Question

Concerned about the possibility of being sued, Modus’s CEO, Rajay Karunakaran, just had a meeting with the company’s VP and General Counsel (that is, their lawyer), Andre Serrano. Now Rajay is reflecting on how he feels about the legal risks his company faces. In his head, he pictures what it would be like to be sued, and the effect that would have on him and his employees. He thinks back to a hypothetical scenario that Andre had outlined for him, one that involved being sued for $500,000. Rajay had asked Andre how likely it was that the company would lose such a lawsuit. Andre, citing the uncertainty of the law regarding medical devices, says, “That’s a hard question, but let’s assume it’s 50/50.” So, he’s saying there’s a 50% chance of winning and a 50% chance of losing.

Now, Rajay hates the idea of having to go to court. Going to court and losing would be a very bad scenario. Even winning in court would not be great, since his staff would have to take time away from valuable projects in order to testify, and it would also bring some bad publicity (being sued always looks bad, even if you win). The ideal situation, Rajay thinks, would be to make an out-of-court offer of $200,000 and for that offer to be accepted. Of course, if it is not accepted the case would go to court after all. When Rajay asks Andre how likely it is that such an offer would be accepted, Andre grins and says, “Well the other guys probably don’t like going to court either, so let’s assume there’s an 80% chance they’ll accept.” If they accept, you pay $200,000. If they don’t, you go to court.

Assign reasonable utility numbers (on a scale from 0 to 10) for the following scenarios.

Going to court and winning ___

Going to court and losing ___

Settling out of court for $200,000 ___

Answer 1

Answer:

Going to court and winning = 50% of 20% of 10 = 1

Going to court and losing = 50% of 20% of 10 = 1

Settling out of court for $200,000 = 80% 0f 10 = 8

From Rajay’s point of view, what is the expected utility of trying to settle out of court for $200,000 = 8

From Rajay’s point of view, what is the expected utility of going to court right away= 50% of 10 = 5

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Thank You.