Litigation Protects and Ruins Businesses: Litigation Impact on Cost, Valuation… Social Media… Outlook for Litigations–2013…

Litigation is the pursuit of practical ends, not a game of chess. ~Felix Frankfurter… U.S. has more frivolous lawsuits and greater– cost of litigation per person– than any other industrialized nation in the world, and it’s crippling the economy. ~Jack Kingston

It’s inevitable that most businesses will face at least one legal dispute… Business litigation takes many forms, including; contract disputes, premises liability, misrepresentation, patents, employment matters… All have potential to bring about unwanted consequences for both small and large businesses.

According to Stephen J. O’Connor; ideally, business disputes can be resolved without resorting to litigation through direct negotiations, mediation, or arbitration, which are often faster, less expensive, and more private than litigation. However, sometimes litigation is unavoidable. When parties are not willing to consider other options or have found alternatives to litigation unsuccessful than litigation must be considered.

However, litigation has major drawbacks including: Negative impact on a company’s bottom line, publicized employee disputes tarnish company’s reputation, accusations of fraud or contract disputes can force a company to put business on hold… Litigation can ultimately diminish a company’s value, drive down sales, or even cause a business to fold.

The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time.

The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that can decrease consumer confidence in company, regardless of whether the allegations are valid or whether the company is ultimately found liable…

Impact of Litigation on Business and Economy: There are two ways to measure economic harm caused by large number and often merit-less litigation: First, there are direct costs that defendants must bear to defend themselves, even against groundless suits. These costs can include; spiraling legal fees and expenses for discovery, documentation, pre-trial proceedings, trials, time that executives must spend preparing for and being deposed and testifying at trial, increased budgets to fund in-house law departments…

Under rules of the U.S.’s legal system, these costs are rarely recouped, even when a suit is so lacking in merit that a judge dismisses it. These direct costs also factor into additional litigation cost; e.g.,  company’s decision to pay settlement simply as price of avoiding the costs (e.g., financial, reputation, executive distraction…) of a trial. The second area of economic harm goes well beyond defendants’ immediate litigation costs to include– the larger losses to society as a whole.

For example, as litigation costs take an increasing share of company budgets, the result is fewer resources available for– research, capital investment, market development and other areas that boost productivity and generate new jobs. As surveys shows, U.S.’s many litigations directly impact its businesses’ ability to innovate; produce new goods and services and overall employment:

  • Survey of 500 U.S. CEOs found that lawsuits caused 36% of their companies to discontinue products, 15% to lay off workers, and 8% to close plants.
  • Gallup survey of U.S. small businesses found that 26% of owners said– fear of liability kept them from releasing new products, services or operations to the market.
  • U.S. state-by-state economic analysis of employment and productivity in 17 industries showed states that adopt reforms to reduce abusive litigation practices– exhibit higher productivity growth than U.S. states that do not.

In the article Litigation Outlook For 2013 by Daniel Fisher writes:  This year, for lawyers, Obamacare will be the gift that keeps on giving: The hastily drafted, 2000-page law that virtually no one read in its entirety before voting on it left so many details to government bureaucrats that it will provide grist for litigation for years to come.

According to Paul M. (‘Mickey’) Pohl; the first Obamacare case are just the tip of the iceberg, there will be huge amounts of litigation over other government regulations… For example; plaintiff lawyers will target manufacturers-big retail chains with litigation over relatively trivial matters, such as; wording on product labels… Pensions will also generate litigation as state and local funds run out of money and creditors challenge the idea that pension obligations stand before all others…

Hovering over all this is the ‘National Labor Relations Board’, which has angered businesses with politicized actions like the lawsuit against Boeing for shifting jet production to right-to-work South Carolina. Lawyers for social media firms will be busy as litigants testing boundaries of traditional law as it applies to new technology. Short-sellers who post baseless accusations against public companies… and people who commit slander online will face lawsuits for damages...

Finally, banks will continue to see lawsuits challenging lending practices and other consumer issues. Pohl and his colleagues’ list five categories that they think will provide especially lucrative employment for lawyers:

  • Regulation: Obamacare, environmental restrictions, new financial rules will all spawn litigation…
  • Consumer class actions: Manufacturers and retailers–consumer protection, product labeling…
  • Financial: Consumer banking and financial institutions lending practices…
  • Social media: Internet-website privacy, content, slander…
  • Pensions: Under-funded pensions– public-sector employees on one side and creditors and taxpayers on the other…

In the article Protect Your Business by lawyers.com writes: Any day you get served with a lawsuit is not a good day for your business. You cannot ignore lawsuit without suffering a judgment against the business; expect that defending lawsuits will involve an uncertain amount of time and money. However, by taking immediate action and active role in your defense, you increase your chances of achieving your best possible resolution…

As soon as your business is served with a lawsuit, important deadlines are established regarding your right to defend against the lawsuit. If you do not take appropriate action within deadlines, you can put your business at disadvantage and potentially lose your right to defend– even if the lawsuit has no merit.

