When Is Appealing Economically Sound?

Have you ever wished for a formula to help you determine when it makes financial sense to appeal an adverse judgment? If so, you’ll definitely want to check out my upcoming article in the December 2021 Advocate Magazine that analyzes the economics of pursuing appeals, including when to outsource, when to accept a defendant’s offer to waive costs in exchange for waiving the appeal, how to determine whether a proposed attorney fee arrangement makes sense for the appeal, etc. In that article, I take the reader through several hypotheticals applying the formula I’m offering here — the “expected value” analysis of the appeal.

In the meantime, here’s a quick overview of how you may calculate the potential value of an appeal when the result is binary: you will either win or lose. Economists use a formula to determine the “expected value” of the financial outcome of a case. The expected value of an appeal, for our purposes, is the average financial award resulting from the success of that appeal. The expected value of an appeal may be represented by the following formula:

Expected value E = p * V

​​Where E is the expected monetary outcome, p is the probability of winning the appeal and V is the desired (albeit realistic) financial judgment if successful (after subtracting any costs associated with the appeal).

In other words, the expected value of the appeal is the sum of the following: the probability of winning (represented by p) multiplied by the net value associated with winning (represented by V).

Of course, neither the probability of winning nor the value of the financial judgment can be known in advance of the appeal. The utility of this equation, therefore, depends on the accuracy of the projections.

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How do you calculate the probability of winning the appeal?

Calculating “p” is an art that an experienced appellate attorney may help you estimate. But, assuming you do not have a case-specific estimate, here are some general “rules of thumb” to assist you.

The Judicial Council of California publishes its annual court statistics. Based on an analysis of those statistics, over the past three years, the average California state civil appeal resulted in a reversal 17% of the time. Hence, we can estimate the probability of success of an average California civil appeal is 0.17.

How do you determine whether your odds of appellate success are better than the average? The answer is nuanced, but a broad-stroke rule of thumb is to determine the applicable standard(s) of appellate review, and specifically, which standard(s) apply to the arguments you’re raising or challenging. Generally, the greater deference the reviewing court applies to the trial court’s rulings, the worse your odds are for reversal.

How do you calculate the value associated with winning the appeal?

I typically calculate this value after discussing with trial attorneys what they have estimated the value of the case to be if they were to win or settle and subtract from that amount the new costs related to the appeal (including attorney fees and appellate-related costs such as filing fees and transcript preparation). Some previous costs are sunk (i.e., already spent and unrecoverable, thus having no impact on future-oriented decision making), and normally are not included in the expected value associated with the appeal. Other costs may be recoverable if the case is salvaged, and can be quite significant to the contingency attorney who has already poured substantial resources into the case. If you fall within that category, feel free to subtract the amount you have already invested into the case into the amount you subtract from the overall case value.

What do these numbers mean?

When you use the formula and the expected value of the appeal does not exceed its cost (i.e., the formula yields a negative number), appealing a case is economically risky and may not make financial sense to pursue. (Of course, there are often other important considerations apart from economics that factor into the decision to appeal). However, when the expected value of the appeal exceeds its cost, appealing may make financial sense and further inquiry is necessary. A high expected value means the financial return from the appeal is greater than the cost of pursuing the appeal, and this typically occurs when the appellate court is likely to reverse a lower court’s error or where the potential recovery, despite long odds, is high.

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