5 PerspectivesNovember 9, 2011
What’s your dispute worth – to you and to the other side? It’s hard to imagine settling without knowing the answer, and a decision tree can be a critical tool to help you get there. As I have said before, there are plenty of reasons why we should use decision trees, but – until now – there hasn’t been a step by step guide detailing how to use them. It’s time to change that.
Smith v. BiggCo, Inc. – Case Background
To demonstrate how to create a decision tree I have used a few screenshots from Resolution Tree, a decision tree product from my friends at Unit Interactive and me. In this decision tree, you represent Smith, who plans to sue BiggCo, Inc. for wrongful termination. You know that BiggCo will fight the case hard, but you’re well into your Early Case Assessment and know that – if you can make it to trial – you have a real shot at $1,000,000.
You anticipate BiggCo. will file a Motion to Dismiss and a Motion for Summary Judgment, and you’ll need to determine your costs to overcome each, as well as the chances you won’t. If you make it to trial, you’ll more than likely win, and you have determined (through your Early Case Assessment) that your damages will be clustered at low, medium and high ranges of $25,000, $150,000, and $1,000,000.
Your First Event — Settle or Litigate?
The first real step in any decision tree is to articulate the decision. This initial choice can be anything over which you have control – “File suit in California or Ohio?” or “Arbitrate or Litigate?” or “Settle or Litigate?”. For disputes, I often insert “Settle or Litigate?” as shown below:
Note that you’ll be asked to insert a “Cost” and a “Payoff/Payout.” In this case I have assumed it’ll cost $1,500 at my hourly rate to negotiate a settlement agreement. The “Payoff/Payout” amount is what you’ll expect to receive or to pay if this event occurs; I have inserted $27,500, which is BiggCo’s settlement offer in my case. If you don’t have a settlement offer, you can insert the offer you anticipate will come, or you can leave it at $0 for now.
Your Second Event – The Motion to Dismiss
For your second event, you need to use your experience and what you know about the case to answer a few questions:
- What are the possible outcomes?
- What is the probability – the chance or the likelihood – that each outcome will occur?
- What will it cost to respond to the Motion to Dismiss – no matter what the outcome is?
- What is the Payoff/Payout to or by your side, if any? What payments will you make or receive? (Note that, if you are the plaintiff, you will enter a positive number, since you will be receiving a payment; if you are a defendant, you will enter a negative number, since you will be making the payment.)
As you can see below, on behalf of Smith you have decided it will cost $10,000 to respond to the motion, and you only have a 20% chance of losing it. There is no payout to you whether you win or lose, since a loss on the motion is a loss of the case and the reward to a plaintiff for winning a motion to dismiss is simply the next stage in the lawsuit.
Naturally, you want the motion to be denied so you can take the next step toward trial. That next step in this case is the Motion for Summary Judgment, which is represented as an “event” that follows the denial of the Motion to Dismiss.
Your Third Event – The Motion for Summary Judgment
You know the Motion for Summary Judgment in your case will be tough. As shown below, you have determined:
- it will cost $25,000 to prepare a response;
- you have only a 33% likelihood of prevailing;
- the next step is trial – if the motion is denied; and
- there is no “Payoff/Payout” at this stage:
Your Final Event – Trial
At trial you could win or lose, but if you win you have clustered your likely damages into “low,” “medium” and “high” damages of $25,000, $150,000 and $1,000,000. You list these outcomes on the tree as follows:
At the end of the day your decision tree will look something like this:
Just as you suspected, there are lots of potential outcomes, including your million-dollar verdict. But what’s your case actually worth before it starts?
The Summary Report on Smith’s case is telling. The following graphic shows that:
- The plaintiff in this case has an 80% chance of losing her case before it even begins;
- If costs are reflected in the equation, the plaintiff ends up owing money in 86% of the outcomes in this case; and
- Even with a 30% chance of a $1,000,000 verdict at trial, the costs to get there – and the chances she won’t – render the Expected Value of the tree a mere $48,870.
Indecision over what to add into your decision tree is often the most difficult part of any tree, and there are no perfect answers, particularly at the outset of the case. So keep your tree simple as your case begins, and revisit and revise the tree as your case progresses. Smith v. BiggCo, Inc. is a perfect tree for an Early Case Assessment, but after winning a Motion to Dismiss, I would likely revise the tree to incorporate more details and issues in the case.
Try a decision tree in your next case. You’ll be glad you did.
For more on Decision Tree Analysis, read the Settlement Perspectives series on decision trees, which includes:
7. The Decision Tree – Step by Step (this post).