Why Most Lawsuits Settle Before Trial

The economics behind out-of-court settlements, including the cost of trials, shared expectations and the role of optimism.

Television shows are full of courtroom drama, but real civil lawsuits rarely reach a trial. In the United States, the great majority of civil cases filed in federal courts end without a trial, most often through a settlement or dismissal. Economics helps explain why.

Trials are expensive

A trial costs both sides money for lawyers, expert witnesses and time. It also carries risk: neither side knows for sure how a judge or jury will decide. Because both sides can save these costs by agreeing on a result, there is usually a range of settlement amounts that would leave both better off than going to trial. Economists call this the bargaining range.

Finding the range

Suppose both sides agree that the plaintiff has a 50 percent chance of winning 100,000 dollars at trial. The expected award is 50,000 dollars. If each side would spend 15,000 dollars on the trial, the plaintiff expects to net 35,000 dollars from going to court, while the defendant expects to lose 65,000 dollars in total. Any settlement between 35,000 and 65,000 dollars leaves both better off than a trial.

Why some cases still go to trial

If settling is so sensible, why do any cases reach trial? Economists point to a few reasons.

Optimism bias is one. If each side is overconfident about its chances, the plaintiff may expect far more than the defendant is willing to pay, and the bargaining range disappears. Research has found that people are often overly optimistic about their own cases.

Private information is another. One side may know something the other does not, such as how strong a witness will be. Some cases also involve principles, such as wanting a public ruling, that money cannot settle.

Is settlement always good?

Settlement saves money, but it has drawbacks. Settled cases do not produce public court decisions, which help everyone understand what the law requires. Settlements can also be kept confidential, hiding problems like unsafe products from the public. And a party with less money may accept a low settlement simply because it cannot afford to wait.

Thinking a settlement means the defendant admits fault

Many settlements include no admission of wrongdoing. A defendant may pay simply because a trial would cost more, even if it believes it would win. So a settlement tells you about the costs and risks of going to court, not necessarily about who was right.

Key takeaways

Most civil lawsuits end without a trial, often through settlement.
Trial costs and uncertainty create a bargaining range where settling beats going to court for both sides.
Optimism bias and private information can make that range disappear.
Settlements save money but can reduce public legal guidance and hide information.