The litigation roller-coaster ride Featured

7:00pm EDT December 26, 2007

Going to court should never be taken lightly. Even if a company wins its case, litigation may still take a significant financial and equitable toll on a company.

“Litigation has become an unfortunate reality for modern businesses,” says John Mark Jennings, a partner with Shulman Hodges & Bastian LLP. “If a company is contemplating litigation, it needs to have the right attorney, the right culture, the right people and the right financial resources to pull it off. Preparing for litigation beforehand can make a big difference in the case and goes a long way toward keeping the company focused during the fight.”

Litigation is particularly difficult for companies that find themselves embroiled in legal proceedings for the first time.

“In every case, you have to protect and brace your company for what is to come,” he says.

Smart Business talked to Jennings about how a company can prepare for litigation.

How can an executive manage expectations before entering into litigation?

Executives must consider and plan for the worst-case scenario before deciding if litigation is prudent. Many executives feel a moral imperative to seek justice against someone or something that has damaged their company. But just because your company is right, does not mean that litigation is right for your company.

Litigation takes commitment by key personnel to actively participate in the process. The toll litigation has on corporate officers and administrators is often significant. It is often very surprising to executives that their companies are scrutinized thoroughly as the parties in the case strive to find documents and analyze financial data. An executive may wish to consider if the company can withstand the bright light that litigation often sheds on the company’s inner workings.

If a company is about to embark on litigation, it has to be prepared to revisit the past. Looking backward is something at which many executives are admittedly not very good. The company officers will need to prepare themselves for this intellectual paradigm shift [i.e., thinking about things that they are not accustomed to thinking about] and be intellectually, emotionally and financially prepared for the impact that litigation will have on the company.

Another point is that CEOs — who are generally not accustomed to being told what to do — have to let the lawyers do their job. Executives should ask their attorneys all the questions they need to ensure the corporation is in good hands, but should also feel comfortable letting them handle the case. This will help lessen the burden on the company’s executives.

Why is a litigation budget good for business?

It is important for executives to have a general understanding of what litigation will cost — which means you have to know the whole process and what financial impact it will have on the company.

There are essentially two types of litigation budgets — those that are specific to a particular piece of litigation and those that are used to plan for future litigation needs. If a company is proposing or anticipating litigation, one of its principals needs to sit down with the company’s attorneys to discuss the potential litigation costs and to develop a budget based upon how the attorney expects the case to proceed. That way, the executive will be better able to justify litigation expenses to the board of directors.

Also, internal litigation budgets may be necessary for companies that compete in particularly litigious industries. Companies that engage in aggressive intellectual property pursuits or other core products are also good candidates to establish a litigation budget.

Some companies have the added benefit of an in-house attorney to assist with the coordinating and overseeing the efforts of outside counsel. Companies that do not have that luxury are forced to rely on their counsel to provide monthly financial and progress reports on the case. That reporting should also include the anticipated fees and costs in the next reporting period.

If a company has used the same attorney for years, should it consider looking elsewhere when litigation arises?

Chief executives are naturally loyal people. Because of that otherwise admirable quality, they tend to turn to the same attorneys regardless of the nature of the particular issue facing the company. That practice can sometimes be harmful when litigation arises. This is particularly true for small companies. Labor law, business litigation and intellectual property disputes are wildly different fields and should be handled by attorneys who routinely handle those types of claims. It is critical for an executive to ensure that his or her go-to lawyer is up to the particular challenge at hand.

It is prudent for executives to use their go-to attorney as a filter for selecting litigation counsel for a particular case. If the future of your company is riding on the outcome of litigation, the selection of which attorney to use may be the single most important decision made in the case.

JOHN MARK JENNINGS is a partner with Shulman Hodges & Bastian LLP. Reach him at jjennings@shbllp.com or (949) 340-3400.