Abraham Lincoln may have been the first lawyer to recognize the pitfalls of litigation but certainly not the last. He noted that: “The nominal winner is often a real loser — in fees, expenses and waste of time.”
Fortunately, today’s executives have an alternative way to resolve disputes that doesn’t put your fate in the hands of a judge or jury.
“Not only is mediation less expensive than litigation, the parties are in control of the outcome and they can be completely creative in finding a solution,” says Jennifer E. Acheson, partner and insurance and bad faith expert at Ropers Majeski Kohn & Bentley PC.
Smart Business spoke with Acheson about the benefits of mediation.
What is mediation and how is it different from arbitration and litigation?
Mediation is a type of alternative dispute resolution, where a neutral or trained mediator helps conflicting parties resolve issues, ideally before a lawsuit is filed. Mediation differs from arbitration and litigation in that it’s not a sworn evidentiary hearing or trial, and the mediator doesn’t rule on the merits of the case or take sides. The parties still have the opportunity to air their grievances during caucuses with the mediator and there’s more leeway in offering testimony.
What are some common business situations where a mediator might be used?
Mediation can be used to settle a variety of disputes including:
• Employee disputes with other employees.
• Employee disputes/grievances with management.
• Sexual harassment complaints.
• Hostile workplace issues.
• Discrimination complaints.
• Americans with Disabilities Act compliance issues.
• Business partner disputes.
• Contract disputes.
How do you select an appropriate mediator, who pays for mediation and how much do mediators charge?
The actual cost of mediation varies with the complexity of the case; however, the parties split the charges and avoid the cost of pre-trial maneuvering, court reporter fees or similar expenses. Mediation is a bargain when you consider that lawsuits cost small businesses $105.4 billion in 2008, according to the U.S. Chamber of Commerce. Since the process of being heard is often the overture to resolution, look for a mediator who is a close and patient listener.
Is mediation confidential?
Yes, anything said during the course of mediation is inadmissible in court, and the communication among participants is confidential. In fact, the mediator needs permission to disclose information revealed during individual caucuses with the other party. This protection even extends to the settlement agreement, unless the parties agree to waive confidentiality. In contrast, trials are normally open to the public.
What happens if the parties can’t agree?
Unlike arbitration or trials, which have a mandatory and possibly binding decision, the mediator doesn’t have the power to force the parties to reach an agreement. The process is voluntary and either party can withdraw at any time. If the parties can’t resolve their issues in one session, with the parties’ permission, the mediator can continue the process until the dispute is resolved.
Is an agreement made at mediation enforceable?
A mediation agreement is enforceable as long as the authorized parties agree on a deal and sign the memorandum. If a party refuses to comply, the parties can appoint the mediator as an arbitrator for the sole purpose of rendering an award that complies with the agreement, as long as the dispute hasn’t gone to litigation. If the matter is already in litigation, a motion for enforcement can be brought under the civil code. This makes mediation an enforceable and cost-effective alternative to litigation.
Jennifer E. Acheson is a partner, insurance, and bad faith expert at Ropers Majeski Kohn & Bentley PC. Reach her at (650) 780-1750 or firstname.lastname@example.org.
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Disputes between adjoining landowners can be bitter. Landowners, whether they be businesses or individuals, want to “protect their turf.” Landowners upset with their neighbors will often rush into court with a spare-no-expense resolve.
“But that can be foolhardy, because they often don’t realize the magnitude of the expense,” says William J. Maffucci, of counsel with Semanoff Ormsby Greenberg & Torchia, LLC in Huntingdon Valley, Pa.
Smart Business spoke with Maffucci about ways businesses that own real property can avoid and economically resolve disputes with neighboring owners.
What types of disputes arise between adjoining owners?
I would put them in five categories.
First are traditional disputes about the location of a boundary. Resolving these disputes almost always requires a survey. Sometimes the parties agree to be bound by a single survey or by the opinion of a single surveyor. More often, the parties each retain their own surveyor. And the surveyors don’t always agree. A boundary dispute is often a ‘battle of the surveyors,’ with a court or other arbiter deciding which surveyor prevails.
There is a different type of boundary dispute that isn’t resolved by surveys. A claimant may instead be relying upon the doctrine of ‘adverse possession’ or on the related doctrine of ‘consentable line by recognition and acquiescence.’ Both flow from the principle, recognized by the courts, that an open and notorious use of property continuously over a long period (21 years in Pennsylvania) by one who does not hold record title to it but who nevertheless acts like its owner, putting up a hostile front and fighting off competing claims of title, effectively becomes the owner of the property.
Next are easement disputes. These are disputes in which your neighbor acknowledges that you own the property but claims a right to use it, such as to drive across it. Many of these claims are based on either ‘prescription’ or ‘implication.’ A ‘prescriptive easement’ is acquired in the same way title is acquired by adverse possession: through open and notorious use continuously over a sufficient period. But a prescriptive easement doesn’t prevent the owner from using the property, too. And it doesn’t result in a change of ownership; it results only in the right to continue the use perpetually. An ‘easement by implication,’ by contrast, is based upon logic. The law recognizes, for example, that when the obvious consequence of a sale or subdivision is to leave lot owners with no access to a public road other than by passage over the land conveyed or subdivided away, the owner of the landlocked land has an ‘easement by implication’ to travel over the other land.
