Legal action Featured

7:00pm EDT November 25, 2009

When a legal dispute arises, often a business owner’s first inclination is to declare war, i.e., file a lawsuit and engage in protracted litigation. However, that impulse should be resisted, says Adam Rome, attorney in the Litigation Practice Group and the Restructuring & Insolvency Services Group at Levenfeld Pearlstein, LLC.

“Litigation should always be a last resort,” Rome says. “Too many times a complaint is filed without determining a clear goal. A number of factors must be analyzed before making a decision about the proper course of action.”

Smart Business spoke with Rome about how to approach a dispute to achieve your desired outcome while keeping your expectations in check.

What are the first things to consider when a dispute arises?

Clearly, a major concern to a business in determining whether to engage in litigation is cost. However, cost cannot be the only factor analyzed. A business, with the help from its trusted business adviser or lawyer, must analyze the probability of its success. Success is defined by the client, which is why it is so vital to set a clear goal before filing a complaint.

After determining its goal, a company must consider all of its options. Not all options are based on the filing of a lawsuit. Savvy lawyers and businesspeople can, and should, get creative. Options are based on leverage. A business can use its leverage to obtain a successful result, without participating in an expensive lawsuit. If a company has little or no leverage, filing a complaint is a quick way to create it.

A business must also understand that a lawsuit is time-consuming. A company is going to have to use its resources responding to discovery requests, sitting for depositions and engaging in litigation strategy, which is time taken away from running the business.

A business should also weigh the impact of its lawsuit in the business community. Filing a suit will have a negative impact on the entity or individual being sued. Therefore, if this customer produces a large revenue stream for your business, it may not make economic sense to sue the customer over an issue that may have a less disruptive solution. A company should also determine whether a lawsuit could negatively impact its relationships with other clients or potential customers.

When is litigation inevitable?

If you are a defendant, litigation is usually inevitable. In contrast, filing a complaint is inevitable only after all other options have been exhausted, and it has been determined that the business cannot survive without achieving a successful result.

Furthermore, litigation makes sense when the amount of money in dispute justifies the cost of litigation. In contrast, there are situations when a business needs to make a public statement to deter future malfeasance from either within or outside the company. Sending a message can be a valid goal that has no direct monetary value. For example, a business may need to file suit against an employee who violated a noncompete agreement. This lets everyone at the company know that employment agreements will be enforced.

When should mediation come into play?

Mediation is a tool used within litigation. Mediation is a powerful device. It can be extremely beneficial when your opponent has deeper pockets. For the most part, mediation must be mutually agreed upon. Leverage is key when trying to convince your opponent that mediation is the best result. It is up to the lawyer to determine what leverage to apply, and how.

Mediation is not binding and should therefore not be treated like a mini-trial. The goal of mediation is not to convince the mediator that the business has a superior argument. It is important to persuade the mediator, but the goal is to convince the principal of the other company that it is in his or her company’s best interest to settle the case at the terms you suggest, rather than having to spend additional time and money.

Mediation is a skill. If one’s mediation style is too aggressive, there is a risk that your opponent may become defensive and/or angry, which could cause your opponent to litigate harder.

When is it best to walk away from a dispute?

Let me be clear, walking away does not mean forgetting about the dispute. It simply means that litigation may not be the best option. It means that sometimes you need to be creative.

If litigation is not economically feasible, business deals need to be, and should be, worked out. For example, depending on the circumstances, discounts can be provided on future deals, an exclusivity agreement can be worked out or payment schedules devised. Successful results can be achieved without involving the court system.

Some businesses file suit when there is no financial or noneconomic upside. For example, a former employee stole your customer list, but this list is not vital to your business. To file suit to enjoin your former employee from using this list may cost a significant amount of money. Again, if the lawsuit lacks financial and/or noneconomical impact for your respective company, a company should consider walking away.

Adam B. Rome is an attorney in the Litigation Practice Group and the Restructuring & Insolvency Services Group at Levenfeld Pearlstein, LLC. Reach him at (312) 476-7585 or arome@lplegal.com.