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From the Archives: If you sue, can you win? If you're sued, will you lose? A manager's guide


Management Magazine Cover

Originally printed in Management Magazine: UCLA Graduate School of Management Magazine Vol. 1 No. 3 Spring 1982

By Charles Rosenberg

I can see the scene vividly in my mind's eye: Galactic Robotics has just been sued by its major supplier, Robot Arms and Legs, Inc. Arms and Legs is claiming that Galactic owes $1 million for breach of contract. The Galactic Executive Committee has just met and agreed, unanimously and emphatically, that it owes Arms and Legs not one red cent. Indeed, the arms and legs supplied by Arms and Legs have malfunctioned, customers have been complaining, and, if anything, Arms and Legs owes money to Galactic.

Galactic has hired the best law firm in town. One of the executives has just been to a fancy seminar which has taught hi that the chances for success in litigation can be quantified at the outset. So he is dispatched to see the lawyers and told to press for a number. He does. "What are our chances?" "50% 60%? What do you think?"

The lawyer hesitates. This is an important client, and he doesn't want to appear stupid or unprepared--after all, he's been looking at the case for almost a week: "Well, uh, maybe 80%," he says, "although there are some problems."

They talk about the problems, but the executive returns to the Executive Committee, happy as a clam, to report that "the lawyers say" that we've got a good case, an 80% chance of winning. The Committee calculates that this means only a 20% chance of losing-a maximum exposure of $200,000- and vows to fight to the death.

Six months later, Galactic settles by paying Arms and Legs $500,000, $300,000 more than "predicted" by the 80% success analysis.

Now you may be thinking, well, there was nothing wrong with the analytic approach the executive took, the lawyer just got his analysis wrong. To the contrary, however, I would argue that the initial conversation between the executive and the lawyer bordered on being meaningless -that it provided about as much useful information as you get when you ask the National Weather Service if it will rain next Tuesday.

In the first place, to predict the outcome of a suit like Arms and Legs vs. Galactic, a lawyer must have information about both the facts and the applicable law. Unfortunately, at the outset of a litigation, lawyers usually cannot know all there is to know about those things. Some facts, for example, will be subject to dispute and some may even be entirely in the possession of the other side. And where the law is unclear (which it often is in some critical area), the resolution of the legal issues will be entirely in the hands of a judge. Thus, any initial prediction of the outcome of a litigation must contain a large margin of error. The lawyer for the Galactic might better have said to his client, "I think you have a 60% chance of winning, but depending on how certain facts and law turn out, your chances could vary by as much as 30% in either direction."

Second, litigation goes through distinct phases. Each phase is information-rich as to unresolved questions of both fact and law. As a result, both the initial prediction itself and the margin of error in that prediction inevitably change as the litigation progresses and more information is obtained. The Galactic lawyer might more accurately have said, "if you come back after each phase of the litigation is done, I will give you a new prediction of the outcome, with a smaller range of possible error."

Third, it may be largely irrelevant to focus primarily on depicting the ultimate outcome because most litigations are compromised far short of trial and have no clear cut winners or losers. For example, in the federal courts, fewer than 8% of cases filed go to trail. Most of the others end in some form of compromise. The Galactic lawyer might well have said to the Galactic executive: "Look, if you insist, I can give you a prediction of who will win, but let's be more realistic and talk about how to position ourselves to extract the quickest, most advantageous compromise."

I do not mean to suggest by this that litigation should not be analyzed at the outset. Indeed, people in business deserve and should ask for a "straight answer" from their lawyers about the course of a suit. I mean to suggest, rather, that litigation is rough terrain, and that an outcome analysis, to be meaningful, must take account of litigation's inevitable hills and valleys and twists and turns. This article is intended as a rough road map of that terrain, with a few tips for travelers.

Phase 1: Looking Down the Barrel of a Complaint

Lawsuits start, formally, with the filing of a complaint by the plaintiff. Since if is taken as axiomatic that most disputes are settled before they get to the complaint stage, it follows that almost ever complaint has been preceded by some attempt on the part of the litigants to resolve the matter short of litigation.

The filing of a complaint is thus likely to have behind it a history of disagreement and failed compromise, and therefore to be an act with some emotional content- the plaintiff is usually fed up, or angry, or, at the very least, despondent over finding a private solution to the dispute.

Despite the heavy emotional context, complaints tend to be unemotional, uninformative documents. Indeed, they usually contain only a barebones recital of the plaintiff's gripe- a skeletal story at best. For example, if Arms and Legs were to sue Galactic, the complaint would probably be only a few paragraphs long, and recite only the following: (1) that there was a contract between galactic and Arms and Legs to produce arms and legs, (2) the arms and Legs had carried out its part of the contract, and (3) that Galactic had breached the contract by refusing to pay Arms and Legs, thereby damaging it in the amount of $1 million.

