CFOs shouldn’t ignore ‘litigation tax’

The dust has officially settled on CES, the behemoth Las Vegas tech convention where attendees reach record high step counts while searching for that one freakishly realistic robotic dog.

Amid all the ping pong-playing robots and smart home tech that exhibitors swear would solve all your daily woes, industry experts gathered to discuss an oft-overlooked problem that could hinder (or outright kill) any company pushing these technological marvels.

It’s the barrage of superfluous lawsuits, often funded by third-party investors looking to profit off the settlements.

“One issue that cuts across all of us, but often invisibly, is the growing cost of litigation,” Michael Petricone, SVP of government affairs at the Consumer Technology Association, said during the CES panel. “Lawsuits that are weak on the merits can still be devastatingly expensive to defend.”

For startups, that can mean never making it to scale, he explained, and “if you’re a platform or service provider, it means higher insurance costs, and ultimately higher prices for consumers.”

Not helping the headache? “This litigation tax is pretty unique to the United States,” Petricone added. “It’s a tax that American companies have to worry about that companies in other nations don't have to worry about.” 

The forgotten “tax.” Notably, this hidden “tax” isn’t about fighting litigation that’s genuine (at least in the eyes of business executives).

“Everyone’s seen Erin Brockovich, right? That is not what we’re talking about,” John Lee, the chief counsel for intellectual property on the House judiciary committee, said. “We’re talking about literally hedge funds, investment funds in Wall Street or Dublin, Ireland, or Riyadh or Beijing; these are investment funds that are literally betting on lawsuits. They’re telling plaintiffs’ attorneys, ‘Hey, file a bunch of lawsuits. We want X% return on investment. Here are the conditions of the funding. Your settlements have to look like this, et cetera, and then those lawsuits go get filed.’”

Startups fare particularly poorly against such lawsuits, according to Kate Tummarello, executive director of Engine, a pro-entrepreneurship DC-based nonprofit.

“One lawsuit, even if you think you’re in the right and you think you would win, that one lawsuit can wipe out a whole month, or multiple months, of runway” for “the average seed-stage startup,” which may have around “$55,000 per month to cover all of its expenses,” Tummarello said. “This really is something that can be an existential threat.”

When Robin Liss, CEO and co-founder of Suvie, a kitchen robot company founded in 2015 and now in production, was first hit with an accessibility lawsuit over the company’s website accessibility, she was “really surprised,” given her support of ADA legislation.

“There’s attorneys who, I guess, hire individuals to browse your website and just file a claim that [the website is] inaccessible,” she explained. “You have to settle these for $10,000; $20,000; $30,000.” When the company’s lawyers deal with plaintiff’s attorneys, she noted, they often “have a price sheet” so they know exactly the exact cost to settle. Fighting and defeating these lawsuits adds to the cost, often amounting to “half a million dollars, probably a lot more,” Tummarello added.

“We’ve been dealing with these over and over again, and they’re not going away,” Liss said. “Ironically, we would love to make our product even more accessible…and we don’t get to invest as much money in actually making the product accessible as we’d like, because we basically have to reserve cash for these lawsuits.”

While CFOs should be aware of the issue, it’s likely much of the solution will come from Congress.

The House Judiciary committee is looking at this issue “at all levels,” Lee said. That includes “legislation to mandate disclosure of third party litigation funding, which is what is fueling the dramatic rise in litigation in the United States that these companies are facing.”