How to Assess if Your Business is a Good Candidate for Settlement

How to Assess if Your Business is a Good Candidate for Settlement

When a business gets sued or faces some other legal claim, one option is to try to settle the case out of court. Settlement allows both sides to avoid the risks and costs of going to trial. It can provide more control over the outcome. Many cases do end up settling before trial. But not every business or case is right for settlement; you need to weigh multiple factors. This article covers key questions to help assess if settlement may be a good option for your situation; the pros and cons; and how to approach settlement discussions if you decide to pursue it.

Assessing Your Situation

The first step is to objectively look at your case and determine how strong or weak your position is. If the claim against you is strong and likely to succeed at trial, then settlement may be wise to cut your losses. But if you have a solid defense and think you can win at trial, you may want to fight it. Consider:

• The facts of the dispute – Review the key facts objectively. Be honest about any weaknesses in your case or defenses. How clear or ambiguous are the facts? Who does the evidence favor?
• The law – Research the applicable laws and precedents thoroughly. Do they support your position? Is the law unsettled or open to interpretation on key issues? Understand how courts have ruled in similar cases.
• Your defenses – Do you have strong factual or legal defenses to assert? Look at defenses like lack of evidence, credibility issues, statutes of limitation, jurisdiction issues, contractual provisions, etc.
• Your risks at trial – Consider the full range of outcomes if you proceed to trial and lose. Could you face significant damages or penalties? Would it harm your reputation or business relationships?
• Your opponent’s goals – Determine what the other side hopes to gain. That can signal their eagerness to settle. If their goal is mainly monetary damages, settlement may appeal to them to gain a sure payment.
• Costs of litigation – Estimate the hard costs of legal fees, expert witnesses, discovery, exhibits, travel, etc. if you litigate fully. Also weigh soft costs like time commitments and distractions for staff.
• Uncertainty – There is always uncertainty in how a judge or jury will rule. Even the strongest case carries litigation risk. Weigh the risks versus the potential rewards.
• Your tolerance – Consider your appetite for risk and uncertainty. How risk averse are you? Are you willing to gamble on an uncertain trial outcome? Or would you prefer to control the results through settlement?

Analyzing these factors will help you make an informed decision about the merits of pursuing settlement in your particular dispute.

Key Pros and Cons of Settlement

If your case seems like a good prospect for settlement, weigh the potential advantages and drawbacks:

Pros

• Avoid trial risks – Settlement reduces uncertainty and ensures you won’t face an extreme verdict at trial. It caps your exposure.
• Control the outcome – You shape the terms of settlement through negotiation. You won’t be at the mercy of a judge or jury.
• Reduce costs – Settlement saves litigation expenses and legal fees that can pile up quickly. It requires fewer billable hours.
• Save time and resources – Avoiding trial allows you to focus energy on your business instead of the dispute. Your staff and operations aren’t disrupted.
• Maintain goodwill – Settling can preserve business relationships, reputation, and public trust that could be damaged by a trial.
• Creative solutions – Settlements can include terms not available via court order, like apologies, donations, refunds, credits, etc. There’s more flexibility.
• Privacy – Settlements often include confidentiality provisions. You avoid public trial records.
• Tax benefits – Settlement payments may be tax deductible as business expenses. Jury verdicts usually are not.
• Closure – Settlement provides finality and lets you move on from the dispute. It avoids appeals that can drag out cases.

Cons

• No precedent set – Unlike a court ruling, settlement does not create a legal precedent that could deter future claims.
• Admission of fault? – The other side may try to negotiate terms implying your liability, fault, or responsibility.
• Confidentiality – If damaging facts emerge, you may need to keep them secret per the agreement.
• Costs still incurred – You’ll likely incur substantial legal costs and fees in the settlement process before reaching an agreement.
• Uncertainty remains – There is still some uncertainty until a settlement is signed. Negotiations could fall apart.
• Disappointing terms – You may have to compromise and accept less than ideal settlement terms to reach a deal.
• Enforcement issues – If either party breaches the settlement, you may need to return to court to enforce it.

Carefully weighing these pros and cons will help determine if settlement aligns with your goals and interests in the dispute.

Approaching Settlement Negotiations

If pursuing settlement makes strategic sense, here are tips for the negotiation process:

• Use experienced counsel – Hire an attorney skilled at legal negotiations and settlement procedures in your jurisdiction. There are many nuances.
• Understand motivations – Consider what’s driving the other side. What do they really want? Their motivations will shape viable options.
• Develop a BATNA – Know your Best Alternative To Negotiated Agreement. This is your walkaway point if talks break down.
• Make the first offer? – There are pros and cons to making the opening settlement offer. It frames the talks but also anchors expectations.
• Consider a mediator – If direct talks falter, a neutral mediator can find common ground and keep talks on track.
• Sweeten the deal – Add creative terms like payment plans, discounts, apologies, etc. to bridge gaps. Offer carrots, not just sticks.
• Watch body language – Read verbal and nonverbal cues. Are they engaged or disinterested? Warm or hostile?
• Leave room to concede – Make reasonable opening offers so you have room to compromise. Don’t start at your best-case scenario.
• Keep emotion out – Negotiate rationally. Don’t take offers personally or react emotionally. Calmly reframe and counter.
• Document everything – Keep detailed notes and records. Follow up key conversations with confirmation emails.

Here are some additional considerations around tax implications when structuring a settlement deal:

• Deductibility – Settlement payments to resolve legal claims arising from your business activities are generally tax deductible as ordinary and necessary business expenses. Structure the settlement to maximize potential tax deductions.
• Timing deductibility – Timing of deductibility depends on your accounting method. Accrual basis taxpayers deduct settlement payments in the year paid. Cash basis taxpayers deduct when the expense is incurred.
• Document business nexus – To qualify business expense deductions, document the business connection to the legal claim in your records. Get a release of claims.
• No deduction for fines – Fines or penalties paid to a government agency are not deductible. Settlements with regulatory bodies need care.
• Attorney fees – Legal fees related to settlements may be deductible. Allocate fees appropriately between deductible and nondeductible amounts.
• Payments to individuals – Settlement payments to individuals may require issuing 1099-MISC forms for tax reporting. Follow IRS rules.
• Structured settlements – Payments over multiple years have different deductibility impacts versus lump sums. Consult a tax advisor.
• Confidentiality clauses – Beware tax disclosure laws if including confidentiality clauses. IRS can still access terms.
• State taxes – Deductibility of settlement payments may differ for state income tax purposes. Review state rules.

Proactively considering the tax implications when structuring settlement terms can potentially yield meaningful tax savings. Work closely with your attorney and tax advisor to optimize the after-tax economics.