The ability to put a realistic price tag on a case is probably one of the most critical skills a lawyer has. At the same time, it is one of the most difficult tasks for the lawyer and one of the most painful for the client.
The simplest way to evaluate a case is to treat it as a simple investment. Assume that Fred claims that he is owed $50,000 by Bob. If he were to take the matter all the way through trial, he will spend $20,000 in attorney’s fees and expenses, leaving him with a net gain of $30,000 – a very respectable return on his investment of $20,000.
Unfortunately, Fred has made several errors in evaluating his case. First, he assumed that he will definitely win his case. Second, he assumed that he will definitely receive everything he asked for. And, third, he forgot to account for the time that the case will require.
A complete valuation of a case is a mix of probabilities, law, and finance, along with a healthy dose of instinct thrown in for flavor.
Instead of Fred’s initial, simple evaluation, a proper valuation of his case would look more like this:
Best Expected Recovery (“Best Day in Court”) x Probability of Recovery + Worst Expected Recovery (“Worst Day in Court”) x Probability of Recovery = “Expected Recovery”
Present Value (Expected Recovery) – Expected Fees and Expenses = Case Value
Fred’s attorney tells him that there is a 30% chance he gets $50,000, but a 70% chance he gets nothing (which are, in reality, good odds at trial). His Expected Recovery, rather than $50,000 is actually $15,000.
Fred’s attorney also tells him that the case will probably take 3 years to complete – meaning that $15,000 recovery is only worth about $13,043 today, assuming a 5% interest rate. In light of the expected fees of $20,000, Fred stands to lose $7,000 on the matter.
This formula changes with every new piece of information and at every stage of the lawsuit. Other factors such as non-monetary relief, the likelihood of punitive damages or attorney fees, and other potential uses for the funds spent on the lawsuit also affect this calculation. It is helpful for evaluating and valuating a case, but is merely a tool – which means it is only as effective as the person using it.
Even more important than the number that comes out of the formula is the logic behind it – the legal system is only an approximation of true justice. Even if Fred is ‘owed’ $50,000, even if it is ‘just’ or ‘right’ that he gets paid $50,000, there is still a good chance that he doesn’t walk away with that $50,000.
One of your attorney’s most critical duties is to evaluate your case, considering what may happen, not necessarily what should happen. At Einterz & Einterz we apply this formula and these lessons to be sure that we do not waste our client’s time or money taking a case through court that has little or no chance of achieving our client’s objectives.