Legal Valuation

I was going to join my fellow visitors in thanking Larry for inviting us to fill in for him. But then I realized that for Larry this is a win-win proposition: if we perform well in his absence, he will look good for having chosen us. And if we do poorly, then Larry's blogging will seem all the more indispensable. So instead of our thanking Larry, maybe he should be thanking us! But in all seriousness, it really is exciting to be guest blogging here in Larry's place together with the distinguished group that Geoff has assembled, and I look forward to what hopefully will be some interesting exchanges.

A word about me. I teach antitrust, bankruptcy, and law & economics at Rutgers Law School in Newark, New Jersey. For my profile, see http://www.law.newark.rutgers.edu/facbio/sharfman.html. One subject that I'm particularly interested in is what might be called the problem of legal valuation uncertainty--that is, the uncertainty associated with how the legal system resolves controversies over the value of legal entitlements.

Take for example a straightforward tort dispute in which A sues B for wrongful injury. Assuming that B is liable, the judge, jury, or hearing officer will need to determine the amount of damages to which A is entitled. A will ask for a high valuation, while B will seek a low one, and what the court will do is anyone's guess. It might accept A's figure, or B's, or choose some number in between. In theory, an epistemologically correct figure exists and the court need only find it. But in practice, legal valuation is inherently imprecise because of its sliding scale, non-dichotomous nature.

Legal valuation is thus less about searching for the truth than about choosing one plausible value from among many plausible alternatives. Understanding this, valuation litigants will often spend excessively on their evidentiary presentations in an effort to win over the factfinder, a practice that is both harmful to the litigants themselves and wasteful for society as a whole.

The problem of legal valuation uncertainty is much discussed in the academic literature though usually from a local rather than a global perspective. That is, most of the articles on the subject tend to focus on particular doctrinal contexts in which the problem manifests itself (e.g., legal valuation in the context of bankruptcy, tax, eminent domain, corporate appraisal, tort, or family litigation) and offer narrowly tailored solutions. In my own work on this problem, I have taken a somewhat different tack. (See http://law.bepress.com/cgi/viewcontent.cgi?article=1005&context=rutgersnewarklwps .) Rather than focus on a particular doctrinal context, I have analyzed the problem at a higher level of generality and proposed a solution that may be used in every doctrinal context in which the valuation problem may arise.

The solution is this: replace the current regime of valuation uncertainty with an algorithmic valuation mechanism of the type often agreed to in contracts between sophisticated firms who anticipate a future valuation dispute. A typical contract of this type will require each side to propose a valuation, and if the valuations are within close range of each other (say within 12%) the dispute will be resolved by averaging the two valuations together. In cases where the party valuations are far apart, the dispute is resolved by obtaining at the parties' shared expense a neutral third party valuation and averaging it together with any party valuation that is reasonably close to the neutral figure (say within 30%). If sophisticated firms find it in their mutual interest to contract for such procedures, my thought was that valuation litigants who have not so contracted might similarly benefit from having such a procedure as the default norm in valuation litigation. I wonder what others may think about this proposal.

Here's wishing everyone a belated but heartfelt Happy Thanksgiving!