PART ONE: A System Out of Control
"Litigation" is a term that encompasses the lengthy process of filing a lawsuit, developing information about the other side's case, preparing the case for trial, trying the case before a judge or jury and, if necessary, appealing the verdict or judgment to a higher court.
More than ever before, both you and everyone in your company have a strong vested interest in avoiding this arduous process. If you own a small company, protecting yourself from lawsuits may even be the key to survival. During the next several years, corporations will value much more highly than in the past those employees who keep the company out of court. Employees whose actions embroil the company in litigation on the other hand will increasingly be shown the door. This chilling policy will hold true even if an employee caught in litigation is morally, legally, or ethically right. The mere fact of litigation will hurt and could destroy your company and/or your career because of the changing nature of business lawsuits.
There is a worsening stigma associated with corporate litigation. It was not always that way. Twenty years ago, employees and executives often sailed through successful careers despite frequent involvement with legal proceedings, even when the propriety of their own job performance was directly at issue. Recently, I was preparing a crusty senior vice president of a major corporation for a "deposition" -- pretrial testimony taken under oath. I asked him whether he had had previous experience testifying in legal proceedings. He smiled, looked down at me through his bifocals, and said, "Son, I've testified before four grand juries; I've testified in three civil trials; and I've had my deposition taken nine times." He was clearly proud of his litigation experience.
There is no doubt that in the "old days," weathering litigation successfully was a badge of experience, almost a rite of passage in many corporate cultures. The reason was simple. Litigation meant the company was tough and principled and that it would get what it was entitled to have. Trial lawyers and individual executives often earned the same reputation. The halls of major law firms are filled with senior trial lawyers who tell tale after tale of corporate executives who booted unruly competitors, subcontractors, or union representatives out of their offices -- often calling security to escort them off the premises while yelling a trial lawyer's favorite cliché: "See you in court!"
THE OLD ASSUMPTIONS ABOUT THE LAW: JUSTICE, LIMITS, FUNDS, AND LAWYERS AS FRIENDS
The outdated perception of corporate litigation as both noble and normal was founded upon four basic assumptions: confidence in a just outcome; well-defined limits on the scope of the litigation process; sufficient funds to pursue or defend a lawsuit; and a close, personal relationship between the company and its trial lawyer. In many, if not most, cases, these assumptions no longer hold true.
THE DECLINE OF JUSTICE
In the past, a company's willingness to test the propriety of its conduct in court was founded upon the belief that American courts deliver justice. At one time, there was faith in the corporate world that the judicial system was always fair. That faith has eroded, and rightfully so.
A company can no longer have faith that it will be vindicated or rewarded just because its conduct was legal, ethical, or within the bounds of its contracts. Some politicians and scholars like to blame judges for the problems facing the system, but not a single practicing attorney whom I interviewed had serious complaints about the fairness and competence of American judges. Indeed, the erosion of justice in business cases has virtually nothing to do with the quality of judges, or the judicial activism for which politicians and law professors criticize the legal system.
Rather, the problem is the sheer volume of cases in the court system. The American judiciary is overwhelmed. While the American judicial system remains the most just on earth, and American judges remain as a group the most incorruptible on earth, the system is simply too overloaded to ensure justice consistently.
Take federal trial courts, for example. The federal system had over 300,000 new cases filed in 1996, up from about 250,000 in 1990. That means that the typical federal judge was assigned 471 new cases. These cases were added to his or her already crowded docket of pending cases. That same judge completed just 27 trials.
The statistics speak for themselves: the judge simply does not have time for your case. Lawyers have gotten used to appearing in court on the same case before the same judge within a month's time and finding that the judge does not even remember the names of the attorneys, much less the clients or anything at all about the case.
