IDEAS

Space Exploration: A Bold New Legal Frontier

THOMAS MCCARTHY AKIN GUMP STRAUSS HAUER & FELD

Thomas McCarthy, partner with Akin Gump, talks about the incredible advances that have been made in the field of space exploration, what the laws and regulatory landscape around the industry look like today, and where it’s all going in the future.

CCBJ: Please provide us with some background on commercial and government space-exploration activities and how the industry has changed recently.

Thomas McCarthy: Until the last decade or so, governments led and dominated the industry. While governments still play the pivotal role in generating demand for launch, satellite, and spacecraft activities, in the last decade or so there has been an unprecedented growth of demand in the commercial sector. It’s been led by innovators across all parts of the industry, including launch services providers developing rockets without an initial customer or specific mission, and there’s a hunger for everything from low-Earth orbit space exploration all the way out to deep space.

The demand is being generated by new manufacturers, investors, and customers who are creating a range of opportunities in space to improve historic space activities and create new products and services – what is loosely known as “new space” or the new space economy. In the 1990s and 2000s, you had an industry that was largely focused on delivering government projects, both military and civil, into the atmosphere and space. There were commercial satellites to some extent too, of course, but now there’s a real hybrid of private sector and government growth. It’s created a model that has invited the expansion of the industry and brought a number of new actors into play.

What types of companies are engaged in the space industry?

Historically, the industry has been broken up into launch service providers and satellite companies. Those are really the drivers. When I say satellites though, I should probably expand that to spacecraft, which can include other types of vehicles beyond those that orbit the Earth. But those two types of companies have had a long-standing presence in the industry.

There’s typically been a fairly narrow view of the possibilities within launch services and satellites, deriving largely from the needs and demands of the government and, to some extent, government contracts. Over the past 25 or 30 years, uses for other types of private satellites have grown, particularly in the telecommunications and sensor industries.

Growth in the private sector in satellites began in the 1990s and continues today. But what has changed is that the technology and the possibilities have opened up quite significantly. For example, the types of players involved on the launch vehicle side and the rocketmaking side have expanded significantly. We’ve seen multiple startups on the launch vehicle side doing very exciting things with new technologies, new types of propulsion and new manufacturing techniques, such as additive manufacturing. As a result, there have been remarkable advances in terms of driving down costs, led by companies that are reusing rockets, including the first stage of the rocket, landing them back on Earth.

On the other side of it, satellites have evolved in really interesting ways as well – meaning the types of satellites, as well as the sizes of the satellites, which are being shrunk down into microsats and even nanosats. It has allowed many new and interesting market entrants in those fields. With smaller satellites, you can have more that go on single rocket launches. So the ability to push different types of satellites and spacecraft up into orbit and beyond has increased, for all of those reasons.

In addition, you have people looking at deep space solutions, for exploration, transportation, refueling and resource extraction, beyond just lower Earth orbit. There have been a great deal of new entrants in these areas over the past decade, and then obviously supply chain entrants there as well. Those are the companies that make much of what go into rockets and satellites, which you might not know are part of the space industry. So the industry itself has grown as a result of the increased numbers and types of companies that are involved in manufacturing and producing, designing, and providing services around these new activities.

There have been a great deal of new entrants in these areas over the past decade, and then obviously supply chain entrants there as well.

What kinds of government bodies are involved in the industry, and how do they interact with each other?

In the United States, by example, you have two types of government bodies. There are the actors – meaning the types of entities that are actually procuring, facilitating and leading space activities – but you also have the regulators of space-related activities.

The government actors generate demand through design, development, and procurement of space products, technology, and services. The most famous is NASA, which historically has overseen civil government space activities and is the most well-known of all the agencies. On the military side, the U.S. Air Force and

now the Space Force drive much of the military space activities that are undertaken in the United States. These agencies look to create projects and programs and then procure services and products, such as launch services, satellites and spacecraft, from the private sector by engaging in partnerships with them. Like many private actors, they can be subject to oversight by regulators, which can lead to interesting dynamics within the government on space issues.

On the regulatory side, you have entities like the Federal Aviation Administration, which is part of the Department of Transportation, as well as the National Oceanic and Atmospheric Administration, which is within the Department of Commerce. You also have the Bureau of Industry and Security, the Directorate of Defense Trade Controls, the Federal Communications Commission, to name a few, all of which have a regulatory role in managing the rules around what companies and government entities engaged in spacefaring activities are allowed to do and what kinds of requirements they need to follow.

