Should I Settle or Go to Trial?

The comparison, in numbers

Strip the emotion out and the decision is arithmetic. A trial outcome is a range of results, each with a probability. Multiply each result by its probability and add them up, and you have the expected value of trying the case. Then subtract what it costs to get there: attorney's fees and expenses from today through judgment, the cost of an appeal, and the time value of money over the years that takes. Then discount again for collection risk, because a judgment against a company that has no assets, or that will file bankruptcy, is worth a fraction of its face.

What remains is what the case is worth to you today. A settlement offer above that number is a good offer, however far below the damages you believe you suffered. An offer below it is not, however tempting it is to be done. The same arithmetic, run from the other side's chair, tells you what they should be willing to pay. Most settlements happen where the two numbers overlap.

What trial costs that settlement does not

• Fees you will not get back. Texas follows the American rule: each side pays its own attorney's fees unless a statute or contract shifts them. A prevailing claimant on a written contract usually can recover fees; a defendant who wins usually cannot, and tort claims generally carry no fee recovery at all. Which rule applies to your claims changes the arithmetic materially; see who pays attorney's fees in Texas business cases.
• Time. A contested business case in a Dallas County district court commonly takes well over a year to reach trial, and an appeal adds more. During that time the disputed money is frozen, witnesses move on and memories fade.
• Management attention. Depositions, document collection and trial preparation take the owner and key employees away from the business for days at a stretch. That cost never appears on a legal invoice.
• Publicity. Trial testimony and exhibits become public record. Customers, competitors and lenders can read them.
• Appeal. A verdict is not the end. The loser can appeal, post a bond and delay collection for a year or more, and a court of appeals can reverse a verdict for a legal error made at trial. What that path looks like is in appealing a business case in Texas.

What settlement costs

Settlement is not free either. You accept less than you might have won, in exchange for certainty and an end date. You give up the public finding that you were right, which matters when the dispute has become known in your industry. A settlement sets no precedent, so a competitor or former employee who learns you settle may test you again. And a settlement with a counterparty you still do business with can define the relationship for years. Weigh those against the costs above, honestly, and write the comparison down.

A judgment is a piece of paper until it is collected

The single most overlooked factor is whether the defendant can pay. A judgment against a thinly capitalized company, an individual with exempt assets, or a business that will dissolve the week after the verdict may never be collected in full. Before rejecting an offer, know what the other side owns, where it is and what claims are ahead of yours. The tools for finding out, and for collecting afterward, are in how to collect a judgment against a business in Texas. A smaller certain payment from a solvent party often beats a large judgment against an insolvent one.

The Texas offer-of-settlement rule

Texas has a formal mechanism that raises the price of rejecting a reasonable offer. Chapter 42 of the Civil Practice and Remedies Code and Tex. R. Civ. P. 167 work together. The procedure is available only after a defendant files a declaration invoking it, which must be filed no later than 45 days before trial. Once invoked, either side may make an offer that is in writing, states that it is made under Rule 167 and Chapter 42, states the terms on which all monetary claims between them may be settled, sets an acceptance deadline of at least 14 days, and is served on the other party. Offers may not be made within 60 days after a party's appearance or within 14 days before trial.

The teeth are in Rule 167.4 and § 42.004. If the offer is rejected and the judgment turns out to be significantly less favorable to the rejecting party than the offer was, the court must award the offering party its litigation costs from the time of rejection to judgment. "Significantly less favorable" is defined: for a claimant who rejected, a judgment of less than 80 percent of the offer; for a defendant who rejected, a judgment of more than 120 percent of the offer. Litigation costs mean court costs, reasonable deposition costs, reasonable fees for up to two testifying experts and reasonable attorney's fees, and they are capped so they cannot exceed the claimant's recovery. The rule does not apply to non-monetary claims, class or derivative actions, or cases against governmental units. A formal offer under Rule 167 changes the other side's arithmetic, which is why it is made.

When trial is the right answer

• The offer is below the discounted value of the case and the other side can pay a judgment.
• You need a remedy a settlement cannot deliver: an injunction, a declaration of rights, a public finding, or a ruling that will govern a dozen similar contracts.
• Your fees are recoverable under a contract or statute, so the fee side of the arithmetic favors you.
• The other side's offer is nothing, or is conditioned on terms that would damage the business more than the risk of losing.

When settlement is the right answer

• The offer meets or exceeds the discounted value, even if it is far below the damages you believe you suffered.
• Your fees are not recoverable and are a large share of what is at stake.
• The defendant's ability to pay a judgment is doubtful.
• Trial would expose information the business needs to keep private, or would consume the attention of people who are needed elsewhere.
• A formal Rule 167 offer is on the table and your realistic outcome is close to the 80 or 120 percent line.

Example

Suppose a Dallas equipment lessor sues a construction company for $800,000 in unpaid lease payments and damage to returned equipment. The construction company has invoked Rule 167 and offered $450,000. The lessor's counsel estimates a roughly two-in-three chance of a full verdict on the lease payments, a weaker case on the damage claim, fees of about $150,000 through trial that are recoverable on the lease claim but not the damage claim, a year to trial and another to finish an appeal, and a defendant with real assets. The probability-weighted judgment, less unrecoverable fees and discounted for two years, lands near $500,000. The $450,000 offer is close enough, and the 80 percent line of Rule 167 sits at $360,000, that the lessor counters at $520,000 rather than rejecting outright. The case settles at $490,000 with payment in 30 days.

Making the decision, and making it stick

No lawyer can tell you what a jury will do. What a litigator can do is build the range of outcomes honestly, put probabilities on them that reflect the discovery record rather than the client's sense of justice, lay the costs beside them and show you where the offer falls. Decide with that in front of you, and decide before the last expensive month of trial preparation, when the arithmetic changes against you. Once you decide to settle, put it in writing at once: under Tex. R. Civ. P. 11 an agreement touching a pending suit is enforceable only if written, signed and filed, or made in open court and entered of record. The mechanics are in Rule 11 agreements in Texas.

Tina Wysk tries business cases in Dallas state and federal courts and settles them when the numbers say to, and gives clients the comparison in writing either way. See the business arbitration and mediation practice page.