Another Legal Settlement

A week ago I wrote about the Bank of America settlement - how the bank was hardly impacted, the lawyers did very well and the customers, on whose behalf the suit was filed were little more than interested by-standers.  Here is another where Wal-Mart gets a $27.5 million slap on the hand, the lawyers collect 25% plus expenses, leaving the customers with less than $1 each (unless they choose to hire their own lawyers and take another shot at Wal-Mart and Netflix).

You read about these settlements frequently. If you listen closely to the ads on TV for personal injury law firms, the client endorsements usually say, “I got a settlement for X”, not “I was awarded X.”  The question for consideration today is, why settlements?  The answer can be traced to a general lack of economic understanding, the prevalence of magic-money-tree thinking.  Here are the typical dynamics.

Someone is injured or wronged in some way.  Lawyers are hired (possibly by persuading them that they are victims) and promise to represent them at no cost to them.  They decide who is at fault, usually any related party with a lot of money or insurance.  (If you are injured by a poor person or struck by lightning, you’re pretty much out of luck.)  They then approach the parties, accuse them of responsibility and give them a choice.  They can avoid the full expense of a trial or by accepting a settlement, or they can fight it.  Insurance companies and large firms, like Wal-Mart, understand that juries are usually more sympathetic to the injured party, who is portrayed as a victim no matter what their share of the fault, and that these same juries have little economic understanding.  They think that these companies have a big stash of money and that making them pay has no ramifications on future prices or premiums for the rest of us.  It’s classic magic-money-tree thinking.  The companies also know that they can end up paying 100% of damages, even if they are only minimally to blame.  With the odds so stacked against them (in part by societal failures in a couple of key dimensions), settlements make more economic sense.

When all is said and done, though, these examples continue to show us who the real winners are.