No Free Lunch: How Settlement Can Reduce the Legal System’s Ability to Induce Efficient Behavior

Ezra Friedman
Abraham L. Wickelgren, Northwestern University

Abstract

The belief that it is better for cases to settle than go to trial is widespread, but the arguments in favor of settlement have typically overlooked how settlement affects one of the most important functions of the legal system: deterring undesirable behavior that gives rise to lawsuits. This essay argues that settlement can impair the ability of the legal system to deter harmful behavior selectively without chilling desirable behavior. Where it exists, this effect is a fundamental property of settlement in that there is no way to change other legal rules to eliminate it. Because settlement also has important benefits, such as the reducing legal costs and reducing uncertainty, this essay does not argue for any across the board prohibition of settlement. Rather, it suggests that judges should be more circumspect about encouraging settlements and that there may even be situations where some restrictions on settlement are warranted.