Law and Economics-Charles W. Upton

Valuing Litigation

Valuing Litigation

The Value of a Claim

• Warts and all, let's take the table as our basic starting point.

• How much is the trial - or claim - worth?

Valuing Litigation

The Value of a Claim

• Warts and all, let's take the table as our basic starting point.

• How much is the trial - or claim - worth?

• That is, what is the minimum amount Jim will take – To avoid filing a claim?– To settle the case?

Valuing Litigation

Some Assumptions

• If Jim wins, he will get $100.

• If he goes to trial, he has a 50% chance of winning.

• If he loses at trial, he has a 10% chance of winning on appeal.

• If he tries to settle the case, he has a 70% chance of getting a $50 settlement offer.

Valuing Litigation

Transactions Cost

• It will cost him $10 to file the case.

• Discovery will cost $3

• The trial will cost $20

• An appeal will cost $20.

Valuing Litigation

The Process (6)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

Valuing Litigation

The Process (6)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

Expected value of an appeal =-$20 + (0.10) (100) = -$10.

Valuing Litigation

The Process (6)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

Expected value of an appeal =-$20 + (0.10) (100) = -$10.

$-10

Valuing Litigation

The Process (5)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$-10 $0

If he loses, the best option is not

to appeal.

If offered any

settlement after a trial loss, take it!

Valuing Litigation

The Process (5)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$-10 $0

If he loses, the best option is not

to appeal.

Note: if the cost of an appeal was $5, EV of an appeal =

-$5 + (0.10) (100) = $5.

Valuing Litigation

The Process (4)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

Expected value just before trial =-$20 + (0.5)(100) + (0.5)(EV of Appeal)

=-$20+$50+0= $30

Valuing Litigation

The Process (4)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

Expected value just before trial =-$20 + (0.5)(100) + (0.5)(EV of Appeal)

=-$20+$50+0= $30

$30

Valuing Litigation

The Process (3)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$30

Just before trial, the minimum acceptable

offer is $30

Valuing Litigation

The Process (2)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

A person thinking of beginning discovery knows that discovery will cost $3. After discovery, there is a 70% chance that there will be a settlement worth $50, and a 30% chance of going

to trial.

Valuing Litigation

The Process (2)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

A person thinking of beginning discovery knows that discovery will cost $3. After discovery, there is a 70% chance that there will be a settlement worth $50, and a 30% chance of going

to trial.

The value before beginning discovery is

-$3 + (0.7)(50) + (0.3)(EV of Trial) =

-$3+$35+$9=$41

Valuing Litigation

The Process (2)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$30

$41

Valuing Litigation

The Process (1)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

-$10 + (0.7)(50) + (0.3)(EV Before Discovery)

=-$10+$35+$12.30= $37.30

Valuing Litigation

The Process (1)Jim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$37.30$27.30

-$10 + (0.7)(50) + (0.3)(EV Before Discovery)

=-$10+$35+$12.30= $37.30

Valuing Litigation

The ProcessJim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$0

$30

$41

$37.30$27.30

Valuing Litigation

The ProcessJim, injured, decides

whether to sueSettle or begin

Discovery?

BargainsQ S

SGoes to Trial

WAppeal?

Q

AppealsW

L

$0

$30

$41

$37.30$27.30

Key Elements in process. (1) Backward Induction.

(2) If we have new information, we can adjust table accordingly

Valuing Litigation

Information for Both Parties

• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.

• Bill believes his chances of losing are 30%

• Jim believes his changes of winning are 60%.

• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.

Valuing Litigation

Information for Both Parties

• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.

• Bill believes his chances of losing are 30%

• Jim believes his changes of winning are 60%.

• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.

Bill believes he is out (0.3)(100) + $2 +$8 =$40

Jim believes he will get (0.6)(100) - $2 -$8 =$50

Valuing Litigation

Information for Both Parties

• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.

• Bill believes his chances of losing are 30%

• Jim believes his changes of winning are 60%.

• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.

Bill believes he is out (0.3)(100) + $2 +$8 =$40

Jim believes he will get (0.6)(100) - $2 -$8 =$50

No settlement!

Valuing Litigation

Information for Both Parties

• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.

• Bill believes his chances of losing are 30%

• Jim believes his changes of winning are 60%.

• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.

Bill believes he is out (0.3)(100) + $2 +$8 =$40

Jim believes he will get (0.6)(100) - $2 -$8 =$50

No settlement!

After discovery, and that, Bill raises his chances of losing to 40% Jim lowers his chances of winning to

50%. Now Bill will offer up to $48 and Jim will be willing to accept $42.

Valuing Litigation

Information for Both Parties

• Bill has hit Jim. If Jim is successful in suing in court, he will recover $100.

• Bill believes his chances of losing are 30%

• Jim believes his changes of winning are 60%.

• Both believe that their legal costs would be $2 for discovery plus $8 after discovery.

Bill believes he is out (0.3)(100) + $2 +$8 =$40

Jim believes he will get (0.6)(100) - $2 -$8 =$50

No settlement!

After discovery, and that, Bill raises his chances of losing to 40% Jim lowers his chances of winning to

50%. Now Bill will offer up to $48 and Jim will be willing to accept $42.

Its Settlement Time!

Valuing Litigation

End

©2004 Charles W. Upton