Resolving Disputes: Certainty and the Sunk Cost Fallacy

IP disputes will inevitably arise from time to time. In a typical process, one party will become aware of circumstances that they consider to infringe their rights. They seek advice, and if positive, proceed to send a letter of demand to the other party. This will set out their rights, the action complained of, and the outcomes which they desire.

In many cases, this leads to a resolution, either by the accused party ceasing their conduct, or a negotiated settlement being reached.

However, in a small number of cases, this is not the end, but the beginning. Formal proceedings are commenced. Early on in litigation within Australia (and in many other jurisdictions), the parties will be directed to undertake mediation. Most disputes will settle at some point before the final decision is reached.

The longer it progresses, the greater the costs for both parties.

I do not propose to address all the fine points of such negotiations, which will try and balance future ups and downs, money, time, prospects and other commercial and emotional factors.

I want to talk about one issue – the value of certainty. Knowing exactly what is going to happen next, even if it is expensive and unpleasant, can be dealt with and planned for much more effectively than the ongoing uncertainty that is inherent in litigation. This is especially true for a start-up or early stage company. The continuing dispute can be concerning to customers and prospects. It also is likely to eat up a lot of management time for the key decision makers; that may be better spent on business development, marketing, operational supervision. Anything that might actually make money.

The problem is that we are all wired to value the time and money we have already spent (or perceive we have spent) more highly than our future returns, even if they are greater. Emotional sunk cost manifests as “we have spent too much money on this to let them get away with this”. The real question is, how much more will you have to spend from now to get to a conclusion, what are the chances of getting a conclusion that you want, and how else could we resolve this.

I was recently assisted in a trade mark dispute between an early stage company, and a U.S. based multinational. The multinational was not really in the same business, had no local presence, and it was dubious whether they could succeed. The law in this space is not clearly settled, and will always heavily depend on the facts and the evidence. After a letter of demand, the multinational commenced proceedings. It would have involved a large expenditure of time and money for the early stage company, to fight this in earnest. Even if they won, they would be well out of pocket, and the management time invested would never come back again. There was a risk of substantial damages and costs if they lost.

The client made the wise decision that certainty was more important. They decided to instead change their trading name, and invest the time and money in promotion and business development of the new name instead of legal costs. Particularly at their business stage, certainty was more important than being found to be right.

Walking away like this is by no means always the right course of action, but the value of certainty should not be underestimated.

by Peter Franke

Leave a Reply

Your email address will not be published. Required fields are marked *