Commentary on "Understanding Pennzoil v. Texaco": Rational Bargaining and Agency Problems

Abstract

pROFESSORS Mnookin and Wilson's analysis of the multi-billion dollar lawsuit between Pennzoil and Texaco is an imaginative contribution to the study of bargaining in the shadow of the law.' This Commentary examines the authors' answer to the question of why Texaco and Pennzoil took so long to settle their dispute after the jury entered its verdict. In passing, it also considers their explanation of why the stock market apparently discounted the combined value of Pennzoil and Texaco by over $3 billion while the case was pending. For Mnookin and Wilson, the parties' failure to settle soon after the jury verdict in Pennzoil Co. v. Texaco, Inc.2 presents a challenge to economic theory. As they see it, there is little reason to think that the parties or their lawyers had radically different assessments of the probabilities of possible outcomes. What is more, shareholders the costs of the continuing litigation were enormous. Mnookin and Wilson conclude that with the parties in substantial agreement on the outcome and extraordinary costs in prospect, [t]he relevant economics literature suggests that the parties to the dispute should have settled quickly for some amount that permitted them to share the avoidable extra costs of the litigation. Yet the litigation was not settled for more than two years, after multiple appeals and a costly bankruptcy filing by Texaco. The authors attribute this apparent departure from profit-maximizing rationality to a conflict of interest on the part of Texaco's board of directors. Mnookin and Wilson contend that from the directors' perspective continued litigation was preferable, not because it benefited shareholders, but because it