Litigation Funding Analytics
Litigation funding companies, perhaps more than any other interested party in a dispute, can benefit from our approach to the analysis of legal claims. To a litigation funder, a legal claim is much more an economic vehicle than it is about restitution, justice or the adjudicatory process. Whereas litigants may be forgiven for sometimes confusing the two, the third party funding of disputes is, in the main, an investment. SettlementAnalytics adds value to this view of litigation because fundamentally, our models, analytic processes and software allow an asset management perspective of legal claims.
The Dyad of Trial and Settlement
Whereas litigants of all stripes may on occasion become overly focused on their ‘day in court’ and the economics of trial alone, third party funding companies understand that their rate of return from a lawsuit will turn as much, and typically more, on the potential for settlement. Funding companies, then, rightly look at their potential return across the dyad of both trial and settlement, and understanding the contribution of settlement and its likelihood are vital considerations.
This view of litigation, as an investment driven by value contributions from trial and settlement, characterises our approach. The chart above (just one of the 32 charts in our game theory analytics platform) illustrates how our models examine the probabilistic ‘wealth components’ of a legal claim — having regard to its different modes of resolution.
The Limitations of Litigation Analysis
However, while litigants and their funding partners will make an active consideration of their potential gains from settlement, the traditional analytic methods applied to litigation are typically limited to the arithmetic of trial outcomes and a qualitative consideration of settlement. This can have the effect of placing a heavy reliance on guesswork when it comes to settlement — a mode of resolution which typically accounts for more than 90% of the asset value of the claim. It can also make it difficult to properly account for the contingent nature of legal claims, the relationship between settlement policy and the probability of trial, and the value discounting effect of uncertainty.
Using a game theoretic framework, SettlementAnalytics addresses these limitations, allowing funding companies to explore the whole value of the claim asset more completely and more accurately. Using a proprietary economic model of dispute which combines game theory, information economics and Monte Carlo simulation, our analytics platform enables litigation funders to look at the potential for settlement quantitatively and explicitly — addressing both its theoretical probability and most probable price level.
Overall, our models and software illustrate vividly how the financial result of any lawsuit is as critically dependent on its ‘economic landscape’ as it is on the law, legal argument and precedent.
Controlling for Risk
Yet, as important as it is for litigation funding companies to examine potential gains from both trial and settlement, it is also vital to assess the impact of risk attached to projected cash flows. Using conventional methods, this has been a difficult task because trial risk is not the same as claim risk and the financial dispersion associated trial is a much more complex animal than it at first appears. In addition to its direct contribution to the risk of going to court, it has complex secondary effects on settlement optimisation, the value of claims as whole and the settlement bargaining process as a result.
Legal Dynamics Chart
Pricing Trial Risk - Award (Df)
Award Uncertainty ±: 100 $M
Litigants and funding companies recognise this complex contribution of trial risk intuitively, but historically, it has been difficult to measure, and therefore difficult to know how it will affect rates of return. A significant advantage of our game theoretic approach is its ability to quantify and visualise the complete impact of trial uncertainty on the entire claim.
Using the game theoretic framework pioneered by SettlementAnalytics, we are able to derive and demonstrate the value erosion caused by trial risk. Our interactive Legal Dynamics™ app [right] illustrates this sensitivity of claim value to trial risk, and shows how settlement decision-making is also affected.
Using the blue control button at the bottom of the chart, the reader can adjust the input level of trial uncertainty about the damages award and examine its impact on the litigant’s wealth outcomes across a range of different settlement offers. Our game theory litigation analytics platform (OptiSettle™) also provides graphic illustration of this economic relationship between risk and return.
Advanced Game Theory Models of Dispute
Fundamentally our approach draws upon advanced economic models of conflict in order to value legal claims in their proper bilateral habitat − having regard to the expectations of the disputants and their potential for interaction. Our models and software differ from conventional litigation analysis by going beyond the calculation of trial values to include consideration of the following key issues:
- the contingency that is inherent to legal assets and liabilities
- the discounting effect of uncertainty on settlement bargaining and claim valuation
- the strategic interaction of the disputants
- the financial dispersion associated with lawsuit economics
The result of our approach is a more realistic basis for claim valuation and sound quantitative guidance on questions of settlement policy and settlement probability. While, as a matter of law, these may be questions for each litigant, the ability to anticipate how, when and where disputes will find a resolution can be an invaluable aid to funding companies as they attempt to estimate the merits of each investment opportunity. Overall, then, our approach allows litigation funding companies to examine legal claims in an asset and liability management framework.
Litigation Funding Analytics
We believe that our software represents the first commercially available offering in the game theory analysis of litigation. But while our models are proprietary, our work has been based, in part, on ideas and theories that have been academic orthodoxy for over 25 years. In addition to model development and advancement, one of our significant contributions to this area has been to make game theoretic models financially complete, ‘production ready’ and easily accessible.
To learn more about our software applications, click here.
To learn more about our models and methods, please click here.
To see our range of consulting services, please click here.
 The analysis presented in the Litigation Dynamics app illustrates the impact of risk from a defendant’s perspective. We will shortly be adding the same case study from a claimant’s perspective. To look at other interactive Legal Dynamics charts, visit our Dynamics Library by clicking here.
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