HOW FAR APART ARE WE? (Determining Your Odds of Winning – Las Vegas Style)

Every experienced litigator has had the experience of winning a case and nevertheless facing an unhappy client.  More often than not, at the end of a lawsuit, neither side is happy with the outcome.  As a general rule, in this country, attorneys’ fees are not recoverable by the prevailing party. Thus, after taking into consideration attorneys’ fees and other costs of litigation, the party making the claim believes he received less than a full recovery, and the losing party is convinced that he lost too much.  Whether pursuing or defending a lawsuit, a client will typically spend an inordinate amount of money, as well as time that otherwise could be put to better use doing what the client should be doing instead – running the business, finding new customers, and the like.  In addition to the dollar cost, litigation is a stressful process, which takes an emotional toll on everyone involved.  These observations have convinced the authors that any worthwhile attorney who has his or her client’s best interests in mind will advise the client early on when a commercial dispute arises that litigation is seldom the best way to resolve commercial disputes. Volume 12, Issue 1

The logical way to avoid these problems is to explore settlement possibilities as early in the process as possible.  In order to reach a point where the parties can negotiate a reasonable settlement, they need to be able to evaluate, on a rational basis, the value of the claim.  One statistical approach that can be utilized to help the parties do that, with the ultimate goal of resolving the dispute without expending unnecessary resources, is a “fair game” analysis.1

Begin with the basic statistical premise that a “fair game” is one in which the odds of winning multiplied by the amount to be won is equal to the odds of losing multiplied by the amount to be lost.  Stated as a formula, the premise would look like this:

(odds of winning) x (amount to be won) = (odds of losing) x (amount to be lost)

To illustrate the concept, think of a hypothetical roulette wheel with 100 pockets, 50 of which are red and 50 of which are black, and with no numbers.  You can bet any amount on either red or black, and if you pick the correct color, you will win twice the amount of your bet back.  Of course, if you lose, you lose the amount of your bet.  So if you were to bet $2.00 on red, and the ball lands in a red pocket, you would win $4.00.  If, on the other hand, you bet on black and the ball lands in a red pocket, you lose your $2.00.  Because there is the same number of red and black pockets, the odds of winning (and losing) are 50%.  Plugging these numbers into the above equation would look like this:

(odds of winning) x (amount to be won) = (odds of losing) x (amount to be lost)
||                    ||                ||                    ||
(50%)       x       ($2.00)      =      (50%)       x       ($2.00)

Since both sides of the equation are equal, statistically speaking, this is a “fair game.”

Suppose, on the other hand, that you are dealing with a roulette wheel which has 49 red pockets, 49 black pockets, and two green pockets.  The casino wins on anything landing in the green pocket.  A winning $2.00 bet on either red or black still returns $2.00, but the odds have changed slightly.  In this case, the equation looks like this:

(odds of winning) x (amount to be won) = (odds of losing) x (amount to be lost)
||                    ||                ||                    ||
(49%)       x       ($2.00)      =      (51%)       x       ($2.00)

Since the results of the two sides of the equation are not equal, this is not a “fair game.”  As everyone knows, casino operators have no interest in a “fair game”, so they build their advantage by adding the green pockets, which structures the game in their favor over the player.

The same concept can be applied to the process of evaluating the value of a disputed claim.  However, in that context, it is somewhat more complicated, since there may be several possible outcomes if the aggrieved party (the plaintiff) takes the case to trial.  For example, the plaintiff may recover the entire amount of damages sought, recover something less than the full amount, or recover nothing.  Under a “fair game” analysis, the plaintiff’s attorney, knowing the various strengths and weaknesses of its client’s case and drawing from experience, would estimate the odds (as a percentage) of the occurrence of each of these outcomes.  Using the “fair game” equation, the anticipated amounts to be won are then multiplied by the odds of winning under each of these possible outcomes.  This is illustrated by the following example:

Possible Outcomes for Plaintiff Odds2 x Amount to be Won = Result
Best Result 20% x $500,000 = $100,000
Most Likely Result 60% x $200,000 = $120,000
Very Poor Result 20% x $20,000 = $4,000
Total 100% Total $224,000 (Weighted Average)

The amounts in the far right hand column are then added together.  The resulting total ($224,000) is the weighted average of all of the possible outcomes, and is a fair assessment, from the plaintiff’s perspective, of the value of the claim, taking into account both the magnitude of the anticipated recovery in each instance and the expected odds of the occurrence of the possible outcomes.

The defendant’s attorney can use the same analysis to estimate the value of the plaintiff’s claim to determine the defendant’s risk.  The following will illustrate the case from the defendant’s point of view:

Possible Outcomes for Defendant Odds x Amount to be Lost = Result
Big Loss 20% x $500,000 = $100,000
Most Likely Result 65% x $160,000 = $104,000
Big Win 15% x $0 = $0
Total 100% Total $204,000 (Weighted Average)

In this example, from the defendant’s perspective, the value of the plaintiff’s claim is only $204,000.  Even though the parties have widely divergent views of the case, the values assigned by the parties to the claim are only $20,000 apart.  If each party performs the calculations realistically, the difference between their respective results can provide a reasonable range within which the parties may be willing to settle the case and thus avoid additional litigation costs, which could easily exceed $20,000.

The importance of utilizing experienced counsel to establish realistic dollar amounts and the odds of winning (or losing, as the case may be) cannot be overemphasized.  Very often, clients include an emotional element in assessing both the likelihood of success and the value of its case.

It is almost always in the client’s best interests to fully explore settlement before investing time, money, and aggravation in a full-blown lawsuit.  The “fair game” analysis provides a road map to arriving at a rational appraisal of the case, which in turn results in an increased likelihood of reaching a result the parties can agree to, and a substantial reduction in the cost of reaching that result.

About the Authors

The authors are practicing attorneys with the law firm of Strauss & Troy, located in Cincinnati, Ohio.  Ms. Young practices in the areas of general business, corporate law, commercial transactions, commercial litigation, and intellectual property.  Mr. Stachler’s practice includes complex commercial litigation and personal injury matters.  Mr. Melville concentrates his practice in the areas of litigation, contracts and restrictive covenants, business torts, including manufacturer’s representative and distributor matters, and protecting ownership of intellectual property.  For questions, the authors can be reached by telephone at Strauss & Troy at (513) 621-2120 or by email: Ms. Young: smyoung@strausstroy.com; Mr. Stachler: tlstachler@strausstroy.com; and Mr. Melville: chmelville@strausstroy.com.
1Another statistical technique known as the “Lloyd’s of London” approach, which was developed by the Honorable Hubert Will, a United States District Judge in Chicago shortly after World War II, has been used by the Honorable S. Arthur Spiegel, Senior District Judge for the United States District Court for the Southern District of Ohio (Western Division).  Judge Spiegel has used the Lloyd’s of London approach successfully for more than 30 years in order to facilitate settlement between the parties.
2Most experienced litigators believe that the uncertainties of a trial are such that a plaintiff never has greater than an 80% chance of winning, and a defendant always has at least a 20% chance of winning.

This entry was posted in Litigation | Dispute Resolution, Published Articles, September, 2010