Big Suit/Little Suit: The Cost of Litigation

Legal costs are relatively inelastic. “Inelastic” in this context is a term from economic theory. It means not responsive to changes in demand or price. For example, toothpicks are relatively inelastic. We will buy about the same number of toothpicks whether they cost 15 cents a box or 20 cents a box, even though one price is a third higher than the other.

In law, prices tend to be inelastic in the sense that a smaller case does not cost proportionately less than a big one. Rather, it costs about as much to litigate a $60,000 case as well as it does to do a $600,000 case. The amount of time necessary to investigate the case will be about the same and the filing and third party fees, like depositions, may be about the same.

Due to this price inelasticity, a small case has a lower “return on investment” than a larger one. A lower return on investment does not matter so much where one prevails on a case that carries through to arbitration or trial and attorneys fees are awarded to the prevailing party. But where the matter settles, then each side will typically “bear its own costs and attorneys fees”. As most cases settle, the client may want to include the cost of the attorney, filing fees and other expenses in determining acceptable offers of settlement.

In small cases the parties may soon have “too much invested to settle”. Too much invested to settle means that after attorney fees are considered, then viewed strictly from a business point of view, settlement is no longer a good deal for either side.

For example, assume a female plaintiff is suing another woman for $30,000 and will accept $15,000. Defendant will offer to pay $10,000 to $15,000. Assume that the costs and attorney fees have already reached $6,000 for each side. (Remember legal costs and fees do not vary much according to the size of the case).

Were the case to settle on these facts, plaintiff would only recover $9,000 after her fees and costs are paid or defendant would have to offer and pay $6,000 more so that plaintiff could receive and keep the $15,000 she is willing to accept in settlement. But defendant is unlikely to offer $6,000 more, particularly after paying her attorney $6,000. If defendant had been willing to do that, she might have just paid the $30,000 claim in the first place.

On these facts – which are not atypical – plaintiff and defendant are not likely to settle because neither party can rationally afford to. On the other hand, like tired, punchdrunk fighters staggering to the end of their struggle, litigants often settle simply because they get sick of the case and want to go on with their lives.

The moral here is to watch costs carefully in small cases. $100,000 in fees for a $37,000 case can happen. It is your job to prevent it, if possible. Ethical attorneys will do what they can to help you to avoid this “no win” situation.