We Need Disruptive Invention in Our Legal System to Reduce Transactions Costs


We live in the world of disruptive invention, according to an op-ed piece by L. Gordon Crovitz published in the Wall Street Journal on January 5, titled Disruption is the New NormalHe used the example of road atlases being replaced by GPS devices being replaced by cell phones, all within recent memory. Each technological advance has reduced costs and made information retrieval easier for the end user.

What drives disruptive invention? According to Mr. Crovitz, one factor is the desire to minimize transactions costs, which the Coase theorem says drives many economic decisions. Mr. Crovitz argues that in the digital age with better pricing and product information, transactions costs are vastly diminished.

Unfortunately, transactions costs do not always improve with technology.

In fact, in that same January 5 issue of the Wall Street Journal issue was an article by Jennifer Smith, titled Companies on Guard for New Legal Pitfalls, describing challenges for general counsels in the year ahead. The high cost of regulations and litigation raise corporate risks. She states that

“Top legal officers at many large companies are preparing for stepped-up scrutiny of their operations by both regulators and private litigants as they head into 2014.”

Image from Forbes

Image from Forbes

Unfortunately, our legal system today is designed to increase transactions costs, not decrease them. In fact, digital technologies have increased legal costs more than they have decreased costs. In class actions, huge numbers of plaintiffs are recruited using customer and employee databases.  Discovery costs have mushroomed with the advent of required electronic discovery into email, hard drives, and other repositories of corporate information.

Trial courts are overwhelmed by the number of cases and the sheer volume of electronic records and paper generated in the average lawsuit these days. Overburdened judges leave it to adversarial attorneys to work out the pretrial procedures as much as possible. Unfortunately, the hourly billing mechanisms of most law firms reward doing more work on a case, rather than less. Neither plaintiff nor defense counsel have any incentive to reduce costs.

All this results in greater risk for companies of all sizes. Any firm that wants to create new products or develop new supply chains and or sell to new customers must account for these risks when making decisions. Do they know and understand all the regulations that might apply to their business? Can they foresee and protect against the threats they might face? In essence, transaction costs are increasing as a result of our legal system, not decreasing.

In my experience, both plaintiff and defense firms are guilty of these abuses. Only in-house legal departments have had any incentive to reduce the transactions costs of litigation. Until our legal system faces the same disruptive innovation that we have seen in the technology arena, the threat of lawsuits and government intervention through burdensome regulations will continue to tamp down our ability to innovate.

gavelThere have been some advances in alternative dispute regulation, through voluntary mediation and mandatory arbitration programs. These have helped to reduce costs and provide more timely resolutions of employment and consumer disputes.

But with every attempt to implement such programs, the plaintiffs’ bar raises an outcry that our rights to jury trials have been denied. But what good is a jury trial when it takes at least two years to get to trial, with attorneys on both sides of the dispute attempting to inflict pain and expense through discovery in the mean time?

More disruption is needed in our legal system. Who will lead it?

How have legal burdens impacted your business? Have you seen any improvement in recent years?

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Filed under Law, Leadership, Management, Mediation

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