DTCI: Defensive litigation and essential steps to corporate protection

By Jason M. Massaro

Massaro

When asked about the areas of law in which I practice, I say, among others, business law and litigation. Inevitably I am greeted with a curious look and a cocked head similar to a dog that has just heard a strange noise. The person then almost cautiously asks, “What exactly does that mean?” I then follow suit with the same bewildered “dog glance” since I still have not developed a good canned answer to that question. And that makes sense to some degree.

For example, a business could range from a seller of genetically engineered popcorn to a granite fabricator and installer and anywhere in between. Moreover, any given company’s particular situation may involve areas of practice normally considered boutique, such as insurance coverage, products liability, construction, real estate, and so on. In fact, ask a defense attorney specializing in insurance coverage or products liability or construction law, and I would wager that the vast majority of his clients are businesses. The term “business law and litigation” is so broad that its use creates more confusion than it solves. But what else can be used to describe this area of practice? I think a better approach is to stop trying to describe the types of businesses represented or the areas of law and instead to describe the services provided.

Given that business litigation is usually situational and can be summed up by a statement that it means representing a company who has sued or who has been sued, business law is really where we need to focus. And by business law, I do not mean the mere drafting and/or negotiation of corporate documents or agreements. I mean the process and manner by which a company is represented to avoid, to the greatest extent possible, the draconian nature of the litigation machine. In other words: “defensive litigation.”

I do not intend to suggest an approach to litigation where the client is represented in anything but a methodical, aggressive, and persistent manner. Instead, it is the goal of this article to remind, refresh, and educate offensive, situational litigators how to more fully develop their skill in the practice of business law. Stated differently, this article is a checklist of ways to protect business clients with a defensive litigation approach to keep them out of litigation.

Changing the corporate mindset toward attorneys

Noted therapist Edwin H. Friedman aptly stated that “[t]he colossal misunderstanding of our time is the assumption that insight will work with people who are unmotivated to change. Communication does not depend on syntax or eloquence or rhetoric or articulation, but on the emotional context in which the message is being heard. People can only hear you when they are moving toward you, and they are not likely to when your words are pursuing them. Even the choicest words lose their power when they are used to overpower … .” While we do not counsel our business clients in the same manner Friedman counseled his clients, the message is the same: change our clients’ mindset through education and experience to achieve the desired goal of better, more complete representation.

The question is: How do we go about achieving this goal? It is no secret that lawyer jokes are one of the most prevalent digs at a profession that exist. Whatever your take on them, perception is reality and these jokes emanate from somewhere. It is merely a fact that some people simply do not like attorneys. Whatever the reason, the implications are undeniable.

In my experience, business clients fall into several distinct and dangerous categories regarding their mindset on the need (or, really, non-need) for attorneys in the operation of a business. Here are a few: (1) an “it’s not broke so don’t fix it” mentality; (2) a belief that their business does not need counsel (even though the business that started out with one man and a truck is now generating revenue of millions of dollars per year); (3) an impression that legal agreements are uncomplicated and that the owner can draft them himself; (4) procrastination toward a review of important corporate issues such as insurance and corporate compliance documents; (5) the false belief that no news is good news; (6) an erroneous assumption that the other party will do the right thing; and (7) the dreaded reality that a lot of people, for one reason or another, just do not want to deal with (or pay) an attorney.

It is these mindsets that we must overcome; they not only place businesses in jeopardy for lack of proper legal guidance but perpetuate the negative stereotype of attorneys. The negative stereotype is perpetuated when we deal with business clients only when litigating; a negative association is developed and the problem is exponentially compounded. You may be asking, “So what is the solution?” In my mind, it is our job to convince our business clients to follow Benjamin Franklin’s advice that “[a]n ounce of prevention is worth a pound of cure.”

Any growing business will have to deal with the realities of changing legal exposure. With expansion comes the need to have an attorney (or more than one) on retainer. Moreover, the company needs to understand that it does not merely need to retain an attorney but it must actually use him. Litigation happens, but it does not have to be part of the cost of doing business. To the contrary, defensive litigation is a cost of doing business. The sooner our clients become accustomed to this fact, the more successful they will be in seeing smooth growth as opposed to one riddled with legal strife.

With retention comes the requirement of use. Encourage your clients to test the waters. Get them accustomed to you and vice versa. Learning your client’s business over time will increase your ability to be proactive and to prosecute or defend a suit should the occasion arise. It is never advisable to let your business client experience the legal process for the first time when things have gone wrong.

This approach will also avoid the problem of having clients draft their own legal documents regardless of how simple they may appear. A simple promissory note with someone out of state that lacks a choice of law provision could mean the difference between smooth sailing and multijurisdictional federal court litigation. As business attorneys, we must make our clients see that, just as they would never operate on themselves, they should never operate legally on their livelihood. They need to allow counsel to be proactive on day-to-day operations as a part of a much larger, and cheaper, defensive litigation strategy. Ask to be kept informed of major changes in your client’s growth, expansions, new product lines, claims or threatened claims, liability issues, and so forth. The better informed you are, the better you can protect the business interests of your client and the more likely you will be to avoid conflict before it manifests.

