What is a High-Low Agreement?
Trial preparation is intense, particularly in the last week or two before a trial begins. Even if you love trying cases – and we do – it’s not uncommon to reach a point where some part of you is hoping against hope that the case will settle or be adjourned so that you can get some rest and/or see your family. And this does happen with some frequency – cases settled on the courthouse steps or rescheduled by a judge at the last minute.
But when it happens – a case resolved or delayed just before it is due to begin, it rarely feels like a relief. It’s more like an emotional letdown. While settlement is often the right decision for the client, trial is about as much fun as you’re allowed to have as a lawyer and it’s always disappointing to have one slip away at the last minute. No matter how good the deal is, the competitive part of your mind still wants to beat up on the bad guys and find out who would have won.
But there’s a special kind of settlement that lets you have your cake and eat it too. And that’s a high-low agreement.
What’s a high-low agreement? A high-low agreement is a deal reached between the parties prior to the jury issuing a verdict. The Defendant promises to pay the Plaintiff a minimum amount (the “low”) no matter what the jury decides. In exchange, the Plaintiff promises not to collect more than a maximum amount (the “high”) no matter what the jury decides.
It’s easiest to understand with an example. Imagine a plaintiff is suing in a personal injury case, seeking $5,000,000 in damages from the defendant. While waiting for the jury to come back, the parties agree to a $150,000 - $1,000,000 high-low agreement. There are several possible outcomes:
If the jury finds no liability, or awards less than $150,000 in damages, then the defendant pays the plaintiff $150,000 anyway (the low).
If the jury awards more than $1,000,000 in damages, the defendant pays the plaintiff just $1,000,000 (the high).
If the jury awards something in the middle, say $850,000, then the defendant pays that, just as it would if there were no agreement.
In theory, almost any case could benefit from a high-low agreement, as it reduces outlier results from jury verdicts without requiring the parties to completely agree on a fair resolution. While a high-low agreement can have a narrow range, it can also be structured to place the high and low very far apart, cutting off only extremely unlikely results.
In addition to the benefit to clients, high-low agreements also offer benefits to counsel. Where a plaintiff’s firm has taken a case on contingency basis and paid money to cover the costs of litigation, a high-low agreement can ensure that the firm does not take a heavy out-of-pocket loss in the event of a defense verdict. In addition, some personal injury firms use jury verdicts heavily in their advertising. A high-low agreement allows the firm to potentially obtain those high verdicts for advertising purposes even in cases that have effectively settled.
And defense firms benefit from high-low agreements as well, particularly where insurance is involved. Insurance providers value predictability, and sometimes require defense counsel to make (frequent) predictions about the range and likelihood of possible trial results. An outsized jury verdict that blows through a coverage layer and/or potentially implicates excess insurance providers is a terrible look, even if defense counsel is ultimately successful at getting it thrown out on appeal. A high-low agreement can allow an insurance provider to cap its exposure without overpaying to settle cases that defense counsel may win.
So, what can go wrong with high-low agreements? Largely what you would expect from contracts hastily negotiated by litigators, sometimes while waiting for a jury to return. Most problems arise from underdrafting – a failure to consider or account for outcomes other than a simple verdict.
For example, many high-low agreements fail to account for what happens in the event of a mistrial. Does this void the agreement? Is this treated as a “low” outcome? Does the agreement apply if the case is retried? When drafting a high-low agreement it is important to ensure that neither side has a monetary incentive to “bust” the trial should it look like they might lose.
A related and sometimes-neglected consideration is whether the parties can make post-trial motions or appeal the verdict. This can go either way, but a choice should be made in the agreement itself. On the one hand, high-low agreements are designed to provide certainty and finality, which subsequent post-trial motions or appeals would tend to undermine. On the other hand, if a lawyer knows that there cannot be an appeal, he or she may have an incentive to go completely off the reservation at trial, making prejudicial statements and arguments or ignoring in limine rulings, without fear that the ultimate verdict will be impossible to defend.
One important consideration that is also often ignored is the impact of a high-low agreement on awards of prejudgment interests and costs. In New York, for example, prejudgment interest accumulates on claims at a rate of 9% per year, meaning that after a few years the prejudgment interest can be a substantial component of the damages awarded in a verdict.
