Vet Your Lawyer

Last of 5 parts, by Richard J. Goossen.

IV. Litigation: An Unpredictable & Costly Process

Entrepreneurs must approach litigation strategically, going beyond legal considerations. Entrepreneurs, often small business operators, may be tempted to use the legal system to enforce their rights. But the role of the law in dispute resolution, compared to its role in ordering one’s business or personal affairs, can be an unpredictable and expensive process.

There are the obvious financial costs, including the lawyer’s billable hours and disbursements such as filing fees. As the path to litigation proceeds, there is the cost of discovery. There are non-monetary considerations as well — time, effort, energy, and foregone opportunities.

First, the entrepreneur must view the specter of litigation with pragmatism and not principles. A decision to litigate involves strategic review. As one of litigator friends put it, you “should prepare for war but hope for peace.”

A good litigation lawyer borders on being a master psychologist. They have no illusions about the frailties of human nature. They realize that individuals do not honor agreements. They find clients who think otherwise to be painfully naive.

Litigators realize that true character emerges when money is involved. The potential for litigation increases in proportion to the amounts of money involved. Key to resolving a matter are understanding human nature and settling based on pragmatics, not principles. A strategic-thinking lawyer will settle to your best advantage rather than fight to your long-term disadvantage. The entrepreneur may think he wants the aggressive litigation glorified on TV, but is not a practical way to function in commercial litigation.

The entrepreneur is offended when he believes he has gotten the short end of the stick. But doing what is best often means moving on to future opportunities, putting the past behind him. Being chained to the past will limit his upside potential.

The best litigators are like pacifists, trained to fight but preferring to settle. Their best approach is to demonstrate problem-solving skills privately and not engage in an adversarial process through the courts. Only in rare instances is a resort to the courts needed.

There are unreasonable and stubborn people in the business world, and occasionally we run into them. One consolation is that the other parties will later reap what they have sown. To those with principle, pragmatism in commercial litigation may seem like a Faustian bargain. But the entrepreneur’s own best interests are almost always served by a fair settlement. By focusing on the overall picture of the effect on his business, the entrepreneur will decide wisely.

Second, if the entrepreneur decides to litigate, he must realize that courts make mistakes. Unlike on television, the just party does not always win. The legal system does not always find the truth through evidence, witnesses, and legal arguments. In our adversarial system, the mutual exaggeration of arguments does not always lead to the truth, just as bargaining for a blanket on the beaches of Acapulco will not always establish a fair market value for an item.

Individuals can be wrongly convicted. One high profile case was that of the boxer, Rubin “Hurricane” Carter. He was acquitted after the reversal of several bad decisions. But the same dynamics apply to every level of the court system, including commercial litigation. The lower the court, the greater possibility for a wrong decision. Your case could be one of the cases that are not properly decided.

The resources of the parties also affect justice. As Napoleon well understood, sufficient resources are required to successfully wage war. In litigation, if you do not have the resources, you may lose the battle. There may be delays in getting a date in court. There are the practicalities of enforcing a judgment — there is no point winning the legal battle unless the other party has the means the pay.

Related to the issue of insufficient resources is the risk that the legal system may become your adversary rather than your ally. The system may be used as an instrument of legal extortion — the threat of litigation to coerce a party into a settlement. Looming financial and time costs of litigation can cause a party to settle, regardless of the merits of their own case.

I have worked with biotech companies that have been subject to legal extortion. A smaller company with an innovative product tried to wedge into a market with one of the larger players. The larger player may either sue the company based on a bogus infringement of their own patent or copy the patent of the small company and allow themselves to be sued. In either case, the larger company knows they will win the economic battle regardless of which party is right or wrong. Their strategy? Either bankrupt the other company or drive it into its arms.

This strategy is routinely deployed by the largest players in the marketplace. It shows that litigation is an imperfect mechanism to resolve disputes and will not always achieve justice.

Third, entrepreneurs must carefully review the value equation of litigation. Entrepreneurs cannot afford a Pyrrhic victory. I once rented a small commercial property to a company that trained security agents. Over a couple of years they caused some damage to the walls of the space, beyond reasonable wear and tear. They denied their liability self-righteously! I took them to small claims court and after 18 months received a judgment in my favor and the money required to repair the damages. But the time and effort involved in the process negated the value of the judgment. An entrepreneur will not enhance his business efficacy with hollow victories.

A practical analysis of whether to pursue litigation is always helpful. Your litigation counsel may advise you that no matter how good your case, it is better to settle for 50% now than to fight for two years to get 100%. Analyze the risks, the costs, the time, the aggravation, and the opportunity costs.

Bill owes John $100,000. Bill refuses to pay even though he should. Bill offers $25,000 and a mutual release agreement. John is irate. When he learns the cost of litigation and is advised to take what he can get, John agrees to take $50,000. John lost $50,000. Bill won since he saved himself $50,000 (and can afford to pay his lawyer). The logic of the litigation lawyer is to have you think about what is likely, not what you think you should get.

One aspect of the value equation of litigation is the opportunity cost of your time. An unfortunate irony is that the more your time is worth, the less the value in pursuing litigation. The less valuable your time, the more willing you may be to fight for a victory through the courts. For example, a dentist or doctor making $300 an hour will lose money defending himself in court. As a result, some parties will settle a case because of nuisance rather than merit. Business people know that many individuals live by the life-is-too-short principle — better to resolve a dispute promptly rather than waste money and cause aggravation by fighting. One entrepreneur’s approach to another party’s unwarranted demand for shares from a high-tech company was simply, “Can’t you throw some shares at her?” In short, give her something to make him go away. The bottom line — experienced business people and lawyers recommend to settle and move on.
Fourth, there are risks associated with the litigation process. Justice is usually equated with getting what you think you deserve. This may be different than what the courts think you deserve. There are always two sides to a story, the issue is never black and white, and there is a chance the court will find against you. What may be a clear issue to you, which has become even more clear in your recounting the facts to your friends, becomes muddy when exposed by the arguments of the other side. The opposing party typically will deny everything frivolous, vexatious, and without merit. As the case proceeds to trial, your litigation adversary will attempt to obfuscate matters as much as possible proposing competing explanations and theories.

For example, you may simply not be able to prove your case. It doesn’t matter if it happened — it matters whether you can prove it happened. Your judge may not have sufficient experience in your subject matter. He may not be able to discern the credibility of witnesses.[1] Studies have shown that judges are no better than anyone else at determining the truthfulness of witnesses. Some people are good liars and will successfully lie in court. In short, you may lose your case for reasons apart from whether you are “right.” If too much money, time, and energy are required to achieve justice, the process may not justify your involvement.

To succeed, entrepreneurs must manage carefully the decision to pursue a remedy through the courts. Even an apparently convincing case may not yield a just result. For the entrepreneur, litigation is a costly and unpredictable process, and the costs are even greater for smaller businesses with fewer resources.

Litigation and other legal costs reduce the net income of the business — they come directly from the bottom line. Legal expenses are best invested in corporate housekeeping. An entrepreneur can increase profitability by managing the legal process through a business-focused approach to resolving differences.

A business-focused approach, managed by the entrepreneur, can incorporate legal considerations into a broader strategy by integrating several business considerations:
• Available human and financial resources
• Opportunity cost
• Corporate morale
• Reputation in the marketplace
• Impact on profitability
• Impact on future business development

A business-focused approach to resolving disputes that incorporates managing the legal process will allow entrepreneurs to achieve the true win of increasing profitability and operating a thriving business. Without it, they may have no more than the hollow victory of a successful legal battle.