Given that nearly all cases settle short of trial, lawyers should constantly evaluate the best way to resolve a matter.
Decision Tree Analysis
A decision tree analysis is one of the most common ways to value a case. In the simplest form, you consider the most likely verdict multiplied by the percentage chance of that verdict. This gives you the “expected value” of litigating a particular matter.
The expected value of litigating a matter is the average value of taking a course of action many times.
Let’s imagine that Pat is the plaintiff in an employment matter.
The expected value of litigating Pat’s case is the average value of taking a course of action (i.e., litigation) many times. Pat’s attorney expects that if she took the matter through trial, Pat has a 60 percent chance of winning $250,000. Pat will incur attorney’s fees of $50,000, win or lose.
If less than 100 percent, the expected probability of litigation reduces the estimated value of any litigated outcome – otherwise known as the client’s public Best Alternative to a Negotiated Agreement (BATNA).
A simple decision tree for Pat is:
Win at Trial: $250,000 - $50,000 = $200,000 x 60% = $120,000
Lose at Trial: $0 - $50,000 x 40% = -$20,000
Pat’s Expected Value of Litigating: $120,000 + -$20,000 = $100,000
In this case, Pat’s public BATNA is $100,000.
On the flip side, defendant Drew’s attorney also expects that Drew has a 60 percent chance of winning, or obtaining a zero-dollar verdict, after incurring $70,000 in attorney’s fees.
A simple decision tree for Drew would be:
Win at Trial: $0 - $70,000 = -$70,000 X 60% = - $42,000
Lose at Trial: -$70,000 + -$250,000 = -$320,000 X 40% = -$128,000
Drew’s Expected Value of Litigating (i.e., public BATNA): -$42,000 + -$128,000 = -$170,000
The Zone of Possible Agreement (ZOPA) is the overlapping area of both parties’ bottom lines, or where it is advantageous for both parties to settle. If the above analysis ended here, the ZOPA would be a number between $100,000 and $170,000.
Valuing Nonlegal Personal Costs and Benefits
Decisions trees alone typically fail to consider the client’s personal costs and benefits.
com jill sophamediation Jill Hamill Sopha, U.W. 1996, is an employment attorney mediator at Sopha Mediation LLC in Milwaukee, where she focuses her practice on helping employers and employees resolve workplace disputes and litigation though mediation. She is also an adjunct professor at Marquette Law School where she teaches mediation advocacy.
The public BATNA rarely accurately reflects the client’s true bottom line, because it does not consider the client’s personal costs and benefits of litigating, or the client’s personal BATNA.
The client’s personal BATNA includes factors such as a client’s desire to avoid the time, cost, stress, and fear associated with litigation or, alternatively, for “vindication” or to “tell their story” through litigation.
As such, the total BATNA, or the sum of the public and personal BATNAs, more accurately estimates the client’s true bottom line.
If Pat and Drew are both completely indifferent to litigation, the personal BATNA would be zero, and the total BATNA is simply the public BATNA numbers above. More likely, however, Pat and Drew would assign some value to those personal costs or benefits.
But how do you place a dollar value on them?
Personal Benefits and the Cost of Litigating
Lawyers and clients must discuss personal concerns to identify and value the client’s personal benefit or cost of litigating.
Identifying and valuing the personal BATNA is not an easy endeavor. To complicate things further, these personal factors are likely to change during litigation as a client becomes more (or less) interested in resolving his or her case as trial approaches.
Throughout the case, lawyers must help their clients identify their personal benefit or cost of litigating. When we ask Pat or Drew what they want out of the legal case, Pat may say “to win as much money as possible” and Drew may say “to pay as little as possible.” Those initial statements likely do not represent a complete picture of the personal BATNA for Pat or Drew.
For example, what if Pat is complaining about the time, cost, and stress of litigation? What if Pat doesn’t want to spend one to two years litigating, along with the invasive nature of discovery? Further inquiry may reveal that Pat recently got a new job, and now does not have vacation or other time to dedicate to the litigation, or immediately needs money.
Alternatively, what if Drew is willing to spend (or risk losing) more to “vindicate” himself? Or, what if Drew has other business priorities that make spending time on the litigation less attractive, or has extra money in the corporate budget that must be spent before year-end?
These are all examples of nonlegal personal costs and benefits to be considered when valuing a case with a client.
Calculating the Zone of Possible Agreement
Let’s say that Pat is willing to forgo $20,000 of a potential settlement to avoid the time and stress of litigation. Then, Pat’s personal BATNA is -$20,000, which is subtracted from the public BATNA of $100,000, for Pat’s total BATNA of $80,000.
Let’s say Drew prefers to spend an additional $20,000 to be vindicated. Then Drew’s personal BATNA is $20,000, and the total BATNA is calculated: -$170,000 + $20,000, or -$150,000.
The ZOPA is a number between $80,000 and $150,000.
Lawyers should exercise caution when setting a too firm of a “walk away number” for negotiations. As noted above, personal BATNAs are difficult to estimate and frequently change – yet play a huge role in a client’s true value of a case.
In summary, when valuing a case, lawyers and clients benefit from looking beyond the legal issues and examining the personal costs and benefits of litigating. Exploring and understanding all aspects of a client’s BATNA, both public and personal, provides valuable information as lawyers and clients work to make the best possible settlement decisions.
This article was originally published on the State Bar of Wisconsin’s Dispute Resolution Blog. Visit the State Bar sections or the Dispute Resolution Section web pages to learn more about the benefits of section membership.