Then there are the agencies that are involved in the types of activities that are inherent to regulating any manufacturing, design and other big industrial endeavors in the U.S. That includes environmental health and safety and labor laws, equal employment and then, of course, a range of other agencies, such as the Department of Justice and Homeland Security, that are keenly interested in the national security aspects of what companies in the space industry are doing.

I’ll also note that one other agency, the National Space Council, which is a White House–appointed council that was revived under the Trump administration and is now being continued under the Biden administration, is responsible for establishing and executing a coherent national space policy across the government. The Council is intended to coordinate the activities of all of these various bodies in the U.S. Government in furtherance of this objective. The Trump administrtion set a number of goals in terms of promoting U.S. leadership in space, and, while there were questions about whether the Biden administration would proceed with the National Space Council, it’s something the Biden administration is continuing – President Biden even has a moon rock in the Oval Office, which many take as a good sign.

What are some relevant areas of law that affect participants in the space industry?

Our clients in the space industry are working on highly sensitive items, such as rockets, satellites, and the sensors and other things that go along with those items. As you can imagine, governments are keen to make

sure that those technologies, which can have national security implications, are regulated and controlled. So, one of the areas that’s a concern for a lot of companies in the space sector is U.S. export controls and U.S. foreign investment in the United States, as well as classified national security programs, which often intersect with the work they do with the Air Force or the Space Force.

There are a number of other highly specialized legal areas that apply to space activities. Insurance, for example – there are special requirements for launches and other aspects of doing business in space. In addition, telecommunications is absolutely critical and is affecting the way that communications flow between items in space and the ground, whether in the private or public sector. Other relevant areas include the federal aviation law, which governs launches, government and commercial contracts, and intellectual property.

There are also interesting new areas where companies are running into a need for legal services. Maritime law, for example, when they’re doing launches in the middle of the sea, or recovering spacecraft and objects that fall from the sky into the ocean. How do you deal with items that are falling from the sky into the waters of a particular country? There are a lot of interesting questions. One of the most interesting, I think, as we go out onto the moon and toward Mars, is that companies and governments have to ask, “Do we refresh our international treaties governing the way we look at the moon and Mars and the way that those bodies are managed, including their resources?”

It’s another new frontier, if you will, from a legal perspective. There are ways that the legal community and academics are examining those questions, to determine what’s the best framework and what the good points of references are. For example, the treaty governing Antarctica has been discussed as an example of the way we should manage the moon and Mars and asteroid exploration. The international community has been able to sit on these treaties without any real

movement or discussion in the framework for fifty years because there simply has not been significant change in the industry – until recently. The same unanswered questions about private actors and activities in space remain unsolved. But change is here, and the way these debates play out will invariably affect the opportunities, requirements, and restrictions that apply to space industry actors.

What are key legal considerations and priorities for companies entering or operating in the space industry?

The capital costs are high, although they are dropping. There are a lot of long-standing commercial barriers to market entry that are now diminishing, which makes it inviting to jump into this growing and exciting area. But there are still legal barriers. You have to realize that you’re entering a highly regulated industry, as just mentioned, where specialized laws and policies can change quickly.

Space industry companies need to have the right legal bench as you’re entering this market. Look at how you’re staffed to protect key areas and comply with the law to ensure that your growth is promoted by good and sound legal support within your company - that is really, really important to the success of companies in this area. Government and commercial partners expect it. Don’t be caught off guard or surprised by requirements or demands in these various areas. For smaller companies, determining and securing the right mix of legal support and staffing can be challenging, especially when the contributions to urgent and visionary extraterrestrial business goals may not be readily obvious.

But as you’re looking to grow globally – personnel staffing, facilities, customers, supply chain – all of those international activities have an important legal component, both a contractual component but also a regulatory component, because of the national security and other related aspects of doing business in this industry. Think about your business model, think about your goals, and look at the various regulatory areas to make sure you’re not going to find yourself exposed inadvertently or becoming the subject of an investigation by the U.S. government, the FBI, the Departments of Commerce, State, Homeland Security or any other agency.

How can companies and governments meet those barriers and challenges?

