Demystifying Small Business Litigation

No need to be sad! The purpose of this post is to demystify the small business litigation process by providing simple definitions and context. No need to worry, understanding litigation is not rocket science. The decision tree is relatively simple. Most small business disputes follow this general outline, including the business torts and breach of contract cases I often litigate.

Litigating a Small Business Dispute

Something went wrong. A business did not pay for goods or services. The general contractor violated construction trust fund obligations by failing to pay its subcontractors. False or deceptive advertising harmed your business. Your employee left and is violating a non-compete agreement. You are an employee and you believe your termination violated your employment contract. Someone unlawfully interfered with a prospective business relationship. A business that owes you goods or services closed abruptly and left you with a large account receivable, but continued operations under another name. A final bill for a good or service is drastically different than the initial estimate. A member of a LLC is misusing LLC assets or otherwise violating the LLC’s operating agreement. There are many other ways a business may end up in litigation, but these examples are quire common.

Pre-Demand Letter Investigation

You contact me to investigate your claim and discuss options. We are unlikely to have access to any documents or information other than what you already have or can glean informally. We develop a plan to demand the other party stop what they are doing and/or pay you to make it right.

Demand Letter

We prepare a demand letter or cease and desist, which outlines all the ways we currently believe the other party has damaged you or your business. I recommend being as open and forthcoming as possible and help the other party understand how wrong and costly their actions have been. There is rarely any incentive to hide the ball at this stage. It is vitally important to also evaluate any competing claims the other party may have against you, and whether you also may have breached a contract or committed a business tort.

I highly recommend you consult with counsel every time you receive a demand letter. I often provide my initial thoughts on a demand letter and initial defense options as part of a free initial consultation. Ignoring a demand letter is overlooking an opportunity to potentially resolve a dispute for a discount or reduce your damages by modifying your behavior. Please do not ignore demand letters. 

Initiating Litigation

Amicable resolution may not be possible before filing a lawsuit. The lawsuit often reads similar to the demand letter, but formatted in more detail. It should articulate how the other party violated the law or breached the contract. Some contracts require you to arbitrate instead of litigate. The outline below is essentially the same for arbitration, but sometimes in a more condensed format.

Responses to a Lawsuit

A small business defending a lawsuit has several options. They often do not admit the allegations in the lawsuit are true (Duh!). 

Motions to Dismiss: This motion often requires the defendant to argue that the allegations in the lawsuit, even if proven true, do not provide a legal right to damages. At this early stage, a party often is limited to arguing the facts as stated in the lawsuit and cannot introduce evidence.

Answer and Affirmative Defenses: The defendant argues the allegations are false or, in the alternative, even if true, the plaintiff does not have a right to any damages because of several reasons.

Crossclaims, Counterclaims, and Third Party Demands: The defendant argues the plaintiff owes damages to the defendant or that someone else is responsible for the plaintiff’s damages. Lawsuits can grow to include many different parties arguing over competing claims.

Discovery in Small Business Litigation

This is the primary fact-gathering stage and where litigation is most likely to get expensive. Both parties are likely to require the other to answer written questions, admit relevant facts, and produce documents related to the lawsuit. Document productions can be voluminous, time consuming, and expensive, but can often make-or-break a case.

Depositions often come next. Witnesses and parties are asked questions under oath. Their answers can be used in motions and at trial. 

Sometimes a party needs an expert to prove a portion of the case, whether it be liability or damages. The expert likely needs information produced in discovery to evaluate the thing/product and provide a report. An expert retained by the opposing party will likely review that report and provide their own report. The parties are likely to depose all experts. Experts can get expensive, so it is important to evaluate as early as possible whether proving your claim or defense will need an expert.

