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Understanding the Use of Decision Trees in MediationA useful tool in preparing for mediation or in a mediation itself is a decision tree. Decision trees, also known as flow charts, help attorneys to make decisions early in the mediation process and plan for potential outcomes.

Long used in business and taught in business schools, a decision tree such as the one at this link, illustrates potential outcomes with probabilities and estimated costs of each result.

The decision tree facilitates understanding the issues and possible results in a litigation. It creates a model and applies mathematical probabilities to each outcome. Even though each case is unique, the expected value can be thought of as the average result of litigating 100 identical cases. The average award then can be used to evaluate settlement offers.

If the average award was just under $300,000 for example, with greatest value at $1,000,000 and the least at zero, a settlement demand of $500,000 would likely be rejected. That is unless a party is unable to bear the risk of litigating or is motivated to avoid a significant possibility of a loss in the $500,000 to $1,000,000 range.

It should also be kept in mind that as the probabilities of outcomes vary so does the expected value of the outcome. For example, if the likelihood of a Daubert motion being granted increases from zero to 100 percent, the expected value of litigating would significantly increase as well. This can be shown in a related graph called a sensitivity analysis.

The likelihoods applied to the varied outcomes can greatly influence the valuation of a case. These should be evaluated and explained to the client in advance of any mediation. Counsel should avoid the situation where a mediator – and some do – starts to use a decision tree analysis in mediation where the client has not been prepared.

For more information on mediation and arbitration of intellectual property matters, contact the attorneys of Panitch Schwarze at 888-291-5676.

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