Companies, as I mentioned, really have to invest in ensuring, from a legal perspective, that they are keeping up with the changes that are occurring within the different agencies. They have to be prepared not only to continue to innovate in the exciting ways that they’re doing but also to engage effectively with the agencies to help shape policy, so that their innovations and business models are not stifled.

At the same time, companies should be investing internally in legal resources to ensure that they have the right personnel models and the right talent – just like they do with engineers and other key people that drive their business – to help with the legal challenges in the various areas that are essential

Thomas McCarthy is a partner with Akin Gump Strauss Hauer & Feld. He advises clients on U.S. law and policy affecting international trade and business. These include export control laws, sanctions programs, customs law, anticorruption laws, antiboycott regulations and foreign investment in the United States. Reach him at tmccarthy@akingump.com.

to growth. This includes intellectual property, national security issues, government contracts, litigation, public policy and a range of other areas.

Governments have a set of complex challenges to address as participants, policymakers, and regulators. They have to determine what they want the future to be in terms of the new space economy, exploration, international cooperation, and how space should be used – and not used. There are heady questions that intersect with basic questions about the direction not only of public resources but of humanity generally.

There’s little debate, though, that the new space economy represents an opportunity for jobs, economic progress, and innovative technology - it is a vital economic interest at stake, and governments need to recognize and support the emerging new space industry. And I think they are taking steps to do that - at least the U.S. government domestically has – looking to modernize through the National Space Council and efforts within these different agencies that regulate the space sector. It will be very interesting to see whether they continue to modernize and how they meet the big challenge of the growth of the private sector in this area.

What excites you about the future of this industry, and how do you see it changing going forward?

I’m in awe of what this industry has done in the past decade, and it’s just been amazing to watch it grow. To serve and work with the clients that we do at our law firm has really been an absolute pleasure and one of the highlights of my career.

The space program has a history of not only contributing to discoveries in fundamental and applied sciences. It has inspired people in unexpected ways to consider something bigger than ourselves. Think about the famous Earthrise photograph from Christmas Eve 1968 that helped launch the modern environmental movement. Consider the myriad benefits in a variety of fields on Earth, from lifesaving medical treatments to environmental and climate change monitoring to developments in energy.

A whole range of agencies are keenly interested in the national security aspects of what the space industry is doing.

I can’t wait to see what the next decade brings. I believe it’s going to yield exciting new developments in low-Earth orbit activities, and all the way out to the moon and Mars and beyond. There are incredibly difficult scientific and engineering problems associated with these ambitious goals. These will lead to more discoveries and innovations to improvements that inure to all of us. Watching that happen and seeing these companies solve some of the hardest problems that can be faced is just amazing. And these are being solved by people half my age who were not alive during Apollo. The torch is being passed.

Each of these innovations usually brings with it interesting new policy and legal problems, and that makes it fun and challenging for us to be part of. The information age took the baton from the old space age in terms of capturing the imagination of the public, but in a sense is now merging back into it, involving a wider range of people all over the world in the ability to become involved and contribute. How do we handle all of these new interactions, as there are more actors, more people in space and in places where we’ve never been before? The policy questions, the commercial relationships, and the regulatory requirements are headed towards more complexity in this area as the industry continues to create, grow, and thrive. 

Private Companies Also Need D&O Insurance

CARRIE MAYLOR DICANIO & ROBERT M. HORKOVICH ANDERSON KILL

Carrie Maylor DiCanio and Robert Horkovich of Anderson Kill address the misconception that D&O insurance is just for public companies, and outline the risks private companies should consider when looking to purchase it.

It is a common misconception that company coverage under D&O policies is limited to liability arising out of the public sale of securities. This misunderstanding has led many private companies to believe that they do not need D&O insurance. In fact, several risks faced by private companies may be covered by D&O insurance – including government investigations, allegations of fraud, claims stemming from a private sale of securities and claims alleging breach of contract. These types of claims may raise coverage issues that risk managers for private companies should consider when purchasing D&O insurance. I. Government Investigations

Private companies and their directors and officers are subject to government scrutiny and may face regulatory action. Two issues arise repeatedly where a claim is made for coverage of a government investigation. One is whether regulatory investigations constitute a claim that triggers coverage under a D&O policy. The second is whether there is coverage and, if so, the extent of coverage for alleged fraudulent acts.

