Feature Stories - November 2007

Judge Not...

How Businesses Can Avoid Lawsuits

by Kathleen Foley

Avoiding a lawsuit is definitely one instance where businesses should apply Ben Franklin’s advice: “An ounce of prevention is worth a pound of cure.” The best way to avoid going to court is to take measures to prevent conflicts that can result in litigation.

Some common types of business lawsuits are: breach of contract; disputes between partners or members of an LLC; liability/personal injury cases; and intellectual property disputes. Dissatisfied customers, vendors demanding payment and clients wanting contracts completed can initiate litigation as well.

Businesses also face the risk of being named in a liability lawsuit. Hotel guests may claim that someone robbed them in their room. Slip-and-fall or trip-and-fall cases may involve any business with public access, and traffic accidents can affect any company that lets employees drive its vehicles.

“There’s nothing you can do to completely avoid being sued, no matter how careful you are, or how much you aim to please your customers and employees,” said George Ogilvie, managing partner of the Las Vegas office of McDonald Carano Wilson LLP. “There will always be disputes that may develop into lawsuits.”

Don’t Court Disaster

Most business disputes that start with a visit to an attorney’s office end up being settled before they go to trial. In fact, Thomas Kummer, a senior partner in the law firm of Kummer Kaempfer Bonner Renshaw & Ferrario, estimated only 2 percent of cases actually end up in court. “Most business people realize litigation is extremely expensive and time-consuming,” he said. Expenses for going to court include not only attorney fees, but also costs for retrieving documents, doing research, and other “soft costs.”

“You can expect to pay between $350 and $500 per hour for an attorney at the partner level, and costs can mount up quickly,” he said. “We estimate 14-hour days for a trial, which includes preparation for the trial, the trial itself, and preparation for the next day. It’s a very, very expensive proposition.”

Bill Urga, managing partner in Jolley Urga Wirth Woodbury & Standish, agreed, saying, “We spend an average of three hours outside the courtroom for every hour in court. You can plan on spending between $4,000 and $6,000 a day just in lawyers’ time, and a three-week trial may cost between $100,000 and $200,000.”

In addition to the expenses of a trial, going to court requires a substantial investment of time. The principal of the company or a corporate representative must sit through the entire trial, and also must spend time preparing to give testimony. “It’s not a process most people like. It’s stressful and antagonistic, especially cross-examination,” said Kummer. Urga noted, “Another thing to consider is that going to court takes your mental focus away from what you should be thinking about (running your business). Instead, you’re worrying about the lawsuit.”

What are the advantages of going to court? “There aren’t any,” stated Kummer. “The only advantages are for the lawyers. Rational people try to resolve issues without going to court.” However, some people are more rational than others. “Although the general rule is that ‘the customer is always right,’ sometimes customers are so unreasonable that they can’t be right, and it’s impossible to give them what they want,” said Ogilvie. This was illustrated by the recent case in which a Washington D.C. man sued a dry cleaner for $65 million for losing his pants.

Moreover, in certain cases, going to court may be the only way to get money owed or to force the other party to make good on a contract. “There are some cases that just can’t be settled,” Kummer said. “One side takes an unreasonable position, or both sides take polarizing positions and refuse to back down. Sometimes it’s not the money, it’s the principle of the thing, and the client is willing to spend the money to get satisfaction. However, there aren’t many cases where people can afford to do that.”

Getting Off to a Good Start

 “The biggest mistake businesses make is trying to do things on their own without counsel,” said Kummer. “It starts with setting up the structure of your business, whether it’s a corporation, partnership or LLC. The money you spend up front getting organized can prevent lawsuits farther down the line. It appalls me when I see ads for an ‘LLC in a kit’ for $250. People don’t realize that a cookie-cutter contract can’t possibly contain as many protections as a document designed specifically for your company.”

Kummer added, “I used to handle domestic relations cases; in my experience disputes between partners or shareholders are the same kind of thing, but without children. When you start an entity, you don’t think it will be a big deal, but business ‘marriages’ can go awry. That’s why entity-type relationships should be formed by lawyers.”

Once an entity has been set up, it usually requires a variety of forms, contracts, invoices and other documents in order to conduct daily business. “Throw some preventive money up front,” advised Kummer. “Hire counsel to help you set up contracts and forms before you start using them. Otherwise, you’re just asking for trouble, because many things can trip you up. Take it to a lawyer familiar with your industry. The money will be well spent.”

It’s also wise to consult an attorney before signing a lease or other contract, advised Urga. “Some people sign a 50-page lease having only read the page with the rates on it,” he said. “Other pages may contain provisions that can hamstring your business or cost you money.”

Because the possibility of a lawsuit always exists, experts advise all businesses to establish a record retention policy. “The more documentation you have, the better off you’ll be if you have to go to court. If you’re worried about being overwhelmed by paper records, have them scanned and put on CDs for electronic storage,” said Urga. “Records help jog your memory, and also give you a timeline of events.” Keep a record of every transaction, even if it’s just a memo saying, “This is to confirm our conversation today, and this is what we agreed to do,” Urga advised.

