You’ve heard it before. Ninety-five percent of lawsuits settle before they are tried. Knowing this, doesn’t it make sense to study settlement and trial outcomes to see if settlement is usually a good idea? Some new research did just that and found that plaintiffs in lawsuits, such as the employee in a discrimination claim, who turn down a settlement offer often do much worse at trial than if they had taken amount the defendant was offering.

A new study in the September 2008 issue of the Journal of Empirical Legal Studies found that 61% of plaintiffs who gambled on going to trial were disappointed with the outcome because they received a smaller award than the amount they had been offered to settle before trial. The average settlement offer was $48,700 and the average award at trial was only $43,000 in the more than 2000 cases decided in California between 2002 and 2005 that were included in the research.

It was an error for defendants to go to trial instead of paying a settlement demand in 24% of the cases reviewed. Unfortunately for those defendants that chose to go to trial, the price of that mistake was high. In those cases, the plaintiff’s average settlement demand was $770,900 but the average verdict was $1.9 million, meaning that $1.1 million could have been saved in those cases if the defendant had settled. Don’t forget that these verdicts occurred in California, so they don’t reflect conservative Panhandle jury awards, but the percentages are worth thinking about if your company is defending a lawsuit.

The study also looked specifically at employment law cases. In those cases where an employee sued his former employer, the plaintiff won 51.1% of the time. The damages awarded to the plaintiffs who went to trial were 86% of what the plaintiff demanded during the settlement negotiations. So it could appear to be less costly in terms of damages for an employer to go to trial in an employment case. Unfortunately, that 14% saved in damages (plus much more) would be spent on the exorbitant costs of trying the case: experts’ fees, trial expenses, court costs and attorneys’ fees.

The study pointed out that the plaintiffs made poor settlement decisions more often when the case was taken by the plaintiffs’ attorney on a contingency fee. That is not surprising, since the plaintiff is not paying for the litigation costs during the pretrial phase. For defendants, the poor settlement decisions were made when there was no insurance to cover the damages. Again, that is not surprising because defendants who have to pay the settlement costs themselves often decide to roll the dice and attempt to win at trial to save money.

It will always be a part of my settlement negotiations from now on to inform the plaintiff or his attorney that turning down a realistic settlement offer often turns out badly for the plaintiff, based on this study. As for defendants, I would suggest that you heed the advice of an experienced litigation attorney in making a settlement decision. If your attorney says that the odds are high that you will lose the case at trial, it is time to settle. But if your attorney thinks you have a good chance of zeroing the plaintiff, as a defendant you may want to gamble on trial.