So, if a “high” is set at $325,000, is that before prejudgment interest is awarded or after? A New York appellate court dealt with this very issue in Cunha v. Shapiro. [1] There two parties agreed on a high-low of $75,000 - $325,000. The jury returned a verdict of $400,000, triggering the agreement. The plaintiff then sought to have $46,800 in prejudgment interest, plus costs and disbursements, added to the $325,000 “high” award, for a total of $373,060. On review, New York’s Second Department rejected this argument, finding that a high-low agreement “is, in fact, a conditional settlement” and that like other settlements, does not permit the plaintiff to recover more than the settlement amount set forth in the agreement. [2]
A New Jersey court reached a similar result in Benz v. Pires, [3] where in examining a high-low agreement, the court held that:
A high-low agreement governs a number of possible trial outcomes:
If there is a no-cause verdict, the agreed floor controls, and plaintiff takes that amount. There is nothing to calculate interest on. There is only the agreed minimum recovery.
If there is a damage verdict below the agreed floor, interest is calculated on the verdict and plaintiff receives the total, up to the agreed ceiling; if the total does not exceed the floor, plaintiff receives the floor.
If there is a damage verdict of the floor or more, but less than the agreed ceiling, interest is calculated on the verdict. Plaintiff receives the full amount up to the ceiling.
If there is a damage verdict of the ceiling or more, plaintiff receives the amount of the ceiling.
But at least one other court has found ambiguity concerning the interest issue, requiring an evidentiary hearing to determine how interest should be treated. [4] This is obviously a sub-optimal result for an agreement designed to streamline the resolution of disputes after trial.
One final issue concerns multi-defendant cases. Most jurisdictions ban so-called “Mary Carter” agreements in cases involving more than one defendant. A “Mary Carter” agreement is an arrangement in which one defendant secretly settles with a plaintiff but remains in the case for the sole purpose of intentionally undermining the other defendants. [5] While very appealing in spy-vs-spy / psychological warfare fashion — “Can you really trust the joint defense group? How many might be working for me?” — courts find Mary Carter agreements deeply distasteful. No judge enjoys being the referee for what amounts to a fixed boxing match.
A confidential high-low agreement is not automatically a prohibited Mary Carter agreement, but it’s a close cousin. If a court determines that high-low agreement gives the defendant an incentive to knife co-defendants in the back, it may void the agreement and throw out any verdict.
For example, in In re Eighth Jud. Dist. Asbestos Litig., [6] the New York Court of Appeals examined whether a secret high-low agreement mandated a new trial. The case concerned a plaintiff with mesothelioma who sued both a manufacturer and a distributor of asbestos containing products. The plaintiff entered into a high-low agreement with the distributor, with an extremely narrow range of $155,000 - $185,000. The distributor remained a defendant in the case and the manufacturer was not told about the agreement. The jury then returned a verdict of $3,750,000, with the majority of liability apportioned to the manufacturer.
On review, the Court of Appeals ordered a new trial. While supporting the idea of high-low agreements in principle, as "a means of tempering the significant risks associated with proceeding to trial,” the Court held that “secretive agreements may result in prejudice to the nonagreeing defendant at trial, distort the true adversarial nature of the litigation process, and cast a cloud over the judicial system” as it provides an incentive for one defendant to secretly collaborate against the other. [7] In particular, the Court was suspicious of the narrow $30,000 range between the high and the low, as it suggested that the distributor had settled its claim in all but name.
So, what’s the upshot of this? High-low agreements are an extremely useful tool for managing risk at trial and allowing efficient resolution of disputes post-trial. But using them properly means ensuring that all possible contingencies are identified and resolved before the verdict comes in.
If you enter a high-low agreement, be certain that it provides for 1) what happens in the event of a mistrial; 2) whether post-trial motions or appeals will be permitted; and 3) how interest and costs will be handled. And in a multi-defendant case, best practice is notify the court and the other defendants about the existence of the agreement. Checking these boxes may seem paranoid, but it helps to eliminate the risk of getting bogged down in post-trial disputes, or, worst of all, being forced to try the case twice.
[1] 42 A.D.3d 95, 98–99 (2d Dep’t 2007).
[2] Id. at 98-99.
[3] 269 N.J. Super. 574, 580 (App. Div. 1994).
[4] Malick v. Seaview Lincoln Mercury, 398 N.J. Super. 182, 187 (App. Div. 2008) (“We have no hesitation in concluding that the high-low agreement was ambiguous.”).
[5] See In re Refco Inc. Sec. Litig., Case No. 07-MD-1902 JSR, 2012 WL 4053939, at *8 (S.D.N.Y. Aug. 8, 2012) (“A Mary Carter agreement has several elements (1) it is kept secret from the nonsettling defendants; (2) the settling defendant remains in the case and defends itself at trial; and, most importantly, (3) the settling parties structure the settlement in such a way as to give the settling defendant a financial incentive to assist the plaintiff in increasing the liability of the nonsettling defendant.”).
[6] 8 N.Y.3d 717 (2007).
[7] Id. at 721.
