By Michael Pressman, Research Fellow
Included in the November 2019 issue of our newsletter was an article written by Judge Clare E. McWilliams, Illinois Circuit Judge, in which she discussed high-low agreements—agreements that specify minimum and maximum damages sums and thereby provide insurance to parties that proceed to trial. If the dollar sum of the verdict returned falls between the maximum and minimum sums agreed to, then the plaintiff receives the dollar sum of the jury verdict. If, however, the verdict is for a sum below the minimum (or a no-liability verdict), then the plaintiff receives the minimum that was agreed to, and if the verdict is for a sum that exceeds the maximum, then the plaintiff receives the maximum that was agreed to. In her article, Judge McWilliams presented the basics of how high-low agreements work, and she also discussed some of the issues that one should be mindful of in connection with their usage.
This article will pick up where Judge McWilliams’s article left off, and further discuss high-low agreements. This article first explores questions pertaining to the enforceability of high-low agreements; next, it explores the questions of whether high-low agreements might encourage more jury trials, what the effect of the agreements might be, who uses them, and why they are used.
In short, the findings are as follows:
(1) Regarding the question about enforceability: High-low agreements appear to be enforceable in all U.S. jurisdictions. However, in light of the fact that they are contracts that involve and affect the court and potentially also other parties to the case, there are additional considerations and procedural safeguards pertaining to these contracts beyond the issues that typical contracts implicate. Thus, most jurisdictions have certain restrictions and guidance regarding these agreements (and their enforceability). This article describes these issues below. Being mindful of these constraints—and the issues that they implicate—is of key importance for those who might consider entering into these agreements.
(2) Regarding the second category of questions: This article provides an overview of the key findings from a recent study (and the corresponding article that articulates the study’s findings) carried out by J.J. Prescott, Kathryn E. Spier, and Albert Yoon (“Trial and Settlement: A Study of High-Low Agreements”)  . In this study, the authors first articulate a theoretical model of high-low agreements. Then, using claims data from a national insurance company, they describe the features of these agreements and empirically investigate “the factors that may influence whether litigants discuss or enter into them.”  Their empirical findings are consistent with the predictions of their theoretical model. The study speaks to our questions of whether the agreements encourage more jury trials, what the effects of the agreements might be, who uses them, and why they are used. Among their various findings is the finding that high-low agreements indeed do significantly encourage resolving matters in trial rather than via full settlement ; parties are more likely to go to trial than they would be if high-low agreements were not vehicles that existed. This and other findings of their will be elaborated upon below.
Parties and attorneys should strongly consider high-low agreements as they weigh their options in their cases; there are many situations in which these agreements can be desirable. Additionally, for those who recognize the various benefits of jury trials, it is heartening to see that there is evidence that high-low agreements indeed encourage jury trials. Thus, to the extent that one wants to prevent the extinction of the jury trial, promoting the usage of high-low agreements might very well be a step in the right direction.
I. The enforceability of high-low agreements
High-low agreements appear to be enforceable in all U.S. jurisdictions. There are, however, various requirements that different jurisdictions impose on the parties to these agreements in order for these agreements to be enforceable. (Further, there are a handful of interesting issues surrounding these agreements, such as questions of how these agreements interact with rights to appeal verdicts and things of this nature.) As for what requirements and restrictions apply to these agreements, these fall into two main camps: (1) These agreements are contracts, and thus typical contractual principles apply, and (2) in light of the particular type of contract that they are (e.g., settlement agreements which thus involve and affect the court and possibly other parties to a case), there are some additional factors and procedural safeguards that pertain to this specific type of contract. The following describes a handful of these requirements and wrinkles, each in the context of a specific jurisdiction. However, the issues and requirements mentioned in the context of a particular jurisdiction typically exist in either the same or similar form in other jurisdictions as well.
Here are some examples:
Before entering into a high-low agreement in a multi-defendant action, counsel should tell the court and any non-agreeing defendants about it. The New York Court of Appeals has held that when a plaintiff and defendant in a multi-defendant action enter into a high-low agreement, and the agreeing defendant remains a party to the litigation, the parties must disclose the existence and terms of the agreement to the court and to any non-agreeing defendants. In the Matter of Eighth Judicial District Asbestos Litigation (Reynolds v. Amchem Products Inc.) , 8 N.Y.3d 717, 872 N.E.2d 232, 840 N.Y.S.2d 546 (2007). The case in question involved claims against various manufacturers and distributors of alleged asbestos-containing products. The plaintiff alleged that he had contracted mesothelioma from his exposure to asbestos at the refinery. Before trial, the plaintiff settled with all but two defendants: Garlock Sealing Technologies LLC and Niagara Insulations, Inc.
