How to prepare to defend against “bet-the-company” litigation

Bet-the-company litigation is a term recently created to refer to complex litigation that could result in a company going bankrupt and going out of business — it’s a new name given to an existing phenomenon. These cases, as the name implies, are deadly serious and could lead to the loss of intellectual property or an injunction that prevents the company from engaging in business. 

Typically, these cases are initiated by a plaintiff that’s looking to put a competitor out of business or gain a competitive advantage in a market. These are time-consuming, expensive and very high-risk gambits. However rare they might be, companies in certain industries should know the risk exists and take steps to prepare themselves for a lengthy, resource-exhausting fight. 

Smart Business spoke with Robert T. Glickman, the managing principal at McCarthy, Lebit, Crystal & Liffman Co. LPA, about strategies companies can use to prepare for and defend themselves against bet-the-company litigation.

How is bet-the-company litigation different from other commercial litigation?

As opposed to standard commercial litigation, bet-the-company litigation is to be avoided at all cost. However, most often a company is forced into litigation and has no choice but to oppose a claim because, if it’s successfully prosecuted, the company could be put out of business. 

Also, because the opponent’s goal is to close the client’s business, these cases are far harder to resolve through settlement. And litigation in these cases inevitably lasts longer than standard commercial litigation. I defended a case that lasted 12 years without an appeal and the legal bills were in the tens of millions of dollars for both parties. 

Who is most likely to initiate bet-the-company litigation?

From a plaintiff’s perspective, these cases involve large companies — as in, Fortune 500 companies — most of which have a history of being litigious. This type of litigation occurs more frequently in industries that are controlled by one to four players. Satellite TV and technology, for example, are industries in which just a few companies are trying to control the market. Smaller companies that are faced with litigation by a much larger, resource-rich company are in a precarious position because there is little regard for the amount of money they’re willing to spend to drive a competitor out of business.

How can companies prepare for bet-the-company litigation? 

Anyone looking to operate in an industry dominated by a few large companies should give serious thought to buying insurance that will provide coverage for certain claims brought against them. This at least provides some protection against a plaintiff with seemingly bottomless resources and an overall goal of causing as much harm as possible. There are lots of types of insurance available, so companies should talk with a broker to determine what’s best for their situation. Having this insurance can be a deterrent — plaintiffs are far less likely to engage in litigation with a company whose legal bills are being paid by a large insurance company. 

Companies can also insulate themselves from some damages by using single-purpose entities, breaking out assets such as real estate and ancillary companies so they can’t be easily sued. 

Also, prepare a war chest ahead of time if there’s concern that a large competitor could threaten the business. That’s important because bet-the-company litigation is fast and hard-hitting. These cases almost always involve emergency injunctive relief as a weapon, which can bring a case to court in as little as two weeks. Companies that are not prepared for this possibility can quickly be outmaneuvered.

Companies worried about the threat of litigation should also have a lawyer prepared ahead of time. It’s best to work with a firm that has expertise in the company’s industry and trial lawyers who’ve tried complex cases. That doesn’t mean the biggest firm is the best. Companies need experience and expertise that’s affordable. Establish a formal relationship with the firm because conflicts can arise quickly and a conflict could mean the ideal lawyer isn’t available when needed.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman