Litigation costs, unlike other costs of doing business, are seldom
estimated on an annual basis. This research attempts to shed light on how
small business fares under the constraint of litigation and calculates
annual litigation costs.
- Litigation is costly to small business owners both in time and
- It modifies the way they do business.
- Litigation causes emotional hardship within small firms.
The impact of litigation on businesses goes well beyond the purely
financial impact of legal fees and damages. Most small business owners
are invested personally in their businesses; litigation causes not just
financial loss, but also substantial emotional hardship, and often
changes the tone of the business.
Many of the small businesses surveyed tried to settle their case prior
to trial, but with mixed results. Those surveyed explained that the main
reason why settlement failed was that the opposing party refused to meet
and negotiate, preferring to go to court. Small business owners indicated
they would go to great lengths to stay out of court, which was their
major motivation for settlement; an indication that there is a hidden
cost to the threat of litigation.
Financial impacts were mentioned by most study participants. Legal
costs for actual litigation ranged from $3,000 to $150,000 with
approximately one third of those providing a response under $10,000.
Small business owners felt they had to ”recoup” these losses by cutting
operating expenses, acquiring new customers or expanding their services
to existing customers. Raising prices was not an option, as it would put
them at a competitive disadvantage.
Most companies used business assets to pay the damages. However, in
the case of employee complaints, insurance covered some of the damages.
Owners mentioned that the payment of damages nearly put them out of
business, which affected them for a long period of time as they worked to
rebuild the business and recoup their losses.
Small business owners who were surveyed became more wary of employees
and customers as a result of their litigation experience.
Scope and Methodology
This study was conducted with the help of a survey (OMB # 3245-0345). The
researchers used the annual reports Judicial Business of the U.S. Courts,
and Federal Court Management Statistics, as they provide useful data on
district court caseloads, but do not identify the types of defendants.
For example, the reports state that in U.S. District Courts in 2001 there
were 302,104 cases filed, 295,308 cases terminated, and 297,265 cases
pending with some cases straddling between 2000 and 2001. They also
report that the median time from filing to disposition in civil cases was
8.7 months, and from filing to trial was 21.6 months. The research team
made use of a micro data set on individual case filings to determine the
number of lawsuits filed that involved small businesses.
The research team used the PACER (Public Access to Court Electronic
Records) system to create a data set of individually filed cases to
determine the number and nature of lawsuits involving small businesses.
Data on cases filed in U.S. District Courts during the 12-month period,
July 2002 through June 2003, was obtained from the PACER system. Members
of the research team then determined whether the lawsuit appeared to
involve a business as plaintiff or defendant via telephone books,
individual business web sites, anywho.com, and directories USA. com. This
sample of cases was also used to select a subsample of businesses to
contact for a telephone interview.