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I am not a lawyer. I am a businessman. A businessman with more litigation
experience today than I could have ever imagined when I started my
company thirty years ago.
In 1983 I co-founded Sentex Systems, Inc. with my partner, Rick
Greenthal. Rick and I met while working at McKinsey & Company, the large
management consulting firm. After five years at McKinsey we decided to
pursue our dream of having our own company. We left McKinsey in 1982
and eventually started Sentex.
With a little luck, a lot of hard work, and the help of so many wonderful
employees, we built a great company. Sentex became a market leader in
the design and manufacture of access control equipment and provided
hundreds of good jobs. And it was very profitable. We had achieved
the American Dream. In 1997, after almost fifteen years of growing a
company we started from scratch, we sold Sentex to The Chamberlain
Group, a large U. S. conglomerate.
The Dream, however, was afflicted by a recurring nightmare through-
out much of the companys history. Beginning in 1989, Sentex was
involved in nonstop litigation that continued until early 2004, more than
six years after we sold the company. The litigation involved several
different cases, including a number of patent infringement cases, prod-
uct liability cases, a case involving a noncompete agreement and insur-
ance coverage cases. Cases were sometimes litigated simultaneously. The
litigation took place in both state and federal courts in the United States
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xii Winning the Litigation Money War
as well as in Canadian federal court. The patent cases in the U. S. resulted
in our appearance before the U. S. Court of Appeals for the Federal Circuit
on five separate occasions. We worked with no less than eight different
law firms.
As luck would have it, the responsibility for managing the litigation
and the lawyers fell to me. I was actively involved in all aspects of the
litigation to an extent I am certain aggravated our attorneys from time to
time. But it was a collaboration that worked. Litigation was not a fight we
sought, but it was one we became very good at. Most of the time we were
a defendant and most of the time we won or reached a very satisfactory
settlement. Almost always our insurance carrier paid for our defense and
the settlement or judgment when we did not win, sometimes unwillingly
and only as a result of our prevailing in coverage litigation.
This vitriolic odyssey was an experience I would just as soon have done
without. However, it taught me some invaluable lessons and left me with
some indelible impressions about our civil justice system and working
with attorneys. The first is that we were indeed the beneficiary of effective
representation. Nothing beats having a good lawyer and I was privileged
to work with many from several different firms. However, we were also
the beneficiary of insurance coverage (usually under a reservation of
rights where the carrier claims it has no duty to defend or indemnify its
insured). By retaining coverage counsel and being aggressive with our
carriers, we saved well over a million dollars in defense costs.
Far and away, the most important lesson I learned in my fifteen
years of litigation was that civil litigation is an economic or financial
endeavor to a much greater extent than it is a legal one. This dismaying
observation was constantly reinforced throughout our litigation
experience and was one reason I fought so hard for coverage. I cannot
overstate the importance of understanding this concept. If you do not,
litigation will eat you alive.
The most compelling legal cases will wither in the face of sufficient
financial pressure or leverage. The most important decisions you make in
litigation will not be legal ones, they will be economic ones. For example,
should you accept a settlement offer? Should you pull a product accused
of patent infringement off the market and redesign it to a noninfringing
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Prologue xiii
design for a later market introduction? Should you reassign a salesman,
who has been accused of violating a noncompete agreement, to a different
territory not covered by the agreement? Or should you just litigate?
Even the best attorneys are notoriously bad at making these decisions.
Based on my personal experience, they typically underestimate the
cost to litigate and overestimate the likelihood you will win. Other than
settlements, they too infrequently think about nonlitigating options or
provoke their clients to think about them. Even with settlement offers,
they typically do not use a very rigorous analytical approach to evaluating
the offer.
At some point in our litigation history, no doubt instigated by this
increasing awareness and frustration, my partner and I talked about a
technique we had learned in business school that seemed ideally suited
to evaluating a settlement offer we were considering at the time. It is
called a decision tree and it is used to make financial decisions under
uncertaintythe very essence of litigation. I went about constructing
what I thought was a reasonable decision tree which indicated we should
reject the settlement offer.
I called our attorneys to explain the technique and its results. They
said they were familiar with decision trees, but they did not believe
the technique was very useful in litigation applications because it was
virtually impossible to construct a tree that reflected all the twists and
turns litigation can take (although they did agree that the settlement
offer should be rejected).