When a successful attorney writes a brief in support of his or her client's position, often the first argument to the judge is not why the client is right but rather why the ruling sought is the most convenient one for the judge! Trial attorneys know that, like all people faced with an overwhelming amount of work, judges will often look for the easiest solution within the bounds of the law. If there is a safe way -- one that is legally justifiable and not likely to result in a reversal by an appellate judge -- to transfer a case to another judge, dismiss a case on a technicality, or enter summary judgment (that is, decide that a party wins without a trial), the judge will feel a lot of pressure to follow that course of action. If, on the other hand, the request made by an attorney requires the judge to hold a lengthy hearing or write a complex opinion, that attorney will often lose -- even if that attorney's argument was well reasoned, well written, and extremely expensive for the client.
Many judges will also pressure parties to settle cases, even when they know little if anything about the case. They push for a compromise that is worse than you want and better than the other side wants, sometimes with little regard for the facts or the law. They just want the case to go away, and often the litigating parties bow to the pressure. Their reasoning is that if you are just going to settle the case in the middle anyway (as happens with the vast majority of business cases), then why go through the entire costly and time-consuming litigation process? Why not settle it before the lawyers take their millions?
Most judges are conscientious and honest. The problem is that they will exhibit these qualities only during the two minutes that they have to address your case. That means that trying to obtain justice these days is always a very big gamble.
Some lawyers like to compare corporate litigation to boxing. Like boxing, litigation is a tactical process of punch and counterpunch, punctuated with breaks. You can adopt a strategy of wearing the other side down or you can go for a quick knockout. However, the similarities between boxing and litigation end there. In boxing, the rules are simple. The entire WBF rule book is only twenty pages long. And the rules are strictly enforced by the referees and the boxing commission. In boxing, the simplicity of the rules combined with their strict enforcement means that the event is well controlled.
In litigation, however, the rules are much more elaborate and continue to grow (the federal rules were 266 pages at last count), but they are not consistently enforced. The increasing complexity of litigation rules combined with decreasing consistency in their enforcement means that the once-clear limits on the scope of lawsuits have given way to a free-for-all. We have already seen that the referee in litigation, the trial court judge, is trying to cover several hundred matches at once. That means that a lot of low blows go unnoticed. Indeed, there are a whole series of litigious tactics that are against the rules, but, as many lawyers know all too well, are not serious enough in isolation to warrant the attention of the judge. In my own practice, I have seen lawyers get away with lying about whether they had access to witnesses, failing to produce relevant documents to the other side, backdating important documents that were late, and committing many other similar ethical offenses -- even though they were caught redhanded. Many lawyers know just how far they can go before a busy judge will come down on them, and they get away with violation after violation of the rules of litigation and professional ethics. These actions offend and disillusion the majority of lawyers and clients who play by the rules and further undermine the perception that justice is served in our system.
Changes to the law itself have also expanded the limits of litigation. Business disputes used to focus on the terms of the contract between two parties. Over the past several decades, however, courts have increasingly accepted nebulous "business tort" causes of action -- lawsuits claiming allegedly intentional wrongdoing by companies in connection with the performance or termination of business agreements. Claims for fraud, "unfair competition," and interference with business relationships can now be pursued on very flimsy facts, and, when an unscrupulous lawyer is involved, they often go forward on mere speculation. Because these "tort" claims are so unclearly defined in the case law, few judges will step in to prevent such cases from advancing.
The result is a number of gaping loopholes in our system of justice that allows litigation to spin out of control. As we will discuss in detail later in the book, lawyers representing small companies have learned how to inflict a lot of pain on big companies by transforming traditional contract disputes into "tort" disputes involving allegedly malicious acts, allowing them to seek huge sums in punitive damages. These claims artificially increase the value of what used to be a basic, bound-and-limited contract case. I recently read about an unscrupulous lawyer who amended his $2 million contract claim to add a $15 million tort claim by fabricating allegations that the big company maliciously breached its contract for the sole purpose of putting his small client out of business. The judge did not have time to read the evidence showing the complete lack of malicious intent. "We'll let the jury decide," he said. So, although the evidence was in its favor, the accused company had to contend with these vague and unsupported allegations.
