should be addressed during the divorce process and how the issues should be resolved. If there is a material defect in a settlement agreement, a reviewing judge will find it and reject the agreement. Requiring the parties to appear before a judge assures that an impartial judge, whose job is to find the flaws in an agreement, will be on watch.
It is poor public policy to allow the parties in a divorce or family law case to settle their case on their own without requiring them to explain the details of their agreement to a third party such as a judge. Indeed, in a divorce or other family case the parties are required to make a full and fair disclosure of all relevant information to each other so that they can make an informed decision with complete information . The lawyers representing each party have a professional obligation to make complete disclosure of any potential conflict of interest. An impartial judge’s review of a proposed agreement assures that such disclosure has been made and that the judge is satisfied that the parties have all the information they need.
An exception to the advice given by the lawyers to the parties under Rule 2.2 is when there is a future act in which the parties do not have an interest that is sufficiently adverse to negate the impartiality of the lawyer. The family relationship is a shared interest among the parties. Consequently, lawyers representing both may conclude that it is poor policy for the parties to involuntarily interact with a third party judge. However, lawyers offering this advice are acting unprofessionally and should be reported to the Lawyers’ Board.
Judges are not perfect. They are human, after all. But the purpose of encouraging parties to meet with a judge is to improve the fairness of the agreement. In Appendix A of guidelines that a judge should follow in divorce, Judge Anderson notes the following:
The purpose of the Conference is to determine if the settlement can be approved, or if the parties and/or counsel have missed something. Judges have special insight into the types of issues that can create problems, or that aren’t understood by an unrepresented party. Judges are obligated to swarmy on a party that an agreement is not in the best interests of the child or will leave the other party in poverty.
If a third-party judge takes the time to review your agreement and so advises the party, the fairness and completeness of the agreement will be better assured.