The Hardest Money You’ll Ever Earn

Blog No. 64

February 5, 2016

— The Hardest Money You’ll Ever Earn —

The Frequent Inadvisability of Using the Litigation Process

For the Resolution of Business Disputes

Part 1

By Mack W. Borgen

Santa Barbara, California

University of California at Berkeley (Honors, Economics); Harvard Law School;

Author, The Relevance of Reason – Business and Politics (Vol 1) and – Society and Culture (Vol 2); 

As Advertised in The New York Review of Books and Recipient of Four National Book Awards

Author’s Note

I am a business, transactional, real property law attorney. The following article is based upon my decades of business law experience and is adapted from an article which I wrote and was published a number of years ago in the Los Angeles Daily Journal and the San Francisco Daily Journals. The three-part article was later re-published in a number of California local bar journals.

Copyright © Mack W. Borgen. All rights reserved.

         There is no way to sugarcoat it. Litigation is oftentimes neither an effective nor even a prudent remedial course of action in the context of business disputes. This is true almost regardless of the nature of the dispute.

          Compounding the problem, businesses routinely fail to apply even minimal, due diligence practicing when considering the advisability of commencing or continuing litigation. Instead, businesses frequently leave both logic and money at their attorneys’ offices or, later, on the courthouse steps.

(Note: Most of the arguments presented in this article apply to both the commencement and the post-filing continuation of business litigation. However for purposes of brevity, the author shall refer only to the threshold analysis and decisions relating to the commencement of litigation. )

          Part of the reason businesses fail to apply meaningful, pre-litigation due diligence is the extent to which businesses routinely delegate legal analysis. To a degree, this is baffling. Sometimes it can be costly.

          Most businesses are highly skilled with respect to financial analyses and cost/benefit projections in the context of their business management and operations. Almost by definition, most businesses are highly involved and participatory with respect to their business’ products, services, sales, marketing, and other transactional matters, but their involvement and participation is inadvisably more limited when it comes to examining the exploratory pros and cons of litigation in the resolution of business disputes.

          Such deference to third-party counsels cannot always be due to some peculiar complexity unique to litigation or the use of litigation counsel.

          To the contrary, businesses routinely work closely with counsels in the context of many complicated matters from corporate reorganizations to mergers and acquisitions; from intellectual property to international law issues; from regulatory compliance matters to tax structurings and minimization. In provision of more detailed examples, businesses are usually very thoughtful and analytical in selecting new office facilities or manufacturing sites; in acquiring new equipment or production systems; in preparing annual budgets; and business plans. They prudently, cautiously and even doggedly evaluate new products, markets, and technologies.

          Litigation matters are frequently treated differently. When it comes to litigation, businesses they too readily and too often delegate to litigation counsels the primary responsibility for evaluating, monitoring, and conducting litigation. The results — litigation is too frequently commenced. Once outsourced and commenced, it is oftentimes allowed to continue for too long without pre-trial resolution.

          Possibly, such undue deference is because such decisions are viewed as uniquely “legal” decisions rather than “business” decisions. Possibly this is the reason litigation-related decisions are so frequently based upon the sometimes narrow advice of litigation counsel. Worse yet, in the intended protection and defense of one’s client, the commencement of litigation is sometimes well-meaningly, but inappropriately, encouraged by litigation counsel.

          Some businesses and some counsels would suggest the relevance of Winston Churchill’s comments regarding war – that when a business “plays the game for stakes higher that it can afford to lose, it will learn how to play the game.” But let’s face it. First, litigation is rarely a game – it’s only sometimes played like one. Secondly, even to the extent it is a game — it’s usually a bad one.

          It will be here suggested that many litigation decisions are – and should continue to be – the responsibility of management, but business and litigation counsels should bear more responsibility for insisting upon and guiding businesses through a sober, pre-litigation analysis of any matter. This article further offers some due diligence recommendations for businesses’ use in making litigation commencement or continuation decisions.

          Preliminarily, there should be no question that this author has an extremely high regard for both the ethics and skills of many business litigators. Likewise, there is no question that business litigation is sometimes prudent or unavoidable, or both. However, too often it is not.

          However, businesses should recognize that some — maybe even many — litigators exercise poor business judgments. There is a difference between business attorneys and business litigation attorneys, and very bluntly, business litigation – not business law is the area and focus of their experience and expertise.

          Additionally, all litigators have a substantial, inherent, and unavoidable conflict of interest with their own clients with respect to any litigation matter. This conflict is rarely, openly addressed; let alone sufficiently discussed and considered. It is not secret that in certain instances litigation counsels either at their behest (or at the least with the quiet encouragement of their business clients) cross-feed, defensively or retaliatory, in the perpetuation of a number of costly abuses upon an honorable, but limited, judicial process. This should stop. But it won’t.

        The purpose here is not to attack the litigation process itself. In fact, this author concurs that this country’s civil court system may be one of the best public, institutionalized systems of dispute resolution in the world — and many thoughtful improvements are continuing to be made.

