A client may want to consider using settlement counsel.4 Settlement counsel simply means that a client hires both a litigator and a negotiator—sometimes from different law firms. The designated negotiator—the settlement counsel—has no authority to conduct the litigation. She does not take depositions, write briefs, or argue motions. She essentially distances herself from the litigation so that she will not get carried away in the heat of battle. If the other side wants to talk settlement, they talk to her.
Settlement counsel, of course, introduces a new agent with new incentives, information, coordination, and communication problems. Although using settlement counsel may help to overcome some of the cultural and psychological dynamics that can lead lawyers and clients to get trapped in escalatory and protracted litigation, the settlement attorney must still coordinate with the litigating lawyers to assess the value of the client’s case, and in that sense remains connected to the ongoing moves intended to better the client’s chances. The role is far from perfect. Nevertheless, in some situations, introducing a new attorney who is expressly designated as a negotiator can make it easier for that attorney to communicate the client’s genuine desire to settle.
The parties may also explore substituting their own information-exchange regime for the formal discovery process. Civil discovery is a blunt instrument. As neither side wants crucial information to fall outside the wording of a request or to slip through the questions put to witnesses, document requests and depositions are long and comprehensive, typically calling for reams of irrelevant material. By exchanging essential information early, the parties can avoid these costs. It is usually possible to identify two or three key sources of information that will be critical to resolving a dispute. In a medical malpractice case, each side may limit itself to two depositions and agree to exchange medical review documents and medical records. Or the parties might voluntarily agree to a regime in which all discovery must be completed in six months. For example, each side may be permitted a maximum number of hours of deposition time during which only objections to form can be voiced; or the parties may agree to forbid use of contentious interrogatories that require more than a simple answer.
Of course, a lawyer will have to think carefully about whether and when such customized discovery is appropriate. If the lawyer is looking for a smoking gun, extensive discovery may be necessary. But how many cases really involve such dramatic evidence? The point is not that lawyers should give up the traditional tools of their trade but that the use of those tools should be a deliberate and proactive choice, not a knee-jerk reaction.
Bringing in a neutral third-party mediator early can also be an effective way to resolve a dispute relatively quickly and to deal with differences in evaluating the net expected outcome.5 Sometimes people are more candid with a neutral than with each other. A neutral can act as an escrow, essentially comparing the parties’ private information to see if a quick settlement is possible.6 And a neutral can often help the parties through the evaluation of their case and point out the costs of traditional litigation.
In addition, sometimes parties may want to refer specific issues to an arbitrator for a quick resolution. This need not mean opening up a full, complex, and costly arbitration of the entire case. Instead, you may negotiate nine out of ten issues and merely submit the tenth for a decision.
WHAT’S IN IT FOR ME?
Settling early may not always seem to be in a lawyer’s best interest. There can be great short-term economic benefits of prolonged litigation. Colleagues in a law firm might raise a skeptical eyebrow if the lawyer closes down a potentially lucrative litigation matter “prematurely.” And early settlement entails certain risks—further discovery might uncover evidence favorable to one’s client. A lawyer considering early settlement might legitimately ask: “What’s in it for me?”
The answer turns on a lawyer’s goals and assumptions. If you are dedicated to serving your client’s interests and trust your client’s ability to make decisions, then working toward early settlement makes sense. And if you assume that clients who receive excellence reward it, either in the short- or long-term, then resolving a dispute quickly may seem more like an investment in future business than an economic loss.
Lawyers and clients, of course, can also try to build incentives for early settlement into their relationship. A client may give her lawyer a bonus for concluding litigation prior to discovery. Although the bonus obviously will not equal the fees that would be generated by prolonging the case, it may offset the principal-agent tension in this context.
