When I handle business litigation, owners ask me how aggressive they should be in prosecuting or defending the lawsuit. Should we try early mediation, or should we gear up for a long-term fight? It depends.
A good example is a lawsuit involving a PBS cooking show – America's Test Kitchen (ATK). Christopher Kimball was the co-founder and star of ATK, which draws nearly 2 million viewers. He left the show in late-2015 to start his own venture, Milk Street Magazine. ATK then sued him for stealing corporate assets and competing against PBS. Kimball countersued for defamation. After battling or 3 years, they recently settled according to the Washington Post. Under the settlement, ATK will reportedly buy out Kimball shares, and Kimball can pursue his own venture.
Was this lengthy, costly lawsuit worth it? Why didn't they settle under this framework 3 years ago to save $100,000+ in litigation costs? Here are a few takeaways:
1. It takes only one aggressor to escalate the dispute.
Parties to a business lawsuit often reciprocate, or mirror, their opponent's tactics. If the other party makes a reasonable offer in a conciliatory tone, you are invited to respond in kind. If you respond with an unreasonable offer in an angry tone, you might be viewed as crazy, reckless, and not worth talking to about settlement. This may limit your options going forward.
If your opponent aggressively threatens you with demands, you will fight back to protect your business. If you don't fight back, you will be viewed as weak and your settlement price may go down. When you escalate, your opponent will escalate in kind. Eventually, this cycle of escalation leads to a very nasty, costly dispute. This is a psychological aspect of litigation that parties should keep in mind.
Takeaway: It only takes one aggressive party to set the tone for a legal fight. Even if you are not the aggressor, you may have no choice but to gear up for a long battle.
2. What is the “prize” worth?
You and your litigation attorney should analyze the litigation options and possible outcomes early in the case. Some litigation attorneys conduct a decision-tree analysis to present visually to their clients.
Sometimes the prize at the end of litigation is so valuable that it makes sense for a business to invest in a high-stakes battle. For example, Apple and Qualcomm fought for years over IP rights to various software before settling during a trial this year. The IP rights had potential value of hundreds of millions, or even billions, of dollars. The IP rights could transform a business for years into the future. Fights over long-term assets and sources of revenue justify a long and expensive fight.
Likewise, the ATK-Kimball lawsuit may have justified an investment in litigation. Kimball was a well-known personality with the resources to grow a competing venture and harm ATK, which had an interest in its brand for the future. The parties could have settled three years ago under the framework used in 2019. However, they valued Kimball's personality and new business venture as highly valuable. An investment in litigation was justified to them.
Not all situations justify long-term court battles. For example, your litigation attorney may pursue an early settlement when your case involves temporary opportunities, short-term assets, low-value assets, dispensable assets, wide disparity in the parties' resources, or when one party has an impenetrable legal position in the case.
Takeaway: Valuing of the “prize” in the litigation will go a long way in determining your optimum strategy and the level of aggression to show.
3. Costs of litigation.
Litigation involves costs to a business. It should consider several categories of potential costs when deciding how aggressive to pursue the litigation: money, time, reputation, and uncertainty.
In the ATK-Kimball lawsuit, the parties paid their hard-working attorneys for three years to litigate in court. The attorneys were likely being paid on an hourly basis rather than a contingency, flat-fee, or hybrid basis. If parties are unwilling to settle, they will incur ongoing costs that could otherwise be spent to grow their businesses. Big firms in large markets may bill at rates of $500-1,000+ per hour, which leads to high costs. I don't charge rates anywhere near this, and neither do most attorneys outside of large firms. But, if you do hire a large firm, factor the cost into your long-term strategy.
Businesses will incur some costs to resolve a dispute, but they can exercise some control by being open to settlement options, properly responding to attorney requests for information, and hiring an attorney with reasonable rates that is committed to an efficient outcome.
Drain on Time
What is your time worth? As an executive or business owner, lawsuits can eat away at your valuable time. Litigation attorneys provide an important service by shouldering most of the time burden. But business owners and executives will still need to devote time to litigation-related tasks: talking to their attorney, identifying witnesses, obtaining information for discovery, having their deposition taken, and making big-picture decisions for the case. Early on, they should talk with their attorney about how to reduce their time commitment.
Is a relationship with your opponent dispensable, or are they a necessary stakeholder for your business? Will a public dispute impact other relationships you need to maintain with stakeholders?
Valuable business relationships can be difficult to build, but easy to burn. Most executives understand that the opposing side has contractual rights that it will protect. Simply asserting your contract rights should not upend a solid business relationship. However, if you and your attorney are not careful in your approach to litigation, you could easily lose a partner, supplier, or customer. What is the cost of that relationship to your business?
Burning a relationship could also impact your business reputation. If the dispute becomes public, or if news of the dispute is leaked, it could impact other stakeholder relationships. An allegation of fraud or misconduct could be devastating to the reputation of a business. You and your attorney may want to take measures to keep the dispute private, such as by pursuing protective orders, arbitration, and an early settlement of the case.
Uncertainty is bad for business. Stock prices can change rapidly when public company discloses the existence of commercial disputes. Private companies are similarly impacted. Litigation can affect a business's ability to execute long-term plans. For example:
- Do you have the time and resources to execute growth plans while litigation is pending?
- Will you have time for deal-making, marketing, and sales functions to meet growth goals?
- Will you be able to switch suppliers while you litigate a claim against your supplier?
- Can you close a new deal if the other side learns about a pending breach of contract case you are involved in?
- Will the litigation present a problem when your lender conducts due diligence for new financing?
To decide how aggressively to pursue a business lawsuit, think strategically about your long-term interests. Economically, a rational business should only invest an amount of resources in litigation that is proportionate to the risk and the ultimate benefit in the case. As a litigation attorney, I make sure to help my clients consider these important questions.