by Adam Juda on Wednesday, September 2, 2015
Many in the software world were shocked by a recent court case. Back in July, a handful of technology firms like Adobe, Google and Apple agreed to pay $324 million to settle a class action lawsuit. The companies had allegedly taken part in anti-competitive agreements that resulted in lower salaries for their workers.
Many would argue that the companies had taken part in a heinous act and should be forced to pay a penalty. Without revealing my personal feelings on the matter, I believe that the government made a grave error by allowing this case (and others like it) to proceed. We need to ban lawsuits against large software firms.
One of the primary reasons for allowing civil lawsuits is to create a deterrent to undesirable behavior. The logic can be easily codified as a simple formula:
Cost_of_Punishment * Likelihood_of_Paying_the_Cost > Expected_Gain_from_Misdeeds
This bit of arithmetic relies on the assumption that no one would commit a crime, if he were unlikely to benefit. The less likely the application of a penalty, the higher that penalty would need to grow in order to maintain a deterrent effect.
Unfortunately, there have been many cases in which the guilty have been able to avoid paying anything at all. As such, in order for the fear of litigation to have the desired effect, the cost of any levied punishment must be significantly greater than the expected gains that can be achieved from committing heinous acts.
Let's take a look at an example. A firm is considering a plan to dump raw sewage into a local pond:
- The plan would save the firm $1,000,000
- There is a 10% chance of getting caught
- The fine for illegal dumping is $3,000,000
In this case, the firm would be crazy not to pollute the local pond. In fact, it would take a fine greater than $10,000,000 to dissuade the corporation from its nefarious plan.
In the case I mentioned at the beginning of the article, the $324 million dollar sum seems quite substantial. However, when one divides the penalty by the number of claimants, it becomes clear that this sum represents but a few thousand dollars per litigant. When we further divide that amount by the number of years that this practice allegedly took place, the result is even smaller. Could software's biggest giants save more than a few thousand dollars per employee by fixing wages? Absolutely! So did the firms come out ahead by allegedly committing their deeds?
As of September 2, 2015, the judiciary is understaffed, with a total of 67 judicial vacancies. As a result, this nation must perform a bit of triage and make sure that its judges are used only for the most important cases. Using our limited resources to claw back mere portions of the proceeds allegedly earned by corporate misdeeds is a waste of resources. It provides no deterrence for poor behavior and minimal benefit to those who have been wronged.
Sometimes economics can be harsh, but it can be understood with a bit of thought. Want to learn how pricing works? Take a look at my book on pricing your software and be sure to contact me if you need help.