Avoiding Litigation: What Every Growing Company Should Know Now—Before it is Too Late

The growth of business opportunities in the Bakken region is impressive and looks to continue on an upward trajectory for years to come. Companies that might have been small—or non-existent—just 5 years ago are growing at a considerable pace. And while litigation is the last thing people want to think about while business is booming, any growing business is almost inevitably going to find itself in a legal dispute at some point down the road. Yet there are several small things that companies can do now that will either help them avoid litigation altogether or better prepare them to handle it should it arise. The sooner these options are considered and implemented, the more return on the investment that company will get for taking the time to put them in place.

The good news is that growing companies need not create full-blown legal and compliance departments to address legal risk. Being aware of potential risks and taking small steps to mitigate those risks can often be done with minimal expense. This article addresses how to avoid some of the most common mistakes that land small-but-growing companies in litigation.

Contract Drafting Should Not Be Done Haphazardly

One of the surest ways to land your company in litigation is to sign contracts without good legal counsel—or worse, fail to sign a contract at all. Nobody wants to think about a deal going bad when the parties are putting it together. Instead, everyone is understandably optimistic at the opportunity the agreement will provide to each side. But going in without adequate thought as to how the agreement will play out in the real world is what keeps litigators in business.

Questions you should consider include:

• What constitutes a default?
• How can one terminate the contract?
• Is your company adequately protected upon termination?
• What venue should a dispute be brought in?
• What state’s law should apply?
• Are there adequate—or, depending on which side you’re on, excessive—limitations of liability?
• Is your company adequately indemnified?
• Should there be requirements that insurance policies cover your company?

Again, these are just a few issues that should be considered. Depending on the nature of your agreement, there could be others.

And even if all the necessary provisions are present in the agreement, are they written in a way that is unambiguous and readily understood by all who might read it? A well-drafted, unambiguous contract will protect you—even if you end up in litigation—because a judge will be able to look at it and make a decision early in the case as to what the contract means. But if the contract itself is ambiguous and it is debatable about what the parties intended, there will be no opportunity for an early resolution—other than a settlement. The case would have to go to trial where a jury would ultimately decide what the parties meant. Needless to say, paying the price to ensure that a contract is drafted correctly upfront is far better than paying a fortune to have a jury tell you what it thinks you meant.

Ensure Your Employees Know How to Avoid Antitrust Violations

Small companies in a growing market—like that of the Bakken— almost always have one goal in common: to grow the company in a competitive market. But while many employees of companies understand the need to compete and stay ahead of their competitors, they often do not appreciate what conduct is acceptable competitive behavior and what conduct is illegal. It is absolutely necessary to make sure that employees understand that agreements with other competitors to fix prices, allocate jobs or territories, or rig a bidding process are strictly forbidden—indeed, illegal. And it is not just agreements with competitors that can get a company into trouble. Depending on a company’s market power, even unilateral conduct that is intended to drive out competition can prove problematic. Even vertical agreements—agreements with distributors or others down the supply chain—can be problematic under certain circumstances.

There are various ways that a company can find itself in the crosshairs of the both federal laws and state antitrust laws. And this article is not intended to provide an exhaustive guide on what is and is not allowed. But antitrust cases are particularly expensive to litigate. Plus, they can result in treble damages and if there are multiple defendants to a case, each defendant can be held “jointly and severally liable” for the damages of all defendants. This means that if three competitors act together in a fashion that violates the antitrust laws, a plaintiff could sue just one of the competitors and obtain a judgment against the one competitor for the damages caused by all three competitors. That competitor would then have to litigate further against the other two to recoup the damages attributable to them. Because of the magnitude of potential exposure, it makes far better sense for a company to pay for a few hours of antitrust-compliance training each year for its employees than to learn the lessons the hard way.

Your Data Can Grow Up To Haunt You

Many companies who experience significant growth over a relatively short amount of time end up with the same problem: a quagmire of technology and data that has little or no structure, making it difficult if not impossible, to manage in a cost-effective manner. E-discovery is one of the fastest growing and significant costs to litigation. But all too often, small, but growing companies have added data systems to their IT infrastructure with no forethought into (1) how they could be efficiently and effectively searched in the future; (2) how long they will be maintained; and (3) how they can be deleted when they are no longer necessary to run the business (or when they are no longer subject to a litigation hold).

The failure to consider these (and other) questions when a new data repository is brought on line will inevitably result in high costs down the road when the company finds itself in litigation. Once litigation is “reasonably anticipated,” a company must preserve all documents—including all electronic documents and data—that could be relevant to the litigation. Can those relevant documents be isolated? Can they be searched in a manner that will allow you to capture the necessary documents, but not over-capture irrelevant ones? The costs associated with processing and reviewing electronic documents often accounts for a large portion of litigation costs on a given matter.

Perhaps more troubling is that the failure to have adequate safeguards in place to preserve data and then collect and produce relevant data can result in significant monetary sanctions. Moreover, it is not uncommon for a company to have to either lower or increase the settlement value of a case to its detriment because its opponent has leveraged the company’s e-discovery weaknesses against it. If your company lands in litigation, the case should be decided on the merits—not on the basis of whether your company was capable of meeting its e-discovery obligations. But all too often, the latter is the case—all because the company failed to take some remedial steps a few years earlier that would have avoided the problem altogether.

Conclusion

Imagining problems that could occur in the future is the part of a lawyer’s job. And while lawyers will never get a call thanking them for the litigation that did not happen, we all have clients that look back and wish that they had only taken some of the above steps earlier. For so many growing companies doing business in the Bakken region, now is the time to take these steps so that you do not look back with regret.

Originally published in The Bakken Magazine, March 2014 issue. Reproduced with permission.