Legal Ethics and Reform

Of Settlements, Confidentiality Clauses, and Informal Societal Controls

Less than three percent (3%) of civil lawsuits filed actually go to trial. This means that more than 97% are settled. So although a lot of media attention is given to cases that go to trial, the bigger story, in a sense, are the cases that get settled.

Cases get settled for a lot of reasons: 1) the people honestly find a mutually agreeable middle ground with both sides happy about the result, this situations is rare because parties that are close to a settlement usually get things patched up before a case is actually filed, 2) there is desire on the defendant's side to avoid the cost and time involved in fighting the case so that side just throws in the towel and pays the other side off, this result is very common where the cost of defending the case is more than the amount the plaintiff will accept in a settlement, and 3) their are cases where the defending party wants to fight the case through to a trial, but his lawyers run the bill up to the point where he has to accept whatever he can get from the other side to avoid additional legal bills. .

Regardless of how the settlement occurs, the typical settlement document contains confidentiality clauses which gag the parties and keep them from discussing the case with friends. The end result is two parties in the community have gone through a process of accusation and counter accusation a process which is very revealing of the character of these parties while other members of the community are deprived of this visibility into the character of the two people they might have to deal with later. .

Communities have all kinds of informal controls which are used to shape the behavior of people in the community. Informal controls only work if the community generally has the information it needs to evaluate people's character. Confidentially agreements work against these informal societal controls. Obviously smaller communities are better able to enforce informal controls, even with confidentiality agreements, because everyone tends to know every else's business. So a confidentiality agreement signed at the time of the settlement can't stop the knowledge already extant in the small community from spreading. In larger communities the informal controls don't work very well in the best of circumstances, but the presence of gag orders or confidentiality agreements frustrate these informal control even more.

The SEC, NYSE, and NASD when investigating customer complaints found many brokers had settled with customers and signed confidentiality agreements regarding these settlements. The securities regulators wanted to make information about all brokers' customer complaint history available to inquiring citizens. The confidentiality agreements blocked the regulators' plan. So these regulators outlawed confidentiality agreements going forward. Now their data base is growing, it is accurate, and it is helping prospective investors. What happened in the securities industry should probably be done across the board. The community at large should be able to find out what happened in every dispute, so members of the community can decided who to do business with and who to avoid going forward.

So why have lawyer clung so tightly to the confidentiality clauses in settlement agreements? Obviously there are cases where it truly is in the parties interest to maintain confidentiality about the details of the case and the terms of the settlement. In addition, a lawyer might honestly believe that it is better in all cases to gag the parties so that half truths don't get spread about by one party or the other.

However other reasons come to mind as well that are not so laudatory:

(1) some lawyers do not want their own behavior in the case discussed in the broader community. As pointed out earlier in this essay, many cases are settled by parties who don't want to settle but are forced to settle by mounting legal bills. Obviously if gag orders and confidentiality agreements did not exist the behavior of the opponent in the lawsuit would be discussed. However, in the processes of discussing the case, the behavior of the lawyers would also be discussed. That second discussion could be very damaging to a lawyer's reputation particularly if he had run up the legal bill unnecessarily or engaged in strong arm tactics to get his client to settle.

(2) A second factor which argues for confidentiality clauses from a lawyers perspective, is the future involvement of the bad actors in the community with others who are unaware of the bad actors history. If an ignorant person gets involved with a bad actor there is a high likely hood that bad actor will do something in the future which will create a need for further litigation, (i.e. work for lawyers). If there is general, wide spread knowledge in the community about the bad actor, ignorant people are less likely to remain ignorant and thus are less likely to involve themselves with the bad actor.

(3) A third factor, beneficial from the lawyers perspective, is the likely hood that litigation ended with a shroud of secrecy will cause other people in the community to routinely seek extra, precautionary legal advice. A party in a big city where confidentiality agreements are common has a limited ability to find out about another person prior behavior. That party will have to engage in extensive pre-contract legal consultation and perhaps extra document preparation designed to protect against "every possible" future contingency. Such document preparation is very costly and makes a lot of lawyers rich, lawyers who would never consider actually litigating a case.

Before closing, a final point needs to be made about informal controls within the legal fraternity itself. Confidentiality agreements deprive the broader legal fraternity, particularly older lawyers and judges of informal knowledge about how settlements are being arrived at. If a wayward lawyer has used strong arm tactics or excessive billing tactics to get a settlement and if that behavior becomes known to senior lawyers and judges, then those local law leaders can implement informal controls to make sure the wayward lawyer does not engage in these tactics again. Aggressive lawyers who do these kinds of things want to avoid these informal controls so they seek as much secrecy as possible.

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