Then, there are disputes over whether an owner is using his or her own property for an improper purpose. These are usually resolved under local zoning law or under the law of ‘nuisance.’ The latter recognizes that even a use that is permitted under the zoning ordinance may be enjoined if it is inherently offensive to neighboring properties.
Last are encroachment disputes, whether the encroaching items be artificial (buildings, parking areas) or natural (tree branches, roots). Your neighbor’s building or tree’s branches extend onto your property. Here the law usually gives you the upper hand; the courts generally require that a proven encroachment be removed.
Once a lawsuit is filed, is it likely that the case will proceed all the way to a formal court trial?
No. Most cases are eventually settled. They don’t settle quickly, because they begin with so much bad blood. But litigation between neighbors can be very expensive. It could easily cost more than $100,000 in legal fees to take an adjoining-neighbor dispute through trial.
And the expense will often escalate as trial approaches. So even litigants who began with a ‘spare-no-expense’ approach are often forced to undertake a cost-benefit analysis. Winning the case could cost more than the property is worth.
William J. Maffucci is of counsel at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (267) 620-1901 or email@example.com.
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The costs of litigation can quickly escalate, especially if you’re facing a motivated and well-funded plaintiff who seems intent on aggressively pursuing litigation. Dealing with litigation can create a big burden upon management to respond, collect documents and be available to give a deposition, testimony or consultation.
“If you have experience with lawsuits, then you understand the cost and time pressures associated with them,” says Stephen L. Ram, Attorney with Stradling Yocca Carlson & Rauth. “That’s why attempting to come to a resolution with the other party ahead of reaching the courts makes sense for both parties.”
Smart Business spoke with Ram about resolving disputes without litigation and the legal protections that exist around conversations undertaken to come to an agreement outside the courts.
What are kinds of disputes do companies become aware of before a lawsuit is filed?
There are a number of common disputes that can come from vendors, contractors and shareholders that stem from some dissatisfaction with your business relationship. Most often, a company is made aware of them through a demand letter sent from counsel, or, as with many vendor disputes, a sales representative will be aware that some looming frustration is becoming more than a trifle and should be a concern for the company.
How do you approach a solution when one or both parties are emotionally charged?
It’s common to have a powerful initial emotional response to a dispute when it arises, particularly when a party makes substantial or possibly outlandish monetary demands. Understand that emotional reactions are natural, but consider what is best for the company and its shareholders and find a suitable resolution. Recognize that the other side has different pressures and emotions to which it’s reacting. Step back and be dispassionate and objective because a measured, discerning approach makes it easier for you to facilitate a resolution. Also consider the applicability of any insurance coverage and notify the broker or carrier after receiving a demand.
What needs to be considered when unequal information is causing or adding to the dispute?
Disputes generally arise because one party speculates the other has done them wrong or has done something suspicious. While there may be a grain of truth to the gripe, the other party’s speculation is usually accompanied by a lack of information or a misunderstanding regarding what actually transpired. Naturally, you will undertake your own formal or informal investigation into the basis for the dispute. There is an opportunity before this dispute boils over into a lawsuit to be open to what the other side needs and wants from you, and you can consider your willingness to share information from your own internal inquiry. Being open to this type of dialogue makes it easier to work toward a resolution.
When should a representative begin talking with the other side?
The decision of when or how to open a dialogue is unique to each situation. Most times, the initial dialogue should be between counsel to ensure confidentiality protections and avoid a blindsided attack. The first step is to gauge and engage the other party, which involves acknowledging the other party’s monetary or other demands. However, you also need to be clear that you do not intend to cave to those demands to manage their expectations, but state your willingness to work with them to reach a fair resolution.
Next, establish parameters for future dialogue. If the other side is requesting information or you would like to voluntarily provide information to correct misunderstandings, legal counsel can assist in determining what documents to provide, what level of detail to share, or perhaps to make a company employee available to tell the story of what happened or answer questions.
If you are going to make a member of management or another company employee available, the third step is preparation. Preparation involves understanding the parameters for the dialogue, understanding of the relevant facts and your story, and that person’s ability to bring back conversations that go astray, or refrain from going beyond the scope of the conversation. This conversation can be as simple as a phone call or as structured as mediation.
Are you putting yourself at risk by engaging in this type of dialogue?
There are legal protections for communications that are undertaken for the purpose of reaching a settlement of a dispute. These protections, available under state and federal law, dictate that what you say during these resolution conversations is not admissible in court to prove liability. This means you can share information that might legally amount to admitting to a breach of a contract, for example, in an effort to reach a compromise.
