One of the most frequent results when a company becomes embroiled in litigation is a settlement – a legally binding agreement outside of a courtroom. Settlements are quite prevalent in the corporate world, but few individuals outside the legal profession know what they signify for the firm, what they include, or what occurs in their aftermath.
Key Takeaways
- 97% of civil disputes in the U.S. settle before they reach a jury verdict and go through long and expensive trials.
- The U.S. spends around $369 billion a year on tort expenditures, including settlements and legal fees.
- Most complex business litigations take 3-5 years to conclude completely.
What Is a Lawsuit Settlement?
A settlement is an agreement between the parties in a lawsuit to settle their issue without going to trial. In the corporate context, the corporation being sued usually agrees to pay money, modify its business operations, or both, in return for the plaintiff dismissing or settling his or her legal claims. The agreement is put down in a settlement agreement, which is a binding legal contract.
Importantly, a settlement of a lawsuit is not an admission of guilt or wrongdoing. Companies often settle cases even when they are confident they would win in court, simply because litigation is expensive, time-consuming, and unpredictable.
“Settlement is not an admission of defeat; it is often the most rational business decision a company can make when faced with legal uncertainty.”
The Settlement Process – Step by Step
- Starting a lawsuit: The plaintiff, who can be an individual, a group, or a government agency, makes a formal complaint against the firm in a court of law. The complaint sets out the plaintiff’s allegations and the remedy he or she is seeking.
- Discovery Phase: Both parties exchange papers, witness testimony, and evidence. This phase is generally what forces firms to settle, due to the devastating unearthed papers.
- Settlement Negotiations Begin: Lawyers for both sides begin discussions, generally through formal mediation with a neutral third party. Offers and counteroffers are traded.
- Settlement Reached: Both parties agree to conditions, usually a monetary payment and frequently a non-disclosure agreement (NDA), and sign the settlement agreement.
- Court Dismissal: The complaint is legally dismissed with prejudice, meaning the plaintiff cannot refile the identical allegations again. Class action settlements must be approved by a court.
- Terms Completed: The firm makes the payment as promised and does any additional duties (policy modifications, compliance monitoring, etc.) required by the agreement.
Financial and Accounting Implications
Once an agreement is made, the corporation will have to account for it financially. Under accounting rules such as U.S. GAAP and IFRS, a company is obligated to record a liability, termed a loss contingency, if it is possible that a settlement will occur and the amount can be fairly calculated. It implies the settlement might appear on a company’s balance sheet before the ink is dry on the deal.
Settlement payments are often recognized as an operational expenditure or an unusual charge on the income statement, decreasing earnings for that period. That may have a major influence on quarterly and yearly earnings reporting in big settlements, and that can affect stock prices and market confidence.
Reputational and Operational Impact
Apart from the cash damage, settlements carry reputational weight. Even with a confidentiality guarantee, word of a settlement leaks, especially in high-profile instances. Customers, investors, and authorities are watching. A cluster of settlements in the same area (product safety, employment discrimination, data privacy) might be an indicator of systemic issues at a corporation.
Many settlements often involve an injunctive remedy – court-ordered modifications in how the corporation does business. That might include altering employment policies, revising product safety protocols, instituting compliance programs, or submitting to third-party auditing. “The operational requirements can be as onerous as the financial penalty itself.
Confidentiality & NDAs
Most corporate settlements contain a confidentiality clause, meaning both sides have to keep the details secret. This shields the firm from additional harm to its reputation and stops the settlement sum from being used as a benchmark for future claims. But courts typically demand that the terms of a settlement be made public in class action litigation, securities proceedings, and government enforcement actions, putting a damper on a company’s capacity to keep things quiet.
Why Companies Decide to Settle
The choice to settle is a cost-benefit analysis. Litigation costs—attorney fees, expert witnesses, depositions, management time—can quickly approach the millions before a single verdict is delivered. Settlements mean certainty. A corporation may limit its responsibility, avert what could be a devastating jury finding, save its trade secrets from discovery, and go on. The removal of lawsuit uncertainty also acts as a stabilizer for the stock price of publicly listed corporations.
Types of Common Settlement
- Class Action Settlement (39)
- Workplace Discrimination
- Liability for Products
- SEC / Securities Fraud
- Intellectual Property
- Violation of Data Privacy
- Antitrust Offenses
- Consumer Safeguarding
Frequently Asked Questions
Does settling a lawsuit mean the company admitted it was wrong?
No. Most settlements include language that makes clear the corporation is denying any wrongdoing. Settling is a commercial choice to avoid the cost and danger of a trial, not an admission of culpability.
Are settlement amounts always confidential?
Not necessarily. While private settlements can be kept secret, class lawsuits, securities fraud charges, and government regulatory proceedings generally require disclosure to the public. Publicly traded corporations are also required to disclose substantial settlements to the SEC.
Can a company be sued again for the same issue after settling?
Usually not. A settlement is rejected ‘with prejudice,’ meaning the plaintiff is barred forever from suing again on those particular grounds. However, additional incidents or new plaintiffs may still give rise to separate lawsuits.
How does a settlement affect a company’s stock price?
That depends. A surprising settlement might see the stock price tumble in the immediate term. But in the long run, the resolution of litigation uncertainty is usually good, as investors prefer the known conclusion to the ongoing legal risk.
What is the difference between a settlement and a judgment?
A judgment is the result of a trial ordered by a court. A settlement is an agreed resolution. Judgments are public record and tend to be bigger. Settlements are private and allow both sides to influence the outcome.
Who gets the money in a class action settlement?
In a class action, the settlement fund is paid to qualifying members of the class, generally after attorneys ‘ costs ( usually 20-40 % of the total ) are deducted. The amount each claimant would receive depends on how many people claim and the calculation for damages applied.
Sources & Citations
- Administrative Office of the U.S. Courts. Civil Caseload Statistics and Terminations. U.S. Courts, uscourts.gov.
- Financial Accounting Standards Board (FASB). ASC 450 — Contingencies: Loss Contingencies. GAAP Codification, fasb.org.
- International Financial Reporting Standards Foundation. IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. IFRS Foundation, ifrs.org.
- U.S. Securities and Exchange Commission. Disclosure Requirements for Material Legal Proceedings. SEC Regulation S-K, Item 103. sec.gov.
- Ostrom, B.J., & Kauder, N.B. Examining the Work of State Courts: Civil Justice Report. National Center for State Courts, ncsc.org.
- Cornell Law School Legal Information Institute. Settlement. LII / Legal Information Institute, law.cornell.edu/wex/settlement.
- American Bar Association. Negotiating and Drafting Settlement Agreements. ABA Section of Litigation, americanbar.org.
- Hylton, K.N. Litigation and Settlement Under Imperfect Information. RAND Journal of Economics. Rand Corporation, rand.org.
Disclaimer: This article is for informative purposes only and is not legal advice. This is not legal advice. Please see a skilled attorney for advice unique to your case.
