Originally appeared in Commercial Litigation Review, Vol. 7, No. 2, May 2009.
The Corporate Defendant
In an article titled "The Corporate Plaintiff: Litigating for Profit?" recently published in the Commercial Litigation Review,1 this writer discussed aspects of the management of client-sponsored litigation. The article was geared toward corporate counsel and written for in-house counsel who sponsor, manage and conduct the corporate plaintiff's side of a commercial dispute. To maintain continuity, this article will continue in the same voice – that is, written as if it were directed to in-house counsel.
In "The Corporate Plaintiff," short shrift was given to the defendant's side – aside from a short passage that summarized the rules of engagement of defensive litigation. That passage is set out below for convenience:
Corporate counsel are fully adept at managing litigation when the company is pulled into court. The routine is relatively straightforward:
- retain appropriate outside counsel;
- determine and set the litigation budget;
- augment the departmental budget if the projected expense is unanticipated;
- analyze the legal issues and obtain an opinion from outside counsel as to the likelihood of success;
- conduct a cost/benefit assessment with the risk profile in mind;
- set the corporate objectives;
- determine and implement a litigation/settlement strategy;
- implement an internal and external communication and reporting plan;
- create the internal support team.
"Hope for the best; prepare for the worst" is the mantra. It would surprise the writer if most, if not all, corporate counsel did not have written policies and protocols in place to manage litigation.
This list was not intended to focus on the defendant's perspective – perhaps a recognition that most corporate clients actually do know what to do when they get sued. That said, the purpose of this article is to now look at these points from the defendant's perspective. Rather than expand them all, this article will focus on the key points.
Remember that the plaintiff has planned for the day of the lawsuit. The plaintiff has already gone through the process of selecting counsel, preparing its case and initiating the lawsuit. In many cases, the corporate defendant will not be caught unawares but will not be as prepared as the corporate plaintiff in the initial days of the dispute.
Setting the Objective: Make It Stop
When counsel defends litigation, the tactical and strategic objectives are obvious. Determining what tactics to deploy is a relatively easy task. For the purpose of this discussion, tactics are the tools or weapons that you have at your disposal to reduce the plaintiff's leverage or increase your bargaining power. They include mounting a counter attack, claiming a set-off, delaying the day of reckoning or seeking out an internal or external conciliator or facilitator to talk the parties out of the dispute. If you have tactics at your disposal, you would use them.
Settling on a strategy is a slightly more difficult step. The strategy is to minimize or eliminate the potential liability in the most cost-effective manner, preferably with the goal of getting rid of the dispute. The question is how. Answering this question is difficult at the outset for a number of reasons. First, the threat of litigation causes disruption. However well a fire drill is conducted, when the alarm is pulled for real, a level of panic always ensues, followed by an intense need for immediate action. At that moment, it is hard to formulate strategy.
Second, the threat is largely unknown at the outset: the threat will have just arisen; it has yet to take shape. Without being able to define the scope and extent of the threat, you certainly have no way of knowing how the dispute is going to evolve, let alone resolve itself.
Third, there is always the "CYA" factor – the tendency of stakeholders to spend the precious first hours trying to unwind the tape and sort out the history of how and why the company got into this mess. At the commencement of a lawsuit, there is always a great deal of drama. This is all natural, understandable and ultimately manageable. However, the drama does have the effect of delaying the development of a clear objective. The key for corporate counsel is to understand that drama will happen and to ensure that it does not distract you from the main goal of initiating a defensive protocol.
Step One: Retain Counsel
The plaintiff will already have counsel actively engaged. The first step is to put the formal aspects of the case in the hands of trusted litigation counsel. Most in-house corporate counsel have lists of approved counsel.2 In many cases, the list will point you directly to the right counsel or combination of counsel to do the job. You will want to choose the right lawyer or team to deal with all of the cross-functional challenges that a file presents. For example, in a patent case, you may want a lawyer who knows his or her way around the Patent Act as well as around the courtroom. In a patent case with an antitrust component, you may wish to have a competition lawyer on board. You will want a counsel with whom you can communicate effectively and in whom your stakeholders will have confidence. If you need to screen counsel, do it quickly. If you create a "virtual firm" of leading experts, appoint one as lead counsel and demand that they work together seamlessly. Put the early stages of the case in your lawyer's hands to allow you to attend to other important issues.
