settlement agreements with early plaintiffs, the defendant credibly
commits to treating subsequent
early plaintiffs that holding out for more.
there is The MFN
plaintiffs no benefit clause has
defendant to plaintiffs.
not later offer a more generous settlement to If the defendant were to do so having earlier
a MFN clause, the defendant would to the early-settling plaintiffs.
also have to make additional payments Therefore, the plaintiffs will reason
that a defendant will not offer a higher amount in the second round and will be more likely to accept the defendant’s first round settlement. Spier concluded that defendants almost always gain from the use of this
Bayer’s announcement of the existence of a fixed schedule coupled with no confidentiality acted as an analog of a MFN clause by serving to credibly commit it to paying out fixed amounts for particular injuries. If Bayer were to “cheat” by paying out higher amounts to later plaintiffs, its long-term reputation for honoring its commitments would be harmed.
The economic literature also models the secret settlement. Daugherty and Reinganum (1999) formally model secret settlements and
show to a
how defendants will often be willing to pay for secrecy in agreeing
the likelihood of future claims.
sold to later buyers at a lower price.
As a result, the high valuation
buyers will pay full-price subsequently lower prices. monopolist to capture full
confident that the monopolist will
Butz (1990) showed this allows the monopoly rents.
Early-settling plaintiffs sometimes also gain from the use of
the MFN clause in a settlement. extended this model.
Daughterty and Reinganum (2004)
16 In Daugherty and Reinganum (2005), the authors extend this model to include consumer behavior and show that the use of confidential settlement as a strategy leads to lower product safety which may reduce
demand. firm may
If credible auditing choose openness.