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Six Factors to Consider for a Successful Litigation Strategy

September 10, 2005

Most of our cases settle before trial!" proclaims the lawyer on the TV. (Cue video of insurance company executive writing check.) That’s a truly amazing track record of success...isn’t it? Is it "success" at all?

Whether a law firm’s high settlement rate is considered "success," it most certainly is not amazing. According to statistics compiled by the Administrative Office of the United States Courts, 252,016 federal civil lawsuits were terminated in 2004, but only 3,951 of those cases – or just 1.6 percent – ever reached trial. Here in Wisconsin, the numbers are comparable – only 1.2 percent of federal civil cases ending in 2004 reached trial in the Eastern District of Wisconsin, and just 2.2 percent in the Western District. (Data from state courts is harder to come by, but recent studies suggest trials are somewhat more common in state court, with about eighty-five percent of all cases terminated before trial.) Some of the cases that never reach trial (statistics are scarce, but recent studies suggest more than seven percent) are resolved on a party’s motion, such as a motion for summary judgment. Whatever the precise numbers, one fact is inescapable: the vast majority of civil lawsuits are settled before trial.

What does this mean for you, if you become involved in litigation? They point out why, when you start a lawsuit or are served with one filed by an opponent, you should plan as much for success at settlement as for success at trial. With the vast majority of cases settled prior to trial, it makes sense to plan for settlement, and begin your planning early. Here are a few things to keep in mind when devising a settlement strategy.

1. Define Success
Lawyers tend to analyze cases by their effect on the proverbial “bottom line,” and, of course, money often is the most important consideration in settlement. Other concerns, however, sometimes overshadow mere cash. You might be concerned about adverse publicity from a lawsuit. You might be worried about setting bad precedent with your employees if you settle with a disgruntled former employee. You might be more intent on maintaining good relations with your customers and suppliers (who might be necessary witnesses) than you are on getting a judgment against your competitor. Keeping a lid on your marketing strategies or on the recipe for your award-winning pizza sauce could far outweigh the cost of paying off your opponent. The important thing is that you think about what you want to achieve or to avoid in the lawsuit and communicate with your lawyer about it.

You and your lawyer first should discuss the litigation process, and focus specifically on your lawsuit. What documents will you get to see from your opponent, and vice-versa? Is your best customer likely to be dragged into the suit as a witness? Your lawyer is not psychic (unless you’re really lucky), but he or she should be able to give you some idea of what to expect as the lawsuit unfolds. Armed with that information, sit down and think through the suit’s implications for your business. Your lawyer can help with this, but you know your business better than anyone, and you will be in the best position to identify hidden opportunities and pitfalls. Once you understand your goals for litigation and/or settlement, communicate those goals to your lawyer. Together, you can come up with a plan for achieving them.

2. Set Aside Your Emotions
People sometimes litigate out of anger. I’ve personally heard clients say that their only goal is to “crush” their opponents. Because lawyers are bound by ethical obligations, there are very real constraints on your attorney’s ability to do much crushing. No doubt, though, litigation can inflict pain. The problem is, the pain goes both ways. Filing a lawsuit in order to “get even” is almost never worth the price. Litigation is a clumsy tool for revenge. It is a long process, inevitably taking more than a year—and more likely several years—to reach trial. Your anger will have long ago dissipated by the time of trial, and it will be replaced by frustration at the process, at your lawyer, and at yourself. You’re not likely to get much visceral satisfaction, anyway. Even if you win, the jury’s verdict probably won’t proclaim that your opponent is a villain who deserves the stockade, making the verdict feel somewhat anti-climactic. And, of course, you might lose.

A similar phenomenon is litigation on “principle.” Lawsuits do implicate principles, and principles matter. As time drags on, though, and you’re dreading opening your mail for fear of seeing your lawyer’s next bill, you might begin to question whether it’s worth the price to “make a point.” After all, your business’ bottom line is important, too. If you make litigation or settlement decisions based on “principle,” let me offer two suggestions. First, think carefully about what you’re really doing. Are you acting out of principle, or out of anger? Second, consider the dispute from your opponent’s perspective. Even if you are right, does she have a legitimate reason to oppose you? If the answer is “yes,” settlement will be easier on your conscience.

Settlement can be a bitter pill to swallow, but remember that the statistics say you’re going to do it anyway. It’s best to set your emotions aside and make your decisions in a frame of mind that will better protect your interests.

3. Know the Limits of Litigation
Someone once said to me, “Anything legal can be achieved through settlement.” This statement is true, but it’s not very realistic. It is theoretically possible that your competitor will pay you $5 billion and agree to close its doors, but it is not actually possible. When you set your goals for settlement, they should be attainable.

What is achievable through settlement sometimes will be dictated by what is achievable through litigation. If you have no real hope of obtaining a certain result at trial, it is unlikely that your opponent will agree to give you that result in settlement. A common mistake in this regard involves the recovery of attorneys’ fees. Many litigants increase their monetary demands during settlement discussions in an effort to recoup the money they’ve spent on their lawyers. In most circumstances, though, you cannot recover your attorneys’ fees at trial. In those rare instances when a statute or a contract permits recovery of attorneys’ fees, the judge will award only those fees that are—in the judge’s eyes—“reasonable.” (And judges sometimes act as if having the authority to reduce an award of fees means they must use that authority.) The lesson? You should not count on recovering your attorneys’ fees at trial, nor, therefore, in settlement.

The same is true of punitive damages. We’ve all seen newspaper articles telling of enormous punitive damage awards. They do happen, but they are extremely rare. I once heard a story of a former judge in Illinois who worked as a mediator after retirement. During one mediation, the plaintiff resisted settlement because he felt that the opponent’s offer did not account for punitive damages. The former judge finally set the plaintiff straight, explaining that in more than 20 years on the bench, he’d seen one and only one award of punitive damages—for $5,000. If you’ve sued someone and asked for punitive damages, you generally should put that claim out of your mind when setting your settlement goals.

