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  • Writer's pictureJonathan E. Pearl

The Art (and science) of Defence

Putting aside hubris, desires for revenge, or to humiliate the other side - parties in dispute need to have some means of making decisions about whether to fight on, whether to settle, and how much to settle for. So many litigants opt for a number-based approach to assessing the chances of success. A percentage chance of success, even hedged with the usual provisos, may feel more precise than verbal measures like ‘reasonable’, ‘good’ – and numbers are always better understood by accountants who have to make the necessary accruals.

When I was a GC I always asked my litigation counsel: “what’s the % chance of us winning this judgment”. In my 27 years in-house, I never got a response that was north of 65%. I never heard “it’s a sure thing”. I knew why they were so conservative, and I would have been shocked to get anything north of 65%, or “a sure thing” as a recommendation. So, why did I ask? The answer is: mainly to find out when the chances were close to, or less than, 50%. I never liked those odds much.

Clients would do well to remember that even in those rare cases that your counsel does give you a 70% chance of a win – that also equates to a 30% chance of losing, completely.

But risk assessment, by GCs and clients generally, involves the calculation of the magnitude of potential consequences (levels of impacts) and the likelihood (levels of probability) that these consequences do occur. ... Essentially, the higher the probability of a "worse" effect occurring, the greater the level of risk.

A 70% chance of winning even a relatively small-sum case is often a risk well worth taking. A 30% chance of losing a case that, if it isn’t fought, will mean the end of the claimant’s entire business, would be a risk that MUST be taken. However, a 30% chance of losing a multi-million-dollar case, or one with serious reputational fallout, would be a foolish risk to take – despite the 70% chance of winning.

At one point in my career I managed a lot of bet-the-farm patent infringement litigation brought against my company by what are commonly called ‘patent trolls’. These are companies which own patents, but don’t produce any products. A defendant facing patent litigation by a patent troll cannot counter-attack by bringing a suit based on its own patents, or other IPR rights, as it could with a competitor. It can win at trial only by proving the asserted patent is invalid, or the targeted product is non-infringing. Proving either invalidity or non-infringement are technically complex endeavours, often relying on expert evidence from PhD-level scientists, some of whom do not make the best trial witnesses. Defence costs are high (at least Euro 1M per patent) and a loss can mean a permanent injunction and/or a huge hit to the bottom line. Also – if you are a well-known brand you need to fight a few of these cases through to the bitter end in order to discourage other patent trolls from doing the same. So, the stakes are very high for defendants. But the stakes for the patent troll claimant can be high also. A Patent troll’s survival is based on persuading people to take a fee-paying license. And they do that by relying on the potentially catastrophic impact of a loss being too great for the defendant, thereby scaring them into settling before trial. They also rely on a lack of transparency around out-of-court settlements and try to bluff what others have paid them. But if the patent is defeated by any single defendant at a public trial then that particular Golden Goose is dead. It will produce no more Golden Eggs. This is why so few patent infringement claims brought by Patent trolls actually get to trial.

Dealing with defensive litigation where insurers are involved also brings added complication to managing the risk. Sometimes insurers take seemingly perverse decisions to back, or back-out of, litigation based on wider considerations. For instance, I was involved in some big-ticket personal injury litigation in Rhode Island where a local 9-year-old child had suffered life-changing injuries from a fire that was allegedly started by one of my then-company’s products. The claimant was a child and would have likely found a sympathetic ear with a jury. At the same time, we had plenty of expensive PI insurance cover for exactly this type of claim – and we wanted to settle at a reasonable sum. The insurers didn’t want to settle. We discovered that this was partly a policy decision based on other claims in their portfolio. The insurers weren’t worried about my company’s reputation. The insurers were more concerned about other cases coming down the pike. Their reluctance was not based on the case facts or a risk-assessment of this case alone.

The brutal truth to remember is that all litigation is a horserace where the odds change as the race progresses. So many things can go wrong during the 12-18 months you will likely be preparing for your trial. Witnesses can change their recollections or disappear or die, new documents and facts can come to light, your chosen expert can fall under a bus, and you can have financial pressures to settle that have nothing to do with the strength or weaknesses of your case. And then there’s the judge and jury (which BTW you don’t get to choose). Your case, supported by documents and fact witnesses, needs to be credible at trial. A lack of credibility can be catastrophic for your chances of success. And measuring credibility is not a science – it’s a fine judgement that can be affected by something like how a crucial witness comes over under the pressure of cross-examination.

In the U.S. – where litigation is almost a national sport, they treat a trial like a science project. Often you’ll engage an expert to run a mock trial where you have your advocate run certain issues and sometime witnesses through their paces to see how a ‘real’ jury might view them. Having attended a few of these mock trials myself as a paying client I can tell you that it’s a sobering experience. After maybe 2 years of hard work the great case that you have constructed is debated in a room by some real-life jurors picked from the county where your case will soon be heard – with you watching behind a two-way mirror. Points which, as an experienced lawyer, you considered a no-brainer, are no longer so. The experience can be so sobering that you are immediately reaching for your cheque book.

And then there’s the issue of legal costs. Most litigation in the U.K. is charged on a time/cost basis. It’s a tough thing to say, but in a time/cost charging environment the incentives for litigators to keep cases out of court are hard to find. The longer the case goes on, and the harder it is fought, the more the parties pay in legal fees. In a loser-pays jurisdiction like the U.K. as the costs increase the risk factor also increases. In the US where contingency-fee arrangements are common, you will often have to keep in mind that your opponent’s lawyer effectively has skin in the game – up to 30% in some cases. Lawyers on contingency fee arrangements won’t care too deeply about the reputational issues in a case, when their fees are at stake.

Assessing litigation risk is also tricky from an accounting point of view. If you make an offer to settle then – depending on the amount, and the possible impact on the company’s overall financials - you may have to accrue for it. Litigation accruals may end up becoming public in your quarterly or annual financial announcements. And remember that once in place it will take a lot to persuade the auditors that an accrual be released before a signed settlement, or final judgment.

All of this leads to one conclusion: when defending: the best resolution is a pre-trial settlement reached through negotiation or mediation.

When defending I always had a policy of making our best offer up front and trying as hard as I could not to increase my generous offer as long my legal costs were continuing to run. If making an early and generous offer does not work, keep your eye on the risks and, if you can, reach a compromise deal or mediate before the trial. The worst possible option in my opinion is to leave a decision that could be controlled by you, to be determined by a judge and/or (worse) a jury.

All Litigation is a horserace.

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