In my 16 years of practicing law and specifically representing both startups and large companies, I think I have seen, heard or experienced it all. I can still be surprised occasionally, but for the most part most problems are usually a remake of a movie I have already seen. Below are the five most important things I think are needed for avoiding litigation from the hundreds of businesses that I have worked with and from 7+ lawsuits my own personal businesses have faced over the years. If you and your business are doing well, you will not be able to avoid litigation altogether but maybe you can avoid unnecessary litigation by following the rules below.
RULE 1
Everything must be in writing
I see so many CEO’s especially new CEO’s take short cuts either to save time or money. Everything you do with third parties should be in writing, NO exceptions. All your partners, investors, employees, contractors, vendors, customers and anyone else that you are providing value or that are providing value to you, should have a written contract with your business. The most important thing to understand about a contract is that it is a record of what was agreed on. Memories fade, people get greedy, circumstances change. Whatever the case may be, it is important to be able to go back to that record (contract) and see what was agreed on. Also, have a professional draft the agreement or at the very least review the contract because more than a few times I have been involved in litigation where one sentence or word made the difference. Not all agreements are worthy of a full-blown contract but at least document them via email in case it is needed.
RULE 2
Don’t let the fox in the hen house
Don’t do business with people you do not trust or who have a bad reputation. It is tempting sometimes to enter into an agreement or bring someone into the business that can further your immediate goals even if you know you are making a deal with the devil. Trust me on this on one. I have seen it go bad many times and I have personally broken this rule to my detriment. What about Rule 1 you ask? Can’t you just enter into a solid contract? Sure, you can do that but all you are doing is buying yourself litigation down the line. A contract only tells a judge or jury what you agreed on it doesn’t make anyone do anything. A person with a bad reputation or questionable history is already telling you what they are going to do to your business and to you. Believe them. They will show who they are sooner or later and you will be part of the long list of people that become their victims. People rarely change and if they have changed, it’s not your burden to help redeem them at the risk of the business you have built with blood, sweat and tears.
RULE 3
Treat your employees well
Employees are your best assets but also your biggest liability. Labor laws are insane, especially in California and New York. I have participated in hundreds of depositions and most employees sue because either they did not feel like they were treated well by their “boss” or they were given extra privileges that were then later taken away and they are upset about losing a “right”. I put boss in quotes above because an employee’s direct supervisor is the usual target of their distaste and the company is strictly liable for the acts of supervisors. If a law was broken, the Company will be responsible. If a law wasn’t broken, the company will still have to pay to defend itself. I also put right in quotations because employees do not easily distinguish between rights and privileges and when anything is taken away, it can trigger a costly problem.
RULE 4
Keep your promises
People don’t like it very much when promises are broken. Not clients, not employees, not creditors and certainly not jurors. Yes, I know, sometimes you intend to keep a promise and it just doesn’t work out. Then own it and communicate. It may not be the ideal situation and it may be uncomfortable but I promise you that people are much less likely to sue you if you do not run from them. They will likely understand and either give you more time or work out another solution if it is warranted.
RULE 5
Pay your bills
Besides treating your employees poorly, not paying your bills is probably the next fastest way to a lawsuit. Pay your bills on time. If it is unavoidable, see Rule #4 above. Communicate, communicate, communicate. Even big heartless corporations are less likely to sue you if you are not running from them. What most people do not realize about having a debtor that is running from obligations is that the value of the money owed is diminished by the additional time and effort required to attempt to collect. For example, if someone owes me $1k and I spend an hour that month trying to collect, at my hourly rate of $400, that $1k is now only worth $600. You see? That’s what annoys people and makes them want to sue, not the fact that you are behind. Late payments are part of every business but chasing someone for something that belongs to you is downright costly.
Bonus Rule
(For California Companies) Always, always, always have a valid arbitration agreement that shifts attorney’s fees with your employees. No exceptions, no excuses.
