Calculating Settlement Value Like a Super Bowl Champion
The New York Giants are playing the New England Patriots in the Super Bowl, again. What would happen if the Patriots prepared for the game by focusing exclusively on their strengths and the Giants’ weaknesses while ignoring their own weaknesses and the Giants’ strengths? That would be ridiculous, right? Bill Belichick, Tom Brady? Forget about it. No way. Those guys will be prepared for every contingency, every angle, and every trick play.
Preparing for mediation is a lot like preparing for a football game-it requires strategic thinking and careful planning. Yet oftentimes I see parties who refuse to recognize the strengths of the opposition or acknowledge any weaknesses in their own cases. They act as if no one will be contesting the outcome if the case goes to trial. On the other hand, parties who prepare for mediation by conducting an objective risk analysis of the strengths and weaknesses of both sides of the case almost always find reasons to negotiate a successful resolution of the dispute.
A recent story in a Wisconsin law blog illustrates this point:
National Maintenance and Repair, a tugboat shipyard and barge repair facility, on Tuesday requested that Madison County Circuit Judge Dennis Ruth prevent an economics expert from testifying on behalf of a man suing the company.
Shannon Blair, 41, is suing National Maintenance and Repair claiming his right arm was mangled when a large metal ball attached to a crane fell on it while he was working on a barge on the upper Mississippi River.
The company disputes Dr. Rebecca Summary's testimony in a 13-page motion to disqualify.
"Dr. Summary's calculation of lost earnings and fringe benefits lack an adequate and reliable foundation," the motion reads. "At deposition, Dr. Summary acknowledged that Plaintiff returned to work for National Maintenance on July 26, 2010. However, only her calculation of past lost wages accounts for this fact. With respect to future lost earnings and benefits, Dr. Summary inexplicably decided that Plaintiff would stop working on the first day of trial and would never work again. Such an assumption is unsupported in the evidence and is belied by reality."
She calculated Blair's lost earnings at $1.7 million.
"Even were the Court to accept Dr. Summary's figures and assumptions, her arithmetic is wrong. Using her own figures and assumptions, Dr. Summary overstates Plaintiff's alleged future lost wages by $251, 700," the motion states.
"As the foregoing illustrates, Dr. Summary's opinions do not bear sufficient indicia of reliability and the bases for her opinions are simply not trustworthy."
A party who ignores the possibility that such key evidence could be excluded will not be able to objectively consider the reasonable settlement value of the case, and the litigants will almost always be forced to go to trial because at least one side’s settlement value is based on unrealistic assumptions. So on the question of lost earnings in this example, what are the chances that the motion will be granted? If it is fifty-fifty, the settlement value would be $850,000 (1,700,000 x .50), assuming 100% liability. What if liability is fifty-fifty? Then the settlement value of the lost earnings claim would be $425,000 (1,700,000 x .50 x .50). Even if the plaintiff got his expert testimony into evidence, what are the chances the damages will be reduced by $251,000 due to the alleged arithmetic errors? If there were a 25% chance of that, the plaintiff would have to do another calculation: $1,700,000 x .50 x .50 -251,000 x .25=$362,250. Under these circumstances from the plaintiff's perspective the reasonable range of settlement of the lost earnings claim is $425,000 to $362,250.
Of course the defendant may have some different assumptions about the likelihood of having its motion granted, so that the defendant's range of settlement may be different. That's okay. It should be expected. So, for example, what if the defendant believes there is a 50% chance on liability, a 75% chance the motion will be granted, and a 10% chance the court will agree the math is wrong? The defendant's range of settlement would be $212,500 (1,700,000 x .50 x .25) to $187,500 (1,700,000 x .50 x .25-251,000 x .10).
Now we see a range of settlement that includes the plaintiff's high of $425,000 and defendant's low of $187,500. There is still a large gap but the parties are now within a reasonable range to get a deal done. By comparison, if plaintiff had assumed he had a 100% chance of defeating the motion and defendant assumed it had a 100% chance of having its motion granted, the range would have been $1,700,000 to $0. I can hear it now, "I am not going to dignify that number with a response. You tell him to get real or we will see him at trial!" And the plaintiff, "Zero? Are you kidding me? I'll see them in court!" Such failure to make reasonable assumptions about the likelihood of success almost always forces the parties into a trial that neither one really wants.
There are many variables that go into determining the settlement value of a case, and the more of them you take into consideration the more realistic the numbers will become. You would, of course, always factor in the likelihood of success on the questions of liability and damages, but what about the chances of winning or losing a summary judgment motion; a motion to preclude evidence; or some other dispositive motion? What about litigation costs and the possibility of having to pay the other side’s attorney fees if you lose? When two sides carefully think through these types of issues, they almost always come to the mediation within striking distance of each other’s settlement range and when that happens-TOUCHDOWN! Both sides win.
