Time to Lawyer Up
I’m always on the lookout for things that are uncorrelated and countercyclical, so you might not be surprised to learn that with the economy potentially slowing I told our chief legal officer (and resident coffee aficionado) Taylor that it’s time to start suing people. I’m kidding, of course (we only sue on the merits), but what is true is that it is a strategy for others. Simply put, when the economy goes down, litigation goes up.
This makes sense. Economic downturns can cause companies to terminate employees and break contracts, which are events that leave counterparties aggrieved, but they also tend to make people poorer and crankier, which are anecdotally the catalysts behind most lawsuits. In fact, we were talking to a structural engineer the other day who had built a commercial construction consulting business with remarkably smooth revenue growth that didn’t seem to ebb and flow with the commercial construction industry. The secret, he revealed, is that in addition to advising contractors on how to build things, he had gotten certified to serve as an expert witness in court to testify at cases of construction projects gone wrong. “When there is money to be made,” he said, “everybody works hard to make it. But when the money dries up, everyone thinks they should have made more.”
What’s interesting about all of these cases, however, is that very few of them (1% to 5%, depending on your source) ever go to trial. That’s because, to quote the aforementioned pithy structural engineer, “everyone knows the last place you’ll find justice is in court.”
If you’re like me (i.e., competitive and never wrong), that’s really frustrating because it means that people who are in the wrong are winning paydays or not being held accountable for their wrongful actions. In fact, I’m pretty sure that the most common attorney/client conversation goes something like this:
Client: What do you think I should do?
Attorney: Settle.
Client: ARGH!
As for why this is (leaving aside the simplest explanation that attorneys lack follow through), I asked Taylor and he attributed it to certainty and agency.
On the certainty side, since you never know what a judge or jury might do, your range of outcomes is unknown and unknowable, whereas one can negotiate a settlement agreement down to the last letter. While this guarantees every lawsuit against you will cost you something (certainty is expensive!), it means that you can at least make sure you get something for your money.
As for agency, a reality is that many civil lawsuits get passed off to insurance companies who (1) aren’t personally competitive; (2) are regulated and have no appetite for open-ended liabilities; and (3) can spread incurred settlement costs across their entire base of customers in the form of higher premiums. The tragedy of the commons strikes again.
-Tim