How Much Could We Lose At Trial?

There’s a question you always hear when in-house lawyers are discussing a case:  “What’s our maximum possible loss at trial?”

That question’s important for a couple of reasons.  First, you can’t assign a settlement value to a case unless you know how much you could lose on your worst day at trial.  Pieces of that loss might be quite unlikely (so you severely discount those amounts when you assign a settlement value), but you can’t think about settling unless you know your maximum possible loss.

Second, an in-house lawyer is likely to be telling others in the organization what the maximum exposure is in the case.  The CFO, for example, might want to know what next quarter would look like if you suffer a loss at trial.  So you report the maximum possible loss.

“How much could we lose?” is thus an important question.

So why don’t people answer it accurately?

When one poses the question, one means, “How much could we lose?”  That’s every possible cent, on your absolute worst day at trial.  I understand that the plaintiff’s expert is insane, and I understand that punitive damages are unlikely, but you still have to include those elements (or at least mention that you’re not valuing them) when you assign a maximum possible loss in a case.

And you certainly have to include other elements, which folks often overlook.

“What’s our maximum possible loss at trial?”

“Five million dollars.”

That triggers a bunch of internal reporting, where in-house counsel is telling folks who matter that the company might lose five million dollars on your worst day at trial.

Six weeks later:

“We lost 10 million dollars at trial.”

“That’s not possible.  Our maximum possible loss was only five million.”

“Oh.  Didn’t I mention?  This is a very old case.  We ended up losing interest in addition to the compensatory damages, so the total judgment was 10 million.”

Not good.

Or this:

“We lost 10 million dollars.”

“That’s not possible.  Our maximum possible loss was only five million.”

“Oh.  Didn’t I mention?  We tried this case in a country where the losing side pays the winning side’s legal fees.  And the other side’s fees were outrageous.  So the total amount of the judgment was 10 million.”

Not good.

Or this:

“Oh.  Didn’t I mention?  There was an indemnity agreement, so when we lost and our co-defendant won, we were obligated to pay our co-defendant’s legal fees.  And those fees were outrageous.”

Not good.

No, no, no!

“Maximum possible loss” means “maximum possible loss.”

We can surely report that, “We’re exposed to a judgment of five million dollars, plus interest (which would bring the judgment to 10 million), plus the other side’s attorneys’ fees (which are unknown, but might be several million more).”  That’s accurate, and that avoids surprises next quarter, when we lose.

But we can’t inaccurately report that, “Our maximum possible loss is five million dollars.”

That disables in-house counsel from thinking about the case, and it sets in-house counsel up for embarrassment when the actual loss is more than the maximum possible loss.

Think about this when you’re asked the routine question.

And answer that question accurately, to keep your clients.

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Mark Herrmann spent 17 years as a partner at a leading international law firm and is now deputy general counsel at a large international company. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at [email protected].