Posted On Jun 17, 2015
Most lawsuits never go to trial, but it is still difficult for a business that is the target of litigation to know whether and when to settle, and for how much.
It may be especially challenging for a defendant to take the initiative to settle when it feels it occupies the moral or legal high ground. However, while it may not seem fair, every defendant starts losing money the day the complaint is filed. Unless a defendant has a viable counter claim or a contractual agreement that the loser pays the winner’s fees and costs, the best a defendant can hope for is to lose only the cost of defense. For this and other reasons, it is often the best business decision to settle, even when in the right. But how much should a defendant pay to settle and at what point in the litigation, and at what number is it better to try the case?
I begin the assessment process by giving our clients a probability analysis. While nobody can be sure of the outcome of litigation, our experience in business litigation and products liability suits, along with monitoring of new case law and other lawsuits, gives us the knowledge to assess the likelihood of possible outcomes.
Based on the facts of the case and our knowledge of the jurisdiction, I build a spreadsheet for a client that assigns values and probabilities to a range of outcomes, from a zero for a defense verdict to a high-end award.
The basis of the model is that the settlement value of the case is the average outcome if the case went to trial 100 times.
For example, a case may have a 25 percent chance of a $1 million verdict, a 50 percent chance of a $500,000 verdict, and a 25 percent chance of a defense verdict. In this example, the base settlement value of the case would be $500,000 (1,000,000 x 25% + 500,000 x 50% + 0 x 25%). In a multi-defendant case, then adjust that base value, depending on the expected set off from settlements of other defendants and the likely apportionment of the verdict among the expected trial defendants. I can also add the cost of defense and use a similar probability analysis to factor in the likelihood of punitive damages.
Metrics provide a rational baseline from which to make settlement decisions
By providing the spreadsheet and the assumptions behind it to the client, I give the client an objective, emotionless starting point for valuing the case and making a decision about settlement. Clients can adjust the inputs based on their own assumptions, or an estimate of the plaintiff’s counsel’s assumptions, and see what the changes have on the settlement value.
From that starting point, additions or subtractions can be made for intangible, subjective considerations, such as whether the case will damage the company’s reputation or disrupt the business. In some cases, the principle at stake or other factors outweigh the monetary cost.
For example, if the high-end of the expected verdict range would threaten the defendant’s ongoing viability, risk management might suggest paying more than the objective valuation to secure the business and move on from the litigation. After all, the case is not going to be tried 100 times; it is going to be tried once, maybe twice if there is a successful appeal. On the flip side, a defendant in recurring litigation might omit the cost of defense from the valuation to discourage even more lawsuits that might result from a reputation for paying plaintiffs to put the company’s name on a caption.
In addition, the objective valuation can provide the starting point for making a rational decision to try a case. If the objective and intangible considerations weigh against meeting the plaintiff’s demand, then it is time to go to trial.
What is true today may not be true tomorrow
Litigation is fluid, and that spreadsheet with the probabilities of possible outcomes may need revision as discovery reveals evidence favorable or unfavorable to the client or to a codefendant. The assumptions built into the initial analysis should be reevaluated as the case progresses, as should the intangible factors. The value of a case almost always changes between filing and trial.
This means that if settlement is the client’s preference, the time for settlement is early in the case to avoid the high cost of defense or when things look good for the client. Cases have inflection points and the known facts of a case usually evolve as the case progresses, and sometimes so does the law. It usually pays to settle from a position of strength. Deciding against slightly overpaying based on the current valuation when in a position of strength, sometimes leads to paying significantly more when the facts or law evolve adversely to the client’s interests.
Cases can settle at any stage and settlement negotiations can devolve into a game of chicken. Often there is an offer on the courthouse steps as one side finally blinks. At times like this, when the pressure and stress of litigation is greatest, returning to the objective valuation methodology can help the client make a rational, rather than emotional, decision to make an offer or to accept or reject a demand.
Our perspective is that decisions about settlements are risk management decisions. It is not necessarily about who is right or wrong; the goal is to do what is best for your business.