WHEN YOU NEED TO MANAGE THE LAWSUIT FILED AGAINST YOUR COMPANY

GUEST LETTER BY MONTGOMERY KERSTEN, JD, STANFORD LAW SCHOOL, 1980, FORMER FORTUNE 500 GENERAL COUNSEL, INVOLVED IN FAMOUS LITIGATION

Dear Founder,

How should you manage the lawsuit just filed against your company? Do not be alarmed: a lawsuit is not lethal; it’s just a thorn in a paw that needs to be removed.

Now, take a deep breath, push away your anger and indignation, and keep calm and carry on (as the British are fond of saying). Being served with a lawsuit is a “red badge of courage” that many ventures experience—in a bizarre way, it declares: “You have arrived.”

Most important: View this threat as just another business problem to be managed by the CEO. It is primarily a business problem, secondarily a “legal” problem. Don’t let any of your constituents worry about it; rather, get it out of their minds ASAP (there’s no upside in being a lawsuit defendant).

Having recognized that, as the CEO, your first question in considering how to manage this lawsuit should be: What are the business goals I wish to achieve for the company in managing this lawsuit? Emotion has no role in answering this question. And note: Lawsuits, by their nature, detract from and harm your focus on achieving your business goals in your operating plan. They are dangerous and parasitic and nonproductive. They require your acute attention.

How you proceed is all about managing the case; it is not about “attacking” or “prove them wrong” or “millions for defense, not a penny for tribute!”

Be clear in your mind about what your business goals are in resolving the lawsuit. Be dispassionate and seek to “get rid” of it, and not make it a “showdown at the O.K. Corral.” Young ventures with only a few millions in cash in the bank simply can’t afford multiyear lawsuits, and thus their strategies in dealing with them are wholly different from the big boys like the Fortune 500 that have already allocated multiple millions a year in the “business as usual” litigation budgets from their big legal departments. Most Fortune 500’s view their litigation budget as a “blunt-edged weapon,” which they invoke without paying attention to the merits of the cases they bring or defend. They are instead designed to destroy competition, with the advantage of a war chest (you have no war chest for lawyers).

Understand that the world of courts and judges and lawyers is a twilight zone; it is not a “business” zone, and thus, the normal, rational rules of business do not apply.

Don’t believe the portrayal of the law as depicted on TV programs—that’s utter fantasy. Instead, as a CEO responsible for preserving cash and building shareholder value, you cannot employ mere logic or business judgment to direct your actions. No, this is the unique legal forum, which has perpetuated from time immemorial (Martial, the court poet of the Emperor Nero complained two thousand years ago of “the law’s bitter tedious cases,” and Shakespeare lamented the “law’s delay” in Hamlet’s famous soliloquy). Thus, do not turn to “common sense” as a rule of how to proceed: rather, you must hire the very best, experienced, and clever lawyer possible (not necessarily the best name or law firm in the business or the most expensive) to lead this business problem to resolution (more on that below).

Yet, before retaining the “right” lawyer (it is not a law firm you hire, as much as retaining a specific partner you trust, who will care about your business more than his bills—a veteran partner you believe in), it is critical to be aware that any time a venture suffers a lawsuit, it has two problems to contend with:

1.  The “enemy” lawyers who will do all they can to twist the facts and the law and the merits, while dragging your cycles and billing your opponent to the max to win against you, despite truth being against them.

2.  Your own lawyers who by the nature of their business model, don’t want a quick fix, and instead often wish to extract as much money from your venture representing you in this case as they can accomplish while they hold your hand and say, “We are doing all we can!” (that is what “litigators” do) all the while getting you to think they are your savior, perhaps leading you to longer-term ruin convincing you they will prevail, rather than just settling.

Thus, it is critical that you retain a lawyer in a firm that you trust will place your business goals above their revenue/billing goals, and that both the lawyer and the firm value a long-term relationship with your venture far past the resolution of this case.

As important: Both must know the court you are in, must know the opponent law firm, and must know the judge well (we prefer if they play golf together).

Know what you are dealing with: the court system in America.

I often tell founders: Going to trial is dangerous no matter the merits and no matter the facts you think are in your favor. I’d rather be in a Las Vegas casino betting my venture’s money and future on the craps table where I understand the odds, than in a courtroom in front of a judge and jury, and a clever enemy lawyer, even if I am sure I’m right and “should” win. Do not believe that courts are the engine of truth—they are subject to human frailty and uncertainty and its consequent flaws and tears of “how could that have happened?”

