Firm A is facing a possible law suit by legal firm B. Firm B represents the fami
ID: 336445 • Letter: F
Question
Firm A is facing a possible law suit by legal firm B. Firm B represents the family of Mr. Smith, who was killed in a motel fire (allegedly caused by faulty wiring). Firm A was the builder of the motel. Firm A has asked its legal team to estimate the likely jury award it will be ordered to pay in court. Expert legal counsel anticipates three possible court outcomes: awards of $1,000,000, $600,000, or $o, with probabilities o.2, 0.5, and o.3, respectively. In addition to any awards, firm A's legal expenses associated with fighting the court case are estimated to be $100,00o Firm A also has considered the alternative of entering out-of-court settlement negotiations with firm B. Based on the assessments of its lawyers, A envisions the other side holding out for one of two settlement amounts: s900,000 (a high amount) or $400,00o (a much more reasonable amount). Each demand is considered equally likely. If presented with one of these settlement demands, firm A is free to accept it (in which case firm B agrees to waive any future right to sue) or reject it and take its chances in court. The legal cost of pursuing a settlement (whether or not one is reached) is $50,000. Determine the settlement or litigation strategy that minimizes firm A's expected total cost (any payment plus legal fees)Explanation / Answer
Case - 1 - In court
Expected payout in this case is 1,000,000*0.2 + 6,00,000*0.5 + 0*0.3 (Probablity*payout)
Expected payout = 5,00,000
Lawyer Fees = 1,00,000
Total expense for Firm A = 6,00,000
Case - 2 - Out of court
Expected payout = 9,00,000*0.5 + 4,00,000*05
Or expected payout = 6,50,000
Legal cost = 50,000
Total cost = 6,50,000+50,000 = 7,00,000
Since expected cost of out of court settlement is more than in court settlement, Firm A should go to court.
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