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PRICING LAWSUITS
by Charles B. Parselle

Pricing lawsuits and racehorses is hard. Racehorses are riskier, but lawsuits are more complicated because two competing theories of value, market price and just price, are implicated in every lawsuit. The theories are not complementary but competitive, and of the two, the concept of a just price has taxed the brightest minds of western civilization.

Market price is simple enough to express; it is what a willing buyer will pay a willing seller, yet the willing buyer and seller are like the reasonable man: they exist only as abstractions. The buyer may be desperate, the seller predatory; the market doesn’t care. The price of the transaction is always exactly right, ex post facto; the theory fulfills itself even though it cannot predict the result in advance. In the practice of law, we deal with market prices every day. In both State and Federal courts, more than 95% of cases settle, and every time a case settles out of court, it settles for the price a “willing” buyer is prepared to pay a “willing” seller. The concept of market price is the foundation of capitalism, and capitalism finds its way into the legal system at every turn.

In economic theory, one talks of the exchange of “goods.” Anything that can be exchanged is a “good,” even if the item exchanged is not what we would ordinarily describe by the adjective “good.” For example, pollution is an exchangeable commodity, a “good.” In the commercial world, transactions occur in the present and relate to the future, but in lawsuits, one half of the transaction has already taken place; to express it in the language of economics, the defendant has allegedly received a “good” from the plaintiff, but the plaintiff has not been paid. In the language of law, however, we do not say that the defendant has received something good without paying for it; we say the plaintiff has received something bad without being compensated for it. Here we can speak of a willing buyer and a willing seller only in the most attenuated sense.

The language of the law is not the same as the language of economics. Instead of claiming the defendant has received something of value, the plaintiff alleges that she has been “wronged.” The language of fault is imposed on the concept of exchange. The plaintiff claims to have lost something of value, for example, her health, her business, or the roof of her house, for which the other party to the event or transaction failed to pay the price. The defendant must be made to pay the price. But what is the price, when there was an exchange of some kind, yet no willing buyer, no willing seller? The elusive concept of the just price survives to provide the answer.

In a capitalist world, the legal system is the last bastion of the other competing theory of value – the just price – and the legal system will always have to deal with “the just price,” because justice is what the legal system is all about. When a case goes to trial, there is no talk of market price. The willing buyer and willing seller fade away. In their place, the demanding “seller” (plaintiff) and the unwilling “buyer” (defendant) step forward.  These parties must present, explain, justify, cajole, plead and persuade a group of twelve jurors why each side’s version of “the price” of the case is the “just price.”

The theory of the just price has antecedents, ancient and modern, and they make strange bedfellows. Religious and secular authorities in the Middle Ages were intensely interested in establishing criteria for the prices of things. They did not believe that matters would take care of themselves nor believe in an “invisible hand” setting prices. How ironic that the thoroughly metaphysical concept of an invisible hand should be left to a quintessential 18th century rationalist, Adam Smith. The mediaeval scholastics did not believe that prices should be left to whatever the market would bear; they believed, in short, in a price that was “just.” And so did Karl Marx! The great enemy of capitalism devoted much thought to the same enterprise that occupied the intellects of his great enemies, the Churchmen. Marx was equally against capitalism and religion, but both Marx and Christianity struggled mightily to develop theories of pricing that would be “just” in the circumstances. And both failed. How ironic that we in legal practice, while eschewing grand theories, also struggle mightily on a case-by-case basis to arrive at the value for a case that satisfies the demands of justice.

Whereas in trial the concept of the just price dominates the proceeding, pre-trial the concept of the willing buyer and willing seller is paramount. In mediated negotiation, one can watch the tension between the just price and the market price as it plays out in the negotiating process. Mediation is the only forum in which this occurs. In the business world, the market rules – anything and everything is exchanged for “what the market will bear.” In the courtroom, the market is banished and everything depends on the judge or jury’s view of the just value to be placed on the transaction in dispute.

But mediation always occurs with trial as a potential option – therefore in mediation, attorneys and parties must perform the considerable intellectual feat of negotiating using both the concept of willing buyer/seller and the concept of the just price at the same time. The parties must work with these twin ideas – what will the market bear, what is the just price? Usually, plaintiffs initially talk in terms of justice, the just or correct amount, while defendants calculate what the “market,” i.e. the plaintiff, will bear. During the course of the mediation, plaintiffs find themselves moving towards a “market price” – find themselves obliged to calculate the relative value of the offer now “on the table,” compared with how much they would have to win at trial to net the same amount. Both sides have to calculate the costs involved in taking the case to trial. Defendants also use the calculus of the just price, because they have to – they have to because that is how the jury will evaluate the claim if it doesn’t settle. Therefore, one sees both sides using a complex mixture of rationales to move from one position to another.

However the parties choose to negotiate, they are always working with these twin ideas – what is fair and just in the circumstances, versus what the other side will accept given the stresses and strains of litigation. It is complicated, but in the final analysis, far fewer people make money on racehorses.

  Copyright 2006, Centres for Excellence in Dispute Resolution, All Rights Reserved