Motions for Summary Judgment

A MSJ is a common procedural vehicle used by a party after discovery to win part or all their case (or defense) before trial. Often utilizing information produced in discovery, a party will ask the judge to rule in its favor as a matter of law, arguing that no reasonable jury could find otherwise on a particular issue. A defendant need not win on every element, just one. It will often target one or more of the greatest weaknesses in the plaintiff’s case and try to get the case dismissed.  For example, here are the 5 elements of a Lanham Act claim for unfair business practices:

(1) a false or misleading statement of fact by the defendant-business in a commercial advertisement or promotion about its own or another’s product or commercial activities; 

(2) the statement actually deceived or has the tendency to deceive a substantial segment of its audience; 

(3) the deception is material, in that it is likely to influence the purchasing decision; 

(4) the defendant caused its false statement to enter interstate commerce; and 

(5) the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to defendant or by a loss of goodwill associated with its products.

A plaintiff must win on all five elements. A defendant only needs to win on one element to have the case dismissed and can file a MSJ on that one issue. If the defendant can prove the false and deceptive statement that entered interstate commerce was not “material”, the MSJ will likely be successful in dismissing the claim. The result of any MSJ will likely have a large impact on the settlement value of your case.

Pre-Trial Motions

It is common for the parties to argue about what evidence is admissible at trial. The court may need to rule on who can and cannot testify about what topics at trial and what experts (if any) are allowed to provide opinions. A party’s claims and defenses at this stage may have evolved since the Demand Letter stage, and it is important to continue to evaluate your claims and their value throughout the process. 

Trial

The trial is a formal process that allows both sides the opportunity to present their case. While I love trial, very few lawsuits end up at trial. We often use the threat and uncertainty of trial to resolve lawsuits. Often, trial is not necessary because the parties have a great deal of information about the claims and defenses and can evaluate the probability and value of success.

Opposing parties may not agree on the probability and value of a case. A judge or a jury will hear your case when a trial is needed. The parties often have a right to a jury trial, but jury trials are often more expensive and time consuming. My experience is that judges take their jobs as fact finder at trial seriously and are fair and impartial. Trial often requires witnesses to provide live testimony and discuss documents or other evidence. The attorneys often provide opening and closing arguments, bookending the live testimony by summarizing the reasons their client should win. 

Post-Trial Briefing and Appeals

The parties may have legal defenses to the trial result, and file additional motions after trial. Appeals from a judge or jury verdict are often an option if you wish to dispute the outcome of the case. 

Small Business Litigation and Mediation

You should consider mediation at all stages. Savvy business contracts often require parties to attend mediation before filing a lawsuit. A skilled mediator can help resolve many business disputes by helping the parties understand probability and value of success. For most mediations that conclude in an agreed resolution, both parties leave somewhere between unhappy and minimally satisfied. Mediation is not where a party is likely to score their ‘home run’. However, they also are likely to leave a successful mediation with more money in their respective pockets, reduced risk, and freedom to re-focus on their core business activities. Mediation is often most successful when both parties are emotionally ready to think clearly and make sound business decisions.

Small Business Litigation and Collection Risk

You should consider collection risks at all stages. Many small business lawsuits end up being bet-the-company lawsuits. Collecting a judgment can be very hard! This is particularly true for litigation between small businesses. Here are a few collection risk questions you should consider:

  • Is there potential for the company to go bankrupt or otherwise simply be unable to pay? 
  • Are there any potential claims against corporate officers in their personal capacity? Might the owners become personally liable, or are you limited to collecting against the company? 
  • Are there assets available to seize and sell to satisfy your judgment, and where are those assets located? 

Understanding Small Business Litigation is not Rocket Science

The potential for an award of damages, reduced by the probability of success, defense costs, and collection risks, will likely determine the value of your claim. Litigation is like the stock market. As you receive good news through discovery and motions, the potential for damages and probability of success goes up and the value of your case increases. Bad news delivers the opposite effect. Unlike the stock market, time in the market does not always increase claim value. Increased defense costs and collection risks may reduce claim value. The impact of litigation on a small business goes well beyond the purely financial impact of legal fees and damages. I am here to help you navigate the litigation process on a personalized budget, so you can get back to what you do best.

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