Shortly before trial, the plaintiff and Niagara entered into a high-low agreement with a maximum sum of $185,000 and a minimum sum of $155,000. Thus, under the high-low agreement, Niagara’s exposure—beyond the minimum that it had already agreed to pay—was limited to $30,000, a range that the Court of Appeals said was “quite narrow,” suggesting that the plaintiff’s and Niagara’s true motive for entering into the agreement was to gain a tactical advantage at Garlock’s expense.
The trial court knew that the plaintiff and Niagara had entered into a high-low agreement (but not the terms of the agreement), but Garlock and the jury did not know about the agreement. The jury ultimately awarded the plaintiffs $3,750,000 in damages and found Garlock 60% liable and Niagara 40%. When Garlock found out about the high-low agreement a few days after the jury’s verdict, it moved to set aside the verdict and for a new trial. The Supreme Court denied Garlock’s motions and entered judgment on the verdict, and the Appellate Division affirmed.
The Court of Appeals reversed and it ordered a new trial. In doing so, it concluded that the trial court’s failure to disclose the existence of the high-low agreement prevented Garlock from obtaining a fair determination of its rights and liabilities. According to the court, “a high-low agreement between a plaintiff and fewer than all defendants has the potential of prejudicing the rights of the non-agreeing defendant if all parties are not apprised of the agreement’s existence.” Additionally, the court stated that secretive agreements “may . . . distort the true adversarial nature of the litigation process and cast a cloud over the judicial system.” Ultimately, the Court of Appeals concluded that the undisclosed high-low agreement had deprived Garlock of its right to a fair trial because the $185,000 cap on Niagara’s liability had given the plaintiffs an incentive to minimize Niagara’s liability and maximize Garlock’s. According to the court, requiring a high-low agreement to be disclosed to the court and any non-agreeing defendants, “strikes a proper balance between this State’s public policy of encouraging the expeditious settlement of claims, and the need to ensure that all parties to a litigation are apprised of the true posture of the litigation so they may tailor their strategy accordingly.”
If there are multiple plaintiffs and/or defendants, it is important to include in the terms of the high-low to whom it applies, and how the verdict is to be determined in the event of joint and several liability. Virginia Code Section 8.01-35.1 addresses the effect of a release or covenant not to sue given “to one of two or more persons liable in tort for the same injury.” Va. Code § 8.01-35.1(A). The Code specifically provides that such covenants include high-low agreements. Under the statute, the high-low does not discharge other tortfeasors, but any amount awarded against other tortfeasors will be reduced by the consideration given for the agreement. Thus, parties cannot include in a high-low agreement any limitation on the amount of offset to other tortfeasors as to do so would deprive them of rights under the statute.
Also, in Virginia, as in New York, the court must be aware of the high-low agreement and deem it enforceable. High-low agreements are subject to the provisions of Sections 8.01-55 and 8.01-424, both of which require courts to participate in settlement agreements. Additionally, the Code specifically provides that approval is secured through a petition process, and that the petition process requires “the convening of the parties in interest… .” Va. Code § 8.01-55. While, a court in Virginia might approve the high-low after the fact, it would behoove parties to secure approval before the trial begins.
Additionally, according to Virginia case law and the Virginia Code, a high-low agreement is a settlement, and thus the parties must request that the court not enter judgment. See Va. Code § 8.01-35.1; Smith v. Settle , 254 Va. 348, 351 (1997).
The Maryland Court of Special Appeals concluded in Maslow v. Vanguri , 896 A.2d 408 (Md. Ct. Spec. App.), cert. denied, 903 A.2d 416 (Md. 2006), that a plaintiff’s appeal after an adverse judgment forfeited the defendant’s obligation to pay pursuant to a high-low agreement. The high-low agreement specifically provided that, with a jury verdict, the parties would waive any right of appeal. After the plaintiff lost on appeal, the plaintiff sought to enforce the high-low agreement. The defendant argued that the appeal was a material breach, thus permitting rescission of the agreement, and the court agreed, holding that the breach of the obligation not to appeal enabled the defendant to seek rescission.
An additional note: What constitutes a verdict?
Because parties may hastily enter into a high-low agreement, all of the issues may not be properly considered. For example, one issue concerns the possibility of a mistrial. A high-low settlement agreement requires a verdict to determine the amount of compensation. However, it might not be clear what is meant by the term “verdict.” For example, is a deadlocked jury a “verdict”? Is a deadlock jury considered a “no cause” verdict for purposes of the agreement? It would behoove parties to anticipate this possibility (and other possibilities) and reach a (written) understanding as to how a deadlock will be handled. Similarly, if the plaintiff’s counsel seeks a mistrial by intentionally violating the court’s in limine order or otherwise, does this constitute a “verdict” or is it a “no cause”? These issues are among a host of related details that it would be wise for parties to address in the drafting of their high-low agreement.
