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One of the quickest ways a business can incur legal expenses is to be involved in contentious litigation. Sometimes litigation is just a fact of business life. Businesses can be sued without justification or as an effort to intimidate rather than resolve a dispute. Other entities behave so badly that their conduct compels even the most litigation adverse clients to sue them.
While sometimes litigation is the only option, our litigators spend a fair bit of time on litigation that could have been avoided – or at least made easier – if attorneys had been involved earlier in the process. Unfortunately, many smaller and even mid-market businesses fail to properly budget for legal support for their ongoing business operations. Although this may result in meager short-term savings, any savings are more than outweighed by expensive and disruptive litigation.
Before you write off this post as shameless self-promotion, keep in mind that we are not suggesting that attorneys need to be involved in every business activity. There are certain areas, however, where prospective legal counsel can help to avoid costly litigation later. Here are a few ways you can maximize the bang you receive for your legal buck.
Some of the most contentious litigation we handle arises from disputes among owners of closely-held companies. Often, such “business divorce” litigation could have been avoided completely if the owners had sought counsel at the formation of the business and properly documented their decisions in an operating agreement.
Dividing equity can trigger difficult conversations among owners and many owners avoid the practical realities by dividing ownership interests equally among all owners. Experienced attorneys can provide advice on how to approach the allocation of interests and identify common areas of future disagreement. Addressing and resolving such issues early in the business venture can create the conditions for smooth operations and reduce the possibility of acrimonious litigation.
Legal advice is especially critical when there is a change of ownership. Adding new investors or accommodating investors who want to “cash out” can present hidden legal risks. Investing additional capital whether in the form of a loan or capital contribution frequently triggers changes in the ownership structure, while selling the business outright potentially creates significant legal issues for years after the event. Knowledgeable counsel can help owners navigate both immediate and long term issues and can work to resolve them in a non-adversarial way.
Growing the business through acquisition of another business or a franchise can be a stressful process. Even “small” acquisitions carry the risk of hidden liabilities that can impact the new owner. We routinely assist clients in their legal due diligence and can facilitate financial due diligence by recommending other knowledgeable professionals. We can advise or participate in negotiation with sellers, lenders, suppliers and possible investors and prepare transaction documents. Once agreement is reached, we can ensure proper recording and transfer to enable a smooth and timely closing. Most importantly, we can assist with the post-sale obligations and adjustments that are frequently part of the acquisition process.
Customer relations are both important and challenging. Not every job goes perfectly and contrary to popular wisdom, the customer is not always right. If a customer fails to pay, alleges defects in your product or service, or posts defamatory statements on the web, a call to counsel can be timely. We routinely work in the background to help resolve customer disputes before the relationship degrades into litigation. This may be as simple as providing advice in anticipation of your meeting with the customer, ghost writing a letter to send to the customer, or writing a “nastygram” on our letterhead. Even if the dispute cannot be resolved without to litigation, letters we have drafted for clients can favorably frame the issue if litigation does occur.
Issues with key suppliers can also pose serious issues for businesses. Suppliers may impose significant restrictions on customers, and defects in materials or services can cause businesses to incur operational and reputational damages in excess of the costs of the materials. Moreover, in the case of an exclusive supplier or a distribution arrangement, businesses may need to proceed cautiously in an effort to preserve the relationship. Our goal in such disputes is not simply to “win the issue” but to arrive at a workable solution that can preserve a business relationship that is worth saving.
Terminating an employee is never easy; it frequently represents a hiring failure. The process is stressful for both the employer and the employee and is fraught with legal risks. When it is necessary to terminate an employee, discussing the matter with your legal team prior to the termination allows them to help you build a record and handle the termination in a way that will put you in the strongest position possible if the employee initiates litigation later.
Early legal help can significantly reduce the risk of employment-related litigation. There are many laws that impact the employment relationship and every disgruntled employee thinks that they have a legal claim. Misclassification of workers as independent contractors or non-exempt employees can be a source of significant liability for employers. The failure to pay or withhold taxes and overtime associated with these errors can expose a company to serious financial penalties that significantly exceed the cost of compliance. Legal counsel can ensure that the way you pay your employees, the hours they work, and the taxes you withhold all comply with the law and can prevent tremendous liability later.
Employees may also threaten an employer’s intellectual property by soliciting customers or suppliers, removing files or equipment or disclosing confidential information to a new employer. Employers may have legal recourse in such situations – even in the absence of a signed employment agreement. Timely conversation with an attorney is necessary in order to ensure quick action to protect disclosure of proprietary information. Having someone available who is knowledgeable about the law and about your business is the first step in protecting intangible business assets.
Many clients retain us to review and negotiate significant contracts. That’s great… but they often overlook their form agreements – statements of work, terms and conditions, bid proposals, construction contracts, license agreements, purchase orders, master service agreements – that are part of their daily operations. “Boilerplate” has legal consequences and well drafted provisions can provide a significant advantage in the event of litigation. For example, form agreements we have prepared for clients have successfully forced disgruntled customers into arbitration, limited our clients’ liability to nominal amounts, and allowed them to collect attorneys’ fees from deadbeat customers that exceeded the amount initially in dispute.
Although most businesses think of attorneys primarily with respect to litigation, the firm also functions as counselors providing impartial advice on how the law might affect potential decisions and identifying legally compliant alternatives that might meet the client’s needs. Businesses considering entering a new market or a new business channel have been well served by a discussion of legal issues. Many products and services are regulated by specialized state or federal agencies and the impact of such regulations should be considered before entering such a market. For example, serving liquor at an establishment, accepting payment in bitcoin, on-line marketing to children, ad claims that a product “kills germs” or running a promotional sweepstakes – all require regulatory compliance. We can help to identify regulatory hurdles so ensure that your new initiative does not result in unexpected legal liability.
Timely and proactive interaction with counsel – not just in response to litigation – not only avoids problems but can also result in a competitive advantage for the business. Law can be an important tool to protect small businesses from unscrupulous competitors, preserve intellectual property and properly secure payments. Regular communication with counsel on operational and strategic issues is the best way to ensure that the law works for your business and that entities get the most out of the money they spend on legal issues.