See you in court Featured

8:00pm EDT March 26, 2008

Contracts are drawn up and signed so that all parties are protected and expectations on both sides are spelled out. However, sometimes all those involved may not be happy with the outcome of a project and decide to take the matter to court. Are there subtle red flags that may warn of litigation on the horizon?

“Usually, there are red flags, but they are more than just subtle,” says Ed Goldenhersh, a litigation attorney, officer and general counsel for Greensfelder, Hemker & Gale, P.C. “There are some subtleties that you may not pick up, but red flags should be identified.”

Smart Business talked to Goldenhersh about what to look for and how to be prepared in case you are summoned to court.

What are the red flags a company should look for that may warn of litigation?

The types of red flags depend on the businesses and the particular situations involved. If you’re in the manufacturing, sales distribution or newspaper business, you may have a covenant not to compete. If the holder of that covenant, the employer, finds out that the employee may be looking for another job or that the employee already has interviewed somewhere else, and he requests a meeting with you, that could be a red flag. Or if you, the employee, receives a letter stating that you need to keep in mind that you have a covenant that prohibits you from working for a competitor or that you’re privy to trade secrets, be careful. These are warning signs.

Take another example. Maybe you’re in a trademark situation where you are using a trade name that is remarkably similar to another’s trade name, although you do not think so. If you continue to use it and get a cease-and-desist letter, that’s a warning sign you may be headed to court.

Some signs may be a little more subtle. Maybe someone suggests that there is an error in the contract’s language or asks to have a contract clause renegotiated. If they suggest that the contract is onerous or that they need relief from one or more of the obligations under the contract, this could lead to problems down the road. You have to determine if you are going to hold the other party to the exact language of the contract or provide a little bit of relief so you do not find yourself heading down the litigation trail.

Finally, if someone asks for backup regarding your billing or invoices or job progression, just them asking for it could be a warning sign that they are auditing the account and may find some irregularities or questions.

Who should be notified when litigation is imminent?

First, your business partners, management and legal counsel. They need to know what is happening and the circumstances surrounding possible litigation. Second is your insurance carrier. You need to determine if you have a covered loss, whether they will furnish you with legal counsel and whether they will instruct you on what you should or should not say.

It is important to bring in your lawyer sooner than later to interview witnesses, collect documents, preserve electronic evidence, such as e-mails, and transcribe voice mails. Once you know that litigation is imminent, you are obligated not to destroy documents and electronic data, even if your company has a records retention and destruction policy in place.

Can you bring in litigation and have it backfire?

Absolutely. Litigation can be seen by the other side as the start of a battle from which there is no turning back; almost like a scorched earth policy, so to speak. Litigation is expensive and time-consuming. If the company loses a lawsuit that you advocated to be filed, the company has incurred a significant expense in having pursued the failed lawsuit in the first place. Furthermore, you could bring a lawsuit and not anticipate that the party you are suing will file a countersuit against you, which can also result in a loss to your company on the counterclaim.

Unwanted publicity is also a problem. Let’s assume you’re a brokerage firm and you want to sue somebody because you believe there are some commissions that are due and the other party does not agree. That party claims that you misled them on some investments and files a counterclaim. The next thing you know, other people you put in the same investment also are suing you because they heard or read about the original lawsuit, the investor’s counterclaim, and they decide to seek redress.

ED GOLDENHERSH is a litigation attorney, officer and general counsel for Greensfelder, Hemker & Gale, P.C. Reach him at (314) 516-2667 or (314) 241-9090.