The hardest things to evaluate accurately are racehorses and lawsuits. Both have huge industries built up around them. But lawsuits are harder. The difficulty in pricing a racehorse lies in the innumerable variables associated with these magnificent and delicate animals. Someone buys a colt for $50,000 and, against all odds, he wins the Oaks. Totally unpredictable, and rare. Suddenly his worth is $5 million. Someone pays $500,000 to have her mare impregnated by a Triple Crown winner – the pregnancy is guaranteed – but the offspring is a dud, sells for $25,000, or breaks a leg and has to be retired. What an enterprise.
Civil lawsuits are not necessarily harder in practice, but the theory of pricing lawsuits is far more complicated. It is more complicated because lawsuits are subject to two of the three great systems of exchange extant in the western world. The first and oldest system is theft. Theft as a method of acquiring things of value has been around a long time, indeed all the great empires were acquired that way. But fortunately for us, this is not the way lawsuits are valued.
Disregarding theft, in the legal profession we have to deal with two methods of pricing lawsuits. They are, respectively, (1) the market price, (2) the just price. These methods do not complement each other; they are in competition. The market price is what a willing buyer will pay a willing seller. The willing buyer and seller are like the reasonable man: they only exist as concepts or ideals. Maybe the buyer is desperate, the seller predatory, or vice versa; the market doesn’t care a fig about the “just price,” even though the great Scottish 18th century writer, Adam Smith, believed that an “invisible hand” was at work to ensure that everything came out all right in the end. Nowadays we don’t believe in invisible hands, only countless hands creating the complex system we call capitalism. In the practice of law, we deal with market prices every day. Every time a case settles out of court, it settles for the price a willing buyer was 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” (noun), even if the item exchanged is not what we would ordinarily describe by the adjective “good.” For example, pollution can be an exchangeable commodity, a “good.” In lawsuits, one half of the transaction has already taken place, that is to say 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. Usually, the plaintiff claims the defendant has taken something of value from her, but the language used is different. 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 he/she, the plaintiff, has been “wronged.” The language of fault is imposed on the concept of exchange. The plaintiff lost something of value, e.g. her health, her business, the roof of her house, for which the other party to the event or transaction failed to pay the price, in spite of requests. 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.
Indeed, the legal system is the great 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” (the plaintiff) and the unconceding “buyer” (the defendant) step forward. These parties must present, explain, justify, cajole, plead and persuade a jury of twelve skeptical third parties why each side’s version of “the price” of the case is the “just price.”
The theory of the just price has antecedents, both 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. The feudal system depended on it. They did not believe that matters would take care of themselves. The medieval scholastics, though deeply religious and living a life of Faith, did not believe in an “invisible hand.” How ironic that the thoroughly metaphysical concept of an invisible hand should be left to an 18th century rationalist, Adam Smith. The true metaphysicians of Christendom 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 Catholicism struggled mightily to develop theories of pricing that would be “just” in the circumstances. And both failed. How strange 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 takes over and dominates the proceeding, in mediation the concept of the willing buyer and willing seller once again makes its appearance. In mediation, one can watch the conflict and 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.” No matter if the seller has to dump her products at a loss, no matter if the buyer is forced to pay a huge premium due to shortages, everything depends on supply and demand. 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, the parties must perform the considerable intellectual feat of negotiating using both the concept of willing buyer/willing seller and the concept of the just price at the same time. That is why it is so fascinating. One watches day by day as parties 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, (though sometimes carriers insulate their adjusters by deliberating removing litigation costs from the calculus as a matter of policy). Yet 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, racehorses are riskier!