Trial-Bound Lawsuits: Predicting Litigation Settlement Failure
The Litigation Settlement Failure Index (LSF Index) is the world’s first legal metric to serve as a quantitative early-warning indicator of trial-bound disputes.
The Economic Fingerprint of Settlement Failure
Not all legal disputes are created equal. The subset of lawsuits that proceed to trial and adjudication are characteristically different from those that are resolved through settlement.
In order to reach a courtroom and obtain a judgment, disputes must first survive the settlement bargaining process and resist the economic forces that might ordinarily encourage or compel a negotiated solution.
Having been filtered along economic lines, it should come as no surprise that the disputes that fail to settle have a tell-tale economic fingerprint. The Litigation Settlement Failure Index is that fingerprint.
Litigation Settlement Failure Index
The Litigation Settlement Failure Index™ (LSF Index™) is the world’s first quantitative legal measurement to indicate the likelihood of a lawsuit proceeding all the way to trial and adjudication. Based on an advanced legal-economic model of dispute, the LSF Index assists in the early detection of lawsuits that will fail to resolve in a settlement agreement.
Using the LSF Index and related legal-analytic technologies, SettlementAnalytics now offers settlement failure risk analysis and prediction (SFRAP). For the first time, corporate litigants and law firms have a rigorous and quantitative early-warning indicator of settlement failures.
Trial Selection Theory
The majority of legal disputes end in settlement. So when negotiations fail and cases proceed to a court or arbitral hearing, it can often come as a surprise, and one that is not always welcome. However, research shows that there is a tell-tale fingerprint of impending settlement failure embedded in the economic landscape of trial-prone legal disputes.
The Index is based on ‘trial selection theory’, which is the branch of legal-economics that seeks to explain why some legal disputes fail to settle and how the selection process affects the resulting plaintiff win rate.
Two separate and competing theories of trial selection have been at the center of academic attention over the past 34 years: divergent expectations (DE) and asymmetric information (AI).
DE theory suggests that litigants fail to agree a settlement because of excessive mutual optimism about trial expectations, whereas AI theory suggests that cases fail to settle because of a high level of uncertainty in settlement decision making about opponent trial expectations. However, optimism and uncertainty often coexist and interact with each other in real-world legal disputes. Pairs of litigants can have varying degrees of relative mutual optimism or pessimism (‘optimism’). But they can also have uncertainty about their legal opponent (‘uncertainty’) – if only about their opponent’s reservation price.
Unified Trial Selection Model
To model the risk of settlement failure successfully, we need to understand how the forces of optimism and uncertainty combine and interact with each other. That is, these two main theories of trial selection must first be unified. To quantify their combined effect, SettlementAnalytics has developed a proprietary Unified Trial Selection Model™ (UTS Model™), which integrates DE and AI theories in a single coherent analytic framework.
But, while optimism and uncertainty are important considerations, in practice they are only two of many factors that can affect trial selection. A major contribution of UTS Model and the LSF Index is that they have been fully-specified to take account of the rich financial complexity of real-world legal conflict. UTS Model incorporates may factors including: costs, capital costs, time to trial, risk aversion, cost rules, hybrid and/or split contingent fee structures – to name a few.
To our knowledge, UTS Model represents the most advanced, factor-rich analysis of settlement failure risk ever undertaken.
Computation of LSF Index
Computation of the LSF Index begins by encoding all of the relevant information that is known and uncertain about a given legal dispute. This information is then input to the UTS Model, which can be used to calculate the Index at any point in time or on a forecast basis. LSF risk analysis effectively provides a structured and formalized process for converting expert knowledge and opinion about legal disputes into its implied theoretical probability of settlement failure.
An additional analytic process uses the LSF Index to make categorical predictions of trial or settlement.
Settlement Failure Prediction Services
The LSF Index and related advisory services offer litigants and law firms significant advantages. Forewarned being forearmed, the Index can enable legal practitioners to head off what may otherwise be an impending and certain trial or arbitration. By understanding the real extent of settlement failure risk and the economic factors contributing to it, litigants can then adopt proactive, calibrated trial-avoidance measures using a new legal-analytic process we call Settlement Risk Engineering™.
Law firms and litigation funding companies, on the other hand, can use the LSF Index as part of their case selection criteria and early-stage case assessment. Knowing whether a dispute is more settlement- or trial-prone can allow firms to optimize case selection and allocate resources more efficiently.
Insurance companies and other institutional litigants can use the LSF Index to rank order disputes according to their settlement risk. Used in this way, the Index represents an invaluable portfolio management tool.