Tuesday, April 29, 2008

E=MC2 For In-House Counsel

Many disciplines often have a formula that describes a profound relationship in the discipline. These formulas are often very simple, but that does not detract from the fact that they describe a relationship that is so profound it finds many applications in the discipline that might otherwise be missed or incapable of explanation. In quantum mechanics it is Einstein’s statement of relativity that energy is equal to mass times the speed of light squared. In DC electricity it is I= E/R, current in amperes is equal to electro motive force in volts divided by resistance in ohms.

You may be surprised to learn that there is an equally profound formula available to in-house counsel that expresses such a simple, fundamental principle that once explained it seems trite. However, looks are deceiving. The value of the principle can not, in my opinion, be under estimated. The formula’s value is not in that expresses a relationship that many did not perceive as in Einstein’s statement of relativity, but it forces one to think about relationships and thus take a more critical structured look at one’s decision making than might otherwise have been the case.

The uses of the formula, and the underlying logic, or perhaps illogic it reveals in one’s decision making or policy implementation can be quite dramatic, and at times embarrassing. I must warn those who have no taste for discovering flaws in your analysis or hidden motives in one’s decision process-- STOP READING NOW. Knowledge of the formula can create discomfort for many—and for those who viewed the in-house career as more comfortable and less demanding than practice as out side counsel, this formula has the potential of changing that perception.

I do not know who first devised this formula—it was not me. My acquisition of knowledge of it is in my dim past, and I associate it with Professor Marc Galanter, whose creative, economic analysis of the profession is something I will address in future blogs. I think I may have added to the formula ever so slightly, by adding the subscript “v” to the TC value.

Ok, you have been patient; here it is SV=DO + TCv

What does it mean—SV is the settlement value of a case. DO is the value of the outcome of litigation discounted to present value for risk and TCv are variable transaction cost—that is a euphemism for legal fees. Variable means their variation can be substantially manipulated by the behavior of the opposing party.

Now, start thinking about how you can use this formula and share some of your ideas.

- Larry Salibra
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1 comment:

Anonymous said...

This formula appears to be simple and the logic behind it is compelling, but its application in the real world is something of a total crap-shoot. The problem with the formula is that at least one of its elements (DO) requires knowledge of a future event, i.e. the "outcome". How does one caluculate the discount value of a future outcome.
This is a guestimate of a future range. Same with the transaction costs. You have two ranges of values that have various ranges of probability associated with them. The "calculus" for determining a given Settlement Value is strikingly more complex than it appears and decidely of less utility absent a method of determining probabalistic outcomes. The formula is obvious in its retrospective application. We can all recognize what a case "should have" settled for after the verdict is in. That is, any value lower than the verdict and the litigation costs. --MDK