Other changes in the law have worked to the benefit of big companies that sue small companies. For example, the rules regarding "discovery" (pretrial exchanges of information and testimony) are becoming increasingly liberal. There is almost no way to limit the access that another side has to your people and documents. More often than not, the other side will take numerous depositions and demand all kinds of marginally relevant documents, forcing you to undergo a massive, expensive, and inconvenient process of reviewing and copying files.
Lawyers defending big companies can often force small companies into submission by posing these broad and burdensome requests for documents and by asking for depositions from almost everybody who ever worked at the company (including, for example, former employees living in Malaysia). This increases the expense of litigation for the small company to an intolerable level.
One game both sides play with discovery is to scour the documents produced by the other side and find the highest-ranking executive mentioned in them so that they can harass that person -- though he or she usually has virtually no knowledge of the case -- by taking his or her deposition for several hours. That means that if you do something to get your company into court, it is more likely than ever that your boss will be dragged into the mess, and so will his or her boss, and that person's boss, on up the line. In preparing your senior executives for their depositions, the company's lawyer will have to tell those executives all the nasty things that the other side is saying about you. Not great for your career advancement. The same high-level executive who once might have said to the other side, "See you in court!" is now asking his own people, "Who in our company screwed up?"
Throughout all of this, the question of which company was right and which was wrong goes by the wayside. Legal tactics become much more important than the search for justice.
Perhaps it sounds as if lawyers should bear the blame for the unbounded scope of litigation. Maybe. But you also share the burden. Remember that no case is decided by a lawyer. Most cases are not decided by judges either. They are decided by juries -- normally nonlawyers like your hairstylist or car salesman. And juries have also changed over the years. First, they get to hear more than they used to because the law is unclear, the judge is too busy to address motions to keep a lot of the nonsense out, and the lawyers try as hard as they can to get questionable evidence into the courtroom. Second, in this era of sensationalism, when emotion seems increasingly to triumph over reason, juries have become less predictable. They often award huge damages for minor infractions; they may ignore evidence if they like the defendant, and they also seem to be more easily manipulated than they once were by lawyers who arouse their sympathy or strike their fancy. And, most unfortunately, there is increasing racial polarization, which could result in an unfair result for your client depending upon whether your key witnesses are black or white and whether the jury is predominantly of one race or the other.
The result of larger dockets, broadening causes of action, liberal rules of discovery, unscrupulous lawyers, and unpredictable juries is what I call the "arbitrary factor." The arbitrary factor is the chance that you will win or lose a case on issues that have nothing to do with the merits of your position. In my opinion, the arbitrary factor is on average about 20 percent. In other words, the arbitrary factor states that no matter how good your case may be, there is never more than an 80 percent chance that you will win.
Consequently, any lawyer who tells you your case is a sure winner is lying to get your business. On average, a good case means you have about a 60 percent chance of winning and a great case means your odds increase to about 70 percent. Only the best case imaginable represents about an 80 percent likelihood of victory. The arbitrary factor must be put into the equation before you decide whether to go to court and before you draw the line and let the other side sue you. It is the reason so many "sure winners" settle at the last minute, after the lawyers have lined their pockets from your corporate treasury. Again, you should consider the arbitrary factor before you go down the path of litigation rather than at the courthouse steps.
SPIRALING LEGAL COSTS
Companies bleed money. They hurt when they spend money and get no return on their investment. Most litigation results in a lot of bloodletting for both sides. A complex business case may go to trial as late as three to five years after it is filed. Once one side obtains a judgment, the appeals process will last one to two years. Ultimately, in most cases, one side (the loser) gets no benefit for its substantial investment, and the other side (the winner) gets some return after four to seven years of sinking money into the case without a return.