I never revisited the topic until a few years after we sold our company
and I had some time on my hands to think about it again. While our
attorneys were being a bit dismissive of the technique, the problem they
raised was a serious one. Litigation is most often a complex sequence
of events, characterized by uncertainty at virtually every stage. Various
motions that can affect the outcome frequently precede a trial. The trial
itself is influenced by many different factors and events that occur during
the trial. The decision at trial might be appealed and the appeal could
have any number of different outcomes. As I demonstrate in the book,
the use of overly simplistic decision trees in litigation that necessarily
incorporate simplifying assumptions and gross overall estimates
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xiv Winning the Litigation Money War
produces very imprecise results. These imprecise results can frequently
lead to incorrect and very costly decisions. And constructing a sufficiently
detailed decision tree that includes even just a few of the events that can
affect the final outcome is difficult or impossible, especially at the outset
of a case.
Simplified decision trees that omit key events produce imprecise
results when used in litigation applications in two ways. First, they
produce very imprecise expected values of litigating and the extent of the
imprecision is very difficult to gauge. Second, they greatly understate the
risk of litigating. As a result, they can often be unreliable, even misleading,
when used to make settlement decisions.
Much has been written about the use of decision trees in litigation.
But my research shows that no one has a solution to this problem. When
decision trees are used in litigation they are usually over simplified,
ignoring the numerous events that can occur in litigation and affect the
outcome. A typical decision tree might include just two events, winning
the case and losing the case, perhaps at most showing the possibility of a
few different judgments and their probability of occurrence.
Recognizing the shortcomings of using over simplified decision
trees, some practitioners have created generalized decision trees for
litigation that are exceedingly complex and difficult to use. And these
decision trees may bear no resemblance to the actual litigation scenario
that unfolds. Moreover, they require a number of highly speculative
probability and dollar estimates for events that may not even occur.
Even these detailed decision trees necessarily omit events that can
significantly affect the outcome. For example, it is impossible for them to
include in any meaningful way the likelihood of an appeal and any of its
possible outcomes before any issues that would give rise to the appeal
have materialized. As a result, even these detailed decision trees produce
unreliable expected values and risk assessments.
The shortcomings of both simplified decision trees and their more
complicated counterparts in litigation may explain the limited reliance
some attorneys place on the technique. They recognize that it is virtually
impossible to construct a decision tree that accurately depicts all the
consequential events that may occur, let alone assign probability and
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dollar estimates to them. As a result, whether or not attorneys use the
technique, they may very well be giving their clients bad advice regarding
settlement decisions.
The solution, as I describe in detail in the book, is to modify how
decision trees are typically used and, in doing so, make them ideally
suited for litigation applications. The methodology developed in the book
avoids the inaccuracies inherent in using a simplified decision tree and
the complications involved in trying to construct a sufficiently detailed
decision tree. It handles all the key events in litigation that can affect the
outcome. For example, it specifically deals with dispositive pretrial events
(such as summary judgment motions), the trial, an appeal, any outcome
of an appeal (including all variety of remands), and any subsequent action
required by the trial court.
This new methodology results in very precise expected values of
litigating a case for both a plaintiff and defendant. Their precision
makes these expected values reliable decision making benchmarks. The
methodology also approaches risk assessment in a completely new way.
As a result, it provides a true and meaningful quantitative measure of the
risk involved in litigating to both parties. The methodology also provides
a straightforward way to deal with the opportunity costs of litigating,
which can be considerable, when making a decision.
The methodology is sufficiently precise and reliable to make a decision
with a high degree of confidence even when the decision to accept or
reject the settlement offer is a close call. Moreover, the methodology can
be used at any point in the case, in fact even before litigation commences.
Thus, it can be used to evaluate settlement opportunities early on before
large sums of money are spent on litigating. It also allows a prospective
defendant to evaluate other courses of action, before a lawsuit is filed, that
might avoid litigation altogether.
Despite its power, the methodology is very easy to use, even for those
who are mathematics averse. First, it is intuitive and easy to understand.
