The root of mediation impasse in monetary claims: case valuation

 By Ed Sikorski Jr.

“Settling or mediating a case is, among other things, a process for agreeing on the value of the claim. Impasse often occurs because the parties do not agree on the value of the case” Laura Kaster: On Impasse.

The focus of this article is to review, explore and propose case valuation methodologies to resolve the largest impediment to case resolution and mediation impasse in monetary claims: Case Valuation.

Juries resolve cases by verdict less than 3 percent of the time (Bureau of Justice Statistics Bulletin “Civil Bench and Jury Trials in State Courts, 2005.”) The Michigan SCAO recently reported that less than 1 percent of filed cases concluded by verdict of judge or jury.

Two recent empirical studies that cast skepticism on attorneys’ ability to make objectively accurate determinations on the outcome of litigated claims:

• The first study conducted by Randall L. Kastor, “Let’s not make a deal: an empirical study of decision making in unsuccessful settlement negotiations,” published in the Journal of Empirical Legal Studies Vol.5, Issue 3, 551-591, September 2008 found that 61 percent of plaintiffs made decision errors in rejection of settlement offers, with a mean loss of $42,000 and 24 percent of defendants made decision errors in rejection of offers, with a mean loss of more than $1,000,000.

• The second study conducted by Elizabeth Loftus, “Insightful or wishful: lawyers’ ability to predict case outcomes,” published in Psychology, Public Policy and Law 2010, Vol.16, No 2, 133-157 which utilized a large sample of U.S. lawyers, showed clear evidence of unrealistic goals and a motivation to achieve a certain case outcome that led lawyers to discount the assessment of a third independent party if it did not fit with their preferred belief.

Settlement leverage – case valuation accuracy-can be substantially increased by gaining a perception of what a typical jury might do in a given fact situation. It helps to know something more than a guess, a subjective estimate, prior verdicts and settlements, or a computer program analysis.

The development and explosion of discovery rules has shifted the paradigm from “see what comes out at trial” to pre-trial resolution through the discovery process that is designed to uncover facts that are well understood by all parties well in advance of trial.  It follows that at a point in time, through some mechanism, the vast majority of cases settle.

What then is the most reliable method to measure the value of the case that provides the information to form the basis of the decision to settle?

The principal reason that cases do not resolve more efficiently earlier than later (and a greater expense to all parties) is that valuation techniques run the gamut from guess work to employment of predictive coding research, but these techniques still do not answer the fundamental question of “How much is my case worth?” The one piece of information still missing is what a jury would award/do IF the case did proceed to trial. The key questions that need to be answered to satisfy the settlement valuation decision-making process are:

1. How would a jury perceive the facts?

2. How would a jury perceive the conduct of the trial attorneys?

3. How would a jury perceive the believability of key witnesses?

4. How would a jury assign a monetary value to the dispute?

Up to this point in time, the traditional methods of valuation have comprised:

• The multiplier

The multiplier is Direct Damages x XYZ (i.e. 3, 4, or 5).
While this approach is simple and of long standing use, it is severely limited by the arbitrary selection of the multiple used.

• The decision tree

The decision tree is a probability diagram of possible litigation outcomes derived from the assignment of percentages to possible jury verdicts.

While instructive, this approach is also highly dependent on a somewhat arbitrary selection of both damage expectations and assessment of individual attorney experience and confidence.

• Prior jury verdicts and settlements

Jury verdict and settlement research is now more widely available to both plaintiff and defense than ever before at affordable prices. LexisNexis touts a content fabrication system that runs on a petabyte of storage capable of 10,000 calculations per second. (A petabyte equals about 1 trillion kilobytes. Apollo 11 ran on 74 kilobytes and could preform 50 calculations per second) (ABA Journal May 2013, How lawyers are mining the information mother lode for pricing, practice tips and predictions). Utilizing this process removes reliance on personal estimations; however, no prior case has exactly the same facts and issues as all cases are in fact unique. It is therefore impossible to measure the impact of all the variables involved in the case at hand.

• Computer models

Most insurance carriers utilize either proprietary or purchased software programs that use a point system to calculate settlement values. Such systems utilize huge databases of information on a spectrum of losses and valuations to derive end monetary values that include the litigation experience history of attorneys representing claimants.

However, this approach still suffers the same deficiency of assigning somewhat arbitrary values and discount probabilities depending on the assessment of the individuals inputting the data. As in all such systems, the maxim of “garbage in – garbage out” is observed.

The common goal of the foregoing methods is to formulate a “best guess” of the amount a jury of peers would award if the case at hand were to proceed all the way to verdict.
These methods all have the shortcomings stated and fall short of predicting what happens in the minds of actual jurors.

In an effort to obtain that critical information the concept of conducting Mock Trial has emerged as has the concept of Focus Group Mediation.

• Mock trial

Mock trials can take many forms all the way from simple presentation of one side of the case to an assembly of mock jurors to practice summary trials. This process may also suffer the deficiency of the absence of a presentation from the “other side”, presentation of the “other side” by someone other than the “other side” (it is impossible for someone other than the opposing party to faithfully represent the other party’s case), or getting the other side to actually agree to a practice trial including the expense of a leased mock trial facility, and a person to act as a judge.

• Focus group mediation

Bring the jury into the mediation. Stop the game of second- guessing jury verdict valuation.

Why does mediation fail? A not so obvious explanation is that the parties enter into the mediation negotiation process with overconfidence and a “mind set” that is adversarial rather than conciliatory. Focus Group Mediation provides a service allowing for presentation of the entire story to a panel of up to 21 jurors, trial consultant facilitation and input, optional videography of the deliberations and/or confidential split panel evaluations with traditional caucus based mediations that follow. This process is designed to take the guesswork out of the valuation question in a mediation setting and can be designed to accommodate the preferences of parties without the higher expense of a mock trial.

Conclusion

Employment of the various available valuation techniques are highly dependent on the magnitude of the claims involved and range from affordable to “bet the company” justifications.  Choose the one(s) that fit the level of investment a case may warrant.

Edmund J. Sikorski Jr. has practiced law in Michigan for more than 45 years and serves as current co-chair of the Washtenaw County Bar Association ADR Section.