As anybody who follows the purchasing of legal services knows – and as any businessperson who does not should know – the topic of the last decade is reducing legal costs, particularly the potentially crippling costs of litigation. This is a necessary topic, which I’ve written about here. Money spent on legal services is money that cannot be invested in your customers, employees, technology, and other important parts of your business. Cottage industries have developed to help companies do this, focusing on things such as different methods of charging for legal services (alternative fee arrangements, or “AFAs”), or on applying business project management tools to legal work. Again, these are important topics and meaningful dialogue on these topics has improved the delivery of legal services.
But the dialogue seems to overlook what is the most effective way of lowering litigation costs: not litigating. Make no mistake, in our legal system, entirely eliminating litigation for your company is neither possible nor advisable. Smaller and/or newer companies may have managed to avoid litigation so far, but over time in business, you will go to court. You may even institute litigation yourself, for example, to protect your investment in company trade secrets, or to pursue your company’s rights under a business contract.
But much litigation is avoidable, and if companies focused their efforts on avoiding litigation as much as managing it, then they would really save money. Here are key considerations for entrepreneurial businesses to minimize litigation.
1. Be mindful about who you do business with. Smaller companies may have limited leverage in choosing who to do business with, but failing to do the appropriate diligence on your business partners will cost you money in the long run. Reference checks just as you might conduct on an employee are in order, and, with particular respect to this post, ask a lawyer you trust to do a quick check of local dockets and see what kind of litigation (if any) the potential business associate has been involved with. Certainly past litigation is not disqualifying, but if the potential associate has had disputes with other businesses in your shoes in the past, wouldn’t you like to know about that?
2. Properly document the relationship. As I have written before, a good contract will save you money, whether you get to the point of potential litigation or not. It is tempting to agree on a handshake, or even a casual exchange of e-mails addressing only the very basics of the agreements, but much litigation results from relationships that began with everybody on the same page and, for any number of reasons, devolved from that.
3. Change your oil filter. As I wrote here, for those old enough to remember the Fram Oil Filter ads, you can pay smaller legal costs now, or bigger legal costs later. It’s hard to invest in compliance and avoidance because you don’t have to – and you do have to pay your rent or mortgage and your employees and your vendors. But if you take the long view, the companies that are proactive on legal issues by writing good contracts, consulting with legal counsel about employee terminations, and making sure you are complying with laws that apply to your business, will spend far less money on litigations than companies that do not.
4. Consider other ways of resolving disputes. Consider alternatives to litigation such as mediation or arbitration, whether it is at the stage of entering into a contract where you can provide for such measures, or when you commence litigation. There is data suggesting that both lawyers and their clients are overly optimistic at the early stages of litigation. Experience at least tells me that clients’ appetite for litigation diminishes as the case progresses. I try to help consider at the beginning whether they will be as bloodthirsty a year (and thousands of dollars) from now. Your lawyer should help you consider these options.
One thing everybody can agree on is that litigation in expensive – not only in dollars but in other valuable resources such as your team’s time and attention. Your business will not avoid it entirely, but taking steps to minimize it will almost always be a good investment in your company.
Barnes & Thornburg LLP is a large full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business.