What's Going On
The costs of litigation are astronomical. According to one study, the median spend to try a breach of contract case is $91,000.00. Another report estimates a litigant pays $75,000.00 to resolve an employment claim pre-trial and at least $125,000.00 if the case is heard. Fees and costs rise as a matter becomes more complex. These medians exclude appeals.
Aribtration can be even more expensive. Organizations like the American Arbitration Association charge thousands of dollars just to file a case. The parties also have to pay the arbitrators, and the process is often as involved and time-consuming as litigation.
Even mediation has become prohibitively expensive, costing thousands of dollars for just a few hours of resolution time. Unregulated facilitators like JAMS make a mint providing glorified secretarial services that used to be handled by the mediators' law offices.
In sum, the cost of dispute resolution is so high that entrepreneurs shouldn't consider it as an option except in dire circumstances.
Entreneurship Sans Litigation
Thanks to a toxic combination of economic protectionism and regulatory incompetence, we have a "country club" justice system available only to the well-heeled elite. It's unlikely to change soon. Industry "leaders" have known for years that most Americans are priced out of the legal services market. They don't care.
Accordingly, entrepreneurs must retask their strategic thinking and adapt to an economy where formal dispute resolution isn't an option. Lawsuits aren't backstops for worst case scenarios. They're cash cows for predatory big law firms and organizations like the American Arbitration Association (which must have an advertising budget most small business owners would envy). Entrepreneurs should want no part of the legal system; even when they're in the right and have legitimate grievances, their claims are grist for a mill specifically designed to enrich others. Ignore the lofty, dishonest rhetoric so many big firm lawyers and state bar regulators incessantly spew; justice is almost certainly out of your price range.
If the goal is to avoid the court system, the question is "how"? Below are several suggestions.
Contracts
Entering contracts understanding that courts aren't available to enforce them changes how you view transactions. How easily have negotiations proceeded? Is the other side being unreasonable or making excessive demands? When issues have arisen, how accommodating is the other party? If you can easily resolve issues during negotiations, you have a better chance of doing so after execution. Shorter contract terms and deals with easy exits may also effectively hedge against potential conflicts. Viewing legal intervention as a risk instead of an option forces entrepreneurs to take a longer view and examine the working relationship with potential partners more closely.
Insurance
The costs of some disputes - like employment or worker's compensation claims - can be shifted to insurance. Coverage for workplace injuries is required by every state. Other policies startups often avoid as too costly - directors and officers insurance, general liability, etc. - should be reconsidered. Shifting the burden of litigation to an insurer gives you more options to vindicate rights and lowers some of the opportunity cost of dispute resolution.
Employment
Claims by employees and former employees are an ongoing risk. In addition to insurance, smart human resources practices help avoid them and make those brought easier to defend. Start with a well-written employee handbook and a management team versed in compliant practices. Be able to demonstrate that your company treats every worker the same with respect to terms and conditions of employment. Avoid risky practices, like misclassifying employees as independent contractors. Employees already present a higher risk of lawsuits. Don't invite them.
Take Control
Even in our cash-grab justice system, entrepreneurs need legal advice. Take control of your relationship with attorneys and demand they add value to the venture. If the $1,500 per hour big firm partner you're using isn't increasing your bottom line, fire her. There are literally hundreds of thousands of small firm and sole practitioners who are equally effective, more accessible, and much cheaper. Be clear when you hire counsel that his job is to help your business, not his. If he isn't, fire him and find someone else.
