Question

Our legal team estimates that a negotiated settlement would cost us roughly $8 million. If we contest the patent, then we have a 30 percent chance of winning the suit. If we concede the patent and contest the settlement amount, then the only question would be the size of the final settlement amount. Our legal team envisions two possibilities:

i. High - $15 million; 60% probability

ii. Low - $5 million; 40% probability

a) Create a decision tree for this problem.

b) Determine the appropriate strategy for our company to take.

c) What is the expected value associated with this decision?

Answer 1

a) The decision tree for this problem is as follows

Created by Excel OM/QM 42 Data row Orange Lawsuit Use the Decision Tree Creation Window to create the tree. Click on a node to edit the tree. Values are on top of nodes. For decision nodes, decision is displayed below the node. Values to the right of final nodes are the cumulative profits along the path Settle out of court now Negotiate a Settlement 8 -8 0.3 We Win A Contest patent claim P 9 0.8 Orange Files a Lawsuit H 6 0.7 We Lose -10 A 0.6 A High -15 -5.6 -11 0.5 Orange Wins Contest Settlement amount 10 Wait for current case decision 0.2 Orange does not file laws 0.5 Orange Loses

b) The appropriate strategy is to wait until the current case against the firm is resolved. And then if Orange wins the current case and Files a lawsuit, then go to Trial and contest patent-infringement claim.

c) The value associated with this strategy is $ 2.8 million