A. Is There a Claim? In general, D&O policies cover claims for wrongful acts made against a company or its directors and officers during the policy period. The term claim often is defined to include a written demand for monetary or non-monetary relief. In Conduent State Healthcare, LLC v. AIG Specialty Ins. Co.

(2019), the Superior Court of Delaware considered this question in the context of a Civil Investigative Demand (CID), a common investigative tool for a state attorney general to use to investigate potential wrongdoing.

In Conduent, the Court found that there was coverage for a CID the policyholder received from the Texas Attorney General. The policy defined claim as “(1) a written demand for money, services, non-monetary relief or injunctive relief, or (2) a suit.” The insurance company denied coverage for the CID on grounds that it did not constitute a claim. The court disagreed, finding that the CID was a claim because it was a demand for non-monetary relief, as the attorney general could compel compliance with the CID without judicial intervention. It found that the CID alleged a wrongful act by asserting that the attorney general was investigating Medicaid fraud, and there was no substantive difference between a document which states that it is investigating an unlawful act and a document that alleges an unlawful act.

B. Alleged Fraudulent Acts Government investigations often involve allegations of fraud and may result in fines and penalties against the company or the directors and officers. While D&O policies may contain exclusions for fraudulent acts, many such exclusions are conditioned upon the establishment of fraudulent conduct by a final, non-appealable adjudication, so the insurance company is required to advance defense costs even where fraud is alleged. In J.P. Morgan Sec. Inc. v. Vigilant Ins. Co. (2015), a New York appellate court found that even a consent order did not trigger this exclusion, because the company and its directors and officers “reserved the right to profess [their] innocence in related proceedings.”

Despite the final adjudication requirement in fraudulent acts exclusions, insurance companies may argue that there is no coverage for alleged fraud because such coverage is against public policy. The Delaware Supreme Court recently rejected this argument in RSUI Indem. Co. v. Murdock (March 2021). Murdock reasoned that providing coverage for alleged but not proven fraud is in line with the broad indemnification rights provided by Delaware statute, which permits indemnification so long as the director or officer acted in good faith and in a matter reasonably believed to be in the best interests of the corporation. Generally, Delaware law is favorable to policyholders with regard to coverage for civil penalties, punitive damages and restitution.

II. Claims Involving the Purchase of Securities

Private company D&O policies may contain securities exclusions relating to the sale of securities or stock in the company. The exclusion can wreak havoc if not narrowly worded and limited to the sale of public securities.

In Colorado Boxed Beef Co. v. Evanston Ins. Co. (2019), the Eleventh Circuit addressed the application of a securities

Carrie Maylor DiCanio is a member of Anderson Kill’s insurance recovery group and founding shareholder of Anderson Kill’s Denver, Colorado office. Her practice concentrates on D&O and representations and warranties insurance and claims involving complex financial matters. Reach her at cdicanio@andersonkill.com. Robert M. Horkovich is managing partner of Anderson Kill and co-chair of the firm’s insurance recovery group. He is a trial lawyer who has obtained more than $5 billion in settlements and judgments for policyholders from insurance companies. Reach him at rhorkovich@andersonkill.com.

exclusion under Florida law. The company and its officers and directors were sued by stock purchasers for allegedly making misrepresentations in connection with a private sale of the stock. Plaintiffs alleged fraud in the inducement, negligent misrepresentation, breach of fiduciary duty, unjust enrichment and rescission. The insurance company denied coverage based on the securities exclusion. The Court found that the exclusion barred coverage for all of the claims against the company because each claim essentially sought the rescission of the stock purchase agreement and every alleged act involved misrepresentations in connection with the sale of the stock. This case is a cautionary tale to policyholders to ensure that a securities exclusion be narrowly written and apply only to public offerings of securities.

III. Claims for Breach of Contract

Policy provisions purporting to limit coverage for claims for breach of contract can limit coverage severely for claims against private companies if they are not narrowly worded. Russell v. Liberty Ins. Underwriters, Inc. (8th Cir. 2020), decided under Kansas law, involved a very broad breach of contract exclusion. Russell involved a company that was held by three shareholders. They reached an agreement whereby the company would purchase life insurance on each shareholder. If one of the shareholders died, the company would use the proceeds to buy the deceased shareholders’ stock from his personal representative. The plan was memorialized in a Stock Agreement.