Use Decision Analysis to Make a Realistic Assessment of Your Case
A primary reason that cases settle late or don’t settle at all is that the parties have divergent expectations about what will happen at trial. One of a lawyer’s central tasks in dispute resolution is to find ways to assess his client’s case efficiently and realistically. Decision analysis can be a very useful tool for this purpose.7
To illustrate the power of decision analysis, consider the following simple example. Two months ago, Paula Jackson, a teller at a local bank, was injured in an automobile accident. A car driven by Steven Smith struck her as she was making a left-hand turn at a busy intersection. The accident was fairly severe. Paula broke her right knee and right thumb, and her car was badly damaged. She missed work for three weeks. Although she has returned to work full-time, she is unable to perform some tasks because of her thumb. Her doctor is uncertain whether she will ever regain total mobility in her thumb because of the severity of her fracture.
At the hospital after the accident, Paula told the investigating police officer that she began her left turn when her traffic signal was yellow and when all on-coming traffic appeared to be slowing down, and that Smith’s car seemed to come out of nowhere and smashed into her. Paula also told the officer that she was not wearing her seat belt at the time of the accident. Smith relayed basically the same version of the events. He told the police that he sped up to make it through the yellow light and didn’t see Paula until it was too late. Two witnesses told the investigating officer that Smith appeared to be traveling well above the speed limit when he entered the intersection.
Paula and her lawyer assess the opportunities and risks of the litigation systematically by identifying sources of legal uncertainty and quantifying legal risk. Every case contains uncertainties—in the law, the facts, how the other side or a judge or jury will behave. The human mind has great difficulty grappling with such uncertainty. Rather than reason through it, people typically default to intuition only. Lawyers are no exception. Many lawyers do no more than get an overall intuitive feeling what their case is worth. But intuition may lead to errors. As we saw in Chapter 6, lawyers may fall prey to optimistic overconfidence about what will happen at trial because they have not identified crucial sources of legal uncertainty and assigned probabilities to them, or they may succumb to loss aversion, partisan perceptions, or reactive devaluation. A plaintiff’s lawyer, for example, may give undue weight to a highly favorable but relatively unlikely outcome, such as a jury verdict of $500,000 in Paula’s case.
To avoid these mistakes, you need a systematic way to deal with uncertainty. We recommend a disciplined approach that identifies the separate issues that bear on the net expected outcome of the case, estimates in percentage terms a client’s chance of prevailing on each of these issues, and isolates issues that require additional factual and legal research.
Figure 8
Suppose that, after conducting some legal research, Paula’s lawyer learns that in the relevant jurisdiction a negligent driver is not liable for damages caused by injuries that are attributable to the plaintiff’s failure to wear a seat belt. She also learns that injured plaintiffs can recover damages for pain and suffering in addition to those for medical expenses and lost wages. Finally, she learns that punitive damages are not available unless the tort was intentional. Now Paula’s lawyer has a basic understanding of the issues that bear centrally on the net expected out
come of the case. These factors can be represented graphically in a dependency diagram (see Figure 8)8
A dependency diagram is a tool used by litigation analysts to identify the most critical uncertainties and relationships bearing on the net expected outcome of the case. These diagrams usually make distinctions between ultimate issues (those that might be dispositive as to liability or damages) and influencing factors (those that affect the odds that an ultimate issue will be resolved in a particular way). In our example, the ultimate issue with respect to liability is whether Steven Smith breached an ordinary duty of care to Paula Jackson. Influencing factors include whether the two witnesses will testify that they saw Smith speeding into the intersection; whether the police report—which concludes that the defendant was speeding—is admissible; and so on.
The next step is for the lawyer to assign percentage estimates to Paula’s chances of prevailing at trial on the relevant issues. At this stage, these numbers can be only rough estimates. Nevertheless, thinking probabilistically will help Paula and her lawyer better understand what the case is worth. Suppose the insurer offers a settlement of $50,000. Without identifying the sources of legal uncertainty and quantifying legal risk, Paula’s lawyer might recommend that Paula reject the settlement offer because her case is “extremely strong.” She might even tell Paula that “if we win, we almost certainly will recover all of your $100,000 in medical expenses.” Note here that the lawyer is working from an intuitive assessment of the net expected outcome and communicating with the client in plain but highly imprecise language. To the lawyer, the advice sounds good. The odds of recovering $100,000 seem high, and $100,000 is much better than $50,000.
