November 18, 2006
The Practical and Economic Consequences of Rules Prohibiting Secret Settlements
Posted by Alan Childress
Many states, newspaper editorials, legal newspaper articles, proposal submissions to the ABA, and especially law professors are all mulling the idea--in proposed ethics rules and more generally--of prohibiting or limiting secret settlements. Two law professors at the University of Kansas Law School have approached the question anew by examining the economic and practical by-product of such anti-secrecy proposals. Their conclusion: "restrictions on secret settlements not only may be ineffective, but in fact may be counterproductive." For example, "rather than increasing the information available to the public about alleged hazards to public health and safety, restrictions on secret settlements may have the unintended consequence of doing exactly the opposite," as parties avoid scrutiny and the public record of filings by acting outside of court or by arbitration.
The paper, "Secret Settlement Restrictions and Unintended Consequences," is authored by Christopher Drahozal & Laura Hines (left). It is now posted on SSRN and will appear in the Kansas Law Review; find its full abstract after the jump. (By contrast, here's a link to a 2003 article by David Dana & Susan Koniak criticizing secret settlements.)
The Drahozal and Hines abstract is:
This Article evaluates the likely consequences of restrictions on secret settlements. Both the defendant and an early claimant - a claimant who discovers that he or she has a claim before other claimants do - have a strong incentive to maintain secrecy, and they have a variety of means by which they might do so. First, in many cases, a claimant can circumvent restrictions adopted by a single state or federal court by filing suit in a state or court without such restrictions. Second, parties might circumvent secret settlement restrictions adopted by a single state by choosing another state's law to govern the settlement. Third, parties could avoid restrictions on secret settlements in court by settling before the claimant files suit. Finally, many parties could accomplish much the same result as a secret settlement by use of predispute or postdispute arbitration agreements, taking advantage of the privacy of the arbitration process. Indeed, restrictions on secret settlements not only may be ineffective, but in fact may be counterproductive. To the extent the restrictions encourage parties to settle before the claimant files suit or to choose arbitration instead of litigation, they may reduce rather than expand the amount of information available to the public about the dispute. Currently, if the secret settlement occurs after the claimant files suit, the factual allegations in the complaint are a matter of public record for some period of time (at least until the settlement occurs). If secret settlements are prohibited, and the settlement takes place outside of court or the case goes to arbitration, even that information is lost. Thus, rather than increasing the information available to the public about alleged hazards to public health and safety, restrictions on secret settlements may have the unintended consequence of doing exactly the opposite.
November 18, 2006 in Abstracts Highlights - Academic Articles on the Legal Profession, Economics, Law & Society | Permalink
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