Record retention policies also apply to E-mails. “If you are facing a lawsuit, make sure to advise employees not to destroy any digital records, including E-mails,” warned Urga. “The worst thing you can do is to destroy records. Although deleted files can often be recovered, more importantly, destroying records looks suspicious to judges and juries. You don’t want to be in the position of having to justify why you destroyed records, even if you routinely delete files after a certain period of time. It just looks bad.”

ADA Compliance

Businesses may also be at risk of lawsuits if they do not take measures to make sure they are in compliance with the Americans with Disabilities Act (ADA), according to Suzanne Martin, an associate with the law firm of Lewis and Roca. Title I of the ADA, which was originally passed in 1990, prohibits discrimination in employment and takes effect as soon as a business employs at least 15 people. Title III requires that all places of public access and commercial facilities must be accessible to the disabled.

Title III has generated a set of accessibility guidelines with many detailed technical requirements, such as placement of toilet paper dispensers, width of the slash-marked areas next to handicapped parking spaces and slope of wheelchair ramps.

Watchdog groups that advocate for the disabled will often initiate lawsuits to force businesses to provide accessible accommodations for the handicapped. “These groups are now coming to Nevada, and they filed several lawsuits in 2006 against Nevada resorts,” warned Martin. “Businesses can be caught in the middle. You want to provide accessibility. On the flip side, there’s a sense that this is a racket. Groups can hook up with attorneys and file hundreds of lawsuits. These attorneys specialize in Title III litigation, and they have an army of experts ready to testify.” She explained the attorneys are willing to sue because they are hired on a contingency basis and Title III builds attorneys’ fees into its judgments.

“They will ask for your records, including all your financial records,” Martin continued. “This requires you to air your financial laundry in front of the public if you go to court. You have to pay your own attorney to defend you, and then pay the other side’s attorney fees if you lose. It costs a minimum of $15,000 to $20,000 for attorneys. However, the legal fees usually total double that amount.”

To avoid being sued for non-compliance, Martin suggested accessing the ADA Web site (ADA.gov), where compliance checklists are available to help business owners audit a property to reveal any deficiencies. For even more reassurance, the Internet is a good source to locate experts who specialize in inspecting property for ADA compliance.

“If you are contemplating a major building renovation, it might be in your best interest to hire an expert before you start work,” said Martin. “If you’re buying a building, you should require the seller to pay for an inspection, as well as any modifications necessary to bring it into ADA compliance.”

Intellectual Property

All companies deal with intellectual property issues, whether they realize it or not, simply because the field is so broad and touches so many aspects of business. According to Mark Tratos, managing shareholder of the Las Vegas office of Greenberg Traurig, intellectual property includes inventions, artistic creations, brands, business processes and know-how, and accumulations of information that provide a person or business with certain economic advantages in the commercial sphere. Protecting each kind of intellectual property presents its own challenges.

Copyrights often trip up companies that are not aware of the laws. “A copyright is automatic and requires no government approval,” Tratos explained. “Just because you ask a person or a company to design something for you, that doesn’t mean you own the copyright. The basic rule is that the creator or the author is the owner. The exception is an employee whose specific job description covers developing those products. However, if you ask your receptionist to design a logo for your company, the copyright belongs to her, because responsibilities do not include graphic design.”

If a business hires an advertising agency to generate creative material on its behalf, Tratos advises the company expressly request the copyright, specifying in writing that the client owns the rights to the material and that it was created as work done for hire. Otherwise, the ad agency will retain the rights to the material and may refuse to let the client modify or print it.

“Web sites provide huge potential for legal trouble,” warned Tratos. “If you hire people to build Web pages for you and don’t enter into the right kind of contract, you don’t own the Web pages. The contract should clearly state that the Web page was created as work done for hire, and that you own the rights to it.”  

If an entrepreneur is planning to name a new company, product or store, how does he or she find out if someone else already has rights to that name? Tratos suggests first taking some simple, no-cost steps: Search both the White Pages and Yellow Pages of the regional phone book where the business will be located; search online directions; conduct a “Business Entity Search” on the Nevada Secretary of State Web site (http://sos.state.nv.us); and consult the Web site maintained by the U.S. Patent and Trademark Office (www.uspto.gov).

“Information previously available only to attorneys is now accessible to anyone on the Internet,” said Tratos. “You can do a good job of researching names yourself and can be fairly sure you’re protected. However, nothing is bulletproof.”  

A Last Resort

Going to court should be the final option after exhausting all other possibilities. “Most sophisticated business people understand the costs involved with litigation, and they will strive greatly to avoid a lawsuit,” Ogilvie said. Prevention should be the first step in this vital process.

Kathleen Foley
Kathleen Foley is a freelance writer based in Southern Nevada.