To invoke the protections of these statutes, you just need to tell the other side you are having the conversation in order to resolve the dispute. But for added protection, talk with outside counsel about what you’re planning, that you’re serious about reaching a resolution, and ask for a confidentiality or nondisclosure agreement. Convince the other side to put this protected dialogue in place, as well. The confidentiality under these statutes and a binding agreement offer comfort to both parties and help facilitate conversations. Still, there may be situations where it’s not advisable to share or only share limited information.
If a resolution cannot be reached, how should you proceed with management of a lawsuit?
Keep an open dialogue and don’t entrench yourself in an emotional reaction or overly rigid position. Allow the other side to see that you’re serious about defending or prosecuting, but hopefully cooler heads can prevail and a resolution is reached, especially if there is an ongoing relationship. An early resolution is usually far less costly and disruptive than one reached after protracted litigation.
Stephen L. Ram is an Attorney with Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4102 or firstname.lastname@example.org.
For a company that depends on the confidentiality of its intellectual property, protecting its trade secrets during litigation may be as important, if not more important, than succeeding in the litigation itself.
“Whether the company is a plaintiff or a defendant in litigation, depending on the scope of the case, its trade secret information may be discoverable,” says Joshua E. Liebman, an attorney at Novack and Macey LLP. “In fact, in some instances, a company may be required to disclose its valuable trade secrets to one of its direct competitors.”
Smart Business spoke with Liebman about how to protect trade secrets during litigation.
What are trade secrets?
To paraphrase Section 1(4) of the Uniform Trade Secrets Act — which has been adopted by most states — a trade secret is information that derives independent economic value from not being generally known to other persons and that is the subject of efforts that are reasonable under the circumstances to maintain their secrecy. It is important to remember that both elements must be met for information to be classified as a trade secret.
In other words, although a customer list that is developed over two decades and that identifies particular needs and price points for each customer clearly provides its owner with economic value, it is a trade secret only if its owner takes reasonable steps to keep the list secret.
Why would a party be required to disclose its trade secrets?
Trade secrets will almost always be disclosed by a party prosecuting a claim for either misappropriation of trade secrets or breach of a confidentiality agreement involving trade secrets. In addition to those two obvious examples, trade secret information could be responsive to discovery requests served in any other breach of contract or business tort case.
Generally, courts permit broad discovery and require parties to produce documents and other potential evidence that are relevant to any party’s claim or defense, even if the potential evidence constitutes a trade secret. As a result, a defendant company may not only find itself in a lawsuit that it did not initiate but also in a position where it is forced to produce trade secret information to its competitor.
What can a company do to protect its trade secret information from disclosure?
The first step is to identify what it considers to be trade secret information. Once the trade secrets are identified, the company’s attorney should closely scrutinize the discovery requests to determine whether the trade secrets are responsive to the requests. If the information is not responsive, it does not have to be produced.
If the attorney determines that the trade secret information is responsive to one or more requests, he or she should analyze whether there are proper grounds for objecting to those requests. Objecting on the basis that the information requested is confidential or a trade secret is not permitted. Instead, a valid objection is that the discovery request is overly broad because a complete response thereto would require the production of information that is not relevant to any of the parties’ claims or defenses.
Once an objection is made, the attorneys may try to negotiate a limitation on the discovery request. If the attorneys cannot reach an agreement, then the party that served the request can ask the court to intervene by filing a motion to compel the production of documents or other information.
If a company’s attorney or the court determines that trade secret information is responsive to a discovery request and no objection applies, then the information must be produced. However, the information can be protected through the entry of a protective order, which prohibits the use of the disclosed information for any purpose other than the litigation in which it was produced.
How does a protective order work?
Generally, parties negotiate and agree to the terms of a protective order. In some instances, certain provisions of the protective order may be in dispute and require court intervention.In either case, the court must approve of the terms and enter the order so that it is a court order that can be enforced against anyone who breaches it.
Although protective orders vary, typically they divide protected information into two categories: confidential information and attorneys’ eyes only information. Confidential information usually can be shared with the court (but only under seal), counsel for the parties to the litigation and their legal staffs, expert witnesses or consultants retained by the parties, deponents in the litigation and the parties themselves. Most protective orders require expert witnesses, consultants and deponents to sign acknowledgements consenting to be bound by the terms of the protective order prior to reviewing confidential information.
By contrast, attorneys’ eyes only information generally can only be shared with counsel for the parties to the litigation. Highly sensitive and/or competitive information that a company does not want its opponent to access should be designated as attorneys’ eyes only.
That designation, however, should be used sparingly. It places a heavy burden on the attorney reviewing the information because he or she cannot consult with the client to determine whether the information is relevant, accurate or complete. Accordingly, a blanket attorneys’ eyes only designation likely will invoke an objection to the designation, which may result in loss of the heightened protection necessary for the information that truly is a trade secret.
Protective orders generally require protected information to be returned or destroyed at the end or litigation. A party concerned about its opponent using its trade secrets at the close of litigation should demand a signed verification that all protected information, including electronic and hard copies thereof, has been destroyed.
Joshua E. Liebman is an attorney at Novack and Macey LLP. Reach him at (312) 419-6900 or JLiebman@novackmacey.com.