Thus, startups almost never go to trial because it just costs too darn much (a lawsuit going to trial can cost as much as $2–4 million a year for a young venture), and the risks are often too great, and your case could backfire! And they suck unproductive cycles from all your team, and even your customers (not to mention your cash balance). Lawsuits are chess games, not checkers. They move slowly, and you must anticipate the next ten moves, and countermoves of your opponent. I tell founders that litigation is the sport of kings; sure, Apple and Samsung can afford multiyear patent battles (Apple’s law firm bill was over $60 million as publicly reported), but startups cannot afford to pay even a million dollars for any lawsuit defense. So, a lawsuit for a young venture (that you are defending, not bringing) is something to dispose of without losing, as rapidly as possible. Kind of like dog doo-doo on your shoe—get rid of it.

Thus, you should immediately assess:

• What are the business goals of the enemy plaintiff company (and its lawyers) in bringing this lawsuit?

• What are your business goals in resisting and disposing of the lawsuit?

• What is the best way to reach a resolution (whether settlement or go to trial)?

In devising an initial strategy for responding and managing, keep these guides in mind:

1.  Immediately defuse this public lawsuit in the eyes of your employees, investors, and customers (if needed to reach that far); be proactive in managing the PR of the lawsuit; don’t let it become a PR problem, nor an employee or a customer-relations problem, in addition to being a legal threat. Your goal should be to get it off their collective radar screen as rapidly as possible. A lawsuit is public knowledge, by its nature, so get proactive on how to respond, but keep in mind, the goal should be to take it out of the public mind as time progresses—don’t get into a PR pissing match.

2.  Rapidly retain counsel you trust (see above) and tell them everything under attorney/client privilege—your lawyer must know all the facts and the secrets and the issues behind it, and most of all constantly remind your lawyer of your business goals in resolving the suit.

3.  Quickly construct with your law firm the next ninety days of actions—assess the hope of marshaling a counterclaim against the plaintiff where, carefully and deliberately you may be able to determine a claim by your venture against the enemy, to put them back on their heels and begin to rethink “Was it a good idea to sue these guys?” You don’t want to be just on the defensive, but you should not bring meritless counterclaims, which will merely undermine your credibility and fuel the flames of a fire you wish to extinguish.

4.  Push your law firm to consider aggressive, judo-like strategies and tactics that force a resolution. Seek a win-win possible settlement where your opponent and you can both look like you “won.” And consider SOON getting aggressive about “discovery” where you seek to depose under penalty of perjury the senior executives of your opponent (after you have developed enough facts through interrogatories and other early discovery tactics). When the senior execs of your enemy find themselves under the microscope of your lawyers in a deposition room, their appetite for litigation often suddenly is lost. Many law firms save this move for a year or two into the litigation, but I like to notice the depositions of the top execs of my opponent ASAP.

5.  Stay on top of this as the CEO. Do not just delegate it to your CFO—lawsuits are dangerous, unpredictable, and can become boomerangs for all involved. Make sure you personally have a solid relationship with your law firm and the lead partner, where you drive them to focus on your business goals for the litigation and your cost-containment goals.

Cost control is critical. Mandate that the law firm you retain cannot staff this case with more than three lawyers: the lead partner, a junior partner, and one associate (and a paralegal).

I have prevailed with that staff against enemy firms with truly ten times those numbers—we were so more on top of the case than those many minions! And, know each of your lean staff’s billing rates. Review their monthly bills and question them (it makes a difference or they will bill as much as they can). Also, make sure you provide in the revised operating plan of your company for your best estimate of the ongoing expense, so your board is aware and you plan for it without destroying your cash plan.

Litigation is WAR.

Treat it that way: Go for the jugular of your opponent. Seek to kill them or neutralize them, rapidly. Yet, given that you are a small company, think: JUDO! Many a case can be resolved early on if you think out of the box, with a mind to what the enemy seeks, and what it fears. I’ve resolved cases for almost nothing, where dignity and honor and “mutual peace” prevailed, in light of the plaintiff’s goals (plus a magnum of champagne for the opponent). And if no compromise is possible, then do all you can to destroy the enemy while NOT distracting your company from achieving its business model. If your enemy is determined to destroy you no matter what, then delay and counterattack are the best tactics.

Do not give management of the case to your law firm; rather, manage their response to the lawsuit just as if it is a plan to build and launch a new product: with a plan, and a schedule, and a budget, and milestone reviews, while always being guided by the unemotional business mandate.

Sincerely,

Montgomery Kersten