Galactic would be then be required to file an answer. But answers are even more cryptic than complaints; they are not required to explain or defined anything, but only to admit or deny the complaint's skimpy allegations. So Galactic's answer would likely be only a few paragraphs long. In would probably admit that there was a contract, deny that Arms and Legs had carried out its part, deny that there had been a breach, and deny, accordingly, that Arms and Legs had been damaged in any amount.

Thus, this initial round of litigation provides no real information to the participants that they didn't already have. It resembles nothing so much as a ritual dance in New Guinea. Remarkably, however, the ritual leads to settlement, without further litigation, in perhaps 20% of cases filed. There are four factors which, I think, account for this phenomenon.

The first is catharsis and recognition. For the plaintiff, the filing of a complaint is a hostile act, a close analogue to punching someone in the nose. For the defendant, the suit is often felt as if it were a punch in the nose. Yet these very emotions can often set the stage for compromise. For the plaintiff, compromise may come to seem more palatable because of the cathartic value of having finally "done something." For the defendant, compromise may come to seem more agreeable because initial anger is often followed by the recognition that the adversary, disliked and perhaps even belittled, will not simply "go away" if ignored.

The second is information supplied by a neutral outsider, each party's lawyer. That lawyer will inevitably point out the weaknesses in the client's case (only the rare care is perfect), together with the cost of pursuing the adversary's unconditional surrender.

The third is the passage of time. Because an answer is usually not filed until a couple of months after the complaint is served, the plaintiff's symbolic punch in the nose and the defendant's reaction to it are usually embedded, glue-like, in a two or three-month period in which nothing happens.

The fourth is isolation. Before the suit, the plaintiff and defendant dealt with each other in increasingly emotional ways. After the filing, the plaintiff and defendant do not talk directly to one another. If they do communicate, it is through their lawyers.

The situation might be summed up this way: After the emotional high of getting the lawsuit under way, with both plaintiff and defendant wanting vindication, there comes a relatively quiet time when both parties are permitted to contemplate the weaknesses in their position and the cost of going forward. Because they no longer have to deal directly, but can deal through intermediaries (lawyers) who are as yet emotionally uninvolved with the dispute, disputes which seemed a few months before to be at an emotional flash point, can be, and often are, compromised.

This phenomenon has several implications for people in business who manage litigation. It means that it is probably best not to enter into litigation, as either plaintiff of defendant, thinking of it as a war which will be fought to unconditional surrender. It means that you should, a the outset, let your lawyer know what parameters of compromise are acceptable. Otherwise, you may leave the lawyer with the false impression that you are not interested in compromise or will think poorly of the lawyer for raising the possibility. Finally, it means that it is not always best to hire the lawyer who eats ball bearings for lunch. Lawyers who have a fuller range of emotions maybe better at exploiting the "natural" openings for advantageous compromise that occur in this and other phases of the litigation.

Phase II: Moving to Dismiss (Or Getting a Judge Involved)

The first phase of a lawsuit has little to do, except symbolically, with the courts. Although the papers are filed at the courthouse, no judge ruses to read them, and, absent something further being done by the parties, the court will take no action on its own. Metaphorically speaking, only a large filing drawer takes notice of the newborn suit.

Either party may change this situation by bringing a "motion," which asks the court itself to take action. Although there are many kinds of motions, the second phase of a suit is frequently dominated by a "motion to dismiss."

A motion to dismiss, if brought, is always brought by the defendant and can usually be filed either before or after the answer. It says to the court, in essence: "Look, the complaint here is fundamentally flawed and should be dismissed because a critical piece is missing." For example, a complaint for breach of contract must contain an allegation that there was a contract. In Arms and Legs' Complaint for breach had somehow failed to include that allegation, Galactic would be in a good position to move to dismiss on the ground that the complaint lacked that fundamental element.

A motion to dismiss, then, is analogous to urging that a runner in a baseball game failed to score because, although he rounded the bases, he failed to tag third base as he went by. The problem is that if the motion succeeds, the other side usually gets a chance to amend its complaint and correct the defect. It is as if a judge finds that the runner has indeed failed to tag third base but allows the runner thirty days to go back and try again.

Many motions to dismiss thus result only in the plaintiff sharpening the details of the complaint through amendment. This is sometimes helpful to the defendant in understanding what the plaintiff is really driving at, but it is not, in and of itself, usually a major matter. The real importance of motions to dismiss lies elsewhere. Specifically, in some circumstances they can provide a great deal of information about how the court will resolve disputed legal issues in the case. A more detailed look at Galactic's litigation strategy will illustrate.

As associate has written the following memorandum to a partner to Galactic's law firm:

You have asked me to explore how Galactic might legally avoid paying full price for the defective parts which it received from Arms and Legs, but which have, nevertheless, been used in products sold to customers. Astoundingly, I have discovered that there is some possibil