Even after twenty years, the so-called “McDonald’s coffee case” or “hot coffee case” is still the poster child of tort reform advocates and the rally cry of consumer attorneys. The former decry a legal system which permits such “frivolous” lawsuits while the latter complain that public relations firms distort the facts of the case to engender public sympathy for big business. Let’s pivot away from the politics of the case and, going back in time, look at the lawsuit from a neutral perspective-as people who want to resolve a dispute as efficiently and effectively as possible. Like a mediator.
The Greek philosopher Diogenes once asked Alexander the Great what his plans were. Alexander answered that he planned to conquer and subjugate Greece. Then what? Diogenes asked. Alexander said that he planned to conquer and subjugate Asia Minor. And then? Alexander said that he planned to conquer and subjugate the world.
Settlement agreements are contracts.They are subject to the rules governing the formation and enforcement of contracts. Each settlement agreement should be drafted to respond to the particular law, facts, and risks of the case. This is not be a simple "cut and paste" job.
The NCAA Basketball Tournament, known as March Madness, is upon us. Each year college basketball fans are captivated by this great sporting event, where winners advance toward the championship and losers go home. Trials are like that: eventually there is a winner and a loser in every case. Except the loser does not always go home; sometimes he appeals. In a recent case the California Court of Appeals alluded to another march (Sherman's) and another kind of madness when it used the term scorched earth litigation to describe the hard fouling, take charge lawyering in the case.
For a long time construction defects and California law seemed to go together like peanut butter and jelly. It got a little sticky, however, for trial courts trying to deal with large, complex, multi-party cases, and builders who faced sizable jury verdicts. After many years of prolific construction defect cases, numerous vanguard appellate decisions, and some intense lobbying by the construction industry, the California legislature enacted SB 800 in 2002. The law requires home owners to give notice and an opportunity to repair construction defects to builders prior to filing a lawsuit. However, the law, now codified in California Civil Code sections 895 through 945.5, gives builders the option of implementing their own contractual pre-litigation procedures for notice and repair of construction defects. The intent is to give builders an opportunity to repair construction defects before lawsuits are filed. If all goes well, contentious, expensive litigation can be avoided altogether.
Benjamin Franklin, born 305 years ago this month, famously said, "A place for everything, everything in its place." This is true for many things, including settlement agreements which are really just contracts for the resolution of disputes. However, like all contracts, settlement agreements have a place for certain things and certain things, such as provisions which identify the consideration being given, the scope of the release and waiver of rights, and much more, must be in their place. Most states have enacted laws that encourage the settlement of civil disputes and attempt to prevent them from being broken. Today's featured case is an example of the underlying public policy that favors the settlement of disputes.
Appellate court opinions provide more than intrinsic precedential value; they are also useful reads in a “best practices” kind of way. Sometimes the lesson derived from them is “what not to do,” as illustrated in two recent cases from the California Court of Appeals.
Real estate developers often prefer arbitration over jury trials for various reasons, not the least of which is the belief that they would fair better in front of an experienced construction law arbitrator than they would in front of 12 jurors who probably have little or no understanding of the construction industry. As a result, developers will often include arbitration provisions in documents called conditions, covenants, and restrictions (referred to as CC&R's) which are akin to by-laws for corporations. CC&R's constitute the governing document for members of homeowner associations and tell property owners what they can and cannot do within the development..jpg)
Resolving disputes is a little bit like cutting an onion: you have to pass through several layers before you get what you want, and along the way you will likely feel some discomfort. The secret to cutting an onion without crying is a primer for "getting to yes" in the world of dispute resolution.
It is an interesting paradox that construction professionals who devote their lives to building unique structures according to customized plans generally use "cookie cutter" form contracts to govern the duties and obligations of the parties. When a construction dispute arises, most construction professionals and their lawyers will spend many hours scrutinizing the contract documents to analyze their rights. Since so much time is spent evaluating the contract after the dispute, shouldn't there be at least an equal amount of time and thought put into it before the project begins? Instead of standard cookie cutter provisions, doesn't it make sense to think about the risks of the project and clearly define what will happen in the event of a dispute? I have been preaching this sermon for many years, and recently posted an article on the subject called, 
world have marital melt-downs. Most people can’t imagine building a marriage on the foundation of such a document. I quess it goes something like this:“You are my soul mate, my one and only, now sign this…” While many would be reluctant to ask their betrothed to contemplate divorce before the "I dos" are even spoken, construction professionals should not be shy about making contractual arrangements for the disputes that will likely arise during the course of construction. 