Step Two: Size Up Your Opponent
You are likely to know quite a bit about your litigation adversary. But do not stop merely at what you know. Learn as much as you can about the plaintiff. Why are they suing? And why now? What is the true motivation behind the lawsuit? Who are the decision makers? What are the points of contact between you (or your client) and the aggressor? Focus and funnel the nervous energy of those back at the office by delegating these tasks to them. By better understanding relationship issues, you may be able to solve the problem at the outset.
Step Three: Identify the Claims and Grounds
Ask your outside counsel, early on, for a description of the claims and the grounds supporting the claims. This is not the time yet for detailed research memoranda. You are looking for blunt advice so that you can paint the picture in broad strokes – sound bytes – to your stakeholders. To do this effectively, you really do need to be working with counsel who can quickly and comfortably sketch out the case against you and the material facts that are required to make out that case. The purpose of this exercise is to bring some focus to the early days of the lawsuit. You will also be required to report, in a preliminary way, on the nature of the lawsuit. In reporting, you will want to be able to frame the debate – to have the client consider context before detail.
Step Four: Conduct Initial Case Assessment
With your outside counsel's legal framework, the in-house counsel will be able to take counsel's broad themes and focus on internal information and facts. For example, in remembering that the plaintiff bears the onus in its case, you may determine that you do not need to fight all elements of the cause of action. If plaintiff has to prove A, B, C and D to win, you do not have to disprove all of A, B, C and D: you can win if you establish that C does not exist. Initial case assessment is meant to sift out issues and amplify and clarify the factual issues that will ultimately be determinative. If the key factual issue is the credibility of a senior executive whose time is invaluable, whose patience is short and whose reputation cannot withstand an adverse credibility finding, then initial case assessment has done its job. At this point, some early and easy decisions can be made (even before you proceed to a more detailed and elaborate risk assessment). If the case looks like a loser at this early stage, it would be silly to think that the chances of success will get better with age. If the case is hopeless, the strategy will obviously be to settle it at some point.
Few cases, however, will appear to be completely devoid of merit at the outset. Often the facts need to develop further before categorical judgments can be made. But a quick and dirty initial case assessment has its purpose. It will help you and outside counsel to quickly identify the initial positions that you will take in the litigation. At this point, the case will be in outside counsel's hands. Counsel will direct (preferably with in-house counsel's active involvement) the mechanics of pleading, discovery and ultimately trial.
Step Five: Conduct Early Case Assessment
Aside from the conduct of the litigation case proper, one vital step is incredibly important for you to focus on while counsel is working on the defence. Distinct from initial case assessment, early case assessment is a more detailed analysis of the likelihood of the plaintiff's claim succeeding, the exposure of the corporate client in relation to the claim and an accurate assessment of the costs of defending the lawsuit.
Early case assessment is typically done within four months of the initiation of the lawsuit – once the pleadings have closed and the major documents have turned up. At this stage, you will be relying on your counsel to teach you the gradations and limits of the law. You will need to master the facts and completely understand your witnesses' ability to set these facts out coherently. By applying the particular facts of your case to your counsel's analysis, you should be able to determine the likely legal outcome of the dispute. Do not limit this exercise to the facts as asserted (pleaded). This exercise should also be conducted on the facts as you know them. Anything can happen in litigation – and it usually does. So do not pretend that bad facts do not exist. Assume that these facts will emerge in the litigation. You need to know at the outset how the bad facts will affect your assessment of the case.
You will also need to find the money to conduct the early case assessment. Being proactive and being prepared can be expensive. True. But, in relative terms, the costs are meagre. And this is not just the wishful preaching of a Bay Street litigation partner who enjoys earning fees from advising clients through the stages of early case assessment. The benefits of early case assessment are clear. In a 2007 survey of U.S. litigators conducted by Cogent Research, on behalf of LexisNexis, the following data were generated:
- 76% of respondents said that early case assessment resulted in a favourable outcome.
- 50% of respondents said that early case assessment resulted in reduced litigation costs.
- 87% of respondents said that early case assessment helped determine the best way to proceed in a case.
- 57% of respondents said early case assessment made it easier to prepare more accurate litigation budgets.
And while the vast majority of lawyers that perform early case assessment find it be an important part of their work, there is still work to be done. The survey reported that practitioners felt that they could do it better:
- 66% of respondents said that their case assessment skills could be improved.3
- Almost 66% of respondents said that time is the greatest impediment to performing effective early case assessment.
