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Managing Business Litigation Risks: Six Common Causes of Business Lawsuits

Litigation. The word strikes anger and scorn into the hearts of business leaders. Litigation can feel like an unwelcome distraction and expense at best, and a dangerously incalculable risk at worst. It interferes with decision-making, inhibits capital investment, and weighs on morale. And, perhaps most frustrating, like a late-summer hurricane, litigation often seems to materialize out of nothing, grow exponentially, and threaten to cut a path of destruction through your business that feels at once terrifying and unavoidable.

When business leaders take a proactive, forward-looking approach to litigation, however, they can prevent it from becoming that sort of all-consuming whirlwind. A significant amount of litigation is avoidable, and the rest can be incorporated into, or at least effectively managed by, your business strategy...if you know how.

Here are six common areas of business litigation, and how timely and knowledgeable legal advice from experienced business litigators can make the difference.

1. Contract Disputes

Otherwise known as breach of contract, these are the bread and butter of business blow-ups. They tend to be straightforward on their face - one party says the other didn't meet an obligation, resulting in a loss - but they can become complicated quickly, particularly when a contract is ambiguous as to the promises it contains. These cases also involve counter-claims where the defendant contends the plaintiff also breached the contract. For that reason, the best time to have a business litigator evaluate your contracts is before they're signed, to reduce ambiguity and provide the right mechanisms to ensure that any litigation that does arise will be as inexpensive and un-disruptive as possible.

2. Fraud and Misrepresentation

Fraud and misrepresentation cases involve the accusation that one party intentionally deceived the other party, who relied on the deception their detriment. Unlike contract disputes, fraud and misrepresentation cases are "torts" that can result in punitive and other exemplary damages, and in some cases can even have a criminal component. A scrupulous and honorable business culture is perhaps the best line of defense against being accused of fraud, and conversely, thorough vetting of your business relationships is a good protection against being victimized. Experienced business litigators can help you assess both risks.

3. Theft of Trade Secrets

Another tort that can carry the risk of hefty damages and criminal liability, theft of trade secrets occurs when a competitor, contractor, or former employee wrongfully obtains and uses confidential business information to a business's detriment. In these cases, whether particular information constituted a "trade secret" is often hotly disputed, and can depend on, among other things, the steps the business took to make that information confidential. Business litigators can help you identify your trade secrets and appropriately protect them, to ensure that if the worst occurs, you will have recourse in the courts.

4. Partnership and Shareholder Disputes

Sometimes the litigation threats that a business faces come from within. When business partners, shareholders, members and other participants in an enterprise come to loggerheads about business decisions, distributions of assets, and other internal corporate operational and governance issues, the resulting litigation can be particularly contentious and distracting from the core business. An experienced business litigator can help avoid these disputes by participating in the drafting and review of your governance documents, such as Partnership Agreements and LLC Operating Agreements, to ensure there is clarity among business owners on topics that typically serve as flash points for dispute.

5. Breach of Fiduciary Duty

Fiduciary duties arise when a person or entity holds a position of trust for another. These duties may be imposed by statute or by agreement, and in the business context often involve people or entities with access to corporate assets. Determining who owes such a duty, and when it has been breached, can be a minefield. It is critical for fiduciaries to know they are acting in that capacity, and to understand the rules of the road. Business litigators can help identify all of the fiduciaries involved with your business, whether employees or outsiders, and evaluate whether your fiduciaries understand and have fulfilled their duties.

6. Non-Solicitation and Non-Compete Violations

When an employee leaves an organization, he/she will often have contractual obligations to his/her former employer not to solicit the former employer's customers, or compete with his/her former employer for a particular period of time and/or in a particular geographic area. The enforceability of those obligations often depends on whether an organization exercises its enforcement rights in a clear and consistent manner, or conversely, whether a business knows of, and ignores, a new employee's obligations. A business litigator can evaluate your business's non-solicitation and non-competition risk – from how you enforce non-compete agreements with former employees to how your current employees must conduct themselves.

Don't Wait to Call a Business Litigator

The common theme running through these areas of business litigation is that the risk of litigation can be mitigated if you bring a business litigator's perspective into in your operations before litigation arises. Business leaders who wait until the hurricane of litigation is already blowing to call upon a business litigator will have missed a golden opportunity to avoid the damage and expense that an unexpected litigation can deliver. Litigations, like storms, will happen, but a little preparation with help from a business litigator can go a long way toward helping your business stay high and dry.

At Hendershot Cowart P.C., we help our clients take a proactive approach to the risks of business litigation. Contact us today.


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