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Every business, no matter how well it is run, faces the possibility of a lawsuit.
But there are steps you can take before that happens to position your company to prevail, says Thomas M. Hanson, a member of Dykema Gossett PLLC and head of the firm’s Dallas office financial services litigation practice.
“If you’re in business, litigation is not necessarily inevitable, but it is certainly a possibility,” Hanson says. “Every company needs to prepare for it, just as you would prepare for other contingencies that might affect your business.”
Smart Business spoke with Hanson about the policies you need to have in place and if, despite your best efforts, you are sued, the steps to take to lessen the pain.
What everyday practices can help minimize litigation costs and potential liability?
In litigation, documents generally carry the day. Most businesses utilize some type of standard form contract, such as purchase orders, sales orders, or a standard form employee/consultant agreement. Businesses need to review those forms on a regular basis to ensure they clearly lay out the terms of the contract. A manufacturing company might think, for example, that its sales order gives the buyer ten days to inspect the goods. But review the contract from the perspective of a judge who has no understanding of your industry. Will she read it the same way? If not, you should clarify the language and potentially save yourself many thousands of dollars in litigation costs, not to mention potential liability.
Significant litigation expense can also be avoided if you have a standard document retention policy. Every company should have one, particularly given the proliferation of e-mail communication. Whatever your policy — if e-mails are deleted every six months, every five years or never — it should be written down. When you get into litigation, courts are more and more interested in finding out what happened to electronic documents.
If you have a standard policy and can show that a key e-mail in the case was deleted according to a standard policy, you’ll be in much better shape than if you have no policy and it looks like e-mails were deleted haphazardly. Again, this simple practice can not only save you from attorneys’ fees but also from potential liability.
What other steps should businesses take to protect themselves?
Another issue with standard contract terms and conditions is making sure employees are using them. Too often, there is a two-page contract; the first page has a purchase order and page two is the standard terms and conditions. But your employees may not bother to send that second page. Suddenly, the case-winning provision you were relying on may not be part of your contract at all.
Finally, proper insurance coverage can be a lifesaver if your company is sued. If you have coverage, the insurance company is not only obligated to pay damages assessed, but, even more important, it is generally obligated to defend you and pay your lawyers. It makes cases infinitely more resolvable if you have a policy that will cover all or some of the cost.
If, despite its best efforts, a business is sued, how should it approach that suit?
Again, documents are key. In particular, courts are cracking down on what happens to electronic documents after litigation commences. If your servers automatically delete e-mails at a set time period, you need to have your IT personnel stop the automated delete function for any potentially relevant electronic documents.
Take steps to collect documents that might be relevant right at the beginning, and make sure, in writing, to instruct any employee who might have relevant documents not to delete anything — not e-mails, spreadsheets or documents stored on their hard drives. If you don’t, some courts may severely punish even the innocuous destruction or deletion of relevant documents. Real-life horror stories exist of courts ordering monetary sanctions of tens or hundreds of thousands of dollars or (even worse) issuing instructions allowing a jury to infer that the destroyed documents were harmful to the company’s case.
Should companies consider alternatives to fighting in court?
Absolutely. There are many ways of trying to resolve a suit without going through a trial, even without invoking a formal litigation process.
Arbitration, especially for smaller disputes among smaller companies, can be a great forum. You have much more limited discovery and, generally, you’ll have an arbitrator who is much more informal and will allow the parties more flexibility to try to work things out on a reasonable schedule. Also, decisions reached in arbitration can generally not be appealed, which lends more finality to a judgment that might be reached in court.
The downside is that you’ll have to pay for arbitration services, but a case that might be a two-week jury trial may only be three or four days in arbitration due to the informality and the lack of dealing with a jury.
Is settlement sometimes a better option than fighting a lawsuit?
Yes. Businesspeople often take a sound, rational, economic approach to business matters until they get sued, then the gloves are off and they don’t care about the expense and just want to fight it. When passion takes over and you’re lashing out at the other side not because there is any long-term benefit but because you are outraged that you’ve been sued, you have to ask if this is the right business decision for your company. But if the answer is yes, and a principled stance is the best approach for the company’s long-term success, then stick to your guns.
Thomas M. Hanson is a member at Dykema Gossett PLLC. Reach him at (214) 462-6420 or email@example.com.
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Cloud computing is the marketing focus of many IT companies.
Ads touting the benefits of cloud computing and the “cloud readiness” of software products are visible in airports, print media and on TV, and surveys predicting the rapid adoption of cloud computing solutions appear regularly. But how do cloud computing solutions affect the production of electronic documents and information in a litigation setting?
Smart Business spoke with James P. Martin, CMA CIA CFE, managing director of Cendrowski Corporate Advisors, regarding the issues that can arise when attempting to obtain information when a party has information stored in the cloud.
What is cloud computing?
Cloud computing describes an IT model in which computing resources can be obtained and utilized on an as-needed basis; this is why cloud computing is often referred to as ‘utility computing.’ The end user is provided a turnkey solution that is supported and maintained by the service provider at a remote location.
