Why Do Most Companies Try to Settle Lawsuits?

Overall, nearly 97% of civil cases are settled outside of the courtroom. You may wonder why companies settle lawsuits so frequently rather than go to court, but there are a variety of reasons that go well beyond guilt or innocence. 

Let’s explore the common reasons why companies are sued, how companies decide whether to settle and why most companies try to settle lawsuits rather than go to court.

Table of Contents:

• Lawsuit Settlement
• Common Reasons Why Companies Are Sued
• Why Do Most Companies Try to Settle Lawsuits?
• How to Decide Whether to Settle or Sue
• Companies Settle Lawsuits for Various Reasons

Lawsuit Settlement

What is a lawsuit settlement? In legal terms, a settlement is a resolution reached between the parties in a lawsuit to end legal action. Settling a lawsuit can happen at any stage in the proceedings leading up to court action or at any time during court proceedings before a verdict has been reached.

Companies often settle lawsuits to bring legal action to a conclusion and avoid lengthy and expensive litigation even if they believe the case has no merit.

Common Reasons Why Companies Are Sued

Companies are sued for multiple reasons, ranging from legitimate causes of action to frivolous suits. The most common reasons companies are sued include claims of:

• Breach of contract
• Intellectual property, patent, or trademark infringement
• Employee discrimination
• Wrongful termination of employees
• Violations of wage and hour laws
• Personal injury
• Product defects
• Misleading shareholders about the company’s financial condition

Why Do Most Companies Try to Settle Lawsuits?

Companies often enter into a lawsuit settlement to avoid prolonged litigation, protracted attorney fees, or resolve counterclaims. Settling a lawsuit can also help prevent negative publicity or attention about your company, which can sometimes do more damage than the lawsuit itself.

Going to court is always a risk. It’s an expensive proposition even if you win. It can tie up resources for years and distract leaders from focusing on company goals. At other times, the parties simply come to an agreement to resolve the conflict without needing to go to court.

Here are a few recent examples of cases that settled:

• Facing a lawsuit filed by Epic Games over sales commissions in its app store, Apple settled the pending case by agreeing to alter the terms for developers doing in-app purchases.
• Settlement between Fortinet and Sophos ended a two-year legal battle that involved talent poaching, patent infringement, and trade secret theft accusations. As is normal in these types of proceedings, the details of the settlement were not disclosed, but both companies agreed to the lawsuit settlement.
• Social audio app Clubhouse was sued by SBS Consulting claiming it had infringed on its federal trademark. SBS operates a network for sports business professionals called “TheClubhouse.” Terms of the lawsuit settlement were not disclosed.
• Nokia and Lenovo agreed to a settlement to end legal disputes involving video encoding patents used in computers and smartphones.
• Netflix settled the lawsuit brought by Chooseco, the publisher of Choose Your Own Adventure books. Chooseco claimed the Netflix interactive program Bandersnatch infringed on its trademark when it let viewers choose how the story unfolded. Netflix countersued, asking the court to invalidate the Choose Your Own Adventure trademark and declare it a generic term. Both sides agreed to settle lawsuit counter-complaints rather than go to court.

Outcomes in court can be unpredictable. When companies settle a lawsuit, the results are predictable and guaranteed. Guilt is not a factor because settlements resolve disputes without either side admitting wrongdoing.

A settlement can end disputes, avoid years of legal wrangling, and allow both parties to get back to work.

How to Decide Whether to Settle or Sue

If your company is sued, you have some decisions to make. Do you want to pursue a settlement, defend yourself in court, or enter into arbitration?

Many companies include arbitration clauses in their contracts or terms of service to avoid the expense of litigation altogether. This moves disputes out of the court system to independent arbitrators who help remediate disputes.

If arbitration is not initiated and you are unable or unwilling to settle a dispute, you will likely end up with a protracted legal case winding up in court. Settling a case lets you avoid going to court, the uncertainty, and the potential negative publicity. In many cases, it’s also significantly less expensive to settle a case rather than to defend yourself—even if you’re in the right.

It can be difficult at times for companies to come to an agreement especially if those being sued believe they are not guilty of the charges levied against them in the lawsuit. However, it can be the most prudent course of action in many cases.

Here are some of the things you should evaluate when deciding whether to settle a case, defend yourself in court, or sue another company:

• Whether an arbitration clause forces resolution outside of the court system
• The evidence against you and the strength of the evidence you have to defend yourself
• Legal arguments you can make to defend yourself
• The potential damages you could be liable for if you lose a civil course of action
• The costs to settle a lawsuit
• Legal fees for going to court, such as fees for attorneys, research, and expert witnesses
• Potential damage to your company’s brand resulting from the lawsuit

Settlements happen frequently in many cases for financial reasons. The cost of defending a discrimination or other employment lawsuit can easily reach $250,000 even for a successful ruling. It’s cheaper and quicker to reach a settlement for far less. 

For larger corporations, the costs can escalate to extraordinary amounts. One survey of Fortune 200 companies presented to the U.S. Committee on Rules of Practice and Procedure revealed that the average outside litigation costs for companies reached $140 million—and that was back in 2008. 

Given those numbers, it’s not surprising how many lawsuits settle before heading to court, especially when you consider the average lawsuit takes three years or longer to resolve.

Companies that settle lawsuit complaints and legal actions too frequently, however, can also run the risk of more litigation and expenses. Facing three class-action suits and more than 75,000 arbitration demands, Amazon recently changed its terms of service to allow customers to file lawsuits rather than go right to arbitration.

Companies Settle Lawsuits for Various Reasons

When companies settle a lawsuit, you can’t assume they did so because they were in the wrong. Companies settle for a variety of reasons, including the cost of litigation, the potential damage to a company’s reputation, and the attention it takes away from running the business.