Illuminating Secrecy: A New Economic Analysis of Confidential Settlements

Even the most hotly contested lawsuits typically end in a confidential settlement forbidding the parties from disclosing their allegations, evidence, or settlement amount. Confidentiality draws fierce criticism for harming third parties by concealing serious misdeeds like discrimination, pollution, defective manufacturing, and sexual abuse. Others defend confidentiality as a mutually beneficial pay-for-silence bargain that facilitates settlement, serves judicial economy, and prevents frivolous copycat lawsuits. This debate is based in economic logic, yet most analyses have been surprisingly shallow as to how confidentiality affects incentives to settle. Depicting a more nuanced, complex reality of litigation and settlement, this Article reaches several conclusions that are quite different from the economic conventional wisdom-and absent from the existing literature. First, contrary to the conventional wisdom that banning confidentiality would inhibit settlement, a ban could promote early settlements. No ban could effectively cover settlements reached before litigation, so any ban would incentivize parties to settle confidentially prefiling-and such early settlements save more litigation costs. Second, a ban would affect high- and low-value cases differently, depending on whether publicity-conscious defendants worry more about one big settlement or several small ones. Third, more settlement data would decrease litigation uncertainty, helping parties settle and deterring frivolous lawsuits. Fourth, more data would also reveal unlawful practices, yielding more efficient decisions by consumers, workers, and investors who otherwise engage in over-avoidance when unable to distinguish hazardous from safe goods. Contrary to the traditional economic story, we cannot predict the net effect of all these competing effects. Economics thus does not counsel against a confidentiality ban. This analysis typifies the schism between traditional economic analyses, which reach definite conclusions by simplifying complex realities, and many contemporary economic analyses, which are realistically nuanced but do not yield categorical conclusions. The latter brand of economics is sounder and still can clarify important matters such as parties’ incentives, rules’ costs and benefits, and the tradeoffs and competing effects of a policy like a confidentiality ban.