        Nevertheless, litigation is costly. Litigation is time-consuming. Oftentimes litigation is even a counter-productive process of dispute resolution. Entrepreneurial businesses – and especially those which do not have in-house counsel—sometimes commence litigation counsel without conducting even minimal, due diligence and cost-benefit analyses.

         As a result of this failure to conduct such pre-commencement analyses, litigation is too often commenced (i) without identifying or admitting its true purpose(s); (ii) without adequately analyzing the probable business disruptions and hard and soft cost impacts of such litigation; (iii) without meaningfully understanding the painful differences between proof and truth, (iv) without thoroughly understanding the differences between establishing liability and proving or recovering damages; and (v) without evaluating in detail the post-litigation likelihood and costs of appeals and the complex challenges of collection even in the event of prevailing.

        This three-part article focuses upon the need for business clients to more fully evaluate the true costs, limited benefits, and risks attendant to any litigation. This article is addressed both to business management and litigation counsels. Litigation counsels are respectfully challenged to more thoroughly emphasize the full costs, the potentially limited benefits, and the sometimes huge risks and unintended consequences of commencing litigation. Later, certain recommendations are made to management in evaluating the advisability of commencing litigation.

        Part One defines certain limitations and exclusions of this article and then summarily describes the theory and putative purposes of litigation.

        Part Two discusses the three categories of problems inherent in the litigation process — the structural and procedural inadequacies; the raw costs of litigation; and the conflicts of interest between business clients and business litigation counsels.

       Part Three proposes certain due diligence steps to be completed by business management prior to commencement of litigation or, relatedly, prior to continuing or defending against such litigation.

 LIMITATIONS AND EXCLUSIONS OF SCOPE OF THIS ARTICLE

        The scope of this article is broad. It can easily become too far-reaching. Many of the comments can apply to any type of litigation, but this article is specifically limited to business civil litigation.

        Despite considerable litigation-related experience, this author is a business, transaction lawyer – not a litigation lawyer. As such, my perspective is often that of watching businesses suffer from their own loss of perspective, from their lack of understanding, or from their failure to be adequately informed by litigation counsel of the limitations of the litigation process. Eventually, they are forced to ride through the wake. They are forced to first discover and then absorb the real costs, disruptions, and frustrations which are attendant to litigation.

        Although many of the comments and recommendations may be applicable (i) to other forms of dispute resolution (e.g. negotiations, mediation, arbitration, and the many variants of ADR), and (ii) to the judicial or administrative, civil, criminal, and regulatory enforcement of laws, these matters are beyond the focus of this article.

        Lastly, this article focuses solely upon business disputes. The use of the judicial process to memorialize, protect, or otherwise re-affirm rights or to enforce non-disputed matters are also beyond the scope of this article. Examples of this wide range of items are normal debt collection actions, debtor protection filings, unlawful detainer proceedings, quiet title actions, trade secret or non-competition enforcement actions, or the preservation of secured or unsecured creditor rights. Arguably, judgments realistically obtainable through summary judgment or ex parte motions should also be excluded.

        With the above limitations and exclusions, a considerable body of litigation is being chopped out of this article. Regrettably, a lot of litigation is remains.

THE THEORY AND PUTATIVE PURPOSES OF BUSINESS LITIGATION

The Theory of Business Litigation

        The theory is appealing. The theory is good.

        Within broad limits and subject to few limitations (e.g. against public policy or the statute of frauds) businesses create “private law” through the negotiation and execution of contracts. The judicial system is intended to provide a mechanism for the enforcement of that private law as sometimes supplemented by the application of equitable principles, by the enactments of Congress, state legislatures, or other governmental or regulatory bodies, and by judicial decisions. Thus, theoretically through the availability of the judicial process, we aspire to provide a remedy for every breach.

        The rough mechanism for this is the proverbial “day in court” where truth will prevail or legally-recognized rights will be preserved and protected. This is to be achieved through the introduction and articulate explanation by competent counsel of admissible evidence to the satisfaction of an impartial judge or jury. Thus, in the end, “truth” is to prevail by this presentation and explanation of relevant evidence.

       Damn, – Just Call Saul — couldn’t you just box that up and sell it? Well, regrettably, that is what is oftentimes done. But it just isn’t that simple. Ever.

        Rarely are two opposing counsels equally competent. This is true no matter how cautious business clients have been in their respective selection of counsels. As a result and from the beginning, litigation starts off as a gamble since the counsel selection process is itself an imprecise science at best.

        Counsels (and judges) vary by their training, by their professional and personal experiences, by their (sustained) level of interest in the case or the subject matter, by their level of integrity and precision, by their physical and mental energy and health, by their prioritization of the litigation in their own and their firm’s affairs, and relatedly by the competing needs of other clients.

        Sometimes these concerns can be minimized by the retention of a larger, “major” law firm, however even here attorneys are not interchangeable. Many of the above considerations come into play and, occasionally, are even exacerbated.

        Apart from counsel selection issues, the commencement of litigation is often burdened by the failure of the client or its counsel to thoroughly discuss and in fact really understand the true purpose(s) of the litigation. For better or worse, there are many, alternative purposes of litigation.

