Plaintiffs Exploiting Plaintiffs: Mass Tort Claims v. Shareholder Derivative Suits

When many plaintiffs sue a single defendant, each plaintiff’s decision to settle affects what the others can recover. The existing literature shows how defendants can exploit this interdependence; we show that plaintiffs can also be exploited by their fellow plaintiffs, depending on how settlement negotiations are structured.

We examine formal models of various settlement postures that parallel classic litigation scenarios, including when many plaintiffs sue a single defendant and when plaintiffs bring shareholder derivative suits on behalf of a company. First, we consider a model of settlement negotiations between a single defendant and N plaintiffs where the total cost of litigation is fixed on the part of the plaintiffs and shared among the members of a suing coalition. By settling and dropping out of the coalition, a plaintiff creates a negative externality on the other plaintiffs—securing compensation for his own damages without contributing to the cost of litigation—such that the failure to internalize this externality can be exploited by the defendant.

However, in a litigation posture where plaintiffs make sequential take-it-or-leave-it settlement offers, we show that they will actually be exploited by one of their fellow plaintiffs rather than by the defendant. When we relax the assumptions, allowing each party to have positive bargaining power, the result lies between the two cases, and the plaintiffs can be exploited jointly by a fellow plaintiff and the defendant. Moreover, if litigation is a public good as is the case in shareholder derivative suits, parties may fail to reach a settlement, even if they have complete information. This may explain why we observe derivative suits in the United States but not in Europe.