Lawsuit Settlement Calculator

Most lawsuits filed in the United States never go to any sort of trial but are instead settled out of court through the agreement of the parties. An issue frequently arising in the resolution of these disputes is the appropriate amount of the settlement. This Demonstration provides attorneys, litigants, mediators, judges, and scholars a tool by which to rationally bound appropriate settlement values.
There are five sets of parameters. (1) Scale: Using the slider on the top, you control the "scale" of the case—the largest plausible judgment that might be entered against the defendant at a trial. You do not have to enter this or any other number in this Demonstration exactly; just approximate. (2) Litigation costs: You set the attorney's fees (and other litigation costs) to be incurred by plaintiff and defendant as a fraction of that largest judgment. (3) Risk aversion: You set the risk aversion levels of the plaintiff and defendant. A higher level of risk aversion will generally work to the disadvantage of a party. (4) Minimum wealth: You set the minimum wealth likely to be held by a party following litigation as a fraction of the maximum judgment. The idea is that even bankruptcy does not really set people's wealth to zero or less; they are left with some positive wealth. (5) Fee shifting: You set the legal rule as to whether the party that "prevails" in the lawsuit is entitled to have their attorney's fees reimbursed by the other side. You determine the meaning of "prevails" by setting the "plaintiff victory threshold" slider. Moving that slider to 0.4, for example, and setting the fee shifting control to "loser pays all" means that if the plaintiff recovers at least 40% of the maximum possible judgment, the defendant will be liable for all attorney's fees; otherwise, the plaintiff will be responsible for all attorney's fees. (6) Damage distribution: You use the locators on the top right to reflect the likelihood of various judgments being entered against the defendant. The graphic is cumulative; thus, moving a point to {750000, 0.7} means that there is a 70% chance that any judgment will be less than or equal to $750,000. Attorneys or litigants seldom know these figures with any exactitude, but the Demonstration provides useful information on settlement bounds even if rough approximations are used.
The Demonstration responds with (1) a grid that shows the plausible bounds for settlement as well as the midpoint of the settlement region; and (2) a graphic representation of the opportunities for settlement in which the translucent red zone represents offers the plaintiff prefers to trial, the translucent blue zone represents offers the defendant prefers to trial, and any purple zone represents a "settlement zone" of offers that both parties prefer to trial. Various tooltips enrich this Demonstration and provide additional information on the controls and displays.


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Snapshot 1: the model can be used for very small disputes
Snapshot 2: the model can be used for large disputes
Snapshot 3: changing the fee shifting rules has a large effect on the settlement bounds and the settlement midpoint
Snapshot 4: a scenario in which the settlement midpoint is $233,586
Snapshot 5: increasing the plaintiff's risk aversion relative to Snapshot 4 reduces the settlement midpoint to $198,700
Snapshot 6: increasing the defendant's risk aversion relative to Snapshot 4 increases the settlement midpoint to $514,596
Snapshot 7: extremely protective bankruptcy laws (implemented by increasing the "defendant's min. wealth" parameter to 0.96) slightly decrease the settlement midpoint relative to Snapshot 4
The scaling slider on the top left of the Demonstration employs a logarithmic scale to permit this Demonstration to be used with some precision over a large domain of lawsuits.
The parties are assumed to have utility functions exhibiting constant relative risk aversion. They are normalized such that their utility would be one if their wealth was equal to the amount of the largest possible judgment and their utility would be two if their wealth was equal to twice the amount of the largest possible judgment.
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