Contempt of Court

How to avoid litigation, cut legal costs, and get on with your business

You'd think executives would handle legal disputes with the same rigor they do other aspects of their business. Why do most simply hand their lawyers a blank check, sustaining a fight that will probably never see trial? Especially today, when there are more alternatives to the courtroom than ever before. -- S.D.S.

Perry Mason was fun to watch; after all, you weren't the one up on the witness stand getting scorched on cross-examination. But the reruns might be painful to see. For executives of small companies, litigation has become a not-so-silent business partner.

Once just an unpleasant diversion, litigation is now as much a part of doing business as finance and marketing. And lawsuits come packaged in a hundred different ways: a fired employee sues for wrongful discharge; a competitor charges patent infringement; a consumer claims injury from using your product.

The situation grows worse every year. More than 16 million civil cases were filed in state courts in 1987, 239,000 in federal courts -- one case per every 15 people in the United States. The cost to business is staggering: U.S. companies spend more than $20 billion a year on litigation, not including the cost of settlements and judgments. In individual cases, the typical battle over depositions and documents often lasts for five years and legal fees can exceed $100,000. Many small companies are forced to cover these costs by cutting into budgets earmarked for sales or product development (see "The Case of The Stolen Secrets," page 2).

Lawyers shoulder much of the blame for the expense of litigation. Their economic self-interest may prolong some cases that might otherwise be settled. What's more, few chief executives actively manage their legal disputes; they fail to apply the kind of cost-benefit analysis that lends discipline to other areas of their businesses. Even companies with sophisticated cost controls hand their lawyers what amounts to a blank check.

Aside from depositions, most CEOs involve themselves at only two stages of a dispute: when the suit is filed and when it is close to trial. "Until push comes to shove on the courthouse steps, there is no input from business executives," says John H. Wilkinson, a litigation partner with Donovan Leisure Newton & Irvine, in New York City. "They don't ask the hard questions: what do I stand to win or lose? What numbers would represent a good settlement? There is no analysis until they've spent, in some cases, millions of dollars. But a risk analysis could have been made as effectively before they spent that money as after."

Managing a dispute involves taking a tough stance on legal expenses. A lawyer's search for a smoking gun can cost at least $1,000 for a day of depositions, far more for skirmishes over the release of documents. "Are you going to spend thousands of dollars looking for a document when it's one chance in 500 that it even exists?" asks Wilkinson. "Lawyers keep going without any check from the court or the client."

Managing a dispute can also mean never going to court at all, but settling at an early stage of the litigation process. There have never been so many ways to step outside the legal system to settle a case quickly and inexpensively using alternative dispute resolution (ADR) techniques.

The old warhorses of ADR, arbitration and mediation, still enjoy popular support, but the 1980s have introduced new techniques for settling disputes. Minitrials, for example, bring lawyers and executives together for a one-day argument of the case; most such cases settle soon afterward. Some companies employ their own "rent-a-judge" to hear a case. Even the courts promote ADR. Many federal judges conduct their own summary jury trials (see "The Case of the Slow-Moving Elevator," page 4) or appoint special masters to settle complex cases involving multiple parties.

Given the variety of ADR procedures, only the will to try it may be lacking. Many executives insist on having their day in court. Few, though, ever do. About 95% of all suits settle before trial, often on the courthouse steps. The ADR movement attempts to accelerate the settlement process so that companies can get back to work.

One of the primary advantages of ADR is that the litigants can choose the neutral third party, an important consideration in complex cases. Recently, for instance, litigants in an antitrust dispute selected a former antitrust chief of the U.S. Justice Department to hear their case (see "The Case of the Price-Fixing Cartel," page 3). Litigants can make the proceeding binding or nonbinding, and can set the rules in advance. Private proceedings can also discourage unwanted publicity.

Most executives say an ADR proceeding allows them to see the relative strength of each side's case for the first time. "At this point," says Frank Sander, a Harvard Law School professor, "with the lucid picture they don't get when they talk with their lawyers, they can make a business decision about going ahead with the lawsuit or trying to settle." Catharsis plays a major role, too. "People who feel they've been wronged want their day in court," says Eric D. Green, cofounder of Endispute Inc., a Washington, D.C., dispute-resolution firm. "But it doesn't have to be in court. They just need to lay out what a bastard the other side is before they're ready to settle." In settling, both parties can protect their interests, sometimes using more creative solutions -- a new contract or creative payment methods involving goods or services instead of cash -- than a judge or jury could devise.

No one knows how many lawsuits are settled using ADR, but the number is certainly growing, creating a new industry in the legal trade. In California, Judicial Arbitration & Mediation Services Inc. (JAMS) employs more civil judges than the Los Angeles Superior Court, one of the largest in the country.

Anecdotal evidence points to enormous savings if companies choose ADR early. One survey found that litigants in 31 lawsuits saved a total of $49 million in legal fees by using ADR to settle disputes ranging from relatively simple contract cases to complex antitrust actions. That kind of flexibility makes it likely that the movement will grow. More than 350 companies, many of them from the Fortune 500, have signed a pledge to pursue ADR whenever they become involved in a legal dispute. Small companies appear to use ADR less frequently, probably because few are aware of its advantages.