Expected Value Arbitration - A proposed new approach to arbitration rulings

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LitigationRisk Management

Institute

Bruce Beron, Ph.D., President

Expected Value Arbitration

Joshua Davis, Professor of Law, University Of San Francisco School Of Law


Institute© Bruce Beron 2014 EVA Presentation CPR 2

There are real benefits and advantages to adopting a rational basis for arbitration awards.

The root word of “arbitration” is probably “arbitrary.”We propose Expected Value Arbitration*

The award is based on the expected value of a decision tree risk analysis evaluation of the case.The analysis reflects the arbitrator’s judgment about the critical legal and factual issues and the likelihood of their outcomes at a trial.

*Joshua P. Davis, Expected Value Arbitration, 57 Okla.ﾊL. Rev. 47 (2004)



Expected Value Arbitration (EVA) will benefit both sides in the dispute.

EVA lowers the risk of arbitration for plaintiff and defendant.No chance of a winner take all if both sides have some meritVery unlikely to have extreme “runaway jury/arbitrator” outcomes

EVA is a transparent process.Less arbitrary and therefore less likely to engender dissatisfactionResults easily communicated and defended to respective managements



Expected Value Arbitration (EVA) will benefit both sides in the dispute (continued).

There are significant potential cost savings.Many discovery and “trial” issues are not important to the determination of expected value.

No need to work on marginal issuesCosts are likely to be significantly lower on issues like liability if the outcome is not an all or nothing.

Less need, real and apparent, for excess effort to establish or defend a threshold measure

Preponderance of evidence for liabilityThere is a greater likelihood of a settlement ahead of the final arbitration ruling.

Parties will learn that the evaluation is unlikely to change significantly as the arbitration progresses.



EVA is advantageous for the arbitrator as well.

Each case is less risky for participants.Reduces “unhappiness” with results Both likely to feel they have been treated (somewhat) fairly

At least in the arbitration processMore meaningful, intellectually stimulating involvementLeading edge implementation of a new approachGets case settled before final ruling

Enables arbitrator to handle more cases



There are two different ways to incorporate Expected Value into an Arbitration:

The usual arbitration with an EVA outcomeA familiar process with a rational result

Early development of a decision tree that gets updated during the arbitration

More integrated use of EVA



The usual Arbitration with an Expected Value Outcome

After motions ruled on, discovery, and presentations, the arbitrator develops and evaluates the Expected Value Tree as part of the ruling.The process and steps are familiar to all the participants.This approach will deliver the primary benefit of EVA — a rational basis for the arbitrator’s ruling.



Early development of a decision tree that is updated during the arbitration

The decision tree analysis helps focus motions, discovery and presentations. Very likely less costly than standard arbitration or arbitration with a final Expected Value ruling.

Many factual and legal issues are not critical to the determination of expected value and don’t need extensive discovery and pleadings.

Can be demonstrated clearly with early decision treesDiscovery and pleadings can focus on critical issues that do affect the expected value.



Early development of a decision tree that is updated during the arbitration (continued)

Early settlement ahead of the final arbitration ruling is more likely.Both parties can see where the evaluation is going and (often) why the Expected Value will not change significantly by the time of the final ruling.

There is some extra involvement of both arbitrator and disputants at earlier stages.

Offset by the cost savings.



There are several possible ways to develop the early decision tree.

Each side independently develops its own tree.Trees shared with the arbitrator who is free to use elements of either, both, or develop a different tree

Each side develops its own tree in active consultation with the arbitrator.

Arbitrator influences development of treeAgain, the arbitrator is free to combine trees or develop own.

Arbitrator develops tree.In all cases, the arbitrator reviews own tree with both sides present.



There are several possible ways to update the early decision tree when required.

Each side updates arbitrator’s last tree independently.Again, the arbitrator is free to combine trees or develop own

Each side updates arbitrator’s last tree in consultation with the arbitrator.

Arbitrator influences the evolution of the tree.Again, the arbitrator is free to combine trees or develop own.

Arbitrator updates own tree.

In all cases, arbitrator reviews his/her own tree with both sides present.



Direct involvement of both parties in developing the trees is preferred.

There will be more of a buy in to, and a deeper understanding of the EVA process by the participantsSettlement before completion of the arbitration is more likely.

Common basis for settlement negotiationsFocused on specific significant differences

The likelihood of liability and the ranges of damagesParties will start with significantly less diparate positions and will more readily come to an agreement.



Both sides benefit from the methodology and rationale that EVA brings to the process.

Lower risk for both sidesCost savings

Entire arbitration process less costlyFewer issues need be developed and argued in detail

Higher likelihood of early settlementsTransparent results

Easily communicated to respective managements


Institute© Bruce Beron 2014 EVA Presentation CPR

For using trees in a more integrated way:

We would propose a “micro trial” briefing and/or arguments at the beginning of the case for the arbitrator to use as a basis for first tree.Could include listing of information sought in documents or depositions that parties think would significantly improve their case

Arbitrator could include the possibility (including likelihood) and show in the tree how that could effect the expected value.

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Institute© Bruce Beron 2014 EVA Presentation CPR

The best way to introduce EVA to disputants is to do a normal arbitration and then do a decision tree analysis as a shadow ruling at the end.

Primarily for the benefit of the arbitratorThere remains the question of whether or not to and if so, how to reveal results to disputants

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