When one of the shareholders died, the company received the life insurance proceeds but never paid the shareholder’s widow for the stock. The widow sued the other shareholders for conversion and breach of fiduciary duty, but not breach of contract. The shareholders sought coverage under their D&O policy, which contained an exclusion for claims “based upon, arising out of or attributable to any actual or alleged liability under or breach of any contract or agreement.”

The insurance company denied coverage, arguing that the breach of contract exclusion applied because the widow’s lawsuit alleged that the shareholders promised her but never delivered the deceased shareholder’s life insurance proceeds. The court agreed, holding that coverage should not turn on what legal theory plaintiffs chose to use in the underlying litigation.

Policyholders should be aware that there are ways to mitigate the impact of this exclusion. The exclusion should apply to claims against the company only and not individual directors and officers. There should be an exception for liability that the company would have in the absence of contract. The exclusion should also state that it does not apply to defense costs.

Private companies need D&O insurance as do other organizations that are susceptible to corporate liability. Corporate policyholders and their directors and officers need to scrutinize policy language that pertains to their most salient risks and be prepared to fight for coverage if their insurance companies invoke overly broad interpretations of exclusions to improperly deny coverage. 

The Legal Spend Guessing Game

NATHAN CEMENSKA WOLTERS KLUWER'S ELM SOLUTIONS

The corporate law department budgeting process can be a guessing game—here’s how you can use that to your advantage.

A recent Wolters Kluwer poll showed only 10 percent of corporate law departments (CLDs) feel that they have a “high degree of control” over hitting their annual departmental budget. Just over 40 percent believed they had “some influence,” but it was mostly up to forces beyond their control. The rest fell somewhere in between.

These numbers go against the reigning legal ops narrative, which lacks nuance and says that legal ops can control outside counsel spend. Recent research from Wolters Kluwer ELM Solutions LegalVIEW® Data Warehouse – the largest body of legal performance data in the world – indicates that narrative is probably untrue. Despite the advent of legal ops, annual outside counsel spend remains highly volatile, with 29 percent of CLDs experiencing a 90 percent swing up or down over any given 5-year period and 9 percent experiencing an even larger swing of 200 percent or more (see chart 1 on page 33). Many will find these results unsurprising. After all, everybody knows the amount and type of legal services needed 12 months from now are hard to predict. On any given day a huge, unexpected investigation, transaction or litigation could emerge and cost tens of millions annually until concluded. If you dwell too long on these realities, it starts to look like CLDs are in the unenviable situation of having lots of accountability, but little control.

But that story, too, is oversimplified. It is true that demand for legal services is the primary driver for cost and that it is generally difficult to control. However, there is a lot that CLDs can do to influence the budgeting process and make it work better for them. Here are some: Don’t predict next year’s spend; advocate for the resources you want.

Every year, law departments go through a departmental budgeting process in which they try to predict next year’s spend and get that approved by the CFO. They look at what they spent in the last couple of years, their anticipated matter mix, and other evidence and try to come up with a number. However, the volatility discussed above suggests there are going to be a lot of “unknown unknowns,” and these make reliance on a single number highly risky. Instead, produce various scenarios: Examine the data and say to the CFO, look, if you give us $X, then our modeling suggests a 60 percent chance of going over budget. But if you give us $Y, then the risk is only 20 percent. You might secure more cushion this way and, even if you don’t, you documented the risk of going over and can bring it up in next year when you’ll ask for more money again (always ask for more money— everybody else is!).

Ask other departments to pay for unreasonable and unanticipated costs.

Some CLDs pay all the outside legal costs, while others have a lot of that come out of the department that generated the legal work. When a business unit you serve creates a costly, unanticipated legal need, ask them to pay for it.

Nathan Cemenska is the director of Legal Operations and Industry Insights at Wolters Kluwer's ELM Solutions. He previously worked in management consultancy helping GCs improve law department performance and has prior experience as a legal operations business analyst. Reach him at nathan.cemenska@wolterskluwer. com.

Otherwise, you may go over budget, no matter how good your legal ops. Having the expense hit another department also makes them—rather than you-- feel the pain if they use outside counsel in a wasteful manner.

Harvest downswings.

The volatility in legal spend means costs can spike, but also means they can plummet. When that big case ends sooner than you thought, you’ve got millions lying on the table. Have a plan ready for that. For instance, you can move some of next year’s legal work into this year, putting yourself ahead on January 1. I even consulted for a CLD that negotiated a deal with the CFO where they would get to keep a percentage of any savings, which would be earmarked for legal ops consulting and legal technology. The entire department became more cost-conscious and eventually ended up with a couple hundred thousand dollars they ultimately used to upgrade their organization.

