RISKY BUSINESS: ANALYSIS OF LITIGATION RISK1

• Jurisdiction: United States

Strategic Risk Management for Natural Resources Companies
(May 2008)
CHAPTER 6A
RISKY BUSINESS: ANALYSIS OF LITIGATION RISK¹
Michael L. Beatty
Beatty & Wozniak, P.C.
Denver, Colorado

This paper is an effort to discuss two common approaches to providing corporate management with a meaningful litigation risk analysis. I approach the topic having confronted it from every vantage point. As a trial attorney, I have often been asked to provide litigation risk assessments to clients; as a general counsel, I often asked for litigation risk assessments from both inside and outside trial counsel; as a law professor, I studied various articles discussing litigation risk assessments; and as a director of publicly-held corporations, I ask everyone - trial attorneys, general counsels and management - for their best estimate of litigation exposure. At no point have I ever felt confident of any method for assessing risk. This paper will attempt to discuss two different modes of risk analysis: Both are subjective methodologies although philosophically they represent very different approaches. The first method is reflective of a belief that risk assessment is a matter of non-numerical experiential judgment; the second method seeks to parse the assessment so as to yield a calculated numerical settlement value.

I. The Sports Bet Theory of Litigation Risk Analysis.

One school of thought contends there is no value in attempting to numerically quantify litigation risk. Proponents of this approach believe that litigation risk, like a sports bet can best be assessed with first-hand knowledge and experienced judgment. For these attorneys litigation risk analysis is primarily a matter of professional expertise. They contend, accurately, that lawyers go to law school for this very purpose - to learn to distinguish good legal analysis from bad, to understand the elements of a cause of action and to assess the quality of evidence as it relates to the burden of proof with regard to each element of a cause of action. The law itself is objective for these attorneys and, since judges will evaluate the legal arguments and facts the same way, any good attorney should be able to discern a settlement value range. Juries are much less predictable, but even there, the knowledge and experience of a good trial lawyer are the best guides for predicting outcome.

In this model, the lawyer who is asked for a risk analysis first provides the cautionary comment that litigation is unpredictable and then offers an expert prediction. The manager receives advice as to whether to pursue a claim or defense or to settle the case in exactly the same way millions of sports fans get online predictions every day for upcoming sporting events.

There is a compelling reason to believe this expert opinion method is quite satisfactory in the great majority of cases, i.e., most cases do, in fact, settle. Since the underlying theory of most settlement theorists posit that cases only settle when parties can agree regarding the expected value of a claim, the large percentage of actual settlements should indicate substantial agreement by most attorneys as to the likelihood of most claims' success.²

The difficulty, of course, is in proving the thesis that lots of settlements means most lawyers make accurate risk assessments. Many alternative theories can equally explain why

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most cases settle. It may be, for example, that defense lawyers understate the value of a case during the pre-trial stage and then exaggerate the risk as trial nears in order to maximize their fees without running the risk of losing the case. An alternative thesis is that lawyers tend to share the same assumptions about valuation - even where they are wrong.³ A third alternative may be that the American legal system works to force settlements regardless of whether the parties share a common valuation.⁴

The evidence supporting any of these alternative theories, of course, makes them as anecdotal as the theory that the large number of settlements represents a large degree of agreement among attorneys as to litigation risk. What the available published evidence does appear to support is a more complex conclusion than the uniform ability of attorneys to accurately assess litigation risk.

If attorneys generally tend to agree as to litigation risk, one would expect the results of cases that went to trial to be uniformly distributed across the docket, i.e., that the cases where attorneys have misjudged risk would be equal among case type and that there would be approximately the same win or loss rate regardless of the type of claim. Evidence suggests that is not the case. Two researchers, Eisenberg and Clermont, have created an interesting online Judicial Statistical Inquiry Form.⁵ This compilation of searchable data allows anyone to make an online inquiry by type of case, court, plaintiff, defendant and disposition. In this way a user is able to ascertain the frequency of various types of cases, their duration and their ultimate judgments. Looking only at federal cases that actually went to trial, one author, Charles Yablon, using this data discovered a win rate for plaintiffs in personal injury tort cases of 29.39% and a win rate for plaintiffs in contract cases of 89.86%.⁶ While it is possible to offer conjecture as to the basis for such disparate results (such as the notion that the contingent fee system fosters more weak tort cases but that business people only sue for egregious conduct), it is at least improbable that attorneys who try tort cases are better predictors than attorneys who try contract cases.

This same author offers other data to further cast doubt on attorneys' inherent ability to accurately predict litigation risk. Samuel Gross and Kent Syverud studied 829 civil jury trials conducted in California State Superior Courts between June 1985 and June 1986, taken from

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reports in Jury Verdicts Weekly.⁷ Those reports include the amounts demanded and offered in settlement as well as outcomes.⁸ In addition, Gross and Syverud studied all real estate, employment and commercial transactions reported in Jury Verdicts Weekly between July 1989 and April 1990 and conducted telephone interviews with 86% of plaintiffs' attorneys and 59% of defense attorneys in those cases.⁹

By any measure, lawyers either failed to accurately predict litigation results or failed to make offers that reflected the actual value of the cases. In 25.2% of the personal injury trials, no offer of settlement was ever made. The mean damage awarded in those "zero-offer" personal injury cases was $108,265 - not counting litigation expenses - and $328,000 for all personal injury trials with plaintiffs' verdicts.¹⁰ Indeed, the defendants' offers were always less than the mean award for plaintiff at trial.¹¹ This is a surprising result if we are to believe that attorneys are adept at assessing litigation risk and generally view cases through a similar lens.

The results in commercial cases (mostly comprised of disputes over the sale or financing of goods or services) are equally surprising. Plaintiffs' mean demand in commercial cases was less than the mean award - $415,313 to $477,880 - and 52.4% of the trials ended with verdicts in excess of the amount demanded.¹² In spite of this, "zero offers" occurred over 40% of the time - almost twice as often as in personal injury cases.¹³ From this data it appears neither plaintiff's attorneys nor defense attorneys are good predictors of litigation outcomes.

Of course, it is entirely possible to offer an explanation undercutting the notion that this evidence must mean lawyers make bad predictions. There is certainly more at stake in most settlement negotiations than in a simple litigation risk analysis. It is possible the defendants believe they can bluff most plaintiffs into dismissing their actions or, at least, discourage other plaintiffs from filing or even intimidate them into dropping their cases. Perhaps only when the bluff is called does the defendant actually lose, and defendants feel it is worthwhile to run the bluff even if an adverse result also requires an additional expenditure of time and money. The point of addressing these statistics is not to assert the correctness or fallibility of any explanation, but rather to point out that the widely held supposition that lawyers do a good job of predicting risk should not be accepted so readily.¹⁴ It is simply impossible either to conclude that lawyers

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generally do a good job of forecasting outcomes or, even if some can do so, to be able to distinguish between lawyers who can and cannot.

What one energy company has done in order to impart an element of standardization to the art of litigation risk assessment is to list the criteria that should be considered in the risk analysis.¹⁵ Each time a risk assessment is done, each listed criteria...