I’ve been involved in lawsuits (fortunately, not for more than a decade), and believe me, they’re no fun.
To begin with, lawsuits are terrifically expensive. In the 1990s, I spent over US$100,000 in legal fees in a lawsuit I brought against a former business partner. A few years earlier, I spent nearly US$50,000 defending myself against a frivolous lawsuit brought against me by a scam artist in Costa Rica. I won both lawsuits, but never collected a dime from the loser in either case, and had to pay all my legal costs to boot.
Those were just the monetary costs. Add to that the enormous amount of time required complying with “discovery” requests, deposing witnesses, and preparing for trial, and the real costs can be many times higher than the legal fees alone. The more you value your time, the higher those costs.
For all these reasons, I’ve long recommended that my clients settle legal disputes before they wind up in court. And now, a new study confirms that this strategy is often the right one to take.
The study, published in the current issue of the Journal of Empirical Legal Studies, reviewed 2,054 lawsuits that went to trial from 2002 to 2005. Ironically, plaintiffs—those bringing a lawsuit forward—lost the most by going to trial. In 61% of the cases reviewed, plaintiffs received a less favorable verdict than they would have received if they had accepted the highest settlement offer. (And again, this counts only monetary costs—not legal fees or the value of plaintiffs’ time.)
In contrast, the decision to defend a lawsuit in court seems to pay off most of the time. Only 24% of the defendants suffered a verdict exceeding the amount plaintiffs demanded before going to trial.
However, I believe this statistic to be very misleading. Within that 24%, the average plaintiff settlement demand was $770,900 while the average verdict was $1.9 million. In those minority of cases, defendants were dunned an average of US$1.1 million more than they would have been had they settled. And again, neither legal fees nor the value of defendants’ time were included in the calculations.
Still, this study is the first one I’ve seen that seeks to empirically quantify the costs of settling lawsuits out of court versus going to trial. It clearly shows that the risk of litigating instead of settling is significant, even not including the very substantial costs of litigation itself.
Of course, the best strategy to stay out of court is to avoid legal disputes. That means taking steps such as recording all contracts in writing, and stipulating in them that any dispute is dealt with through binding arbitration, not through the courts. And don’t forget my top two strategies to avoid lawsuits:
- Keep your mouth shut; and
- Don’t flaunt your wealth.
Copyright © 2008 by Mark Nestmann
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