You must immediately notify your company’s lawyer about the lawsuit so that your lawyer can determine important deadline dates. Promptly investigate the lawsuit’s allegations by determining who in your business is a potential witness and what business documents may relate to allegations.

Share information with your lawyer, as soon as possible, in order to determine the best way to interview witnesses and preserve documentation. However, lawsuit is not the only means to resolve a dispute, even after the lawsuit has been filed: Arbitration, mediation, neutral evaluator, settlement conference… are alternative dispute resolution that can be used instead of, or in conjunction with, a lawsuit.

Although the procedure differs for each alternative method, as a group they are less formal and generally less time-consuming and expensive than a lawsuit. You should evaluate your options regarding alternatives as soon as your business has been sued…

In the article Litigation: Risks and Opportunities of Social Media by Michael Lynch writes: Growing case-law allowing for the discovery of social media content has significant implications for litigation strategy… Although the growth and popularity of social media affects numerous aspects of litigation, the role it plays in civil litigation discovery has been one of the hottest issues.

The ‘Federal Rules of Civil Procedure 26(b)’ allows liberal discovery, such that; any non-privileged matter that is relevant to any party’s claim or defense– is discoverable. Most states have a similarly broad approach to discovery. In the past few years, social media has already dramatically changed the scope of discovery, and courts are weighing in on when social media content is discoverable.

As technology advances, potentially discoverable information that is generated and stored in social media sites must now be considered as part of litigation strategy. The growing case-law allowing discovery of social media content has significant implications for litigation strategy for both parties. Lawyers and their clients must keep in mind the risks and opportunities associated with social media.

One important step is to evaluate early on in a case whether relevant information exists on social media sites. This includes– researching information regarding the opposing party that can support its claims or defenses, and seeking discovery of such information. Even before litigation, lawyers should advise their clients that social media content may be discoverable. For instance, companies that use– blogs, Facebook pages, or other similar social media to promote themselves should be cautious about the nature of the content.

Companies should be aware that simply because the technology is private or available only for internal use will not necessarily insulate the content from discovery. Also, these issues may not just be limited to company-sponsored content; it could possibly extend to content that employees post on their personal social media sites…

What is the ‘value’ of litigation? Placing a value on litigation– that is, determining the probable outcome and its potential financial impact– is important for several reasons. For instance, it not only can help you weigh relative costs and benefits of various litigation strategies, but it’s also relevant for business valuation and financial reporting purposes.

The value of litigation is particularly significant in light of the ‘Financial Accounting Standards Board’s (FASB’s) proposed changes in the way loss contingencies are accounted for and disclosed in a company’s financial statements. These changes raise some concerns regarding potential disclosure of litigation strategies and confidential information.

Accounting for litigation and other contingencies is a challenge. But FASB’s proposed changes raise significant concerns, particularly from the defendant’s perspective. Under current standards, contingent assets, such as– a plaintiff’s potential recovery, generally aren’t recorded on financial statements until they’re recognized– in other words, until the litigation is completed and the contingency is resolved.

Contingent losses, on the other hand, such as– a defendant’s potential liability, may need to be recorded or disclosed in the financial statements. Loss contingencies are classified as– ‘probable’, ‘reasonably possible’ or ‘remote’. Companies must accrue contingent losses that are probable, provided the amount of the loss can reasonably be estimated. If a loss isn’t accrued, it must be disclosed if there’s at least a reasonable possibility that a loss has been incurred…

When making litigation-related decisions (such as; settle a case or bring it to trial), it’s helpful to view litigation as ‘investment’. For example, valuation experts use a variety of techniques– including; decision trees, real options analysis, discounted cash flow… to determine the potential ‘return on investment’ of various litigation outcomes. Also, from a business valuation perspective, pending litigation can have a big impact on what a hypothetical willing buyer would pay for a business; i.e., pending litigation increases a business’s risk, which in turn has an adverse effect on its value…

A courtroom is generally the last place any business would want to be. Aside from the large legal bills associated with corporate litigation, there is the added stress and time taken up by being involved in legal disputes.