Product litigation is always a business disruptor. Product litigation costs can range anywhere from few thousand dollars to few million dollars.
Litigation Costs
Product litigation costs can be divided into two main categories: (1) attorneys fees and costs; or (2) settlement or damages awarded.
On the defense side, attorney’s fee are calculated per hour. The attorney’s fees can rack up as litigation progresses. If litigation ends up going to trial, the cost greatly increases because of the time it takes to prepare and go through trial. In addition to the hourly fee, there are addition costs depending on how far the litigation goes. This may include hiring experts to review the issue with the product itself and hiring them for trial.
Not only does a business need to pay for their own attorney’s fees and costs, the business may also end up paying some amount in settlement. If the case goes through trial and the business loses at trial, the business may end up paying a large amount in damages.
If the business goes through trial and wins, generally, the business is still the loser. The only winner in this case ends up being the lawyers because the cost of litigation from beginning to end may cost a few hundred thousand dollars.
Offsetting Litigation Costs
There are ways a business can offset litigation costs. The main way businesses offset litigation costs is cost sharing across their customers.
In the legal field, there is a formula, the Hand Formula or Hand Rule, to help understand negligence.
P x L>B where P is the probability of loss (or injury), L is the gravity of loss (or injury) and B is the burden of taking precautions.
A business can utilize the formula in understanding how to calculate a cost sharing amount. The business should understand the probability of injury related to their products (P) and the cost associated with the gravity of such injury if an injury were to occur (L). The business could then estimate the amount P x L would cost the business.
Cost Sharing Example
For example, a business is selling hair curling irons.
The probability of an injury occurring because of a defect or other reasons putting a business at fault may be one product out of every then thousand products (.01%).
The the cost associated with the gravity of such injury may be a medium amount because burns from curling irons are not so big. The estimated amount in settlement or damages on average a business would have to pay for this injury may be $50,000. If attorney’s fees is included at an average of $50,000, assuming settlement earlier in the litigation (as most cases end up in settlement). This can be done in conjunction with a products attorney to have a better estimate.
Thus P x L would be .0001 x $100,000. The addition cost per product ends up being $10. Adding this additional $10 to the product’s original price, the business can offset future litigation costs to the every customer.