Articles

How To Control Your Legal Costs

Marshall H. Tanick
(email)
Mansfield, Tanick & Cohen, P.A.
1700 U. S. Bank Plaza South
Minneapolis, MN 55402
Tel: 612.339.4295
FAX: 612.339.3161

Start-up businesses face many challenges, but unnecessary legal expenses don’t have to be among them.

Some legal spending is appropriate. Attorneys’ fees for drafting corporate documents and employment contracts, for example, are wise investments for start-ups. But spending money on legal disputes isn’t prudent or productive. It’s painful.

Like more established businesses, start-ups can take several steps to avoid or minimize legal expenses. And those expenses involve more than payments to lawyers. The time busy entrepreneurs spend on legal disputes costs money, too. The divisive nature of many legal disputes is another intangible cost.

Problems that seem destined for lawsuits and disputes that cannot be resolved without litigation are prime candidates for legal cost-cutting.

Start-ups can rein in their legal costs by following these sound and simple steps.

• Try pre-litigation procedures. Many legal disputes can be nipped in the bud before time, money, and resources are wasted on them.
• Before you get embroiled in a legal dispute, consult experienced people in your industry to see how they have handled similar situations. Mentors can be invaluable in helping start-ups steer away from legal troubles or resolve them early.
• Don’t let principle override common sense. Disputes fought over so-called principles are often ego-driven and hurt the bottom line -- the real focal point for a fledgling venture. Once you have achieved some business maturity and success, principle can be more of a motivating force. In the start-up stage, it can be hazardous to the health of the enterprise.
• Choose competent legal counsel with expertise in the subject. The lawyer as generalist is a relic of a bygone era. Today, most lawyers tend to specialize, which means that they can be more efficient. Even if the specialist’s hourly fee is a bit higher than the generalist’s, the specialist’s greater expertise and familiarity with the subject will cut the amount of time spent on legal disputes and save you money. There are some lawyers who "cross over" and work in many fields, but a start-up business whose lawyer wears too many hats may be headed in the wrong direction.
• Try to do as much legal problem solving as you can without a lawyer. Self-help can often save money. But don’t be penny-wise and pound-foolish. A skilled and experienced lawyer can be invaluable in avoiding mistakes during negotiations, such as making damaging admissions that may come back to haunt you.
• Know your limitations. Trying to negotiate complex disputes without legal expertise is like trying to pull a bad tooth by tying it to string attached to a doorknob. You’re better off having a dentist pull the tooth and a lawyer negotiate a settlement. Trying to do too much yourself can make a bad situation worse.

Try to steer a legal dispute into Alternative Dispute Resolution (ADR) rather than conventional litigation. Most lawsuits that go to court have tremendous costs, especially in pretrial discovery, including depositions, expert witnesses, and other courtroom paraphernalia. These expenses can be avoided, or at least minimized, by ADR. The ADR menu includes arbitration, conciliation, mediation, and several semi-litigation devices. These generally move swifter, cost less, provide greater flexibility, and are more confidential than going to court.

In Minnesota, most lawsuits are required to take a detour through ADR at some point. About 90 percent of the cases that are channeled to ADR result in satisfactory settlements and substantial savings.

The most basic -- and an often neglected -- form of ADR is negotiation. Sometimes an entrepreneur’s outlook becomes clouded when a legal dispute develops and a "sue them" mentality sets in. Don’t let this happen to you.

Inevitably, some disputes are headed toward litigation. But others can be resolved through savvy negotiation. To negotiate effectively, start-ups must identify their goals and objectives, and have at least a mental sketch of ways to achieve them.

Don’t give up if you are unable to reach an amicable settlement at an early stage. You may wish to divert the dispute into ADR without resorting to litigation.

Most ADR methods are not binding. This means that the parties can try a tactic or two while preserving their rights to go to court if the dispute is not resolved.

Probably the most popular and cost-effective form of ADR is mediation. It involves choosing someone neutral to help the parties reach a compromise. Other business people, educators, practicing attorneys, and retired judges are available to provide mediation services. Most have special training and certification by the Minnesota Supreme Court to serve as "neutrals" in dispute resolution.

Mediation, like other forms of ADR, has its own costs. A typical mediation may take a day and cost about $2,000 to $3,000, which the parties can split among themselves. If it’s successful, it can save you a lot more than it costs.

ADR can even be anticipated before legal disputes arise. Parties can agree at the outset that they will arbitrate rather than rush into court.

In arbitration, the parties choose an unbiased third party to act as an umpire. The arbitrator presided over a streamlined version of the lawsuit and gives a ruling, which the parties can agree is binding or simply advisory. Even if it’s nonbinding, an arbitration decision frequently provides the guidance that leads to an efficient and economical resolution.

If the parties are in a lawsuit, they can still call a temporary truce and try ADR. That’s usually the first step toward reaching a substantive resolution.

Going to court is not necessarily an evil to be avoided at all costs. Hard feelings, wide differences in views, and unrealistic demands or expectations can all lead to litigation. Judges and juries exist to settle disputes that the parties themselves cannot resolve.

But if you do go to court, there’s no need to turn the trip into a spending spree. There are a number of ways to curb litigation costs:

• Start-ups can save money by shopping around, although they should be wary of any deal that’s too good to be true. The principle "you get what you pay for" also applies to legal talent.
• Fees are negotiable. Think of creative billing methods, such as a reduced hourly fee in exchange for a premium or "bonus" for a favorable result. But be careful to define "favorable."
• Watch legal fees carefully. Insist on regular billing statements, usually monthly. Ask for itemized bills so you can see who’s performing what legal service. Consulting with your attorney about billing issues may help you avoid unnecessary charges.
• Don’t wait until you are on the courthouse steps to settle. Almost all civil litigation ends in a settlement, but it becomes harder to settle the closer you are to the trial. Settlement efforts should start early and be repeated as often as necessary. Eleventh-hour settlement efforts are often difficult because the parties have spent so much that one side wants more and the other side is willing to pay less to cover the enormous legal costs. A claimant should make a detailed settlement demand in the early stages of litigation to avoid escalating legal costs.

Most settlements can be agreed on verbally, but it’s better to record the terms of the agreement in a written, signed document. In a controversial decision earlier this year, the Minnesota Supreme Court ruled that a settlement was not valid, because it did not contain specific language stating that it was "binding," as required by an obscure state statute on mediation proceedings.

Careful draftsmanship can sidestep this minefield and avoid more negotiations -- or even litigation -- after a deal has been struck.

Small businesses that follow all these steps before, during, and after a legal dispute still won’t avoid legal expenses entirely. Like death and taxes, legal costs are inevitable. But there’s no reason they should put the success of your start-up in jeopardy.

Click here to go to Civil Litigation.