Why a business should consider having a litigation 'war chest'

In our last post, we discussed the questions a business should ask itself when confronted with a lawsuit. Specifically, whether the amount of damages sought is below or above the “nuisance number” a business owner should have in determining whether it would be more expensive to settle a matter or to litigate it to conclusion.

While having a nuisance number is a prudent measure of determining whether to fight or settle, a business should also consider whether it should have a litigation “war chest.” This essentially an amount of money set aside to defend lawsuits

A war chest should not necessarily be based on whether the charges against a business have merit or not. Rather, it should be based on how much a business stands to lose by having an ongoing lawsuit that could affect its market share, its relationships with customers and suppliers as well as its bottom line. 

After all, as we have noted in our last post, lawsuits can cost a great deal of money; both for the entity bringing the lawsuit and the one defending it. But for the company defending a lawsuit, it could feel as if it is being extorted or being asked to pay a “legal ransom” in order to make a lawsuit go away. Keep in mind that some lawsuits may be brought knowing that a company may not have the financial wherewithal to litigate a matter to a verdict.

Because of this the consideration of a war chest is important; not only for setting a nuisance number, but also for establishing an expectation for how to deal with lawsuits.  

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