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In Litigation, It's Usually the Fall that Kills the Client
By John W. Toothman
Washington Business Journal (May 13, 1994)
Tell all the lawyer jokes you want, but sooner or later the legal system will get the last laugh. For many businesses, the punch line arrives as a lawsuit. Whether the case is a frivolous jab from a disgruntled employee, sour grapes from a competitor or overzealous ranting by a government regulator with political ambitions, just having the litigation label slapped on your business can be the kiss of death.
Thanks to the terrible reputations of lawyers and litigation, few people look behind that label to consider the real merit of the case; even fewer know what to look for if they bother. A whiff of impending litigation can cause lenders to reexamine loans, venture capitalists to venture elsewhere and suppliers to close the supply spigot.
According to Bob Kagle, general partner with TVI, a venture capital firm in Menlo Park, Calif., "several times, the existence of litigation has been a deal breaker. "No matter how confident the company is that it can win, the fact is that the case will be a sink of time and energy," concerns Kagle.
For a company with publicly traded stock, a threat of litigation can send its stock price tumbling, regardless of the merit of the case. A highly visible case in point is the federal government's ongoing investigation of Microsoft Corp. on allegations of illegal product tying and unfair trade practices relating to sales of MS-DOS and other Microsoft products.
Microsoft's stock dropped five full points on Aug. 1, 1993, the day the Justice Department announced it would take over the investigation on which the Federal Trade Commission had already wasted three years. Yet real action by Justice is at least another year away, probably two, which is plenty of time for intense lobbying to kill the case.
Even if the case gets to court, it may collapse under its own complexity, especially if the government draws one of the conservative judges appointed by Presidents Bush or Reagan -- the philosophy and stamina of the trial judge are critical to the outcome of this case.
Beyond lobbyists and the judge, the government's biggest handicap in pursuing Microsoft is very basic: After 12 years of attrition and inactivity, the Justice Department lacks the seasoned, aggressive antitrust lawyers it would take to bring this monster of a case to court. "When President Reagan took office, the Antitrust Division lost some of its best trial lawyers. Since then, its bark often has been worse than its bite," according to Barry Coburn, special assistant to the Director of Operations of the Antitrust Division until 1985.
Recently there has been a much publicized multimillion dollar effort by Assistant Attorney General Anne Bingamen to hire and train dozens of new antitrust lawyers, but most of them are being drawn from large law firms -- impressive resumes, but no practical experience. Microsoft is an example of how factors like the legal team and the philosophy of the trial judge can make the real threat of a case far less immediate or, ultimately, significant than the public imagines.
Litigation occasionally kills companies, but it is more often this stigma, the interminable litigation process that Bob Kagle called the "sink of time and energy," or the attorney fees, not the case's eventual result, that tortures companies to death first.
To prepare for the real problems litigation can cause, here are five pieces of advice every business should place in a glass container labeled "In Case of Litigation Emergency, Break Glass and Read Immediately":
- Start looking for the right lawyer immediately, but make the choice carefully: Selecting
attorneys is the most important decision a party makes in litigation, but the selection is
often made in haste and based on the wrong considerations.
For example, with apologies to my friends in major law firms, just because a business uses one firm for its routine legal work does not mean that it should automatically use the same firm for litigation, although a firm's familiarity with the business is a factor to consider.
Litigation is a very different specialty, handled by different lawyers. Find a lean firm that fits the case and can handle opposing counsel. Choosing a firm that fits is also crucial to saving money because, while there is surprisingly little correlation between the size of a firm and its litigation expertise, there is a virtually perfect correlation between the size of a firm and the size of its bill.
- Strike a fair deal with your lawyers: Legal services are currently a buyers' market,
with clients negotiating many concessions from hungry lawyers. Inexperienced clients
reeling from a fresh suit are relieved just to find a lawyer, however, and rarely feel
comfortable haggling. Yet fees and expenses can exceed the damages or settlement obtained,
making them even more trouble: than the original suit examine each bill promptly and
carefully.
Rather than complaining about fees after the fact, clients can save more and build a stronger relationship with their attorneys by negotiating a fair deal up front -- before making the final selection of counsel -- because, once the attorney is selected, negotiating leverage shifts from client to lawyer.
- Manage the case or it will manage you: It is a myth that litigation is unpredictable,
mysterious, and, therefore, unmanageable. Business people take less tractable problems in
stride every day, including technological breakthroughs, competition and the economy, none
of which has a written set of rules nor appellate courts in which to challenge their
results.
Clients who abdicate to their litigators will see their bill swell as the case meanders off track. As they would with other consultants, clients should listen to their attorney's recommendations but reserve the authority to make all final decisions.
- Counteract the litigation stigma: Once a workable legal relationship is established
businesses should turn their attention to neutralizing the remaining side effects of
litigation. Pay special attention to lenders, customers, investors, vendors and creditors.
It is through them that the litigation stigma can be fatal.
Another important group is employees, who will inevitably gossip about the case. In addition to listening for trouble, one should be ready with appropriate educational information (also known as "spin") for dissemination as needed. At a minimum, however, spin control should consider factors beyond the "merits" of the case, including the character of the opposing party, the character of its lawyers and the judge's track record.
- Suppress the urge to do something stupid: Fight those counterproductive impulses to
blast opponents in the press, destroy documents or conduct an in-house witch hunt, all of
which can backfire both in court and with the public. In "Butch Cassidy and The
Sundance Kid," Sundance (Robert Redford) and Butch (Paul Newman) were considering
whether to Jump off a cliff into a river to escape.
Sundance objected that he could not swim, to which Butch sardonically replied: "You crazy? The fall will probably kill you." So it is with litigation: Unless you manage your lawyers, their fees and the collateral damage that litigation may cause, the fall through the legal process will probably kill you long before you land in court.
©1994 John W. Toothman