Amazingly, the cost and disruption of winning a case can near or even exceed the value of the judgment obtained. I recently heard of a large company that had sued another large company and obtained $4 million. Sounds great. Unfortunately, the legal fees were $8 million. In most cases, corporate litigation is an open wound for the companies involved, and, based on my observation and experience, in at least one third of all cases filed, both parties lose even if one party technically wins.
The financial wounds caused by lawsuits are much deeper than they once were. With clogged-up court dockets, fewer rules, and more unscrupulous tactics by lawyers, it is going to cost your company a lot more than it once did to prosecute or defend a lawsuit. Further still, money matters now a lot more than it once did. Money always mattered, you say. Not true in litigation. Back when corporations were run less leanly than they are today, most companies did not even have a mechanism to monitor legal costs. Money for lawyers came out of the general funds of the corporation and was not carefully tracked. Into the 1980s, it was common for law firms to send their clients an unitemized bill which simply stated, "For Services Rendered..." followed by a dollar figure. Clients paid these bills because they had faith in the system and because the fees looked reasonable.
There are a lot of theories as to why companies started paying attention to legal fees. The steady increase of fees themselves was one obvious reason why corporations took note of legal costs. More broadly, however, it was the tumultuous business cycle of the 1980s that caused companies to fully grasp the amount of money they were wasting on lawsuits. The greed of the mid-1980s led to a lot of reckless business deals, followed by a lot of protracted lawsuits, followed by an economic downturn that hit before the lawsuits were resolved. Executives who had been throwing money around on frantic and ill-advised business ventures and who thought they could get out of them by throwing money at lawyers were replaced with a new generation of downsizers and cost-cutters.
The "slashers" put pressure on their lawyers to itemize their bills. They also required that lawyers provide litigation budgets to the company, against which performance was closely tracked. The new generation of executives considered lawyers to be an exorbitant cost that the company should incur only in the most extraordinary and carefully considered situations.
Today, the financial officers of every major company as well as most smaller ones carefully monitor the costs of litigation, and they do not like what they see. Managers at small companies know that the costs associated with pursuing or defending even a single lawsuit can wipe out profits and that the bad press associated with one nasty legal battle or government investigation can dry up the customer base and literally put the company under.
f0 As for larger companies, a 1997 corporate survey showed that companies with revenues of $1 to $2.5 billion employed on average fifty-three law firms and generally spent $3.5 million per year on outside counsel alone.
A different 1997 survey of companies with sales of $10 to $20 billion annually placed their median legal spending at over $40 million, with almost $21 million of that sum spent on outside counsel. The third quartile of such companies averaged over $63 million in annual legal expenses, of which $32.8 million was spent on outside counsel. The median companies on average employed 250 law firms in a given year. A great majority of the outside costs were related to litigation. In fact, the typical large corporation surveyed had over 450 active cases in the survey year.
Legal costs come right off the bottom line. In the old days, when fees were unmonitored and paid from general revenue, these costs went unnoticed because they were relatively low when compared to the overall revenue of the company. The new breed of corporate management, however, realizes that these expenses hurt the company badly. They compare legal costs to earnings, not to revenue. In the very first paragraph of this book, I noted the figure that legal costs sometimes take a 5 to 10 percent bite out of the quarterly earnings sheets of large companies -- a fact no financial officer likes. And while there are no statistics available for small businesses, experience indicates that the cost of one lawsuit can turn otherwise profitable sailing into a tumultuous sea of red ink.
Moreover, legal costs include more than legal fees. The actual cost of litigation is much greater than the mere $250 per hour charged by a decent trial lawyer. The surveys do not take into account the money lost from the delay and disruption caused by depositions of company personnel and the incessant ransacking of corporate files. And don't forget the $1,000 per day charged by "expert witnesses" who are hired to prove technical points or damages, and you are talking some real money.
