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When solid business plans go awry

What kind of disputes can lead to litigation? The most common are disagreements between business owners, employee claims of unfair treatment or harassment, customer lawsuits claiming product liability or injury at the place of business, disagreements about intellectual property rights, insurance issues, and disputes regarding loans or other financial obligations.

It is prudent to review all of the organization’s policies and operating practices to identify areas where it may be vulnerable to lawsuits. After determining risks – which may depend in part on the nature of the business – work with a trusted insurance expert to purchase protection to the extent it is affordable and practical. Be sure that internal policies are in place to monitor practices, employee policies, contracts with vendors and other agreements that could trip up a firm not disciplined about consistent implementation.

If, despite full attention, one’s company is sued, here are the most important steps to take early on:

1. Read the documents. Many people may be surprised to learn how many defendants in lawsuits fail to thoroughly read the claims brought against them.

2. Conduct research within the organization to develop an understanding of the problem, how it may have occurred, and how it relates to stated policies or operating practices.

3. Find a good lawyer. A business lawyer may be able to provide a referral for an experienced commercial litigator. Ask other trusted and respected business owners. Check in with trade associations, accountants or other business professionals. Be sure to select someone with the experience, expertise and judgment needed to understand and protect the business.

4. Preserve evidence. After being served papers, one has a legal obligation to retain any data or documents related to the matter. This includes emails and other electronic files, as well as paper and other media.

5. Review the company’s insurance policies and tender the claims to insurers as early as possible. Don’t expect them to automatically cover the exposure. One may have to engage a lawyer who specializes in advocating for rights to coverage.

6. Think about the steps that need to be taken to protect the organization’s good name and brand. Be sure that communications and public relations strategies are in alignment with the lawyer’s litigation strategies.

There are times when it is in a company’s interest to pursue legal action against a person or entity that has damaged or done something that threatens the company. Litigation is a legitimate business tool for protecting company interests, but it must be backed by a willingness to commit time and resources. Never pick a fight you are not prepared to finish. Before filing a lawsuit, be sure that there is a clear business objective for doing so, and discuss that objective with legal counsel.

One thing that many business owners and managers fail to appreciate is that when they enter into litigation, there is a loss of control. Their claims may be met by counterclaims from the other side. Litigation should never be used as a threat or ultimatum unless one is prepared to follow through.

If one chooses to move forward with litigation against another party who has harmed the business, here are the next steps:

1. Find an experienced lawyer with good judgment. See above for suggestions about how to locate an attorney.

2. Follow the rules of evidence. Protect all pertinent information and documents.

3. Consider the potential effects on one’s business, particularly as they may relate to customers, vendors, lenders and other parties. Plan and prepare for those effects.

4. Understand that litigation can be burdensome and costly. Be sure that sufficient resources exist to embark on what can be a long process and budget accordingly.

5. Discuss with one’s attorney the most appropriate jurisdiction (state or federal) and venue for the lawsuit. Having a “home court advantage” and litigating in one’s headquarters city is not always prudent. Listen to the lawyer’s recommendation and be prepared for additional travel costs should the suit be adjudicated in another city or state.

Sometimes litigation is the best way or the only way to achieve a business objective such as resolving issues of ownership or management control, asserting intellectual property rights, or pursuing a vendor that has failed to perform a business-critical function for one’s company. But, like most important business decisions, it is best not made in a moment of anger, frustration or impatience.

Steven Olson is co-chairman of the litigation department at Tonkon Torp LLP. Contact him at 503-802-2159 or at steven.olson@tonkon.com.

About Steven Olson