The defendant would prefer to settle
with the low-valuation is rational for the defendant
to later make higher valuation plaintiffs later offer a higher
offers to the high valuation defendants, the low- will correctly anticipate that the defendant will amount to attempt to settle with the high-valuation
plaintiffs. So this subsequent
the low-valuation plaintiffs higher amount that they know
therefore hold out for be rationally offered.
Why settle for $3 when you know that $6 will soon be offered? reason, the defendant and the low-valuation plaintiffs will be reach a settlement at the low valuation ($3).
For this unable to
By using defendant can
a device to offer a avoid this effect.
single price to all plaintiffs, This is a commitment device: an
taken by the defendant to make it subsequently irrational for the defendant to do something that would have otherwise been rational. an MFN, Bayer’s strategy eliminated the possibility of settling at 2 for an amount that would be higher than that in time 1. 27
An MFN clause has the function of committing the defendant to not
later offering a more generous settlement to other plaintiffs.
defendant were to do so under an MFN clause, the defendant would also
have to compensate the plaintiffs will reason
amount accept 2008).
in the second round and the the defendant’s first round
more likely to
Here, in the cerivastatin litigation, the announcement of the fixed schedule, no confidentiality agreement, and Bayer’s reputation for
27 Whether or not it makes sense for the defendant to commit itself to a single price in this way hinges upon the distribution of valuations
among plaintiffs, the communication among plaintiffs and the
and risks of trial.
our simplifying assumptions, commit itself in this way if
expenses it may not there are