Cloud computing is enabled by rapid, reliable Internet communications, and, in fact, ‘the cloud’ is a term referring to the pool of resources hosted on the Internet.
What are some common cloud solutions that should be considered in litigation?
Cloud computing applications include hosted email products, such as Gmail or Hotmail, picture hosting services, text message services, hosted document processing, as well as social media services such as Facebook, Myspace, or dating sites. These sites would potentially have data that could be relevant to the litigation.
How does a cloud solution affect electronic discovery?
Moving to a cloud computing solution does not remove an organization’s document retention requirements, and many cloud solutions tout their ability to help the organization meet statutory requirements. If the cloud vendor performs services to the public, access to the data stored in that solution would be subject to the restrictions of the Stored Communication Act.
It is also important to understand that this is an emerging area of law. Third-party solutions are evolving rapidly, and social media services are creating issues and carrying information that was inconceivable a few years ago. The legal system is dealing with emerging issues related to these new technologies and case law is changing rapidly.
What is the Stored Communication Act?
Data hosted by a third-party service provider may be covered by the Stored Communications Act (18 U.S.C. §§ 2701-2712 (SCA). This act was included as Title II of the Electronic Communications Privacy Act of 1986.
The SCA states that ‘a person or entity providing an electronic communication service to the public shall not knowingly divulge to any person or entity the contents of a communication while in electronic storage by that service.’ The SCA was primarily written to protect the end user of computing services from government surveillance. In civil litigation, some courts have concluded that contents of communications cannot be disclosed to litigants even when presented with a civil subpoena.
How can a litigant obtain information subject to the SCA?
The SCA defines three categories of information; each category has different requirements to obtain the information. In litigation, the parties will tend to need access to ‘contents,’ such as email conversations and documents, which has the highest threshold. Contents generally require a subpoena with notice, a court order with notice, or search warrant.
One wrinkle is that the SCA defines a ‘court of competent jurisdiction’ as any district court of the United States, and the U.S. Court of Appeals; it is silent on whether state courts may issue orders to providers outside their districts.
Are there any exceptions to these requirements?
Yes, the SCA includes several exceptions. Importantly, contents can be produced with the permission of the subscriber. Also, contents can be released in emergency situations related to the commission of a crime, death, or serious physical injury, or if it is submitted to the National Center for Missing and Exploited Children.
Also, the SCA applies only to companies that provide the service to the public. For example, consider a consultant who is provided an email account by a company where he or she is assigned for work. Court decisions have determined that the company providing such an email account is not covered by the SCA, as it does not provide services to the public.
How are courts dealing with discovery in a civil matter?
In a recent decision, the court noted that a subscriber could grant permission for the provider to release contents and reasoned that the information held by the provider was under the control of the subscriber, and therefore had a duty to exercise this control and retrieve the content. The court allowed a subpoena to the subscriber directing it to provide permission to produce the information. Courts continue to evaluate aspects of the SCA, and case law continues to build around these issues.
Investigators attempting to access information held by a third party will need to evaluate an appropriate course of action depending on the type of information to be received, as well as the relative cooperation of the subscribing party.
JAMES P. MARTIN, CMA, CIA, CFE, is managing director for Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or
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The realm of securities litigation and enforcement is shifting. Federal enforcement investigations are on the rise, prompting the need for more robust compliance and training programs for businesses, says John Cannon, a securities litigation and enforcement defense attorney with Stradling Yocca Carlson & Rauth.
“When I first started practicing, it was often the rule that securities litigation would be something that would occur first, and following that, maybe an enforcement action, which didn’t always have teeth,” Cannon says. “That’s changed; it’s actually flipped. The risk associated to a company’s bottom line could be much more material today with the government taking a more focused look at these issues.”
Smart Business spoke to Cannon about the changing landscape and how businesses can prepare and protect themselves.
What trends should companies pay attention to?
Nowadays, the real threat to companies — public companies, in particular — is the potential for an enforcement action by an agency or department of the government. That could range from a Foreign Corrupt Practices Act issue, an Exchange Act issue, a False Claims Act issue and an FDA issue, as well as other agencies and departments.
The government is taking a much more active role, and the risks and the penalties associated with that process are very different than in typical securities litigation.
Enforcement defense raises different issues relating to insurance coverage. Often, private securities litigation tended to be covered by a directors’ and officers’ insurance policy. But coverage for a government investigation might be much more limited — in fact, it’s nearly nonexistent under some policies.
What types of securities fraud class action filings should be of concern?
Taking the place of the classic ‘stock-drop’ lawsuit in terms of the volume of cases that a company should be worried about are cases related to the mergers. If you’re involved in a public company merger or going private transaction, the chances of being sued in your home state and Delaware are fairly high. Those cases tend to be manageable, and they tend to be dealt with in a way that preserves the transaction.
