Firms Can Deter Litigation by Being Junkyard Dogs

Published November 16, 2011

Lost in the coverage of Herman Cain’s alleged sexual harassment episodes is a lesson for tort reformers: It always costs more in the long run to settle frivolous cases.

Just ask the National Restaurant Association.

The sexual harassment allegations against GOP presidential contender Cain arose when he headed the association. Though he had no part in investigating the allegations and resolving them on the NRA’s behalf, the association chose to settle two cases for a total of $80,000, rather than spend hundreds of thousands of dollars in legal costs to defend them.

“Legal costs and damage control top the list (of reasons to settle), employment attorneys and workplace policy experts say,” Cain told CNN recently. “Even if the allegations seem baseless, it’s the cost of doing business, a quick fix to shield an employer from further allegations, boycotts or worse.” Such “business” decisions are made every day in corporate America in all kinds of cases, not just sexual harassment ones.

But these experts are wrong. Questions about Cain’s particular case notwithstanding, these kinds of penny-wise and pound-foolish decisions to settle cases for “nuisance value” are not a quick fix against future allegations that are similar. Instead, they are a magnet drawing more of them. That’s what caused the “tort crisis” in the first place.

Some blame goes to young lawyers who graduated from fourth-tier law schools at the bottom of their classes, who have virtually no hope of getting hired by a law firm. They don’t need jobs, though, because they can use nuisance cases to earn a living. Maybe not a living to put them in the 1 percent railed against by President Barack Obama and the Occupy Wall Streeters, but a comfortable living nonetheless. Another part of the blame goes to law schools continuing to churn out graduates not needed for “real” work like preparing someone’s will, helping a client adopt a child or drafting a purchase agreement between two businesses.

Take a frequent type of personal injury case, one involving a shopper who slips on a banana peel at the grocery. Such incidents often cause a soft-tissue injury to the lower back. There’s no way to prove whether the injury is being faked if no bone fracture occurs. The victim complains to a doctor of lower back pain, but the injuries don’t show up in X-rays, CAT scans or MRIs, so there’s no objective evidence they exist. Unless the store hires a private investigator who captures the victim on video dancing at a wedding, it’s not uncommon for such cases to settle very early on for $30,000 or $40,000 each. Since about one-third or more of the settlement goes to the lawyer, it takes only a few cases each year to bring in $200,000 or $300,000, with only a few hours’ work on each case.

What corporate defendants don’t seem to understand is that throwing relatively small amounts of money at a relatively large number of nuisance-value cases costs much more money in the long run. That’s because pretty soon there are so many “nuisance” cases they amount — in the aggregate — to a crisis.

A major corporation made headlines in the corporate legal world a few years ago when it announced it had reviewed and compared two sets of numbers on the books of its legal department: the amount spent on outside counsel legal fees and the amount spent on settlement. The outcome was huge news in that world because the corporation found the more money it spent on legal fees in comparable cases, the less it spent on settlement of these cases.

That was a revelation for corporations, but not for private practitioners who labor in the trenches of corporate litigation. A winning defense is often found buried in a document in the bottom of the last of hundreds or even thousands of boxes of documents reviewed by lawyers. That’s expensive. But a vigorous defense in one case can deter the filing of many other cases.

Yes, earning a corporate reputation for being a junkyard dog when it comes to fighting frivolous litigation can be costly in the short run. But in the long run, it can be worth its weight in gold.

Maureen Martin is senior fellow for legal affairs at The Heartland Institute.