Litigation is about dollars, not about 'right' vs. 'wrong'

By Henry C. Krasnow

Family business owners who approach the process objectively will waste less money and energy on an intrafamily lawsuit.

Lawsuits involving the family members who own a family business are notorious for wasting money and energy. This waste could be avoided if the parties had a better understanding of the litigation process and set goals that are realistic and achievable.

Many think of litigation as a process to determine who is “right” and who is “wrong.” The legal system, however, does something different —it resolves disputes based on uniform rules applied as consistently as humanly possible. Family business owners who think of a dispute only in terms of what is just or unjust are stuck in a paradigm that is incongruous with the system in which they are operating.

Seeing a dispute as a test of one’s principles or an opportunity to affirm one’s righteousness destroys the opportunity to reach a compromise that saves money and time and avoids the risk of losing more of both. Viewing disputes as moral or ethical battles is almost always economically unwise.

Family business owners should not let emotionally charged disputes blind them to the fact that they are running a business. Objectivity is required; without it, no business will make informed decisions about any issue, especially litigation.

Risk is a factor

All lawsuits involve risk! This is true even if one side has many willing witnesses or an expensive lawyer who has found cases exactly on point.

Lawyers don’t offer guarantees. A case that certainly can be won can just as certainly be lost.

• “The law” is not a simple set of clear rules. If the law were simple, lawyers wouldn’t be able to charge so much to argue about it. For each on-point case your lawyer produces, the other side will produce a case suggesting that you are wrong.

• Like all people, judges and juries make mistakes.

• Key witnesses may be unavailable, die, move away, forget or even lie.

• It is never easy to prove that something is a lie. And even if you tell the truth and your opponent lies, the judge might not believe you.

• You may be right but have no evidence other than your own testimony.

• Your witnesses may have lied to you because they knew what you wanted to hear.

• Written documents often are ambiguous.

• The “truth” is usually hard to determine. Two people may genuinely and honestly have differing understandings of the same conversation or event.

Lawsuits are not metaphors 

Business owners may sometimes be faced with a lawsuit that has metaphorical import. Discrimination claims from employees who are fired may affect how subsequently fired employees react.

But how a family business owner deals with an unhappy family member will rarely affect anyone else. Buying out a sibling or having a cousin/shareholder leave to start a competing venture is probably a once-in-a-lifetime experience. Risking a huge amount of money or the success of the business to establish a “principle” makes little sense if the situation has little likelihood of recurring.

Time is money

Lawsuits take up a shockingly large amount of a family business owner’s time and energy. Preparation for a three-hour deposition can take a full day. Producing documents can take weeks. If you run a profitable business, this time can be better used to make money. Sometimes, it is good business to pay more than what you think someone’s claim is worth simply to be done with the time requirements of a lawsuit.

A friend of mine, along with his brother, inherited a business started by their father. The father had hoped the business would stay in the family and be the glue that held the family together. My friend ran the company while his brother practiced medicine.

The brother wanted to be bought out. But my friend, who had all of his capital tied up in the business, did not want to borrow money and knew his dead father had never wanted him to have to go into debt in this way. When his brother brought a suit claiming mismanagement, my friend was outraged. He had done his best, not stolen a cent and knew this was legal blackmail.

A trial would cost him $150,000 in legal fees and thousands of hours of his own time and that of his business staff. His lawyer correctly pointed out that he had an 85% chance of “winning,” but he also had a 15% chance of losing. He ultimately bought his brother out, using the money he would have paid the lawyers plus an additional amount the company borrowed.

My friend went on to be fabulously successful, having rid himself of the constant second-guessing that he had put up with for years from his brother. Yes, it was difficult to give up the dream of fulfilling his father’s wishes, and yes, the payment was a “victory” for his brother. But, ultimately, it was a bigger victory for my friend: He was free of his brother’s constant criticism, desire for greater distributions of cash that could be used for working capital, and resentment of the “perks” that the business was providing.

Settlements are not losses 

Litigation is a “good news, bad news” situation. The bad news is that it is not possible to guarantee the outcome. But the good news is that, as uncertain as you may be about the outcome, so, too, is the other party.

Settlements are not failures, signs of weakness, evidence of poor leadership or defeats. Settlements, if agreed to at the right time and for the right amount, are victories.

Wise leaders deal with litigation by addressing the same question they would ask before making any major business decision: “In view of the risks involved, is my projected investment of time and money [legal fees] wise in terms of the likely gain [if you are trying to get someone else to pay you money] or reduction of loss [if you are trying to avoid paying someone else money]?”

When the matter is framed as a business decision, the business owner has an intellectual framework within which to evaluate the alternatives in lawsuits. 

For example, is it better to pay $500,000 for a 20% interest in the company or to invest a non-refundable $150,000 in legal fees (and a great deal of company staff time) to have a trial in which there is a 25% chance of losing and having a judge appoint someone else to run the company?

Litigating is negotiating

Von Clausewitz, the great German military theorist, observed, “War is a continuation of diplomacy by other means.” The same idea was expressed more colorfully by a mythical Chicago police officer who purportedly said, “It’s much easier to get things done with a smile and a gun than with just a smile.”

A diplomat cannot negotiate a resolution of an international dispute without the ability to wage war or repel an invader. The threat of war is a tool to use in reaching a “diplomatic” resolution—a cease-fire or truce based on the mutually perceived benefit of avoiding the mutual destruction that will occur if war is pursued.

Similarly, family business owners make the most rational and efficient decisions by understanding litigation as a continuation of a negotiation and not the end of a negotiation. Litigating and negotiating are not mutually exclusive.

Most people (lawyers included) view litigation as a process of preparing for and then pursuing a trial. But data show that in all but a few rare instances, litigation is a process of preparing for and pursuing a settlement. More than 95% of business lawsuits are resolved by compromise.

Legal fees as an investment

All lawsuits can be settled in a heartbeat. Give the other side what they want and they will always settle. But what they want will change from week to week.

Always be aware of the price (at that moment) that your opponent has put on a settlement. Once you know this, you can think of legal fees as an investment into changing that figure. Set investment goals. Assess the risks. Determine the other potential uses for that money. 

Do you want a 10-1 return, a 5-1 return or a 1-1 return on the money you invest in your lawyer to change the other side’s position? Can you get a better return for less risk by investing the money elsewhere in your business? Think of the process as one of making incremental investments based on the likelihood of achieving a goal. Think of legal fees as an investment into changing the status quo.

Henry C. Krasnow is the founder of the Chicago law firm of Krasnow Saunders Cornblath LLP (hkrasnow@ksc-law.com). He is the author of Your Lawyer: An Owner’s Manual, published by Agate Press.

Article categories: 
Print / Download
Issue: 
Spring 2011

OTHER RELATED ARTICLES

  • Low Interest Rates — Recession or Distortion?

    Financial markets have been volatile for the better part of the last two years. In the meantime, the current U.S. economic expansion has progressed to now become ...

  • September/October 2019 Family Matters

    [[{"fid":"11287","view_mode":"default","fields":{"format":"default","field_file_image_alt_text[und][0][value]":false,"field_file_image_title_text[und][0][value]":false},"type":"media","field_deltas...

  • July/August 2019 Family Matters

    Kyle Fernley has been named the fifth president of Fernley & Fernley, a 133-year-old association man­agement company based in Philadelphia.

    Fernley has also been named p...

  • Building a community

    When Family Business Magazine debuted in 1989, business leaders who had grown their companies after returning from World War II service were passing the baton to their baby boomer children...