Legal Ethics and
Reform 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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