The Impact of Fee-Shifting Tort Reform on Out-of-Court Settlements

Among the goals of proponents of tort reform is the goal of encouraging outof-court settlement of claims, rather than burdening the court system. Congressional discussions of tort reform have included a proposal aimed at promoting out-of-court settlement by making the party rejecting an offer not improved upon at trial responsible for the other party’s attorney’s fees as well as litigation costs. This plan is similar to Federal Rule 68, adopted in 1938 and infrequently used. This paper analyzes the impact of Rule 68 on the optimal range of settlement offers. Under certain conditions, the settlement range—the range of settlements over which the plaintiff and defendant are willing to negotiate—is qualitatively different than previously shown. The range may be shifted upward, in favor of the plaintiff in that the lowest (greatest) offer that the plaintiff (defendant) has an incentive to accept (make) may be greater than the expected payoff at trial after the offer is rejected. Comparative statics are performed to show how changes in attorneys’ fees, court costs, and the probability of a high judgment affect the characteristics of the outcome.