You've Been Sued: How to Avoid Early Missteps
Litigation doesn't have to be catastrophic for a growing company, but it can quickly spiral out of control if not handled properly. This article will explore issues to consider when your company is faced with a lawsuit.
Stop All Communications
Most lawsuits don't come out of the blue. They usually are preceded by a back-and-forth with the other person or company, sometimes through counsel but often without. Emerging companies understandably need to keep costs in check, so it is not uncommon for a company to try to deal with a brewing dispute on its own. But once litigation hits, it is important to put pens down and consult counsel immediately. Everything you write or say – internally, to the other side, or to anyone else (except your attorney) – can be obtained by the other side during the lawsuit's discovery process. You don't want anyone to write or say something in the early hours of the lawsuit that unnecessarily pins the company down or hurts it later in the litigation.
Preserve Documents and Files
Although it sounds mundane, it is crucial that the company preserve all documents and files that may be relevant to the dispute. In a nutshell, the company will need to preserve every document that relates to the issues raised in the lawsuit. And "document" includes both hard copy documents as well as emails, text messages, voicemails, electronic files, and everything else that contains relevant information. It encompasses more than just the important documents or communications. It includes anything that bears on the claims asserted in the complaint and your potential defenses to those claims.
Preserving evidence includes obvious things, like not deleting emails, text messages, or electronic files, and not throwing away hardcopy files. But it also includes less obvious steps, like turning off any settings in your email system that automatically purge messages after a set period of time or after the mailbox reaches a certain size. It also includes preserving data and files on individual laptops, desktops, and other devices, if that data isn't saved on a company server or other system. There are potential landmines everywhere, and failing to preserve relevant evidence – called spoliation – can dramatically affect a case.
Gather the Facts and Understand the Law
It is important to gather and understand the underlying facts as soon as possible. This involves not only reviewing relevant documents, but also talking to key players who were involved in the matter. While the process doesn't have to be exhaustive at this early step, it must be deep enough for the company to be able to make a reasonable assessment of the case.
If there are good facts, you want to know them. If there are bad facts, you need to know them early, so you can factor them into your decision about how to proceed. You will need to assess the facts, good and bad, in light of the relevant law and begin to assess the strengths and weaknesses of the plaintiff's claims, as well as your likely defenses and any potential counterclaims you may have against the plaintiff.
Other things you and counsel should consider at the outset are: whether the company has insurance that may cover the lawsuit and any potential settlement or judgment that results; whether someone else has an obligation to indemnify the company in connection with the lawsuit; whether the lawsuit was filed in the right court; whether the plaintiff was required to bring the claim in arbitration rather than court; whether the plaintiff waited too long to sue such that one or more claims may be barred by a statute of limitations; and whether the company has any counterclaims it could assert against the plaintiff.
Establish a Plan
Armed with an understanding of the facts and the relevant law, you should establish a plan for how to proceed with the lawsuit. Should you fight to the end? Is it better to settle early? There's no one-size-fits-all answer to those questions. The answer will be unique to your company, the lawsuit you're facing, and the opposing party with whom you're dealing. You should weigh each potential outcome, including the cost to reach that outcome, and assess how it will impact your company. Be wary of sacrificing business goals for the sake of litigation.
Your plan for the case does not have to be static. It can change over time, as the litigation unfolds. Even when you have thoroughly analyzed the available facts at the outset of a case, the landscape almost always changes as the case proceeds and additional evidence comes to light. Your strategy can evolve with the landscape.
Prepare for the Long Haul
Litigation can be painfully slow. Few things in litigation happen quickly, and it usually takes more than a year to get to trial, and sometimes two or three years depending on the type of case. After the Complaint is filed and served, there typically will be motions practice, additional pleadings, and an extended period of discovery where the parties gather and produce relevant documents, depose fact witnesses, and retain expert witnesses to provide reports and give testimony. It is a long process, and parties should be prepared for the possibility that it could take years for the case to wind its way through it and get to trial.
Although you need to prepare your case as though it will go to trial, the reality is that almost all cases eventually settle. Some cases are resolved through direct discussions between the parties (typically through counsel). Others are settled through the use of a mediator, who serves as an independent third party to foster settlement discussions and attempt to resolve the dispute. Mediation is voluntary, and the mediator cannot force either party to settle. But an effective mediator can bring a fresh perspective to a lawsuit, giving each side an unvarnished view of how a judge and jury may see their case. That alone can serve as a useful reality check to parties who have been living with a case for months or years and may have difficulty viewing it dispassionately.
No company wants to be sued. But the odds are that your company will face at least one lawsuit in its lifetime. By knowing what to expect and being proactive when it happens, you can avoid some of the pitfalls that strike less prepared companies. And by approaching it with a clear plan and developed strategy, you can put your company in the best position to prevail in the lawsuit or resolve it on favorable terms.
This article is part of a series called, "Legal Issues for High-Growth Technology Companies." Please click here for more information.