Admitting you aren’t totally in control can feel like defeat, but it actually brings you closer to victory. Legal ops still has plenty of influence and can save 10, 20 or even 30 percent in outside counsel costs. That still doesn’t guarantee staying under budget, but it is a significant amount of money, and you would have gone over even worse without all that hard work. 

Flipping the Script on Litigation

BENJAMIN RUBINSTEIN, MAXWELL HERMAN AND CHRIS EMCH HERBERT SMITH FREEHILLS

Litigation is often viewed through an avoid-atall-costs lens. Yet, there are a number of reasons to embrace it. There are overlooked benefits of litigation for dispute resolution that should be considered.

Corporations involved in commercial disputes often view litigation as an undesirable last resort. To read the prevailing commentary, one can hardly blame them. Online articles abound recycling the same, generic reasons why companies should avoid a lawsuit: it’s time consuming, it’s public, it’s ineffective, and it’s too expensive. At many companies, “litigation avoidance” is treated as an end in itself, and in-house counsel often are charged in the first instance with meeting that end.

The “avoid-litigation-at-all-costs” mentality misses the mark. While the above concerns are legitimate, what companies with this mentality overlook is that in certain contexts an unwillingness to litigate leaves value on the table. Litigation should not be viewed as the end result of a failed negotiation – indeed, the vast majority of lawsuits end in a negotiated settlement – but as a tool that frequently can help achieve a superior resolution to a commercial dispute. Like any tool, litigation can be exceptionally effective when deployed in the right context and manner.

It’s time to flip the script on how corporations view litigation of commercial disputes, and that can start with inhouse counsel ensuring that key decision-makers take into account the often overlooked benefits of litigation as a tool for dispute resolution. Here are a few:

Litigation can improve the dynamics of a negotiation

Litigation can accelerate the resolution of a dispute. In the absence of a credible threat of litigation, a counterparty may view negotiation as a test of endurance, wasting endless hours of senior executives’ time going through the motions of negotiation while making no real progress toward a resolution. Filing a complaint signals that a company is committed to its position and should be taken seriously, and oftentimes forces a once-inflexible counterparty to make a move toward compromise.

Litigation also can reverse a company’s bargaining position. If, for example, a market leader is strong-arming a smaller company over resolution of a dispute, the smaller company can file a complaint that portrays it as David facing Goliath; this converts the market leader’s dominance from a strength to a weakness and puts the smaller company in a position sympathetic with the court and jury. Large companies know these dynamics well and may be more willing to negotiate fairly after being sued. Similarly, a company set back on its heels by the threat of litigation from a counterparty can regain its leverage by filing its own preemptive lawsuit, such as an action for declaratory judgment.

Litigation can establish favorable precedent and discourage future conflicts

A company can gain long-term commercial advantages by litigating disputes and establishing favorable precedent, even if the disputes could have been resolved outside of court. For example, if a company has a recurring issue with the same entity (e.g., with respect to intellectual property), a favorable judgment may be issue-preclusive and prevent future disputes between the parties. Alternatively, if a company has recurring disputes with different parties over the same issue (e.g., with respect to a key term in a form contract), a favorable judgment or contract construction may provide a ready basis to resolve future disputes. Having a reputation for going to court can have a prophylactic

effect as well, dissuading counterparties from engaging in conduct that could give rise to a lawsuit. An investment in litigating a dispute today can save significant time and money tomorrow. its opponent is willing to take the dispute to court. On the other hand, a company that has been unfairly criticized in the public sphere can set the record straight and repair reputational damage by way of litigation.

Public litigation can be a benefit

Key decision-makers may resist litigation because “all press about litigation is bad press.” Although this may be true for some disputes, in others, the public nature of litigation can provide a distinct advantage to a litigant. For example, if the facts or equities fall in a company’s favor, a counterparty that suddenly finds its unsavory conduct under the public microscope may feel pressure to amicably – and quickly – resolve the matter. That same counterparty also is more likely to negotiate fairly pre-litigation if it knows Where public litigation is not advantageous (and might, for example, reveal commercially sensitive information or damage corporate reputation), companies can shield documents from public disclosure by executing confidentiality agreements. Confidentiality agreements have become ubiquitous in commercial litigation and courts expect, and may even demand, that the parties agree to reasonable restrictions on public disclosure of sensitive documents. Thus, a company can still avail itself of the other benefits of litigation while mitigating the risk of disclosure of sensitive information.