The mathematical and conceptual rigor that underlies the methodology
is largely transparent to the user. Even so, the math used to develop the
methodology is very basic and easy to understand. Second, to use the
methodology just a few basic probability and dollar estimates have to be
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xvi Winning the Litigation Money War
made. And these estimates are for specific events, not gross overall esti-
mates for litigating a case, further simplifying the process and enhancing
its accuracy. Finally, as will become clear as the methodology is described,
it is perfectly suited to a spreadsheet program. A spreadsheet program
written in Microsoft EXCEL is available at the website, litigateorsettle.com.
No decision trees have to be drawn and no calculations have to be made.
The user simply enters the few estimates required and then the program
calculates the expected values for litigating automatically. Performing
sensitivity analysis by changing the values of the estimates is therefore
very fast and easy. A summary description of the methodology and the use
of the spreadsheet is included as Appendix 1 and will be a handy reference
when using the spreadsheet.
Because the spreadsheet program allows a litigant to quickly calculate
expected values of litigating under different assumptions, it will be very
useful in settlement negotiations. During a settlement conference, as
discussions progress and viewpoints moderate, a litigant can calculate
new expected values for litigating on the spot and determine a new range
of acceptable settlement offers. Moreover, a litigant can use the program
to calculate expected values for the opposition. Thus, a litigant can get a
feel for their adversarys bargaining position as well as their own.
In the course of developing the methodology, it became clear to me
that the methodology and the mathematical concepts that were used
had a much wider application than just evaluating settlement offers and
other litigation avoidance measures.
Because the methodology reliably prices litigating a
case to a litigant, at any point in the case, and provides
a true measure of the risk involved, it has far reaching
implications for virtually every aspect of civil litigation.
This realization encouraged me to examine the use of the methodology
in civil litigation more broadly. This further effort produced additional
results, including how settlement conferences could be changed to make
them more productive and worthwhile, an approach that attorneys who
work on a contingency fee arrangement can use to maximize their returns
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from litigation and manage their risk, and how the methodology can be
used to formulate litigation strategy and enhance case management. A
new approach to reforming the U.S. civil justice system also emerged.
The intended audience for this book is anyone who is currently
involved in civil litigation or could be in the future, whether they are
an attorney or a client, or anyone who has a general interest in civil
litigation. A reader need not have a legal background. Most of the legal
terminology and concepts referred to in the book are relatively simple
and are explained so that a layperson will understand them. In any event,
having an intimate familiarity with them is unnecessary to understanding
the methodology and its various applications described in the book.
The book should be of particular interest to those who are in the
business of litigating and who assess settlement opportunities as a way
of life. This group would include corporate attorneys, law firms that take
cases on a contingency fee arrangement, and insurance companies. It
should be of special interest to anyone who has their own money at risk
in litigation. In todays litigious business climate, business owners will
find it indispensable.

* * *
This book is a management book about the law. It describes a powerful
new methodology for making financial and strategic decisions in civil
litigation. The methodology quantifies the financial value of litigating to
a plaintiff and the financial exposure of litigating to a defendant at any
point in litigation, even before a lawsuit is filed. Thus, it can be used to
compare litigating a case to a settlement offer or any other alternative
course of action to litigating, allowing a litigant or prospective litigant to
make what are arguably the most important decisions in litigation. It can
also be used to guide litigation and settlement strategy and be a vehicle
for a more productive collaboration between attorney and client. Finally,
it forces a financial discipline that might otherwise be absent or obscured
by the vitriol of litigation and the inertia of the legal battle. Ultimately,
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xviii Winning the Litigation Money War
the methodology will empower clients and help their attorneys to better
serve them.
If you have ever been a party in litigation, you know how unpleasant
and nerve-racking the experience can be, especially if your own money
was at risk. You may have felt like you were at war, maybe even at times
with your own attorneys. And you may have felt like you were losing
the money war even if you were winning the legal one. If you in fact lost
the case, the financial consequences were probably very unpleasant.
As a defendant you may have had to pay a judgment that put a serious
dent in your net worth, in addition to what you paid for your defense.
As a plaintiff you may have passed on what was, in retrospect, a very
attractive settlement offer. The methodology described in the book allows
you to optimize your financial outcome in litigation and thus win, or at
least survive, the litigation money war. It is a dispassionate, quantitative
framework for navigating financially and strategically through litigation
without losing your wayor your shirt.
The law is reason, free from passion
Aristotle
Send lawyers, guns and money
The shit has hit the fan
Lawyers, Guns, and Money
by Warren Zevon
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