Bringing a lawsuit is like any other business decision. Here's how to think it through.
Often the hardest part about litigation is making the decision to take it on in the first place--and that has a lot to do with how much the whole affair might cost. Many attorneys often divorce litigation from the business goals of the client. (After all, the litigator's business is to sell as much of his product--that is, time--as he can.) Common result: disproportionately high fees.
The decision to sue or settle should, in almost all cases, be seen as a business decision. Parties tend to litigate when at least one side is overly optimistic about its case. Settlements occur when reality converges with expectation.
Here is a basic decision-tree analysis that will allow you to deconstruct the problem into components, weigh the relative significance of the parts, assign possibilities to them and reach a conclusion.
Say a landlord comes to me and says he wants to sue a tenant for breaching a lease. The company was under a long-term lease and vacated the premises. The amount that is owed on the balance of the lease is $500,000.
At first blush, my client is correct. The tenant did vacate and the total owed is $500,000. So, we go to court, right?
To quote Lee Corso from ESPN: "Not so fast, my friend." According to the tenant, my client forced him out. (In legalese, that's called "constructive eviction"). If true, then it was my client who breached the lease and the tenant would owe nothing.
So how do we disprove this constructive eviction? What documents do we need to look at? Whom do we need to depose? What motions might we need to file? Once we get that information, we do a little economic modeling--now stay with me.
Essentially, we have to estimate the expected value of an ultimate victory. Because the likelihood of victory lies somewhere south of 100%, we have to discount the potential spoils by some factor that captures the inherent risk of not winning the case. That means taking the likely award and multiplying it by some probability of success.
Example: If you're likely to receive $500,000, but there is only a 50% chance of prevailing, the expected value of the suit is $250,000. It is against this amount that you should weigh the costs of going through with the suit vs. a settlement. (Unfortunately, most cases settle "on the courthouse steps"--that is, after most of the fees have been incurred.)
In theory, plaintiffs will accept a settlement that is higher than the difference between the expected value and the litigation costs; defendants will accept a number beneath that difference. Unfortunately, at the beginning of a case the value of the claim is overestimated by the plaintiff and underestimated by the defendant. Those poor estimates muddy the waters a bit--that adds time, and therefore, cost. That's why clients must be open and honest with their attorneys about the strengths and weaknesses of their cases.
Using the example above, say the expected value of a trial is indeed $250,000. Next, we look at the number of witnesses and other litigation factors. Let's say we conclude that it will cost each side $100,000 to go to trial (Litigation costs often chew up around 20% of the value of a case). That means the best the plaintiff can do is to net $150,000. Also, most cases do not go to trial for well over a year. Because a dollar tomorrow is worth less than a dollar today, that $150,000 in 18 months is worth less in real terms. (To simplify the calculation, we'll ignore the impact of inflation.) Bear in mind that, at this juncture, there is a lot of guess work involved; many key facts are still unknown. This is where the experience of the attorney comes into play. Self-serving, perhaps, but true.
It's difficult to accurately estimate the fees at the beginning of a case. Who really knows how aggressive the other side will be? How many motions will they file? How many depositions will they schedule? And then there are the other intangible litigation costs in addition to lawyers' fees: The time people spend being deposed or in court is time they are not spending working on their business. There is a cost to that.
So, given all of these variables, we have decided that the expected value of the case is worth something less than $150,000 on day one. What would I do as the plaintiff's attorney?
First, I may not make the opening salvo, as this would be considered "betting against yourself." However, I would sit down with the defendant's attorney and go through the same analysis, with one small difference. I would look at the upper range of success. Rather than a 50% probability, I would make a cogent case as to why the likelihood of success is 75%, or some other justifiable percentage.
So I start by saying the case is worth $375,000 on day one. Recognizing that my client is saving litigation costs, I would discount the amount to, say, $300,000. However, I would make it clear that the $75,000 discount is to account for the litigation costs and that the settlement offer will go up by a similar amount. In other words, if $10,000 is spent on the case in the first month, the settlement offer goes up to $310,000.
Also, look at it this way. On a $500,000 claim, at a 75% probability of success, less $100,000 in litigation costs, the estimated net return on going to trial is $275,000. If the defendant comes back with an offer of $300,000, you have done well. Not only is the money in your pocket, you have avoided paying your lawyer, eliminated the uncertainties of the case and, most importantly, get to move on with your business.
One of the lines I hear so often from new clients is "I don’t care how much it will cost; it's the principle of the matter." Let me tell you something: It's always the principle of the matter until the first bill arrives in your mailbox. Make a business decision: Do the math.
