Lawsuits can typically be a lengthy process with multiple fees, but do you know how much it will actually cost your business if someone sues you? Read on below to understand the different factors that go into determining litigation costs and better prepare yourself and company.

What are Litigation Costs?

Litigation costs are the overall amount of money you would spend on a lawsuit. It includes costs related to the trial preparation and the costs for the actual trial itself. Examples of litigation costs include but are not limited to attorney and paralegal fees, expert witness, consultant, private investigator, specialist fees, court fees, copy fees, deposition fees, costs related to obtaining medical, government, and school records, accident reconstruction fees, and/or court reporter fees. According to 26 U.S.C.A. § 7430(c)(1) and I.R.C. § 7430(c)(1), the term “reasonable litigation costs” are defined as follows:

  1. Reasonable court costs, and
  2. Based upon prevailing market rates for the kind or quality of services furnished—
    1. The reasonable expenses of expert witnesses in connection with a court proceeding, except that no expert witness shall be compensated at a rate in excess of the highest rate of compensation for expert witnesses paid by the United States,
    2. The reasonable cost of any study, analysis, engineering report, test, or project which is found by the court to be necessary for the preparation of the party’s case, and
    3. Reasonable fees paid or incurred for the services of attorneys in connection with the court proceeding, except that such fees shall not be in excess of $125 per hour unless the court determines that a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies a higher rate.
  3. In the case of any calendar year beginning after 1996, the dollar amount referred to in clause (iii) shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, by substituting “the calendar year 1995” for “the calendar year 2016” in subparagraph (A)(ii) thereof. If any dollar amount after being increased under the preceding sentence is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.

On top of all the costs defined above, if your business is not successful in litigation, it will have additional costs depending on the following: 

  • The type of litigation – i.e. contract, employment, tort
  • The type and amount of damages claimed by the opposing party (i.e. if punitive damages are permitted the exposure is much greater)
  • Attorney fees provisions within relevant contract (awards attorney fees and costs to prevailing party)
  • In employment litigation it will depend on the following:
    • Number of employees
    • Type of claim (i.e. wage and hour, discrimination, harassment)
    • How long they worked for you
    • If the employee was properly classified
    • Whether you gave them their final paycheck on the last day worked
    • Accuracy of paycheck stubs and timesheets

How Does This Affect Your Business?

The concept of litigation can be far more complex than you initially think. The most important fact you, as an employer, should takeaway is that litigation can be incredibly costly and a lengthy process. If you lose a lawsuit, you may have to pay the litigation costs of the other party, which includes all of the costs stated and possibly more. In some cases, the person who loses the lawsuit may also have to pay the attorney fees of the other party, which will be extremely expensive.

Keep in mind that your litigation costs will be a determining factor in whether a lawsuit will be pursued. If your litigation costs are expected to surpass what you would potentially be awarded in a case, you need to think very hard about whether or not it is worth defending or whether you should consider resolving the matter. Additionally, depending on what type of issue is in dispute, defendants and plaintiffs can potentially litigate for years. That’s why it is common to see alternative forms of dispute resolution when going through litigations. Many times, a defendant will agree to pay the plaintiff an agreed-upon amount, known as a settlement, if that amount is less than what the estimated cost would be to defend against the plaintiff’s claims.

If your business is facing a lawsuit in the near future, it is important to reassess and reevaluate the resources you currently have available. Ask yourself questions like:  What is the nature of the claim? Are any of my employees involved? Do I have the proper files to back up my claims? How much in total will this lawsuit cost me? Do I have the resources to pay for it?  If you are unsure about any of these questions, it is a good idea to try to settle the matter early outside of court so that your business will not have to incur additional fees. This is mainly due to the fact that your costs will exponentially increase if you cannot settle the case outside of court.

Key Takeaways

Although litigation costs may vary per lawsuit, the overall cost is still high. Before going through with a lawsuit, take the time to do a thorough check on the files, documents, and resources you have in place. We recommend employers consult with their legal counsel whenever a potential lawsuit comes about. If you need any assistance navigating litigation costs, please contact Hackler Flynn & Associates.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post. Hackler Flynn & Associates is only licensed to practice in California.

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