A software development business was reaping the cashflow from its recent launch of a new payments system when it received an unexpected claim for £10m damages in respect of an alleged patent infringement. The General Counsel (GC) advised that whilst the claim was spurious, the nature of the claim made conducting a defence expensive. Three options were available for consideration:
1. enter negotiations to settle the claim at the lowest cost and with as little external noise as possible. The GC advised that this could be expensive:
some legal costs would be inevitable
some element of the £10m would have to be paid
2. engage lawyers and allocate a budget to fight the claim noting that this could take up to 3 years to conclude. The GC advised that the Board would have to be ready to pay
their own lawyer costs of at least £0.6m and disbursements of approximately £0.4m if the case went to trial plus
their opponent costs that might be as much as another £0.7m if the defence failed at trial plus
whatever element of the £10m damages claim the court judged appropriate if the defence failed
The CFO noted that mounting a defence had the benefit that if the company won at trial no damages would be paid and legal costs could be awarded against the claimant. The risk of such an adverse outcome for the claimant would make an early settlement more likely and on terms far better than if the claim was not defended.
3. pursue option 2 but reduce the potential cost of a loss at trial by taking insurance under QLCC’s Legal Costs Cover policy with a limit of indemnity of £1.7m representing the estimated maximum legal cost exposure. The GC advised the Board that this changed what they would have to be ready to pay from option 2 in the event that the case went to trial and was lost
The insurance policy would reimburse of of their opponent costs if the defence failed at trial
The insurance policy would reimburse all of their own lawyer costs except for a deductible of 25% (in a worst case this would be £0.15m assuming that everything budgeted by their lawyers was spent)
The insurance would reimburse all of their disbursements to other professionals and experts
The company would have paid a maximum insurance premium of £0.595m (excluding Insurance Premium Tax) and would have to settle whatever element of the £10m damages claim the court judged appropriate
The CFO noted that this option reduced the incremental risk of defending the claim to the £0.15m deductible on own lawyer costs plus the worst case insurance premium of £0.595m. This was a reduction of £1m in the downside from conducting the defence whilst retaining all of the potential benefits i.e.
in all options the company faced the prospect of some element of the claimed damages being payable but only by defending the claim could this be potentially reduced to zero.
commencing litigation demonstrated the strength that would cause early settlement negotiations
The Board were clear that defending the claim was essential and that the risk to the shareholders of an adverse outcome must be mitigated by an insurance policy. The CEO summarised the decision thus:
defending the claim opens the probability of a win at trial and the likelihood of a zero cost conclusion
defending the claim increases the likelihood of an early settlement on the best terms with minimal legal expenditure
insuring the action means that the benefits of defence do not come with penalty of a significant increase in the downside in the event of a loss at trial since the worst case legal cost of defending and losing is reduced by more than 60% and is capped
Insuring the action with a staged premium means that in the event of an early settlement the overall downside protection could be achieved at an incremental cost of just £0.19m (the first stage premium)
“QLCC” and “Quantum Legal Costs Cover” are trading names of Harbour Underwriting Limited.
Harbour Underwriting Limited is an appointed representative of Bennett Gould & Partners (Dorset) Limited which is authorised and regulated by the Financial Conduct Authority.
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