November 26, 2013

Negotiation basics: How to Value a Case or Claim

Posted in Negotiation by Gene Killian |

There’s a short but very good article on litigation management from Claims Magazine a few years back, written by Domenick DiCicco, formerly a New Jersey state legislator and now an insurance executive. I like to send the article to clients or prospects involved in retaining outside litigation counsel.  The article is written for insurance claims personnel (normally, my natural nemeses), but contains a lot of valuable advice on the litigation process.

One of the things DiCicco says is: “Millions of dollars in legal fees are wasted on matters where 96 to 98% of the matters resolve for an amount any seasoned claim professional could have predicted at the start of the case.”  DiCicco goes on to write: “The most effective counsel is one who understands your definition of success for a particular case and gets you there quickly…If we manage litigation with a nebulous definition of success or, far too common, no definition of success, the attorney may engage in many activities that do not add value and are done, at best, to hedge against second-guessing or, at worst, to churn the file.”

DiCicco puts his finger on the inefficiencies inherent in a billable-hour system (but that’s another subject for another article), and, maybe, on the BigLaw model generally. But for those of you who are involved in litigation, or are contemplating litigation, have you taken a hard and realistic look on what “success” would be in your particular case? If you’re in a bitter dispute of some kind, I don’t mean rendering your opponent destitute, burning down his facility, and salting the earth around it. I mean: Within the context and vagaries of the litigation system, what, within reasonable expectations, would constitute a “successful” outcome?

I’ve mediated hundreds of cases, both as participant and mediator, and it always amazes me how many experienced lawyers have no real understanding of the value of the cases they’re handling. So, they either tell me they have a great case, or that the other side has no case, or both. That’s generally ridiculous; if the anticipated result were so clear, there usually wouldn’t be a litigation. Similarly, when I ask clients or prospects what would constitute “success” in a particular matter, they almost always haven’t thought the issue through in practical terms, at least at the outset.

Of course, you can take this concept to extremes. There’s risk analysis software out there, for example, that’s incredibly complex, and that can help you to analyze every aspect, facet, or eventuality of a particular problem. For our purposes, though, I’m proposing a simple model that will help you engage in a crude cost-benefit analysis to help determine an appropriate settlement number for your matter. Here it is:

First, what are the damages sought by the plaintiff or claimant?  Getting a handle on this may require some rudimentary discovery if you’re the defendant; although, it’s worth an initial call to your adversary to ask: “For purposes of settlement negotiations, what do you think your damages are and how have you calculated them?”  You may be surprised at the honest answer.  If you’re the plaintiff, on the other hand, be realistic as to the basket of damages. Yeah, you want $1 million in punitives. That’s usually not likely to happen. Take a hard look at the case. 

Let’s suppose you do this, and come up with a realistic compensatory damages number of $750,000.

Next, what’s the plaintiff’s estimated percentage chance of success on liability? Since everyone falls in love with his or her own story, this may be difficult to assess. The telephone is a wonderful research tool, though; call some fellow lawyers or businesspeople and ask them what they think of the case objectively. “Focus group” the case in your office, with your staff included. Ask your significant other. Consider an early mock trial. Mock trials were once a highly expensive enterprise; no longer. There are companies out there now who can do them online and give you excellent analysis of the results. (Here, I‘ll put in an unsolicited plug for my friends at Magna Legal Services, who do an excellent job at this.)  Eventually, you’ll arrive at a ballpark number in your mind.  Let’s say you do this analysis and conclude (as plaintiff) that you have a 75% chance of success on liability.

(A word here about using your office staff as the focus group.  Your staff can be an excellent source of input, but I would not make it your only source of input.  Many times, intentionally or not, they may say what they think you want to hear.  I once had a major coverage case against an insurance company which my adversary refused to settle, because he said he had tried the case before a mock jury of claims adjusters, and had won convincingly! Needless to say, he was unable to replicate that result at trial. By the way, notice how we usually tell war stories only about cases we won?)

Now, take a look at the damages involved in the case. What’s the rough percentage chance of likelihood that, if the plaintiff prevails, all of the damages will be awarded? Are there “soft costs,” such as emotional distress damages, for example?  Are there ways for the factfinder to reduce the number? If you’ve been around the litigation system long enough, you can make a reasonable if imperfect estimate of how strong the damages claim is. (Years ago, I lost a trial in which the other side had technically breached the duty of good faith and fair dealing to sell a business to my client; but my client suffered no damages, because the judge concluded he couldn’t have closed on the deal. Lesson learned. Take a hard look at the damages.)

In our hypothetical, suppose you review the damages, and conclude that the plaintiff has a 50% chance of success on the total damages claim.

For negotiation purposes, the value of the claim is therefore $281,250, calculated as follows:  Total damages of $750,000 x .75 (plaintiff’s percentage chance of success on liability) x .5 (plaintiff’s percentage chance of success on damages) = $281,250.

Lastly, calculate your transaction costs; that is, how much will it cost you in legal fees and associated litigation expense to get you to the uncertain but estimated result? If you conclude that it will cost $100,000 to move the case through trial, then, from the plaintiff’s perspective, the case value is reduced to $181,250. From the defense perspective, the case value is increased to $381,250. (In a fee-shifting case, such as an employment case, you also need to consider the likelihood that fee shifting would take place, and for how much.)

In our simple example, therefore, a plaintiff would need to consider seriously any settlement offer in excess of $181,250 (case value less estimated amount to get there). A defendant, on the other hand, would need to consider seriously any settlement demand less than $381,250 (case value plus estimated amount to get there).

This methodology is obviously unsophisticated, but it does give you the opportunity to start thinking about the value of the case, and what your walkaway number should be. That will give you a leg up on most parties involved in trying to settle disputes. I’d be interested in hearing about any other methods that people are using.


-- Gene Killian