None of this is meant to stifle imagination in negotiations or to limit what you should ask for in settlement. Good settlements frequently arrive at resolutions that could not be obtained at trial, such as a new business venture between the two litigants. And negotiations often involve requesting more than you think you ultimately will get. When you define “success” in your own mind, however, you must be aware of the limitations of litigation.

4. Understand Why Cases Settle
Two factors drive settlement. The first is uncertainty of outcome. If the results of a trial were certain, there probably would be no lawsuit in the first place. But the results are not certain. Rather, lawyers and litigants predict outcomes along a range of probabilities that always must acknowledge the possibility, however remote, of a total loss. Settlement, then, can be thought of as “buying certainty.” Generally speaking (and assuming rational behavior by both sides), a case will not settle only if the parties have sufficiently different predictions of the likely trial outcome, or if one side cannot afford to settle because the financial stakes are too high—a so-called “bet the company” case.

The second factor driving settlement is pressure, or, in the hands of one litigant against another, leverage. Both sides usually feel financial pressure in the form of mounting attorneys’ fees, expert witness fees and other expenses. There are other kinds of pressure, too, such as negative publicity or the basic inconvenience of litigation.

When you are plotting your litigation strategy, you need to talk to your lawyer about these factors as they specifically bear on your case. Assessing uncertainty is not so difficult. Once your attorney is armed with the relevant facts, he or she can (perhaps after some initial research) estimate the probabilities of various outcomes. And your lawyer can help you evaluate the financial pressure on you by preparing a cost estimate (though much of your costs will be in your opponent’s control). You’ll need to help your lawyer account for other kinds of pressure on you, however. Does this lawsuit threaten an unrelated, valuable business relationship? Are you afraid of public speaking, so that you’ll do almost anything to avoid taking the witness stand? You should communicate openly about such issues. Your lawyer might be able to alleviate the pressure and improve your settlement posture.

Judging the pressure on your opponent is much more difficult. Sometimes it is easy to see that you have no leverage at all, as, for example, when you are sued by an insolvent person representing himself. That person has nothing to lose, and you either must pay up or go to trial. Usually, though, the factors impacting the pressure on your opponent are not so obvious. How much is he paying in attorneys’ fees? Is his lawyer on a contingent fee? Is he afraid of public speaking? You might be in the best position to evaluate business pressures on your opponent, such as how publicity might affect him. Your lawyer, on the other hand, is in a better position to evaluate his or her likely litigation costs. You will never be able to fix the pressure on your opponent with certainty, but together you should try to evaluate the financial, business, and emotional or psychological factors that will affect his or her settlement position.

A final note on pressure. You control, in large measure, the pressure that your opponent will feel. The best way to apply pressure that will lead to a successful settlement is to prepare for a successful trial. If your opponent senses that you are just marching in place and waiting for a settlement, you will lose much of your leverage. But if you litigate aggressively, your opponent will see the odds of a successful trial go down, while the cost of getting there goes up.

5. Be Firm, But Flexible
Once you’ve set your goals for litigation and considered a strategy for achieving them, stick to them. One of my mentors once told me, “You don’t put money in someone’s hand just because he’s holding it out.” If you and your attorney have concluded that a plaintiff’s case is worth $200,000, there’s no reason to pay $250,000 just because the plaintiff asks for it.

At the same time, you must be flexible. Litigation is fluid. Your opponent might discover a harmful e-mail that undermines your position. Your star witness might get struck by lightning and develop amnesia. The judge might schedule a three-week trial in the middle of your busiest sales cycle. Whatever the circumstances, you need to continually reevaluate your goals in light of changing circumstances. If your goals remain realistic and attainable, stick to them. If not, adjust them accordingly.

Even if circumstances do not change dramatically, you shouldn’t be overly rigid. Settlement necessarily involves compromise. If a particular compromise is in your best interest, you should take it. If you have an opportunity to settle by paying $210,000, you should consider settling even if you think the case is only “worth” $200,000. Your estimate of the value of the plaintiff’s case is just that—an estimate. Is there $10,000 worth of wiggle room in that estimate? Probably. And if the extra $10,000 allows you to forego a series of depositions in Juneau, Alaska, next week, it might make sense to swallow hard and write the check.

6. Don’t Be Too Hasty
If you have a firm goal for settlement—a dollar figure, for example—you should understand that you might not be able to reach that goal until at least part of the litigation process has played out. You know that you didn’t steal your competitor’s trade secrets, but your competitor might need to take a few depositions or review some documents to reach that conclusion. Until you and your opponent are on somewhat equal footing in terms of knowledge about the case, your evaluations of the case might be so different that a successful settlement is impossible. (This is not to say that you should educate your opponent. To the contrary, possessing superior knowledge gives you a distinct advantage in both litigation and settlement.) Moreover, you can use the litigation process to your advantage. For example, motions can be expensive, but you might be surprised at how much your opponent’s settlement position changes when the weaknesses in his case are written out and dropped on the judge’s desk. You might recoup in settlement much more than the expense of preparing the motion.

So when should you stop litigating and start settling? There’s no definite answer, but here’s a rule of thumb: Settlement should occur when the cost of going forward with litigation exceeds the value of the settlement advantage to be gained by going forward.

Litigation is a reality, but so is settlement. If you get embroiled in litigation, you should understand that the dispute most likely will be resolved by negotiated agreement. You want the upper hand in those negotiations, and you should prepare your strategy accordingly.

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