Legal Ethics and Reform

The bringing of a lawsuit should be the last step in the process of settling a dispute. St. Paul, in Chapters 5 and 6 of his first letter to the Corinthians, says that if you have difference with your neighbor you should first try to settle it between yourselves and if that fails you should  get an elder from the chuch to review the facts and decide the matter, only as a last resort should the parties go to a court of law.

In America today, many people will file a lawsuit at  the drop of a hat before they even bother to inform the other party that they are upset or feel aggrieved. In fact many of these lawsuits are totally without merit. They are filed as a way to get the other person to pay some money just to get the lawsuit to go away. Such lawsuits are little more than “blackmail”.

The reason such frivolous lawsuits work is the high cost of civil litigation. A person who is faced with a lawsuit has to hire an attorney to mount a defense. This is very costly. Lawyers can cost $150 or more per hour and the defense of a lawsuit, even a very simple lawsuit,  is going to cost at least 80 hours or $12,000.

Suddenly the person has who is defending against the frivolous lawsuit is prepared to consider paying say $10,000 to settle the lawsuit rather than pay the $12,000 to a lawyer to defend the case. The math and the logic is irrefutable. Lawyers say it is  always better to settle rather than try the case if the cost of going to trial is more than the cost of settling.

The structure of a frivolous lawsuit is important for the “blackmailer” because the structure will determine the cost of defending the case and indirectly the probable settlement amount available. To better understand this point, an example follows which shows two different ways to structure a frivolous lawsuit given a hypothetical fact pattern.

Assume there is a corrugated box manufacturing company that is owned 40% by the company’s chief salesman, 40 % owned by the plant manager, who is also the President, and 20% owned by the other employees via an ESOP plan. Further the company has an appraised value of $1,000,000. This value being mostly determined by the company’s book of business rather than its plant and equipment. One day the chief salesman announces he is joining a competitor and wants to sell his 40% ownership interest and thinks his interest is worth 40% of $1,000,000. There are some conversations with some employees but no agreement is reached.  The plant manager and the other employees point out that his departure will put the company in a difficult situation; they say it is impossible to determine what his stock is worth until the company is stabilized perhaps in year or two.

The chief salesman realizes that the value of the company is going to drop as he gets more and more customers to switch their business to his new employer, so he visits with three different lawyers to inquire about his options. The first lawyer points out that he really doesn’t have a case against anyone and advises him to hope that his former employer prospers so his stock increases in value. The second lawyer says that if he is willing to testify that the conversations he had about selling his stock had risen to the level of an oral contract then he could sue for breach of contract and compel his old business associates to buy his stock at the $400,000 price; this lawyer further advises that the case is very weak since it involves an oral rather than a written contract, but the case might induce the other side to settle for $15,000 or $20,000.  The third lawyer suggests the same breach of contract lawsuit that lawyer number two suggested but he goes further and suggests that additional counts be added to raise the cost of defense and thus increases the chance for a quick, generous settlement. The additional counts the third lawyer suggests are fraud for
failing to honor the oral contract, a count against the company claiming the company was mismanaged and needed to be dissolved, and a count against the president saying he had to reimburse the company for injuries he caused the company through his mismanagement.

This final lawyer explains the logic of his suggestions. First, the fraud count when added to the breach of contract count allows the plaintiff to request both actual and punitive damages because fraud is an intentional tort and thus eligible for punitive damages. Second, the corporate dissolution count forces the company to hire an attorney other than the attorney representing the employees being sued under the breach of contract/ fraud count; the second count also allows the plaintiff to drag in any and all facts about the way the company was run over its multi-year history; these facts can be spun any way the plaintiff wants in his initial pleadings thus forcing the corporations’ attorney to spend time familiarizing himself with all these facts and the company’s explanation of why things happened the way they did. All this legal research into these facts is very time consuming, very expensive. Third, the count demanding that the company’s president make restitution to the company requires that a third attorney be hired to represent the president.

The final lawyer goes on to point out that this multi count, multi-defendant approach has the additional advantage of compelling the three attorneys on the other side to spend many hours simply communicating with each other as they prepare their defense. The simple breach of contract lawsuit suggested by the second lawyer might take $10,000 or at most $25,000 to defend and therefore might logically lead to a settlement of $10,000 or $20,000. However, the multi- count, multi-defendant approach will easily carry the cost of defense up over $150,000 perhaps to $300,000.  If the desired settlement amount from the frivolous lawsuit is in the $400,000 area the only approach that holds any chance of success is the third lawyer’s suggestion.

In the typical lawsuit there is heavy expenditure in the first month or two by both sides. The level of expenditure drops down until the trial date approaches, when the rate of expenditures rise dramatically. The exact percentages in each phase are hard to state exactly, but a rule of thumb might be 25% in the first six weeks, 20% in the period from initiation till the trial phase and 55% during the ninety days leading up to and through the trial. Since no lawyer is going to suggest a settlement until he is familiar with the facts and since the preferred strategy in a frivolous lawsuit case is to file the lawsuit and then discuss settlement, the typical frivolous lawsuit situation has seen about one quarter of the total cost of lawyers expended before settlement negotiations get underway. In the above example the defendants would likely have $40,000 plus into legal bills before the three lawyers handling the defense would feel comfortable discussing settlements.

The reader, who has a strong sense of right and wrong, might find himself disgusted by the the forgoing. This reader should remember that the frivolous lawsuit has one strong redeeming quality. Social and political commentators, such as deTocqueville, have pointed out that advanced societies need an aristocracy to function properly. In America, the aristocracy is largely centered in the legal establishment. This aristocracy needs to be supported and the frivolous lawsuit, for all its other faults,  is a very effective way to transfer dollars from the wealth holding and wealth generating class to the legal/aristocratic class.  So even a most distasteful process can have within it redeeming qualities.
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