Litigation may seem like one of the unavoidable risks of business life, but there are a number of ways that a business can reduce and mitigate that risk. Given the significant costs, turmoil and distraction of litigation, and the possibility of losing in trial or settlement, it is important to understand some of the measures you can take to minimize this risk.
The First Rule, at the risk of sounding like a Sunday School teacher, is the Golden Rule: behave honorably, as you would want others to do to you. It is an old joke among defense attorneys that if you don’t want to be sued for embezzlement, don’t embezzle, and if you don’t want to be indicted for tax fraud, don’t commit tax fraud. Firms that establish, practice and maintain a strict policy of ethical behavior among their entire staff (not just the C-Suite) tend to be in court less frequently than firms that have more slippery standards. Quite simply, you are not giving ammunition to others to come after you if your business conduct is honorable. This strategy includes:
- write a strong code of ethics and business conduct;
- promulgate that policy throughout the entire company, regularly;
- have internal training sessions on this policy; and
- use an employee’s behavior in relation to the policy as criteria for bonuses, promotion, and even for retention.
This takes a whole-hearted commitment from the top; standards flow downhill.
The Second Rule is to be prepared and do your homework upfront. That means to make sure that all legal and accounting issues are dealt with from the start. If you enter into a contract (whether it is an employment contract, a lease, a distribution agreement, a licensing agreement, a securities transaction, or whatever) make sure your counsel writes all of your documents, and gives a rigorous review to the documents provided by the other side. Retain a competent CPA to set up your chart of accounts, your books, and all of your internal procedures, including A/R policies and credit policies. If you have solid legal documents and well-crafted accounting procedures, you are less likely to get into trouble later.
As someone who has testified in 41 cases as an expert witness, in litigation on financial matters, it always amazes me how companies will do very sloppy, if any, legal and accounting work upfront, and then five years later have to be in court to interpret what should have been clarified from the start. For example, I am working with three entrepreneurs who started a company seven years ago, and did everything casually, by oral agreement. No ByLaws, and no Partnership Agreement. The only Articles of Incorporation they have is the boilerplate one provided by the Secretary of State when they incorporated. Now they are in a serious disagreement about who has the right to commit the company to certain actions, and it has the potential to get contentious and expensive. All of this could have been avoided by having counsel write these Agreements on day one, at a total cost of less than $5,000.
The more carefully you establish all of your legal documentation and accounting practices at the beginning, at a modest legal and accounting cost, the less likely you will have to pay large legal and accounting fees to dig your way out of a problem you should have avoided. As they say, pay me now or pay me later.
The Third Rule is to document and retain everything. Computer storage and cloud backup are so cheap today that there is no excuse not to maintain very careful and thorough records of everything you do, say, write, receive, or send. Store it, and then back it up. Rather than maintaining a storage room full of banker boxes, scan everything of importance and store it as a digital file. Keep copies of all emails sent and received, all paper correspondence, all documents and earlier drafts of documents, and all analyses. Sometime, in litigation, the party that prevails is the one that has kept the best and most complete records. If the other party is claiming that you said X and your position is that you said Y, then produce the document or email that proves you said Y, and you win that point.
The Fourth Rule goes in a different direction: prepare for battle if you have to. Having said all of the above three rules, it is still possible that you will get entangled in litigation. Sometimes there are genuine differences of opinion and interpretation, although those are best handled by mediation or arbitration. Sometimes you may wish to initiate legal action against a party that has injured you: perhaps IP infringement, or dishonest business practice, or fraudulent behavior. Then by all means prepare for battle. Retain good counsel, and remember General Patton’s dictum that the best defense is a good offense. But be sure of your facts, and double-check your supporting documentation. Be honest with your counsel that if there is incriminating evidence in your own files, disclose it to him and decide how to deal with it.
In the Department of Justice’s anti-trust case against Microsoft, several years ago, accusing Microsoft of attempting to destroy Netscape as a rival search engine, the following hilarious exchange took place between the government’s attorney and Bill Gates:
Attorney: “Mr. Gates, can you tell the court how you felt about Marc Andreeson [the founder and owner of Netscape]?”
Gates: “Well, sir, I have a deep respect and affection for Marc. He is one of my best friends, and I have always suggested to him that we find ways to collaborate for our mutual benefit.”
Attorney: “In that case, Mr. Gates, please read aloud this email you sent to your senior staff.”
Gates (stammers): Uh, well, it says: “F**k Marc, tear his f**king throat out.”
Clearly, no one on Microsoft’s legal team checked Microsoft’s email archive before entering the courtroom, or they would have handled this defense differently.
At the same, the Sixth Rule, keep your ego in check. Don’t necessarily go for blood, but recognize that a trial becomes very expensive, and you can’t always predict a jury’s reaction. I testified in a class action against Prudential, on the side of the class, in what I saw as an open-and-shut case of Prudential intentionally selling junk bonds to retail investors from a fraudulent transaction. Prudential offered a generous settlement, probably sensing that the odds were against them, but the attorney for the class talked them into rejecting the settlement. So the trial continued, and the jury found for Prudential. The class received no compensation, and their law firm, which was working on a contingency, lost several million dollars in expenses.
Judge your chances carefully, and weigh any possible awards against the cost of litigation. Sometimes it is better to have half a loaf than an empty plate.