Assessing Litigation Risk (Advice for Executives & In-House Counsel)

Over the course of my career, I have repeatedly observed corporate clients being led astray by outside counsel whose primary motivation is billable hours. Let’s be clear: Some corporate lawyers are true fiduciaries and give their clients outstanding, honest advice. But there are many lawyers out there whose advice hinges on what course of action will make them the most money. That is a recipe for disaster. Let’s unpack this even further: A lawyer thirsty for billable hours is going to recommend litigation regardless of the propriety of that decision. That lawyer is going to steer the corporate client into litigation, regardless of his knowledge of the relevant law (or lack thereof), and regardless of whatever downside risk might exist. In light of this problem, I am providing the following guidance about assessing litigation risk. This guidance is primarily intended for in-house counsel and C-level executives (although it may be useful for other outside lawyers).

1. Emotion vs. Logic. Is the contemplated lawsuit a good business decision? Have you arrived at the decision to file a lawsuit based on logic, analysis, and sound reasoning. Or, is it entirely driven by emotion and panic? Good outside counsel always serves as a check against emotional litigation (which often is completely unnecessary, a massive waste of money, and frequently ends in disaster). On countless occasions, I have counseled corporate clients out of pursuing litigation where (a) I questioned the cost/benefit analysis and (b) felt the contemplated litigation was driven by emotion rather than sound analysis. Conversely, I have seen far too many instances where outside counsel just fed into the emotion that was pushing toward litigation.
2. Goals Matter. You know who wants to litigate cases just for the sake of litigating cases and billing hours? Lawyers. But that makes zero sense from a business standpoint. Litigation is a tool. Before going down the path of litigation, you need to have a clear understanding of why you are pursuing litigation and what you realistically expect to accomplish. Only idiots file lawsuits without first clearly establishing the goals of the litigation.
3. Litigation Spend. I hear the horror stories all the time. BIGLAW Firm A advised litigation and assured the client that it could get results for, say, $150,000. After a year in litigation and $400,000++ spent, there is no end in sight. If a lawyer is actually going to agree to a fee cap, then get it in writing. Otherwise, regard any verbal guarantees or promises about litigation spend with absolute suspicion. Do you know why certain lawyers make lowball promises on the front end? To induce clients to pursue litigation. These sorts of lawyers are afraid of being candid about the true cost of litigation up front. Consider the following: Joe is a BIGLAW attorney. Joe’s client is inquiring about pursuing a trade secret case against a former employee. Joe says its a slam dunk and he can deliver absolute victory for less than $100,000. Fast forward. The ex-employee lawyers up. The court denies Joe’s motion for a preliminary injunction. The ex-employee countersues. The company has already spent $200,000, only a few months into litigation. More invoices are on the way. Joe is insisting upon massive, leave-no-stone-unturned discovery. Collection of every document. Ten or more depositions. The company can see where this is headed. At this rate, they will easily spend $750,000++ on the litigation. That says nothing of their fee exposure or exposure on the defendant’s counterclaims. Bottom line: Before filing a lawsuit, you’d better have a candid, come to Jesus talk about what the litigation is going to cost. That should include a range. That range should account for the cost if things go disastrously wrong. Do not get fooled by lowball estimates from thirsty lawyers.
4. Fee Exposure. Over the past decade, I have encountered dozens if not hundreds of lawyers who have no understanding of fee exposure. Contracts often contain mandatory fee-shifting provisions (i.e. loser pays). Some statutes contain mandatory fee-shifting provisions, but other statutes contain permissive fee-shifting provisions. I was an expert witness in a case where a MEGA firm got hit with a $15 million fee award—- all because they did not understand the basics of fee exposure under FDUTPA. Upshot: Always ask this question: “Do we have any fee exposure on our own claims?”. You would be amazed by how many in-house and general counsel do not have enough litigation experience to actually ask that question. Your fee exposure gets even worse if the opposing lawyer has taken the case on a contingency fee or contingent hourly basis (multipliers).
5. Counterclaims. Particularly when I represent companies, before initiating any litigation, I ask the following question: What can the defendant countersue us for? That question seems like a basic component of any risk mitigation strategy. But you would be surprised by how many corporate lawyers never ask it. I countersue companies all the time. And, almost invariably, they are shocked – absolutely shocked – by being countersued. Sometimes, they have to bring in a separate team of lawyers to handle the counterclaims! In gaming out any dispute, I always start with the assumption that the other side is just as smart as I am. If I can identify a viable counterclaim, then I assume the defendant will also be able to identify it. So, as part of the cost/benefit analysis and risk assessment, I always consider any plausible counterclaims, the cost of defending against those claims, and the possible exposure on those claims.
6. Business Disruption. Litigation can be incredibly disruptive for countless reasons. First, there is discovery. Ok, folks. We need to collect email accounts of 30 different employees and executives. That alone is massively disruptive. Second, litigation disrupts market activity. Counter-parties are often hesitant to conduct business as usual for fear of being dragged into the litigation. This can often result in massive revenue losses. Third, there is the general stress/psychological impact of litigation, particularly where the stakes are high. I could list at least 10 examples of litigation disrupting normal business activities.
7. Public Relations. Are you suing a poor person over a bogus non-compete agreement? Are you suing a single mother who has cancer for theft of trade secrets? Are you trying to shut down a market rival who is trying to cure cancer? Bottom line: In today’s world, corporate bad actors are often punished by the media, shareholders, and investors. You must vet the risk of a public relations crisis and factoring that into your analysis. In most cases, that risk will be non-existent. In some cases, that risk will be catastrophic.
8. Overall Cost/Benefit Analysis. All of these factors – and more – should be considered in a comprehensive cost/benefit analysis.

Final Thoughts 

The sad reality is that many lawyers are desperate for billable hours. Those lawyers encourage litigation without ever weighing the pros and cons. In many instances, it would be highly beneficial for companies to obtain this type of litigation risk assessment from counsel who has no interest in serving as litigation counsel. Why? Because then you can assure a truly objective assessment. For instance: A lawyer charges a flat rate of $10,000 to provide a litigation risk assessment. This lawyer lays out the cost/benefit of several possible options. This lawyer has no interest in serving as litigation counsel. This lawyer is far more likely to provide honest, objective guidance (guidance not motivated by a desire to bill hours). The problem, however, is that most companies have no outside counsel who they engage purely in a consultative capacity. Companies – particularly big, well-capitalized ones – engage large firms, firms that cross sell, and firms that almost always are incentivized to litigate.

Companies must either be certain that they have lawyers who are true fiduciaries, or, move in a different direction and hire lawyers who want to consult and advise rather than litigate.

Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. He has extensive experience litigating complex, high-stakes non-compete, trade secret, and unfair competition cases. In addition to litigation, Pollard has advised hundreds of individual and corporate clients on related matters. Pollard has appeared in or on PBS NewsHour, The New York Times, The Wall Street Journal, The Guardian, Law360, The Daily Business Review, and many more. His office can be reached at 954-332-2380.