One of our corporate competitors, Orange, is threatening us with a lawsuit for patent infringement. Orange is already in court in a similar lawsuit against another firm, and our legal team estimates that there is a 50% chance that Orange will prevail. One option open to us it to settle out of court now; the alternative is to wait until the current case against the other firm is resolved before taking any action. If Orange loses the other lawsuit, it will not pursue any action against us. On the other hand, if Orange wins, then Orange will likely formally file a lawsuit against us. Our legal team estimates that the likelihood is 80%. Our legal team also estimates that the lawsuit would be brought for $10 million.
If Orange files a lawsuit against us, then we can:
i. negotiate a settlement,
ii. go to trial and contest the patent-infringement claim
iii. go to trial and concede the patent-infringement claim but fight the settlement amount.
Our legal team estimates that a negotiated settlement would cost us roughly $8 million. If we contest the patent, then we have a 30% 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?