Litigation isn’t always expensive, and its costs are not always unpredictable

The “boogeyman” of litigation is its perceived high cost, particularly in the United States where expansive discovery burdens and the absence of fee-shifting provisions create an impression of unjustifiable expense. In reality, litigation often is far less expensive than the value assigned to litigation avoidance during commercial negotiations. Alternative fee arrangements, litigation funding, and the use of aggressive trial strategies can all reduce a company’s legal expenses and provide greater predictability of cost. When a company is developing an offer or counteroffer and putting a price tag on litigation avoidance, taking these options into account may allow it to take a more aggressive stance at the negotiating table.

Outside counsel increasingly are willing to agree to alternative fee arrangements. Flat fees, fee caps, fixed fees, risk collars, phased work, success fees, and subscriptions are all used by innovative law firms to make fees more predictable and improve client value. A growing number of firms also will represent clients on a contingency basis or via the use of holdbacks (a form of contingency fee), which shift some of the risk of success to outside counsel. A company can reduce its expenses further by taking advantage of the rapidly growing litigation funding industry. Third-party lenders may be willing to shoulder some or all of a commercial plaintiff’s legal fees in exchange for a share of the settlement or judgment proceeds. In the event the company would not be entitled to a money judgment (for example, because it plans to file a preemptive lawsuit for declaratory judgment to reverse its bargaining position), it may still be able to use litigation funding to reduce its risk. Some litigation funders will cover the cost of a company’s legal defense in exchange for a portion of the savings realized in a settlement or judgment as compared to the company’s total, pre-assessed liability. If the company loses outright, the funder still pays the legal fees, and the company owes nothing to the funder.

Smart trial strategies can also lower the cost of litigation without compromising the company’s chance of success.

Benjamin Rubinstein is a partner with Herbert Smith Freehils. He is a commercial litigator in the New York Office and has particular expertise defending product liability lawsuits, including class actions and claims brought by governments, both in the United States and internationally. Reach him at Benjamin.Rubinstein@hsf.com. Maxwell Herman is a senior associate with Herbert Smith Freehills. He focuses on product liability, climate change and class action litigation. He represents domestic and international companies in disputes in U.S. courts and advises companies in disputes in Canada and South America. Reach him at maxwell.herman@hsf.com. Chris Emch is an associate in the Dispute Resolution Practice at Herbert Smith Freehills in New York. Previously, he worked as a corporate PR professional, representing automotive and financial services companies. Reach him at Chris.emch@hsf.com.

Time to judgment is the single biggest contributor to high litigation costs. A company frequently can reduce its legal expenses by setting clear expectations with outside counsel of an aggressive pacing of the litigation. Some firms may not be equipped to meet the goal of speed, or can only deliver speed at the expense of putting more attorneys on the case. But oftentimes, in-house counsel and outside counsel can work together to expedite a case by scheduling procedural milestones as early as possible, avoiding extensions, seeking early discovery, producing discovery timely, and not hesitating to engage in motion practice when the other party drags its feet. Experienced in-house and outside counsel will be sensitive to the interplay between these strategies and the nature of the case – for example, by avoiding lengthy discovery battles at the expense of speedy resolution when the amount of controversy is low or the matter is not particularly complex. A lawsuit will not always improve a company’s negotiating position, and there are legitimate downsides to litigation, but it is only after balancing the pros and cons of litigation on a case-by-case basis that a company can determine, in a more strategic and empirical way, whether it wants litigation (or the credible threat of litigation) to be a part of its negotiation toolkit. In some cases, the answer may be no, such as when there is a relatively low amount in controversy, the company’s position on the law or facts is particularly weak, the dispute involves technical questions that would be difficult for a lay judge or jury to understand, litigation could damage ongoing commercial relationships, or the negotiation is near resolution. However, a company that fully appreciates the benefits of litigation will best be able to assess the pros and cons and, where appropriate, deploy litigation to its greatest effect. The risks of litigation are evident, but a well-reasoned choice to litigate in spite of those risks can reap major rewards. 