The other issue that you’re seeing is ‘circumstance cases,’ where you’ll have an event happen, like the Gulf explosion, or a matter such as options backdating, which will then trigger a whole series of cases. Or you’ll have the financial downturn, which will trigger a series of cases involving the institutions that are most affected. What you get is a kind of localized action surrounding a particular event, as opposed to an across-the-board risk.
What can businesses expect going forward in regard to enforcement?
Any enterprise that is in one way or another connected to or regulated by the federal government should be looking at itself immediately to determine whether or not it has appropriate compliance policies and procedures in place to prevent violations of law. And they should also anticipate that it’s as likely to get a knock on the door from the FBI as it is to get served with a lawsuit.
The reality is that the federal government in particular is looking toward the various statutory mechanisms it has in place on the enforcement side to mold, form and direct business as it’s done in the United States. It’s also a revenue source for the government. If you start totaling up these numbers in terms of fines and penalties that companies have to pay, they’re not small.
Who is impacted the most by the current environment?
Prime examples of entities that are particularly at risk on a regular basis:
- Small and medium-sized public companies
- State and local agencies
- Private equity/hedge funds/investors/investment advisors
- Direct and indirect payees of funds from federal programs and contracts
- Pharmaceutical and medical device companies
- Companies doing business internationally
How can businesses prepare?
Fortune 100 companies, and some Fortune 500 companies, have been somewhat proactive in establishing programs that ensure that they are in compliance. That can range from everything from an insider trading policy to a policy regarding anti-trust laws to a policy regarding the False Claims Act.
For mid-size, emerging public and private companies, I don’t think they have been as effective or have prioritized compliance as much as their larger brethren. Because larger companies have focused more on compliance, there is an expectation in the enforcement process that policies should be in place to protect against violations. Emerging companies tend to focus on revenue and the bottom line.
Quite frankly, that needs to change, because they are as susceptible to a knock on the door by the FBI today as larger companies, and the expectations about what should be in place are fairly high from a government standpoint.
John Cannon is a securities litigation and enforcement defense attorney with Stradling Yocca Carlson & Rauth. Reach him at firstname.lastname@example.org.
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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 email@example.com or (312) 419-6900.
Insights Legal Affairs is brought to you by Novack and Macey LLP
No business owner starts each day thinking that his or her company will be sued. Preparing to avoid a lawsuit isn’t on most owners’ to-do lists, but it’s a risk that should garner their attention — a reality of running a business is that it’s always a potential target.
“The statistics say that about 70 percent of all businesses in the United States find themselves engaged in litigation every 10 years,” says Richard L. Charnley, a partner at Ropers Majeski Kohn & Bentley PC.
Smart Business asked Charnley for tips on what to do if a company is sued and how a company can be prepared by taking appropriate preventive measures.
What are common reasons that a business may be sued?
Commonly, businesses make the mistake of not having well-drafted employee handbooks or a set of company guidelines regarding Internet usage. Problems occur when companies use items off the Internet without getting permission. Companies become involved as defendants of litigation for using someone else’s artwork or logo and violating the intellectual property rights that belong to third parties. It’s very difficult for companies to manage the issue because their employees, looking to come up with a new design or competitive edge, regularly use the Internet for inspiration. Management relies on the employee’s ‘new concept,’ runs with it and somewhat innocently broadcasts it to the public. Then, suddenly, the owner of the original art files suit against the company for violating a trademark or infringing upon a copyright. Well-drafted handbooks and guidelines addressing Internet use can help businesses to avoid this.
What steps can a company take to avoid lawsuits, or make litigation easier should it occur?
Sometimes when a claim arises, there is a tendency to make light of it or to not deal with it straight away. Many lawsuits could probably be avoided if someone simply called the offended party, admitted to making a mistake, apologized and offered to discontinue the offending practice. It makes a difference to have someone in the chain of command in the company — for example, the president — make the call. People may file lawsuits because they think of companies as just being big nameless entities. Picking up the phone and calling someone who has a claim or a pending claim could eliminate the problem. Don’t lawyer up right away and try to keep it on a personal level, but scripting the message with input from counsel is advised as long as the message is not too ‘legalistic.’
When preparing for an anticipated lawsuit, business owners need to be aware that the current ‘big issue’ is electronic discovery. In any modern company, there are internal e-mails, people going on the Internet and a lot of outside e-mails coming through. There is a disturbing tendency for e-mail, especially inside a company, to be casual and inappropriate. But, regardless of content or source, almost all e-traffic is saved somewhere and its public release can be damaging and embarrassing. When a business is looking at a claim, a memo should go out to everyone that could possibly be included in the e-mail or e-traffic chain simply reminding them that everything that ends up in the e-mail rotation can eventually be discoverable. Businesses should make sure that all of their electronic data and electronic information is properly secured and not destroyed. A company can face serious financial sanctions for deleting electronically stored information.
What should a company do if it is being sued?
Lock down the house — Take charge of all the electronic data, the e-mail, the voicemail, anything that can be stored on a computer. Make an assumption that it’s going to end up being discovered and reviewed by an opponent. And, once again, advise everyone that all e-mail and computer generated documents can be obtained by the ‘other side.’
