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Ten business practices to manage risk and avoid litigation

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Michael Freudenberg.

We see litigation in our daily lives, whether it is depicted in movies and television shows or blasted all over the news, but most business owners don’t stop to think about what it really means for them when they get into a legal situation. Typically, litigation is settled by agreement between the two parties but it may also be resolved by a jury or judge in court. Litigation is often necessary in some cases where attorneys fight hard to get the best results for their clients. However, litigation can be time-consuming, distracting, stressful and expensive for businesses. 

Below are 10 proven strategies to shield against risk and limit the likelihood of litigation for your business. 

Have clearly written agreements.
American film producer Samuel Goldwyn’s famous quote says it all: “A verbal contract isn’t worth the paper it is written on.” No matter how trusting you may be of the other party, a clear written contract is the first and most critical step in avoiding litigation. Parties often differ in opinion on what exactly their obligations were or when they would arise or whether it was conditional on other things occurring first. The terms of any business deal, which clearly set out the parties’ rights and obligations, should be in writing to avoid any misunderstanding in the future. 

The cause of many lawsuits is a direct result of contracts between the involved parties either not being memorialized in writing or simply not being clear. A clear, detailed and well-thought-out contract which addresses what happens when a business relationship deteriorates can minimize the cost of resolving the dispute. Any amendments to the agreement or ancillary arrangements should also be evidenced in writing.

Retain an attorney to review your agreements.
Engaging in upfront dialogue with legal counsel can help your business avoid costly mistakes.  To save costs, many business owners find it enticing to utilize template contracts they find online for particular transactions.  Typically, these standardized contracts do not take into consideration the specific needs of the businesses involved as well as the laws of the applicable jurisdiction.  A contract that is not legally valid is useless if a business wants to enforce its rights under it in court.

An attorney can advise on whether a nondisclosure or noncompetition agreement would be appropriate. Whether a dispute should be litigated in a particular jurisdiction under a selected state’s laws or through alternative dispute resolution should also be memorialized in your agreement.  Setting aside a portion of a business’s budget toward retaining an attorney to draft and review the agreements you utilize in your business can reduce more costly litigation fees down the road.  

Read the agreements.
While this is an obvious act, many neglect to fully read and understand the agreement before signing it. Understand both parties’ roles in the agreement before accepting it to ensure the parties are capable of fulfilling their role. Ask for clarification of provisions that you are unsure of or may require further negotiation. Often we see parties falling short of their responsibilities outlined in the contract partially because they weren’t fully aware of their obligations. 

Be informed. 
Contact an attorney when you first see a potential problem arising in the business arrangement. Involve counsel early; the first call to an attorney should not be when you’re already facing litigation.  Inform yourself of the laws and rules that may apply to you and your business. Through the help of an attorney, learn about your rights and responsibilities and the best options for reaching a resolution for any current or future issues. This can prevent you from escalating a problem and provide you with a feasible solution that may ultimately avoid litigation. 

Think about whom you want to do business with.
There is a temptation, especially for new businesses, to take on any client or business opportunity that walks in the door. It is critical to conduct research on your potential clients, customers, employees and suppliers.  Ask your referral source, speak with people in the business community and conduct an internet search. Learn about their reputation and consider if that individual or company is someone you would want to do business with. At a minimum, conduct a quick Secretary of State database search to ensure that the business is active, which will help reduce your risk. If you find that the company is often involved in disputes and has complaints, think twice about starting a relationship as it might be a business you would want to steer clear of. 

Have an employee handbook.
Every company with employees should have an employee handbook that is provided to all employees. Employees should sign a form acknowledging receipt of the handbook. The handbook not only sets forth in writing the employer’s expectations but also provides statements of compliance with federal and state laws and regulations. It is a very important tool for stating reporting procedures relative to discrimination and harassment. 

An attorney should be contacted to not only help draft and review the original handbook but also on an annual basis to ensure that the handbook complies with current laws. Having an outdated handbook or no handbook at all can be very detrimental to a business involved in an employment litigation.

Obtain appropriate insurance coverage.
As it is not just a question of the amount but also the kind of coverage that your business carries, every business should consult on a regular basis with a qualified commercial insurance broker. It can be devastating for a business to be involved in a litigation where there is not the proper insurance in place to defend and indemnify the company against a potential judgment. As your business grows and expands and with changes in laws and technology, your commercial insurance will need to be modified. Commercial general liability and property insurance policies are probably not sufficient. 

State law will often require specific types of insurance, such as workers’ compensation. Depending on the nature of your business, you may also need professional liability, errors and omissions and cyber security/data breach insurance, as well as additional coverage suited for your industry. 

Protect your company’s IP assets.

Intellectual property such as trademarks, copyrights and patents are often the most valuable asset of a company.  A business selecting brand names and logos should seriously consider retaining an attorney to conduct the required initial due diligence and legal analysis to identify potential conflicts, thus saving significant money if the business is later confronted with infringement allegations.

Companies should be aware that they have a duty to protect, enforce and “police” their own registered IP assets, including sending out cease-and-desist letters and prosecuting claims against other companies infringing on their IP rights. Being proactive and putting an end to infringing use promptly is more effective and cost-efficient than litigating over it after it has already done harm to your company’s hard-earned goodwill.

Record retention policy
Many disputes can be avoided if a company is able to keep good records of its agreements, related correspondence and notes taken to memorialize telephone conversations. Businesses should establish an appropriate record-retention policy both for electronic and hard copy documents.  While you work with the other party to solve problems, document how that problem was communicated and what was agreed upon to resolve it.  Also document any satisfaction and praise expressed by the other party, resulting in a written proof of you meeting their expectations. 

Website privacy and terms of use policies
If your company’s website collects and uses the personal information of its users in any manner, it should have a privacy policy that defines exactly the information that is being collected and the precise manner of use the company intends to make of such information. Businesses conducting e-commerce or with a high level of activity online should have a terms of use policy on their website, including having users expressly agree to the terms of use. Such companies should be aware of international e-commerce regulations, privacy laws and intellectual property laws, just to name a few.

By adopting these 10 good business practices, your company can help manage risks and limit time-consuming and costly litigation. It is important to be proactive in protecting your business from possible legal issues. If you find yourself unable to avoid litigation, consult with a qualified attorney to learn the best options based upon your company’s situation. 

Michael W. Freudenberg is a partner working primarily in the commercial litigation practice group at Harrington, Ocko & Monk LLP in White Plains. He can be reached at 914-686-4800 or by email at mfreudenberg@homlegal.com.

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