Business litigation is typically an expensive and time-consuming process. As a result, it’s imperative that businesses make rational, financially sound decisions when they consider the potential costs of litigation and weigh those costs against any potential benefits.
However, this type of “bottom line” based decision making process is often easier said than done while in the midst of litigation. Although we all recognize that certain types of litigation — such as divorce, probate disputes, and suits over one’s home — are fraught with emotion-based decisions, too often our business clients allow extraneous factors, such as perceptions of justice or retribution, to cloud what should otherwise be a business decision.
By far, the biggest hindrance to making rational, cost-based decisions in business litigation is a client’s adherence to the so-called “Sunk Cost Fallacy.”
In this article, we’ll discuss the “Sunk Cost Fallacy,” the importance of making cost-based decisions in business litigation, and provide a guide for businesses to navigate the decision-making process.
The experienced attorneys at Brousseau Naftis & Massingill, P.C. have represented clients in business matters for decades. For more information, contact us today for a no-obligation consultation.
Understanding the Costs and Benefits of Business Litigation
The costs of business litigation can vary depending on the complexity of the case, the length of the litigation process, and the experience level and billing rates of the attorneys advising you. In addition to legal fees, businesses may also incur costs for expert witnesses, court filing fees, deposition costs, mediation fees, and other expenses associated with the case. While there is no way to predict the exact costs of business litigation, your attorney can and should provide estimates to you for the various stages of litigation, with the understanding that the unpredictability of litigation (in particular, the actions of the opposing party and their counsel) will often necessitate a reassessment of those estimates.
Your attorney should also analyze and provide you with a range of potential damages or other forms of relief requested in the litigation. As with your attorney’s estimate of litigation costs, damage and recovery assessments will often change during the course of litigation.
Making Cost-Based Decisions in Business Litigation
Once your attorneys have provided you with estimates of potential litigation costs and estimates for potential recovery (or liability) in a matter, it’s important to work with your attorneys to determine the best course of action, whether it’s pursuing (or continuing) the litigation, settling the case, or exploring alternative dispute resolution such as mediation. Throughout these discussions, the guiding principle for any business should be the weighing of litigation costs against potential recovery. This discussion should occur before initiating litigation and should be continually revisited throughout the litigation process as your attorneys’ assessment of litigation costs and potential recovery may change.
The Sunk Cost Fallacy
What happens when you and your attorneys’ initial cost/benefit assessment warrants initiation of a lawsuit, but later assessments determine that the costs of litigation outweigh any potential benefit? The rational answer is simple: Do whatever you can to extricate your business from the litigation with as little additional cost as possible. In reality, however, businesses often allow the costs they’ve already spent (the “sunk costs”) to influence their decision to continue with litigation, in effect, saying “We’ve already invested so much in this litigation, we may as well stick with it.”
However, a business’s refusal to cut its losses against its own better judgment will only amount to more litigation costs with little to no benefit in return.
When I see that a client’s litigation decision may be more influenced by the “Sunk Cost Fallacy” than a pragmatic cost/benefit assessment, I often bring up examples from daily life to illustrate how they may be veering into a bad decision for their business. For example, I might compare their litigation to continuing to borrow money to prop up a failing business, or refusing to part ways with an old projector TV because it was such an expensive investment twenty years ago, or the continuing to pay monthly Peloton membership fees while the bike gathers dust in the corner of a room (this last example represents my own personal battle with the Sunk Cost Fallacy). Like litigation whose potential expense exceeds any possible benefit, all of these examples demonstrate the same psychological trap: Making decisions based on past investment, rather than on future costs and expenses.
Conclusion
Making cost-based decisions in business litigation is essential for businesses to avoid unnecessary costs and risks. By assessing (and reassessing) the potential costs and benefits of pursuing legal action and avoiding the “Sunk Cost Fallacy,” businesses can make informed decisions and choose the best course of action for their litigation.
With the help and cost assessment of experienced attorneys, businesses can navigate the decision-making process and achieve the best possible outcome in their legal disputes.