Tender the claim — One thing to keep in mind is tendering the lawsuit to the business’s insurance company. Insurance policies oftentimes cover a variety of risks that executives may not understand or may not recognize. Risk managers understand what is in an insurance policy and what is covered, but not all companies employ risk management professionals. Insurance is an old business. There are all sorts of insurance companies and all sorts of policies, and insurance language is often difficult to interpret. As a result, on first impression, some people assume they are not covered for a particular claim. It’s important to tender to every conceivable policy in order to potentially save hundreds of thousands of dollars in attorneys’ fees.
Horses for courses — Really consider the choice of lawyers and conflicts of interest. There is a tendency for a defendant business owner to pick up the phone and call a trusted business lawyer and send the case to the ‘go-to firm.’ But, instead of immediately sending the case to the business lawyer, a better approach is to meet with that lawyer to explain the particulars of the case. A good business lawyer will know when it is important to bring in a litigator, and he or she should be able to provide a referral to the right lawyer for the case. An important consideration here is the impact of ‘hometown advantage’ — the benefit of retaining local counsel that speak the language of the people and judges in the area.
Benefits of quick disposition — Early mediation is an option that is too often overlooked. Some lawyers don’t like the risks of early mediation. For example, in the first 30 days after you’ve been sued, a defendant really may not know much about the other person’s case. The concern here is that mediating or settling too soon may result in the defendant giving away too much money. Oftentimes, however, attorneys’ fees and an untold amount of time can add up to more than what either side would have spent with early mediation. There are ways to set up an early mediation to try to get a case settled and still protect the business’s interests. The reality is that every case will eventually be sent to mediation before moving to trial. For business owners and management, why not explore settlement early, take a shot at resolving the dispute and get back to running a successful company free from the burdens of litigation?
Richard Charnley is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2000 or firstname.lastname@example.org.
If you are worried about how technology issues are impacting your business, how management issues are demanding more time and how federal regulations are often a challenge to understand, you are not alone.
Setting aside bottom line concerns, these three areas are among the top legal challenges that companies are facing today. But don’t despair. The best advice is ? get legal advice, and do it sooner rather than later.
“The biggest pitfall to avoid is not involving your lawyers until there is a problem,” says Steve Zack, former president of the American Bar Association. “Legal counsel is much more cost-effective if it used preventively rather than as the crisis begins to brew.
“Any issue where your lawyer has not been a partner in your decision-making process is going to become costly,” he says. “Lawyers are there to look over the horizon with you and help you weigh your options. You’ll make more fully informed and better decisions that will save you time, money and legal headaches.”
Here are some tips to find solutions to some of today’s common problems.
Avoid the legal pitfalls of technology
Issues with technology, be it over social media, privacy or data security, are among the top concerns of companies. Many employees today are from what might be called the “TMI Generation” because they reveal too much information ? and information leaks could lead to problems.
“They don’t have a good sense of the walls that should exist between a public personality and their private life,” Zack says. “So they could wind up tweeting information on Twitter about an account or an internal project.”
Too much information can also affect the hiring process. One of the tools employers have started using to screen job candidate applications is to search Facebook and MySpace pages to eliminate the people that might not be desirable to represent their company.
“The problem with using social media is that it gives the person making the hiring decision information that in many ways that person should not have while making that decision,” says Rick Bales, professor at Northern Kentucky University Chase College of Law. “So, for example, you go on to Facebook and get somebody’s birth date, you now know how old they are.”
To avoid a possible age discrimination suit, you should have a low-level staff member do the screening.
“You should have one person who is not a decision-maker do those social media screenings who will report only that part of the information to the person actually going to make the hiring decision,” Bales says.
To protect the company, rules and policies drawn up by your attorneys for use of the Internet and social media should be included in employee manuals.
“It’s important that companies set clear standards and then train and retrain employees on those issues,” Zack says.
Issues that should be considered in the policy will vary because of the nature of the business, how it is operated and what kind of electronic devices are provided to employees. Most concerns are over limiting what can be said through social media about a company and that any social media policy will have to pass muster under the National Labor Relations Act ? employee use of company computers during work time is subject to being reviewed at any time for security and other purposes.
Data security is another technological concern. With a number of companies using cloud computing, where data is stored over the Internet at remote sites, how secure that data is and who can access it are major issues.
“It’s crucial that companies protect their customer data from hackers,” Zack says. “There could be serious liability issues otherwise.”
A data security breach can be devastating for a company, and you need to have steps in place internally in the event that something does happen. Just the case of losing a laptop computer with company information on it can cause major problems.
The cloud computing concept opens new chapters on areas of law that are evolving. If the wrong people get access to your data, do you have a claim against the Internet provider who is managing the data? What about an employee who leaves the company and has the ability to hack your site?
You should consider both the upside and the downside of social media, privacy and data security concerns with your legal counsel.
“Good legal counsel will make the journey easier,” Zack says.
Take training seriously
When it comes to management issues, there is no shortage of pitfalls to be concerned about. Probably the most historical involves promoting a high-performing worker into a management job and failing to give that person the training to be a supervisor.
