Law and Economics-Charles W. Upton 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L

Valuing Litigation The Process (6) Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L Expected value of an appeal = -$20 + (0.10) (100) = -$10.

Valuing Litigation The Process (6) Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L Expected value of an appeal = -$20 + (0.10) (100) = -$10. $-10

Valuing Litigation The Process (5) Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L $30 Just before trial, the minimum acceptable offer is $30

Valuing Litigation The Process (2) Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L $30 $41

Valuing Litigation The Process (1) Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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 sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L $37.30 $ $10 + (0.7)(50) + (0.3)(EV Before Discovery) =-$10+$35+$12.30 = $37.30

Valuing Litigation The Process Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W L $0 $30 $41 $37.30 $27.30

Valuing Litigation The Process Jim, injured, decides whether to sue Settle or begin Discovery? Bargains Q S S Goes to Trial W Appeal? Q Appeals W 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