II. Questions regarding whether, and if so how, high-low agreements affect the likelihood of cases going to trial
What follows is a synopsis of the key findings from the Prescott et al. study on high-low agreements.
The authors first articulate a theoretical model of high-low agreements. Then, using claims data from a national insurance company, they describe the features of these agreements and empirically investigate the factors that might influence whether litigants discuss or enter into them. Their empirical findings are consistent with the predictions of their theoretical model. The study speaks to our questions of whether the agreements encourage more jury trials, what the effects of the agreements might be, who uses them, and why they are used.
For our purposes, the key findings are the following:
High-low agreements significantly encourage going to trial over resolving a case via full settlement, and they make parties more likely to go to trial than they would if high-low agreements were not vehicles that existed.
Among other things, the study found: Of the claims resolved without high-low activity, approximately five percent went to trial or arbitration; on the other hand, of the claims that did have high-low agreements, forty percent went to trial or arbitration.
Claims that are expected to be have low litigation cost and have highly volatile potential outcomes are the claims that are the most likely, relative to baseline probabilities, to involve high-low discussions and/or result in a high-low agreement during litigation.
Their model suggests that (1) when expected litigation costs are high, they should observe more settlement and fewer trials, including fewer high-low agreements, all else equal, and (2) when adjudication outcomes are sufficiently unpredictable (or the variance in the award or payout amount is high because its distribution has a larger spread), we should see litigants considering, discussing, and entering into high-low agreements more often.
Combining these two predictions, the authors rank four categories of cases in terms of how likely they are to involve high-low discussions and agreements, from most likely to least likely: (1) cases with low expected litigation costs and high expected outcome variance (LC-HV), (2) cases with low expected litigation costs and low expected outcome variance (LC-LV) or with high expected litigation costs and high expected outcome variance (HC-HV), and finally (3) cases with high expected litigation costs and low expected outcome variance (HC-LV).
These predictions were confirmed by the data.
They report the relative difference in the likelihood that litigants engage in high-low discussions and agreements (versus adjudication with no such discussion) between the cases in the various groups.
Moving from below-median variance to above-median variance when litigation costs are expected to be high (in other words, replacing HC-LV claims with HC-HV claims) increases the odds of a high-low discussion or agreement on average by more than 4 times
The choice between a high-low agreement and full adjudication does not differ across claims if only the expected cost of litigation varies, unless high-low agreements offer some means of lowering costs. The point estimate for LC-LV claims hints at that possibility, and they explore the idea explicitly in Section 5 by modeling high-low agreements as commitment devices to restrain wasteful expenditures.
As between adjudication with and without high-low activity, costs may be irrelevant. Still, one could hypothesize that the differences in the point estimates between the HC-HV and LC-HV claims imply some interaction between costs and volatility, with high litigation costs magnifying the role any difference in outcome volatility may play.
Only the coefficients on LC-LV regularly approach statistical significance: LC-LV claims are only 75–85 percent as likely as HC-LV claims to settle (as opposed to going to trial or arbitration without the parties discussing the possibility of a high-low agreement), a result that is fully consistent with their model’s predictions
So expense of trial does not contribute much to whether parties settle instead of going to trial with a high-low agreement). Rather, the key determinant of the use of high-low agreements as a vehicle in place of settlement is the volatility of the possible verdict.
According to the authors, their work “moves beyond the existing literature on settlement in civil litigation, which primarily focuses on only the extreme ends of the dispute resolution spectrum—cases that are fully settled or dropped and cases that proceed to full-blown trial. In reality, dispute resolution occurs on a continuum. [The possibility of entering into high-low agreements (as well as the possibility of pursuing arbitration and the possibilities of stipulating to certain facts or points of law while still allowing a judge or jury to decide other issues)] make plain that settlement behavior in litigation includes far more than simply out-of-court settlement.”
High-low agreements typically are enforceable, though, as this article has shown, they are often subject to a variety of constraints that typical contracts are not. Being mindful of these constraints—and the issues that they implicate—is of key importance for those who might consider entering into these agreements. Additionally, parties and attorneys should strongly consider high-low agreements as they weigh their options in their cases; there are many situations in which these agreements can be desirable. Further, for those who recognize the various benefits of jury trials, it is heartening to see that there is evidence that high-low agreements indeed encourage jury trials. Thus, to the extent that one wants to prevent the extinction of the jury trial, promoting the usage of high-low agreements might very well be a step in the right direction.
 57 J. L. & Econ., 699-746 (2014).