The Putative Purposes of Litigation

        I have referred above to “dispute resolution.” To the extent the dispute is bona fide, this may clearly be the basis for the commencement of litigation.

        However, in most cases there are numerous, other stated or unstated reasons for any such litigation. The initial step for any client and for counsel is to know, confirm, and identify the real purpose(s) behind any contemplated litigation. Only by clearly recognizing (or admitting, as the case may be) the real purpose(s) of such contemplated business litigation, may the very economic advisability or inadvisability of such litigation become clear.

        While it is beyond the scope of this article, the author recognizes that in some instances (e.g. matters of first impression or appellate resolution of disparate lower court rulings) litigation serves almost a public purpose by “completing” legislation. It does so by refining and clarifying legislative enactments. While this is a societally, useful by-product of litigation, it is rarely a purpose sought by or even cared about by business litigants outside the scope of the law’s application to their own case.

        While reasons for litigation frequently overlap, their specific identification is still useful. Some of those reasons are as follows:

1 . Precedential Value and the Establishment of Business Policies and Practices.

          Litigation may be used by businesses to create or maintain precedent such as, for example, publicly (and loudly) by establishing or preserving ownership rights (e.g. certain types of trademark or patent litigation) or by maintaining contract enforcement policies (e.g. franchisor or distributor rights). Arguably, there should be no challenge here. However, sometimes the true precedential value intended to be created is the “bad bear/dangerous person” reputation.

 2 . Vindication, Retribution, or Bravado.

          Litigation may be used as a means of vindicating one’s position or actions, of imposing costly retribution from another party, or displaying one’s personal or corporate bravado. However, these reasons read immeasurably better than they live. Sometimes it is the mere loss of a business customer or opportunity or, as will be discussed below, the conflicting interests of counsel, which truly supports this supposed need for vindication. As for retribution and bravado, the judicial process has an uncanny way of equally distributing its costs and frustrations upon all parties.

3 . Damages or Lost Profits Recovery.

          The seeking of damages or the recovery of lost profits is at the core of many business disputes. The problem is, however, that even with these types of almost common business dispute, the judicial process is sometimes not the best, or even the most viable, course of action for the business complainant. Wholly apart from collectability and enforcement of judgment issues, from the risk of counterclaims, or the incurrence of non-covered attorney fee, the commencement and pursuit of litigation (especially beyond the summary judgment stage) is oftentimes not well-supported by any true cost/benefit analysis conducted by the business complainant. This is especially true when cost allowances are made for the hard and soft costs attendant to evidence collection and organization, the burdens upon employee and officers who must appear at depositions and other proceedings, and the raw frustrations which will arise in the courser of any such litigation.

4 . Preservation of Rights.

          As noted above, in some instances the judicial process may have to be used in order (i) to preserve rights (e.g. declaratory actions, quiet title actions, trade secret or non-competition enforcement actions, bankruptcy non-dischargeability actions, creditor rights actions in bankruptcy or other debtor relief proceedings), or (iii) to avoid the imputation of waiver, laches, or statute of limitation claims. However, all of these can sometimes be done equally effectively, far faster, and much cheaper outside of the use of the judicial process.

5 .The Preemptive or Defensive Uses of Litigation.

          The imprudent or poorly-advised business may try to use the “time-drag” attendant to the litigation process as a means of deferring payments or otherwise performing contractual obligations. Sometimes, but very rarely, there is no other real alternative. Sometimes this may be advisable — but rarely. Thus, wholly apart from ethical, moral, or abuse of process issues, rarely can this use of the litigation process be supported by any cost/benefit analysis. The difference between the cost/.benefit application as it relates to this purpose of litigation and, for example, the damage and lost profit recovery purposes discussed above, is that in this instance the business normally knows the lost-cause, cost implications of this type of retrograde action.

6 . Litigation as a Negotiating or Predatory Weapon.

          Far down the food chain, some businesses use litigation as a negotiating tool or, worse yet, as a possibly unlawful monopolistic or predatory business weapon. Despite the mirage logic of this negotiating “tool” to intimidate, wear down or mislead another party, this purpose is too frequently one of the true purposes of litigation. There is no question that even the most spurious claims can be cleaned up by an experienced attorney through the preparation of a well-drafted complaint or responsive pleading, but this reasoning is poor and is, in the opinion of this writer, an inappropriate use of the litigation process.

Conclusion  – Part I

        Even assuming one or more bona fide litigation purposes can be identified, litigation should still not (yet) be commenced. The commencement of business litigation may still not be prudent. There remain considerable, intractable problems inherent in the use of litigation.

        In Part II of this article three categories of problems inherent in the litigation process will be discussed — the structural and procedural inadequacies; the hard cost of litigation; and thirdly, the inherent conflicts of interest between business clients and business litigation counsels. In Part Three, there will be presented certain due diligence steps which are recommended to be completed by business management prior to the commencement of litigation or, relatedly, prior to continuing or defending against such litigation.