How to avoid business litigation Featured

9:01pm EDT March 31, 2012
How to avoid business litigation

There is a time and a place to fight for an important principle. Yet, business litigation is rarely about principle. After all, you are in business to make a profit. Often this is something business owners need to remind themselves of.

Monte Mann, partner at Novack and Macey LLP, urges owners to think long and hard about the costs and distractions of business litigation, which can be severe.

“As a business litigator who makes a living in the courtroom, it may be surprising to learn that I also spend a great deal of time in the boardroom — working with clients on ways to avoid litigation well before it arises,” he says.

Smart Business spoke to Mann about the six items that come up most frequently when he is working with clients on avoiding litigation.

What are some common ways that litigation arises for a business?

Many companies find themselves in litigation with their own minority shareholders. Yet, surprisingly few shareholder agreements have ‘buy-sell’ provisions, which provide the company with the right to buy out a minority shareholder based on a stipulated price formula.

Disgruntled minority shareholders are a big source of litigation, and these buy-sell provisions can be used to remove the complaining shareholder and, consequently, eliminate the likelihood of litigation.

Partnership agreements may also include these useful provisions. Business owners should check their shareholder or partnership agreements to ensure that they have  these buy-sell provisions. If their agreements lack provisions, they should make efforts to include them as soon as possible. It’s very difficult, if not impossible, to negotiate later when something goes wrong.

How can owners avoid employee-related litigation?

Your employees are another big source of potential litigation. You must  have an employee handbook that sets forth policies on issues central to the employer-employee relationship, such as confidentiality, discrimination and harassment, employee absences, sick leave, vacation time, and other employer rights and employee benefits.

Policies should be simple and clear, and all managers should be intimately familiar with them. Moreover, these policies must be applied consistently. While it will not totally eliminate them, operating your business in a way that is consistent with your handbook will greatly reduce the likelihood of employee-initiated lawsuits.

What other practices and policies should be reviewed to help companies avoid litigation?

Terms and conditions of buying and selling should be an area of focus. Your purchase and sales order forms should be reviewed and revised by counsel periodically to ensure that your terms and conditions give you critical advantages if a dispute arises with a customer. At a minimum, the terms and conditions that you want to review include terms on payment, risk of loss and warranties.

In addition, requiring that the other side litigate all disputes in your jurisdiction (a ‘choice of forum’ provision) will likely reduce lawsuits against your company. Even better, require that all disputes be resolved in an expedited arbitration in your jurisdiction, with strict limits on pre-trial discovery. This should reduce: a) the number of claims against you; b) the costs of each claim; and c) the amount of time each claim will take until resolution.

Finally, if you have to pursue amounts owed to you, make sure that your forms allow you to recover your costs of collection, including, but not limited to, attorneys’ fees.

How else can a business ensure that it is protected?

Pay close attention to protecting intellectual property. You do not get the right to do business under a particular name just by incorporating or filing a name registration in your state. The only way to properly select and protect a name is through a trademark search and registration with the U.S. Patent and Trademark Office. This is not for the uninitiated. An outside search and legal review may cost less than $1,000.

Your company’s name is not likely its only valuable intellectual property. Patents protect those who invent or discover new processes, machines, manufacturing methods, or any new or useful improvement thereof. Trademarks protect words, names, symbols, sounds and even colors that distinguish goods and services from those manufactured or sold by others. Copyrights protect original works of authorship. Patents and trademarks are registered with the U.S. Patent and Trademark Office. Copyrights are registered with the U.S. Copyright Office. Consider the intellectual property your business uses and seek to register it as early as possible to avoid problems.

When should a business owner involve a litigator?

Don’t wait until you are sued, or you want to sue, to involve a business litigator. The time to do so is when you see trouble out on the distant horizon. An experienced business litigator can help you shape the dispute so that it is consistent with your contract terms and conditions — as well as the law — so that you are in a better position to prevail in court. After all, when a dispute arises, one of the best ways to avoid litigation is to convince the other side that you will likely prevail in court.

Monte Mann is a partner at Novack and Macey LLP. He is a business litigator who represents closely held corporations and partnerships in business disputes. Reach him at mmann@novackmacey.com or (312) 419-6900.

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