Further still, in most cases in which over a million dollars is at stake, the company will assign one or more of its employees virtually full-time to the case. For large cases, it is not unusual to have an in-house litigation team of ten or fifteen people, and I once worked on a case where the in-house staff alone was comprised of over fifty employees. The assignment of company personnel to lawsuits diverts valuable resources to activities other than making products or providing services to customers. Moreover, the in-house litigation team is sometimes made up of the people who got the company into the mess, so being a member of such a team may be no honor and can be detrimental to your career, as well as to the company.
YOUR LAWYER, YOUR FRIEND
Until the early 1980s, top executives very often had a close relationship with the partners in a particular law firm. The senior partner may have incorporated the company; that same lawyer may have had a seat on the company's board of directors, and probably played golf with the CEO on a regular basis. The company and the law firm grew together. Often there were even family ties between corporate founders and their law firms. The social relationships between the company and its lawyers meant that company employees often worked with the boss's friend.
While many companies today maintain close professional ties with law firms, and individual lawyers may have strong social connections with company executives, the statistics on corporate legal expenditures cited earlier show that the practice of using only one law firm has fallen out of favor with most of corporate America. Just as companies instituted itemized billing and project budgeting to reduce costs, they also determined that they could lower expenses by the oldest cost-cutting strategy in existence -- competition. Most large companies not only use many law firms but they are not shy about letting firms know that their fees (and their performance) will be closely compared to those of other firms. Some companies even have what law firms jadedly call "beauty contests" in which several firms are invited to make a bid for a particular case.
Law firms have responded by aggressively seeking new business and trying, albeit tacitly, to convince potential corporate clients to let go of their current lawyers. And, of course, there is now legal advertising on every medium from TV to billboards.
This type of competition among lawyers was unheard of twenty years ago. In fact, at that time, the legal profession severely limited a lawyer's ability to market and advertise his or her services. That made it more difficult for companies to learn about their options. Now competition is the rule in the legal profession, and clients have embraced it.
The changes in the way legal services are procured are significant to employees who become involved with litigation. Outside lawyers are now truly outsiders. They are less likely than ever to be perceived as part of the corporate team. At best, executives view lawyers as just another subcontractor; at worst, they consider them to be a major disruption. This alteration in attitude has removed what little glamour there once was for corporate employees affiliated with litigation. When lawyers walk in the room, they are perceived as a necessary evil; when you walk in with lawyers, you may be perceived as an unnecessary evil.
THE LESSON OF LEGAL HISTORY
As I have discussed, recent changes in the law make it imperative for corporate personnel to avoid litigation because they can no longer be assured of a just outcome. In addition, today's tactics are disruptive and disillusioning, the costs of litigation are skyrocketing, and mere association with litigation can have a negative impact on your career.
There is another reason why staying clear of lawsuits is more important than it once was: cost-reduction efforts such as itemized billing, competitive bidding, and up-front budgeting are not working as well as companies had hoped. Litigation costs, which burgeoned in the late 1980s, have remained high even in the days of budgeting and "beauty contests." They continue to drain corporate treasuries because the savings achieved by the methods mentioned above do not effectively offset cost increases caused by the backed-up court system and the dilatory tactics condoned by the law and practiced by some lawyers.
Costs continue to climb because lawyers are very good at getting a new client by proposing a low budget based on optimistic assumptions. As the case proceeds, however, the assumptions underlying the original budget often change (which is often unavoidable, given the inherently unpredictable nature of litigation). Ultimately, the firm ends up billing the client for a sum greatly in excess of the budget that got it the case. If, as a result, the firm loses the client, it is less likely to be as big a deal for the law firm as it once might have been -- long-term relationships may be a thing of the past, and the firm will simply prepare for the "beauty contest" with the next company.
Companies are now beginning to realize that the only effective way to lower the cost of litigation and end the disruption it causes is to avoid it entirely. The concept is just starting to reverberate through corporate law departments, executive suites, and offices of small business owners. The goal for the next century is to structure transactions so that they do not result in disputes, and to resolve disputes so they do not result in litigation. In the next chapter, I will show you how to take big steps in that direction.
Copyright © 1998 by Thomas Schweich