Fortunately, just because respondents were honest enough to answer that they were not as proficient as they would like to be at doing early case assessment, that did not mean that early case assessment had to be avoided. Indeed, the data underscore the awareness and need for early case assessment.
Almost 90% of lawyers who conduct early case assessment do so on a case-by-case basis. This point is made because we often look for protocols, checklists or programs to help us with our early case assessment. Although there does not appear to be any set protocol used in every case, some strong themes recur. These are summarized below:
Early case assessment is usually conducted within 120 days.
Examine key facts; interview key witnesses and analyze applicable law.
Look for "smoking guns" that might initiate or propel settlement.
Determine the cost of the various steps of the proceeding to understand the case's cost/benefit ratio.
Determine what makes sense from the perspective of the business, including the anticipated staffing of the case.
Do the practices or policies of the corporation need to be adjusted in light of this lawsuit? (If this question is answered affirmatively, it may suggest a reason to settle.
Determine the range of financial outcomes on the basis of the legal analysis.
The benefit of early case assessment is that it will assist you in crystallizing the most important themes and strategies in the case. This will help a litigation plan to be efficiently developed and clearly executed. It will also highlight critical links in your evidence, which in turn will indicate which employees you may need to involve in, or safeguard during, the litigation. It will also help you to create a principled framework upon which to base any future settlement discussion.
Step Six: Deciding When to Settle
In "The Corporate Plaintiff," it was suggested, again from the plaintiff's perspective, that the best prospect of realizing a solid financial recovery is to force a favourable settlement. The thought was simple: make the defendant want to settle rather than face a trial. Indeed, it now appears that there is some support for this proposition. In a recent statistical study of civil litigation cases in California,4 it was concluded that (and here I am taking some "litigation licence" in translating the work of eminently qualified statisticians and reporting the results):
- 60% of plaintiffs who were presented with a settlement offer in pre-trial proceedings declined the offer and failed to beat that offer at trial;
- 24% of defendants who were presented with a settlement offer in pre-trial proceedings declined the offer and failed to beat the offer at trial; and
- When these 24% of defendants went to trial, the awarded damages far exceeded these defendants' expectations – that is, they fared far worse financially than they expected they would.
Taking this data set alone, it is clear that if the question for these parties was whether to take the settlement or go to trial, clearly 60% of plaintiffs and 24% of defendants got it wrong – they should have settled.
The point of all of this, from the defendant's perspective, is that the defendant should not be bullied into a swift settlement. The data shows that plaintiffs more often than not fail to beat the offers made to them. Moreover, defendants do quite well at beating offers made by plaintiffs. Note, however, that there is a significant chance that if the defendant goes to trial and fails to beat the offer made to it, it will regret the decision by receiving an unexpectedly large damage award.
If we accept the data, what they may suggest is that defendants should not fold their tents at the first hint of a wind of adversity. They should not fear a rejection of their first settlement offer; they should not accept the first plaintiff's offer. Defendants should, perhaps, tough it out for a while – to ensure that they understand the case well enough to determine and pay out a fair and true settlement value. This is where early case assessment comes back in. You do not want to misunderstand your case to such an extent that it falls into that quartile of defendants that do worse at trial than they expected.
Defending the corporate plaintiff must be more than adopting a reactive mindset. The keys to managing defensive litigation are (a) getting the process started efficiently; (b) engaging in meaningful early case assessment to help you effectively determine and steer the litigation; (c) being prepared and patient to wait for a rational and beneficial settlement offer; and (d) being prepared to go the distance to eliminate the offensive threat at trial.
Andy Shaughnessy is a partner in Torys' Litigation and Dispute Resolution Practice. His practice focuses on intellectual property litigation and dispute resolution, and Federal Court practice.
1.Vol. 6, No. 4, December 2008, 48. The paper was first presented to a session of the Canadian Corporate Counsel Association annual meeting in August 2008.
2.If you do not have such a list, make one. In this market, most outside counsel would be more than happy to spend time to have you pre-qualify, or pre-select, them.
3.Try getting that admission out of your trial counsel about his or her advocacy skills
4.R.L. Kiser, M.A. Asher, B.B. McShane, "Let's Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations" (2008) 5 J. Empirical Legal Studies 551.
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