From John DeGroote’s Settlement Perspectives
A .pdf version of this advanced decision tree is available here.
Decision Tree Analysis isn’t new to litigation, and it isn’t new to this site either — we discussed the basics and more a few months ago. But when you’re ready for an advanced take on the subject, where do you turn? All roads lead to Marc B. Victor, Esq., who pioneered the application of decision tree analysis to litigation in the 1970s.
Through his company, Litigation Risk Analysis, Inc., Marc has taught decision tree analysis in the litigation context to over 10,000 senior legal professionals, some of whom no doubt had a hand in the American College of Civil Trial Mediators awarding Marc their Education Award of Excellence in 2003. Marc was kind enough to guide me a bit when we began our series on decision trees a few months ago, and I have wanted to flesh out some of the details with him since those initial discussions. The Q&A below is the result of our recent follow-up interview.
It was truly fortuitous. I was a joint JD/MBA student at Stanford in the mid-1970s and had a summer job for a company bringing an antitrust suit against IBM. I happened to have lunch with one of our lawyers the same day the president had asked him if $10 million would be a reasonable settlement. As our lawyer walked me through what might happen if we went to trial — “if the judge rules for us on issue 1, and the jury then finds for us on issues 2 and 3, and then believes our expert on issues 4 and 5, we’ll win a lot of money; on the other hand, if . . .” — my Decision Analysis course at Stanford came to mind. I started sketching the tree that fit his description of the twists and turns the case could take. Over the next few weeks, we worked with outside counsel to finish the evaluation, presented the tree and the results to the president, and the matter settled soon thereafter.
I believe there are a few ways: (i) to be sure the lawyers have a clearer understanding of the key issues, uncertainties and exposure presented by a case; (ii) to gain settlement authority from the client; (iii) to convince the other side to accept a given settlement; (iv) to persuade a mediator or settlement conference judge of the rationale of their position; and (v) to plan a cost-effective litigation strategy.
I have been asked to present decision trees as an advocate in mediation, and it certainly helps show the mediator that my client and I have a reasoned basis for our settlement position. I have also been retained by mediators on several occasions in large cases to help the mediation process by getting the parties to agree on the appropriate decision trees, discuss arguments, and assess probabilities and verdict ranges. These cases have typically involved hundreds of millions of dollars, and by way of example include the $1.1 billion class action settlement of the Microsoft antitrust claims in California a few years ago.
The first is making just a one-node “we win overall/we lose overall” tree, and another is failing to do thorough “Lists of Reasons” before coming up with probabilities in the case.
Some people limit their tree to a simple “we win/we lose,” despite the fact that there may be multiple underlying questions the jury or judge will deal with that will influence the ultimate outcome of the case — evidentiary rulings, alternative causes of action, potential defenses, and other uncertainties. The parties and their lawyers would end up with a better evaluation of their overall chances of winning and losing if they would model these underlying issues and influences in a larger tree and then use probability arithmetic to arrive at the overall result. [Editor’s Note: More on the process can be found in Marc’s article, “Interpreting a Decision Tree Analysis of a Lawsuit,” available on the articles page at litigationrisk.com.]
Too many novice users of decision trees jump immediately from building the tree to filling in their probabilities. But a probability that’s thrown onto the tree without first thinking rigorously about what the judge or jury will be weighing at trial won’t be as good as one made after doing so. The “List of Reasons” is a summary of factors — pro and con — that the judge or jury will consider in deciding who should win each of the uncertainties represented on the decision tree. This might be information on hand, such as key documents already in the file, but it might also include facts that could be uncovered in discovery, as well as witness strength, sympathy of the parties, and more. [Editor’s Note: For more on Lists of Reasons, see pages 12-8 to 12-9 in “Evaluating Legal Risks and Costs with Decision Tree Analysis,” which is reprinted available on the articles page at litigationrisk.com; it also appears in the ACC’s Successful Partnering Between Inside and Outside Counsel.]
The decision tree should be updated whenever there are new developments that would cause a significant change either to the structure of the tree itself (such as when a new cause of action is plead) or to the probabilities (because of what’s learned as discovery progresses, for example). In addition, it’s usually a good idea to review and update your analysis prior to making a settlement decision or prior to a mediation.
Those are almost always privileged and highly confidential, but the one on page 2 of my paper “Interpreting a Decision Tree Analysis of a Lawsuit” is a good start. [Editor’s note: This article is available here and a .pdf of that analysis is available on Settlement Perspectives by clicking here.]
As users become more advanced, I often see them putting multiple causes of action in separate trees when they should be in one tree or, if they know they should be in one tree, linking the causes of action together incorrectly. Either of these mistakes will cause the calculation of case value to be wrong. I also sometimes see them making trees more complicated — more academic — than they should be, forgetting that an effective decision tree should mirror the more streamlined, simpler approach juries often take when presented with complicated cases.
I use TreeAge Pro exclusively. It was co-founded by Morris Raker, a Boston lawyer, after attending one of my seminars in the 1980s, and it can ship with a manual I wrote for litigators. [Editor’s Note: Additional providers of decision analysis software are listed within the comments to our first post on decision tree analysis in litigation.]
Come back next week for more of our interview of Marc Victor. You’ll be glad you did.