On Drafting Settlement Memos

A settlement memo explains why I should pay money to settle a case.

It also should say a little more.

Start with the basics:

What case are you talking about?

Maybe: “We are seeking authority to settle the case of Scrooge vs. Crotchett.”

How much authority are you requesting in total, and how much has already been reserved?

Maybe: “We already have $5 million reserved, and we are asking for an incremental $5 million, to a total of $10 million, to settle.”

Will the amount being reserved take you above your insurance deductible?

Maybe: “We are insured above a $7.5 million deductible . . .”

What is the financial effect this quarter of taking the reserve?

“. . . so your approval has a $2.5 million P&L impact this quarter.”

Have you received appropriate authority in the business units to settle for this amount?

Maybe: “Smith, the CEO of the X business unit, approves settling in this amount.”

Have you told the finance department that you propose to settle for this amount, and is the amount of the settlement built into the current quarterly numbers?

Maybe: “Finance is aware of this request for settlement authority, and has built your approval into the numbers for the current quarter.”

Now, the heart of it: Why are we being sued, and what is our defense?

Maybe: “Briefly, this case involves . . . .”

And now the hardest part: Why should we pay substantial money to settle the case?

You might be inclined to say: “The plaintiff is demanding $200 million for the case. We should pay $10 million to settle.”

Nope!

The plaintiff doesn’t get a lot of money just because it has the temerity to make a big demand. You must say something about the case.

You might be inclined to say: “This case will cost us $15 million in defense costs through trial. We should pay $10 million to settle.”

Nope!

All of our cases are expensive to defend. And the other side is paying money to prosecute the case, too. You must say something about the case — not the legal fees associated with it — to justify settlement.

You might be inclined to say: “This case is nearing trial, so we should pay a lot of money to settle it.”

Nope!

Eventually, every case approaches trial. But that doesn’t mean that you settle ’em all. You must say something about the case.

You might say: “We are accused of having screwed up in five ways, each of which independently caused the plaintiff $100 million in damages. We have sound defenses to the first four ways that we are accused of screwing up. But as to the fifth way, the plaintiff says X. Our best defense is Y. But that’s hardly a rock-solid defense, because of Z. On balance, we think we have a 20 percent chance of losing at trial. Plaintiff will seek $100 million at trial, but the $100 million is inflated for these reasons. [Explain the reasons.] Plaintiff might realistically recover $50 million. 20 percent of $50 million in damages is $10 million, which is what we are requesting in settlement authority. Additionally, settling now will avoid incurring an estimated $1 million in defense costs through trial.”

Eureka!

That’s it!

That explains what we did wrong. It explains the amount the plaintiff will likely recover and the likelihood that we will lose that amount. It multiplies the realistic damages times the realistic exposure, and calculates the amount that we should pay.

That’s why you should settle a case. And (barring exceptional circumstances) that’s what folks need to know when they give authority.

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Mark Herrmann spent 17 years as a partner at a leading international law firm and is now responsible for litigation and employment matters at a large international company. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at [email protected].