But to be systematic about the decision, Paula’s lawyer should identify the relevant factors that bear on the net expected outcome of the case and assign probabilities to them. She might analyze the settlement decision by using a decision tree. One branch would represent settlement; the other would represent proceeding to trial (see Figure 9). The goal of breaking down the choices in such an explicit way is to help lawyers and clients compare the uncertain benefits of proceeding to trial with a concrete settlement offer.
In order to value Paula’s case, her lawyer must estimate the likelihood of success. Assume that when she says the case is “extremely strong,” she means that there is an 80 percent chance that the jury will find Smith negligent. If this is the only uncertainty, the expected value of the case is roughly $80,000 ($100,000 × .8; see Figure 10).
Figure 9
Figure 10
But in most cases there are several sources of uncertainty. Suppose that Paula asks her lawyer to assign a probability to her prediction that Paula is “almost certain” to recover all medical expenses if she wins. Paula’s lawyer might explain that there is a small chance—10 percent—that the jury will not award damages even if Smith is negligent because the jury will conclude that all of Paula’s injuries occurred as a result of her not wearing her seat belt. This remote possibility reduces the expected value of the case to $72,000 (.8 × .9 × $100,000; see Figure 11).9
Although Paula’s case is still “extremely strong” and she is still “almost certain” to recover all economic losses, the settlement offer of $50,000 looks much more attractive than it did initially. Instead of thinking about $100,000, Paula and her lawyer are now focusing on a more realistic expected value of $72,000.
Further refinements are possible. Paula’s lawyer should factor in transaction costs and the time value of money. If the costs of proceeding to trial are $20,000, the value to Paula of litigating the case decreases to $52,000 (see Figure 12). The time value of money may reduce the net expected outcome still further.
Figure 11
Figure 12
The time value of money is a basic principle of finance that says that $1 today is worth more than $1 a year from now. The reason is that a rational investor can invest that $1 today in a certificate of deposit, a corporate bond, or a share of stock and expect to receive a return one year from now.10 Because trials take time and Paula will not receive her money until the case is concluded, Paula’s lawyer should convert the expected $52,000 into today’s dollars by discounting it. If she assumes that payment of an adjudicated award would occur in one year, and that the relevant discount rate was 5 percent, the present value of Paula’s expected return from litigation would be $49,524 ($52,000 ÷ 1.05). If the appropriate discount rate was 10 percent, then the present value would, of course, be lower—$47,273.
Finally, Paula’s lawyer should take Paula’s risk preferences into account. When clients are risk-averse, their reservation value will likely be smaller than the net expected outcome by an amount known as the risk premium. In many (and perhaps most) cases, clients will be risk-averse. From a defendant’s point of view, for example, if the damages at stake involve a significant percentage of the defendant’s assets, the defendant may be willing to foreclose the possibility of a catastrophic loss at trial. In other cases, clients may be risk-neutral or even risk-seekers. In these situations, a lawyer must not let his own risk preferences color his settlement recommendations.
The expected value can be translated into a risk-adjusted certainty equivalent. The decision tree in Figure 12, for example, suggests that litigation requires Paula to face uncertainty about (1) whether Steven will be found negligent; and (2) if so, whether a jury would award damages. The time-discounted net present value of this gamble is $49,524. Paula could be asked: for what dollar amount would you be indifferent between taking this gamble and accepting a guaranteed payment? If Paula were risk neutral, this amount would be $49,524. But because she is risk averse, she might report that this amount is $45,000, her risk-adjusted certainty equivalent.
