Recent 6th Circuit Decision Emphasizes the Value of Foresight, Not Hindsight, in Evaluating Settlement
Last month, the U.S. Sixth Circuit Court of Appeals delivered an opinion that underscores the importance of realistic expectations and timeliness when resolving litigation.
In McKelvey v. Secretary of United States Army, the plaintiff, a soldier wounded in action, became the victim of workplace discrimination after he returned home and took civilian position with the Army as an operations specialist. The constant taunting and menial assignments reached a point where he was forced to resign. He later sued the Secretary of the Army for disability discrimination in violation of the Rehabilitation Act of 1973.
As the lawsuit progressed, the Army offered McKelvey reinstatement in a new position at a new location, along with a $300,000 payment to resolve the matter. The Army concluded that re-instatement was a high potential remedy that would significantly reduce its economic exposure at the time of trial. McKelvey rejected the offer, demanding $2.2 million in front pay and no re-instatement. The case went trial, where a jury awarded him $4.4 million, but the court vacated the award, finding that re-instatement rather than front pay was the appropriate remedy as a matter of law. The Sixth Circuit affirmed, and on remand the parties resolved the case with re-instatement and a payment of $60,000.00.
McKelvey then sought attorney fees as the prevailing party, but the trial court determined that his rejection of the Army’s offer of re-instatement and $300,000 was not reasonable and reduced the amount of fees to which he was entitled by 50% to $122,000.00. The plaintiff appealed again, and the Sixth Circuit made this very poignant observation:
Hindsight has a way of making things look clearer at the point of decision – the time of declining to settle a case – than they may have been.
The McKelvey case brings to mind a fascinating study of California cases, which compared jury verdicts with rejected settlement offers and demands. The findings demonstrated that plaintiffs erred more frequently than defendants in rejecting settlement offers (61% of the time) and that the average error was equal to approximately $43,000. Although defendants erred less frequently in rejecting settlement demands (21% of the time), the average error was far greater, approximately $1.1 million.
With the benefit of hindsight, the McKelvey result may be dismissed as “bad luck,” but the decision of when, how, and with which calculations and factors one should resolve a claim is by no means simple, regardless of whether you are the plaintiff or the defendant.
One of the many critical issues McKelvey had to evaluate was whether or not the Army’s offer of re-instatement would be deemed the appropriate remedy by the trial court. If re-instatement was the appropriate remedy for front pay, then the potential for realistic back pay and emotional distress was in the range of $250,000 to $500,000. If back pay and front pay was the appropriate remedy, then the obvious potential jury verdict (in hindsight) might have been as high as $4.4 million.
Assuming for purposes of this analysis that McKelvey had a 50:50 chance of prevailing on the allowable award of front pay damages, then one might argue his demand for $2.2 million in damages might have been most appropriate (50% of the high potential jury verdict). However, such an argument may be too simplistic given the facts. The negotiation strategy might have been informed by evaluating any number of possibilities along the “dispute resolution continuum potential” from a no cause of action (while not likely), to an award of re-instatement and some back pay, all the way up to an award of $4.4 million with no re-instatement.
When evaluated in this manner, the possibilities and options can be analyzed along the following potential dispute resolution continuum (the assigned percentage possibilities are purely illustrative):
When reviewing all the realistic possibilities, the greater likelihood is that re-instatement (which has a calculable present cash value) and monetary damages will be awarded rather than an award of $2.2 million, and the likelihood of a $4.4 million award is significantly less likely.
Without relying wholly upon hindsight, the message from this analysis is clear: McKelvey might have been better served economically to seriously evaluate an offer of re-instatement (to a position that was certainly subject to negotiation) and exploring the maximum cash payment the Army would make. The present cash value of re-instatement might even be calculated to gain a full appreciation of the enhanced value of any up-front cash payment. McKelvey’s initial negotiation strategy – demanding a significant amount of money with no re-instatement – may well have been most appropriate and productive. The simple question is whether McKelvey might have declared an impasse prematurely without fully exploring and maximizing all potential realistic options along the “dispute resolution continuum.”
While there are any number of analytical tools that can be used to educate counsel and their clients in the development of a negotiating strategy and establishing their “bottom line,” this is just one example of how counsel and their clients might develop an appropriate strategy and decisional framework before entering into any negotiations or a mediation. Employing such tools using foresight may be one way to avoid lamenting one’s “bad luck” with hindsight.