When $4.5 billion is just the beginning of the conclusion, then the phrase “record fine” is clearly appropriate.
According to this week’s announcement by the Department of Justice about the 2010 Deepwater Horizon oil-spill (available at: http://1.usa.gov/WarQVm), this represents “the single largest criminal resolution” in U.S. history.
Moreover, the DoJ is still pursuing “civil action to recover civil penalties under the Clean Water Act and hold BP and other defendants liable for natural resource damages under the Oil Pollution Act.”
Analysts have estimated that further potential cost to BP from this could amount to $20 billion, not to mention the billions of dollars already paid under settlement agreements with adversely affected business and individuals.
Mega-settlements like this one — which won’t be in effect until approved by a judge — pose the question of whether litigation or settlement is the most efficient way to resolve such issues. There exists a voluminous economics literature on this question.
Much of it points to the conclusion that “the socially optimal result will normally involve a settlement rather than a trial, in that there is in principle some settlement amount such that, if the parties settle for it, trial costs will be saved without raising any other social cost,” as Harvard Law School professors Kathryn Spier and Bruce Hay write in “Litigation and Settlement” (available at: http://hvrd.me/QMe92g).
Of course, there is also some social cost involved. Settling, rather than going through a public trial, may deprive society of the deterrence effect that public justice provides. Obviously, in the BP case this concern does not apply, given the level of public scrutiny surrounding every aspect of it.
That points to another part of the question of when settlements are efficient and effective. It is related to the relative bargaining power of the parties involved.
Widely divergent endowments with resources, as well as with information (often described as an asymmetric information scenario) may lead to detrimental outcomes. Such variation makes it more likely that one side of the settlement is browbeaten into agreeing to terms that are much more unfavorable than could likely be obtained in a court of law.
This becomes a problem from society’s point of view when there is no judicial approval needed for the settlement.
Of course, judges are humans, too, and there are economic studies that have shown clear patterns of judicial decisions that favor reduced workload through settlement over additional judicial scrutiny. This has to be considered as well.
Potential cons of settlement procedures are discussed in “Some thoughts about the economics of settlement” (available at http://bit.ly/XMu0Qs) by Law professor John Bronsteen. He writes: “Trials cannot be deemed deadweight losses if they satisfy a preference for fairness, given that preference satisfaction is the economists’ own yardstick for measuring value.”
Bronsteen also suggests more trials would be valuable in “clarifying legal principles” — making it more likely for “potential tortfeasors to understand and comply with the law.”
However, none of the above-discussed limitations apply to the BP case. From an economic and free enterprise point of view it seems entirely reasonable to give a powerful company like BP the option to negotiate a settlement with an equally powerful adversary, the Justice Department.
In this particular instance, the resulting “record fine” also fulfills the deterrent effect our system of laws relies on so much.
Dr. Michael Reksulak teaches economics and public finance in Georgia Southern University’s College of Business Administration. He may be reached by email at mreksula@georgiasouthern.edu.