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The second in a series of articles about how to reduce litigation costs while getting better results. The following is adapted from Chapter I.C of Bensen & Myers on Litigation Management.
Once the pertinent facts and applicable law are analyzed and a detailed budget prepared, virtually all of the pieces of information needed to decide whether to bring suit are available except one: the outcome. There is typically no shortage of predictions about the outcome, of course, but those who favor going forward with the suit usually have rosier predictions than those who do not and vice versa. Notably, moreover, those favoring suit are not necessarily the people responsible for the litigation budget.
Many subjective considerations may come into play. For example, injunctive relief, the value of which is usually difficult to quantify, and ancillary considerations, such as a company's reputation for protecting its rights, may weigh in favor of suing. On the other hand, the negative publicity that may accompany a suit may weigh against bringing it. There is also corporate culture - a litigation adverse company may not sue unless it views its anticipated recovery exceeding its estimated costs by a significant margin, e.g., at least 20% while a more litigious company may be satisfied with a 5% margin. Lastly, because of budget restraints, a case may go forward that would not have gone forward a year earlier, or vice versa.
However, the objective determination of the relationship between the estimated costs and likely recovery is a critical one in every decision to sue. An efficient and reliable methodology for making that determination based on objective criteria will afford Inhouse and Outside Counsel more time for thoughtful consideration of the subjective factors and permit better quality decisions with respect to instituting litigation.
The key factors to consider in deciding to sue are probably not unfamiliar:
The last two questions provide unique challenges not just because they involve predicting the future, but also because they involve predicting several if not numerous alternative futures. For example, in a given litigation, what does "success" mean? Where a party has two claims, each capable of supporting a separate damages award, does success necessarily mean prevailing on both, or would prevailing on either do? If winning on both would make the litigation worth pursuing, but winning on only one would not permit the party to recoup its litigation costs, would prevailing on only one claim be a "success"?
What about a party's decisions to bring suit over the course of several or many litigations? For example, assume a party is faced with three possible litigations. In each, costs are expected to be $1 million dollars and the potential recovery is expected to be $4 million dollars. However, based on the party's analysis, each has only a 33% chance of prevailing. Plainly, in one out of three cases, going forward would be the right decision while in the other two, it would be a mistake, but how does the party decide which is which?
Thus, the decision to bring suit presents two intertwined challenges: (i) how does a party know if its net recovery after deducting attorneys' fees justifies bringing suit and (ii) for the close calls, how does it avoid guessing as to which suits to bring and which to forgo?
The intuitive response is to look at the odds of winning a case and, assuming the anticipated recovery would exceed costs, go forward with it if a victory appears probable. However, that may not always be the best course. What if in a given case the chance of success is 75%, the potential recovery is $4 million and the budgeted costs are $3.5 million? At first glance, it appears the case should be brought because odds are it is a winner and the recovery will exceed costs. However, were four such cases brought, likely one of the four would be a loser. The result would be that the total cost of bringing the four actions ($14 million) would exceed the total recovery ($12 million). That result is portended by that fact that when the anticipated costs ($3.5 million) are compared to the anticipated recovery ($4 million) discounted by the likelihood of success (75%), there is an anticipated loss ($500,000) even assuming the litigation is a success, suggesting that bringing suit (and others like it) may not be the right decision. For the similar reasons, it will make sense at times to bring a suit even where odds are against winning. In sum, viewing potential litigations broadly can put the advisability of bringing a particular litigation in a new, helpful perspective.
Tools for deciding whether to bring suit along with concrete methodologies and tools to address case evaluation, budgeting, whether and when to settle, staffing issues, document collection, review and production, trial preparation and other facets of the litigation process are provided in Bensen & Myers on Litigation Management.
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