Yesterday’s WSJ carried a story about a legal skirmish between Google and, as the story implied, Microsoft.  IT Business Edge also has a post on this topic. The background is that Google was pursing a collection action against a small company in Ohio, I think, for about $350K. Apparently, Google filed a "normal" collection action, but the defendant hired a well known antitrust litigator from the Washington office of the venerable New York based law firm of Cadwalader, Wickersham & Taft. This fellow, and his firm, have Mircrosoft as an important client. The thing that rightly caught WSJ’s eye is that no one would ever hire Cadwalader to defend a collection case (certainly not one in which $350K is at issue). Cadwalader, on behalf of their client, counter attacked with a bunch of antitrust claims. Of course I think it is interesting that these two titans of the tech world are engaging in legal skirmishes. But the point I want to make here is more akin to the WSJ’s initial insight. Cadwalader will burn way more than $350K if this "collection" case goes to trial. This type of litigation is the sport of kings.

Most (all?) startups do not fit that category. I recall a litigation between two founders related to stock ownership, handled, on behalf of one founder, by my firm. The two hated each other to the point where there was no settling the matter, and it went all the way through trial. The cost, on our side, was in excess of $250K. Even modest litigations with small amounts at issue will run up costs that can far outweigh the benefits to any party.

Also, by the way, no investor wants to see his or her money frittered away in pursuit of a litigation. If the prospect for litigation is high, then prospect for obtaining new financing is correspondingly low. I am actually aware of one industry segment, in which a reasonably well funded company is pursuing a policy of suing all other players – including new entrants – for patent infringement. The merits of their position is unclear to me, but the fact of their strategy has made it impossible, as a practical matter, for companies with related technologies to get financing in New England.

Another thing to note about litigation, that is, apparently, true of the Google case I began with, is that once you start the process you can’t unilaterally undo it. Why? Because the adverse party will inevitably bring counterclaims. In Google’s case they initiated a simple collection case and are now stuck in an antitrust case. If you sue your co-founder he or she may counterclaim. If you then drop your claim, you will still be stuck defending the counterclaim.

My larger point here is that litigation can be a self-inflicted wound that kills your company. Litigation does have its place, but don’t think that even a seemingly great claim is as strong as it sounds.