Note the potentially dramatic effect of litigation analysis on a lawyer and client’s perceptions of a settlement offer, even though both may still believe they have a very strong case. In this highly stylized example, it turns out that the $50,000 settlement offer is higher than the net-expected value of the case. By using systematic analysis and probability theory to incorporate counsel’s intuition about the odds of success on key issues, Paula’s lawyer has saved his client from rejecting out of hand a reasonable settlement offer.11
Decision analysis does not eliminate the potentially distorting effects of overconfidence bias, as described in Chapter 6. The analysis is only as good as the judgments informing the probabilistic assessments incorporated. The caution about “Garbage-in, garbage-out” clearly applies. But the beauty of decision analysis is that it forces lawyers and clients to be explicit about critical judgments. This can serve to improve communication and dampen the principal-agent tension between a lawyer and client. By requiring the lawyer to quantify his legal judgments, the client can more easily assess whether it is sensible to invest more in further litigation.
Construct a Joint Decision Tree
At the table, it can help to jointly construct a decision tree. This helps to focus the lawyers on the precise issues they think will be dispositive in the litigation, to illuminate what each side sees as the strengths and weaknesses of the case, and to highlight what steps need to be taken to produce convergent expectations about what will happen at trial.
A joint decision tree is not difficult to create. First, both parties work together to see if they can agree on the structure of the tree. What issues will the litigation turn on? Although drawing a tree is usually fairly easy, the next step is more difficult. The lawyers discuss their respective assessments of the odds for each issue.
Some lawyers may fear—with some justification—that candidly disclosing their honest assessment of the case to the other side will disadvantage their client, especially when opposing counsel might not reciprocate. We do not wish to gloss over the strategic problem presented by this kind of information exchange. Talking about the opportunities and risks of litigation implicates the first tension all over again. But even if both parties are less than candid in terms of the odds attached to specific nodes, the
process may reveal which uncertainties most impact the net expected outcome.
Constructing a joint decision tree can help reduce gaps in expectations—even if it cannot eliminate them. Moreover, trying to build a decision tree can produce strategic benefits. It offers lawyers an opportunity to “smoke out” whether opposing counsel has candidly disclosed his or her views of the opportunities and risks of litigation. Paula’s lawyer, for example, might probe the insurer’s assertion that the law of the jurisdiction is unclear. She might refer the insurer to the relevant authority and ask why it is unclear or unpersuasive. If the insurer cannot give reasons, or distinguishes the cases on flimsy grounds, Paula’s lawyer may continue to assert her original analysis of the law.
On the other hand, if the insurer articulates a reasonable argument, or cites a controlling authority, Paula’s lawyer may be able to pinpoint exactly where the insurer’s interpretation of the law differs from hers. Isolating the scope of the disagreement in this way can be useful. Suppose that the insurer asserts that although the law is somewhat unclear, the court will most likely rule that if the plaintiff failed to wear a seat belt she cannot recover, under the common law doctrine of contributory negligence. Suppose further that this is the only relevant legal issue on which the two lawyers disagree. They can now turn to finding an efficient way to resolve this impasse—perhaps by agreeing to hire an expert to render an opinion solely on that question.
Building a joint decision tree also can identify disputed facts. In some cases, the governing legal standard is relatively straightforward, and the parties’ disagreement centers on how the law will be applied to their specific facts. In Paula’s case, for example, the litigants normally would put on expert testimony regarding whether Paula’s injuries were caused by her failure to wear her seat belt. Problem-solving lawyers might avoid the expense and delay of this process by finding creative ways to produce convergent expectations about how a jury would resolve that issue. For example, Paula and her lawyer might agree with the insurer to hire an independent expert to examine Paula’s medical file and to make an independent assessment about the magnitude of the seat belt damages. This estimate might cause one or both sides to revise its view of what the jury might do. If the parties are inclined, they could agree to be bound by the independent expert’s determination.
Beyond Winning Page 27