By Ronald J. Levine and Richard Torrenzano
In December, McDonald's Corp. clawed back more than $105 million and achieved a public apology from its former CEO, Steve Easterbrook, resolving a protracted litigation arising from his alleged inappropriate conduct with employees. The settlement avoided bringing McDonald's v. Easterbrook to trial in the Delaware Chancery Court.
Prior to the outcome, investor groups and others publicly called for the resignation of some board members based on their initial handling of the termination and departure of the former CEO.
In an internal memo, the board chair explained that the decision was a step in moving beyond a chapter that belonged in the past, and toward fostering a culture where people are expected to speak up in response to wrongdoing.
McDonald's took advantage of a settlement and its timing to position itself positively with internal and external constituencies.
Companies under attack frequently wait until the eve of jury selection to begin serious negotiations. They follow the traditional model of litigation — lawsuit filed, battle lines drawn, motions filed, trial scheduled — which results in huge legal and other costs, as well as consumption of management time for discovery and pretrial preparations.
Nevertheless, in the end, most lawsuits are settled, often for an amount the defendant would have paid much earlier had the matter been approached as a business transaction rather than a battle royal.
Five Stages of Grief
So why do companies waste valuable resources in legal battles, when logically, they should seriously consider a path to settlement?
The answer is classic psychology. In the book 'On Death and Dying,' Elisabeth Kübler-Ross' introduced the five stages of grief. Those stages are denial, anger, bargaining, depression and acceptance, or DABDA.
Faced with litigation, company management, along with outside counsel, tend to pass through these five stages as well. For better or worse, the vast majority of lawsuits — as high as 90% — end in settlement, the final stage of grief: acceptance.
Unfortunately, far too many clients and attorneys stagnate at the first two initial stages of grief: denial and anger. They do so instinctively, without evaluating the final stage, acceptance, which should be considered before responding to a legal pleading.
Failure to try to reach an early resolution inevitably results in far too much money and time expended at the denial, anger or bargaining stages.
A lack of interest in early resolution by companies is not the only driver of traditional models.
Too often, outside counsel will promote a standard prescription for achieving the best result: A more aggressive defense leads to a lower settlement. And defense counsel, who are usually paid by the hour, are not being incentivized to take a different path.
After all legal fees have been paid, and the file is finally closed, in-house counsel are left with the unenviable job of explaining to management why it cost so much for the privilege of ultimately settling a case, and why so much was spent when similar results could be achieved earlier.
The fact that the company fought the good fight or made its point is often lost on management, which will write a check to the adversary, often after having written perhaps an even larger check to its outside counsel.
An early resolution will often make sense, and one that uses logic to predict the ultimate outcome will be much easier to sell to the company. Of course, settlements most often involve money, and amounts cannot just be pulled out of thin air.
A valuable tool used by business leaders to make choices is a decision-tree analysis.
Unfortunately, most lawyers do not map complexities of their cases using decision trees, which carefully consider probabilities of losing or winning many issues they face at various stages of litigation. So, when counsel is pressed for probabilities, the client often hears that there is a 50-50 chance.
There are usually four simple steps to calculating an appropriate settlement using the decision-tree analysis:
Once clients are convinced that the settlement range is appropriate, management must be confident it can sell core constituencies on the target number and terms.
The decision-tree analysis can respond to anyone who tries to lay claim that the settlement was giving away the store.
In addition to assisting clients in evaluating and defending potential resolutions, this analysis may also be helpful in convincing adversaries that a proposed settlement would be the best outcome.
A multitude of plaintiffs’ attorneys work on a contingency and have no interest in wasting time in litigation if they can be convinced that the company is serious about an early resolution.
The fact that a defendant company has carefully thought through an appropriate settlement goes a long way.
When to Consider a Two-Track Approach
In certain situations, companies and their counsel may consider adopting a two-track approach, which involves having separate trial and settlement teams. The trial team continues battling, but the settlement team hopefully brings the adversary to the peace table.
Such an approach may especially make sense when parties have an ongoing business relationship — when the two sides may be more interested in an early resolution in order to get things back on track.
If a dispute is primarily emotional, the settlers may be able to smooth over areas of contention and bring both sides to the table without incurring huge legal costs.
If the adversary has a miscalculation of the value of its claim, the settlers may be able to explain that there is no pot of gold at the end of the rainbow.
Selling the Settlement to Important Constituencies and Engaging the Outside World
Many companies are understandably concerned that settlements could be viewed by core constituencies — investors, customers, employees, regulators and others — as an admission of guilt.
But, like McDonald's, settlements that are consistent with values can be promoted internally and externally as a step forward in serving the company mission, not a defeat.
Winston Churchill is credited with saying, "Never let a good crisis go to waste." Today, if a legal crisis can be resolved successfully, the settlement story should be used to maximum advantage in the court of public opinion.
In today's instant digital world, it is vital to position legal disputes, outcomes or settlements advantageously through communications with media, investors, regulators, clients, customers, employees and others.
Communications personnel should be involved well in advance of a settlement so that a full understanding of outcomes and company values, as well as board or management direction, can be crafted into approved communications.
At the outset of any lawsuit, corporate counsel should always consider two questions that could have vastly different answers:
All too often, the client and counsel fixate on the "like to" question, when the company is better served pursuing realistic expectations.
With a well-reasoned decision-tree analysis in hand, coupled with a strong communications plan that reflects core corporate values, the company may be able to move past the costly first four stages of grief and accomplish a great settlement.
Ronald J. Levine is counsel at Herrick Feinstein LLP.