Organization and business methodology

It has been my experience that many of the companies with which I am involved in litigation, operate in utter chaos. But I believe that I may have a very simple answer to the reason for this. While maybe not causally related, I am a firm believer that businesses that fail to pay attention to the details are much more likely to be lax in their other business operations. Eventually, that cavalier approach to organization leads to errors that ultimately lead to litigation.

The second punch of this vicious combination is that such disorganization makes a business much more costly to defend. In my experience, I have seen companies waste literally thousands of dollars by merely grabbing the potentially relevant documents pertaining to a suit and dropping them off at my office for me or my staff to attempt to comb through, assemble, and collate. As alluded to above, this expense grows if a business does not have a good, prior working relationship with counsel. Counsel who is unfamiliar with the operations of the corporation must not only assemble the case for litigation but also endure a sometimes very steep learning curve. Thus, it is our further responsibility as business litigators practicing defensive business litigation to educate our clients about the potentially severe negative consequences of failing to be organized and efficient.

Spoliation and maintaining electronically stored data

Discussions surrounding spoliation and e-discovery have become prevalent in the last few years. While a thorough analysis of the duties to preserve and produce electronically stored information is beyond the scope of this article, all practitioners should be well versed in what they are. This is especially true for attorneys whose clients are businesses. With as much communication being sent electronically, both state and federal courts have implemented very strict rules (both discovery and evidentiary) about the retention and production of ESI. Moreover, even if the rules are silent, good counsel will either seek an e-discovery stipulation as to the production of the data or a preservation order from the court ensuring its protection and ultimate production.

Even a sophisticated business client may know nothing about what to do with the information once on or still on its application software, smart phones, backups, archive files, input devices, networks, operating systems, storage media, and so forth. It can get hugely complicated very quickly. An astute practitioner must guide his clients through this labyrinth and proactively seek to ensure the protection and production of ESI. There can be grave consequences for failing to maintain and produce such data, and otherwise winnable cases can be lost on the failure to implement a retention system.

Synergy of relationships

The concept of a shift in corporate mindset concerning the use of attorneys in the operation of a business was discussed above. Another helpful shift in mindset is that of the attorney himself. I don’t think there can be much debate that a well-protected business will need more than advice of counsel to protect itself. Other specialties are needed such as accountants, bankers, financial advisors, insurance agents, and so forth. In fact, attorneys with other specialties (such as intellectual property and transactional attorneys) may also be required.

This team does not need to be so large that the company is overwhelmed in costly minutia. However, there must be a synergy and a constant flow of communication between the client and the various specialists as well as between the various specialists themselves. There is much less chance of exposure if, for example, a corporation knows from its attorney that it must preserve its documents, knows from its accountant that it must pay the requisite payroll taxes, knows from its insurance agent that workers’ compensation coverage is needed, and knows from its intellectual property attorney that its new product name needs to be trademarked. It is crucial that chosen counsel maintains a good rapport and working relationship with these other specialties and that there is always an open line of communication. The best business attorneys are those who stay connected with the service providers that help protect the corporation.

Maintain corporate formalities

The primary reason a person incorporates a business is to take advantage of the limited personal liability the corporate umbrella provides. That is, all things being equal, the owner-shareholder’s liability is limited to the extent of his corporate investment. I.C. 23-1-26-3(b); see also Aronson v. Price, 644 N.E.2d 864 (Ind. 1994). His personal assets are not at risk. Id.

However, this protection can be lost through certain conduct of the owners. The plaintiff in a suit may seek to “pierce the corporate veil” and impose personal liability on the owner. In deciding whether a plaintiff has met his burden of proof on a piercing count, Indiana courts consider whether the plaintiff has presented evidence showing: (1) undercapitalization; (2) absence of corporate records; (3) fraudulent representation by corporation shareholders or directors; (4) use of the corporation to promote fraud, injustice, or illegal activities; (5) payment by the corporation of individual obligations; (6) commingling of assets and affairs; (7) failure to observe required corporate formalities; or (8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form. Aronson, 644 N.E.2d at 867. Also of importance is the maintenance of current and accurate corporate records on file with the secretary of state. Failure to do so may result in administrative dissolution and the loss of the right to carry on business. I.C. 23-1-46-2.

Conclusion

As can be seen, there is quite a bit that goes into business law or “defensive litigation.” It is not only important to become adept at client communication relaying the importance of these issues, but also implementing defensive litigation into the daily functions of your practice. In doing so, we can all offer our business clients more complete and protective representation. It also becomes easier to explain what I mean when I say I practice business law and litigation by merely responding: “I work just as hard to keep my business clients out of litigation as I do to protect them in litigation.”•

Jason M. Massaro is a partner at Massaro & Ciobanu, LLP in Indianapolis and a member of DTCI. His areas of expertise include complex business, UCC, contract, construction, real estate, and premises liability law and litigation. The opinions expressed in this article are those of the author.