“This is a perpetual problem from hundreds of years ago ? the training of low-level supervisors,” Bales says
There is a huge difference in the skills that it takes to go from a front-line production worker or sales associate to managing people.
“The skills are not necessarily transferable, and the new managers are often not well-trained,” he says. “They don't know the slightest thing about sexual harassment law or the meaning of nondiscrimination. They haven’t had any training with working with people or dealing with workplace conflicts. They don’t necessarily know how to motivate people.”
The proper approach involves training the person and monitoring the results.
“Start at the bottom and make sure that somebody promoted from the line or the sales force or whatever into a supervisory position for the first time has adequate training and is supervised closely enough so the folks at the top can figure out what challenges that person has and what kind of training that person might need,” he says.
The downside is that there are many potential problems, for example, discrimination suits, claims of bullying and group dynamics issues.
“The person needs to be an effective manager ? very often union campaigns grow out of employees being upset with a manager or supervisor who doesn’t know how to manage,” Bales says.
Sometimes not keeping your house in good order causes headaches that could have been prevented with some foresight.
Take, for instance, employers who have the idea they should document what happens with their workers. Having records of incidents and situations may not offer the security desired.
“Employers still do a terrible job of that, by and large,” says Josh Fershee, associate professor at the University of North Dakota School of Law. “Giving someone a difficult time in one department and moving them to another department, sometimes even with a promotion or a perceived promotion, and then they get to the point where they want to terminate the employee and everything in the records indicates no problems.”
What typically goes hand in-hand with that is not having some clearly stated policies. If that is an at-will employee, he or she can be terminated at any time for cause.
“But employers periodically will make promises that as long as you do a good job or as long as sales are good, you have a job here,” Fershee says. “Well, that can change that status to some degree and those relationships are certainly something to watch out for.”
Play it safe with the feds
The number of federal regulations keeps rising over the years, and along with it comes concern of not just complying with them ? but what do they mean?
One area where misunderstanding the law is creating problems involves compliance with the Americans with Disabilities Act.
“Discrimination is something that they have to take a real amount of care to avoid and obviously comply with the civil rights laws at all levels,” says Carol Miaskoff, assistant legal counsel for the Equal Employment Opportunity Commission.
“But the positive is that the employer is able to benefit from the talents and the contributions of people with disabilities as opposed to just losing that.”
Reasonable accommodation enables employers to make some low-cost modifications that enable an injured or disabled person to stay on the job ? as opposed to being out of work.
“That seems to me to be a win-win situation for employers,” says Chris Kuczynski, assistant legal counsel for the EEOC.
Difficulties may arise over the sense of what is an accommodation for the worker.
“They need to make a reasonable accommodation, but what is reasonable?” Fershee says. “Some instances where businesses get into trouble is that they really try to avoid hiring somebody, whether they know it consciously or not, who comes in with a potential disability, because they don't want to have to accommodate it.”
Doing so may actually create a problem that wouldn’t have existed had they had just moved forward the way they should have. For example, if they think it is going to be too hard to accommodate someone in a wheelchair, some companies don't want to tell the person that's why so they just skip the application even though the person is fully qualified otherwise.
“In fact, the law generally says if you can't accommodate, you don't have to,” Fershee says. “Reasonable accommodation is a fairly low standard most of the time.”
You need to go to an expert in the ADA area and ask what you need to do.
“Oftentimes, the answer is something that works for everybody,” he says. “Or there's something that doesn't work for everybody, but it can insulate them from liability because they've done what they are supposed to: ‘We looked into how much it's going to accommodate and we can't.’ That is often a legitimate defense.”
While virtually unheard of as a term before the 1970s, sexual harassment is a concern in the workplace. Sexual harassment policies are in place at nearly all major companies, schools, universities and the military.
“It’s always a problem in the workplace for two reasons: No. 1, the perception of the person who was on the receiving end of the harassment is always different from the person who was on the giving end of the harassment. No. 2, the legal difference between banter/flirting and sexual harassment is kind of blurry,” Bales says.
The giver may perceive that it was not harassment at all. He or she may perceive it as an expression of sexual interest or as good-natured flirting or as banter while the person on the receiving end may view it very differently and take it much more personally.
“Even a trained attorney or an HR manager may not know at first glance if this is crossing the line or not,” Bales says.
An employee who has a workplace problem needs to have somewhere to go so that the employer gets notice early on and can correct the problem before it rises to the level of legal harassment.
“If this is the first time that the employer has received notice of it and the employer takes prompt action, the employer's not going to get sued or if he does get sued, he’s going to win,” he says. “If a company is big enough and can afford an ombudsman, I think those are terrific. But if not, use someone who is functioning as an HR person.”
How to reach: American Bar Association, www.americanbar.org; Salmon P. Chase College of Law, Northern Kentucky University, chaselaw.nku.edu; School of Law, University of North Dakota, law.und.edu; U.S. Equal Employment Opportunity Commission, www.eeoc.gov