Author:

William T. DelHagen, Law Officer
Murchison & Cumming, LLP
801 South Grand Avenue, 9th Floor
Los Angeles, California 90017
Telephone: 213-623-7400
Facsimile: 213-623-6336
E-Mail: wdelhagen@murchisonlaw.com

The following essay was originally published in the Lift and Access magazine and can be visited under the following Internet link:
http://www.liftandaccess.com//index.php?id=581

Permission to publish this article on the following page was given by the author and the publishing magazine.

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How to Avoid Being Sued — And What to Do If You Are

Businesses can ward off most legal threats by thinking ahead and being proactive.
By William T. DelHagen, Esq.


William DelHagen
William T. DelHagen is a partner and a member of the Product Liability Practice Group of Murchison & Cumming, LLP in Los Angeles. DelHagen focuses his practice on product liability, aircraft, automotive, general, and business litigation matters. Prior to becoming an attorney, he served as an advanced systems project engineer for Rockwell International. DelHagen can be reached at wdelhagen@murchison-cumming.com.

 

October 5, 2005 — Death, taxes, and litigation have become certainties in the modern business world, yet a surprising number of successful enterprises are unprepared and ill-equipped to handle the uncertainties of litigation. Every day, foolish verdicts and unbelievable monetary amounts show up in the media, but successfully defended lawsuits or trials where the verdict is small are rarely reported. In this climate, one would think that every business would be prepared for litigation.

Unfortunately, most small business and many mid-sized companies are still unprepared for the onset of litigation because they have had little or no experience. Without a legal staff that’s familiar with the needs of litigation, most companies do not have a plan to deal with the next summons and complaint. But just like major corporations, small- and mid-sized companies can be prepared easily, and without a lot of expense. Here are some philosophies and practices that will minimize the possibility of your company being sued.


Pick the right business partners

A surprising amount of business litigation happens because companies have picked the wrong business partners. This is particularly true with franchise agreements and component suppliers. In each case, the performance of the business depends upon the good faith and performance of the contracting partner. The closer your enterprise is to the consuming public, the wider the net of your responsibility. Underperforming subcontractors can set you up for personal injury, wrongful death, and warranty actions — against which there may be no factual defenses.

It’s important that the subcontractors have adequate resources and insurance. Contracts should always have indemnity, hold harmless, and defense agreements. It’s also highly recommended that you become an Additional Insured on a liability policy that’s been purchased by your contracting partners.

 
Hire and keep the right people

It’s almost too obvious to state, but it’s the long-term, highly responsible employees who will most likely minimize the possibility that you will be sued. If you are, experienced and qualified employees will become your defense witnesses. Every business needs employees who remember what happened and why.
 

Deliver a quality product

Although delivering a quality product is another obvious preventive measure for litigation, often it is not enough to prevent being sued when persons are badly injured. The money and effort put into design and quality control will mostly likely be cheap in comparison to a major lawsuit or the cost of increased insurance premiums.
 

Keep your promises

A lot of business litigation comes about because people are simply unable to keep the promises they made to get the business. It can be a very expensive mistake to promise what will really never be delivered.
 

Know your regulations

Over-regulation of the U.S. economy — and the business community in particular — is getting out of hand. In 2003, 13,000 separate bills were introduced into the California state legislature, and most were seeking to regulate conduct in some form or another. It is important to stay current on regulations that affect your business by joining trade associations, subscribing to clipping services, or regularly consulting with legal experts in your field.

The problem is that violations of regulations often energize litigation. For example, violation of a safety regulation is considered negligence under the law and could result in a finding of liability irrespective of good intentions and best efforts.

 
Address complaints ASAP

No one likes to receive complaints about their services or products, but it is imperative that there is a system in place to deal with feedback. If you do not evaluate complaints, you often will miss an opportunity to improve the product or stave off litigation. In various surveys, a number of plaintiffs complained they were ignored and not treated properly by the company they eventually sue. One example is in the automotive field where quick and appropriate response to customer complaints often eliminates any motivation to seek legal help and file a “lemon law” lawsuit. In addition, recognizing and evaluating complaints provides valuable feedback to the persons in your organization responsible for the quality of products or services.

Also, keep in mind proof of customer complaints that have been ignored becomes terrible evidence at trial. With the amount of networking now available to the plaintiffs’ bar, many times consumers with similar problems are linked across the country to provide testimony against a common defendant. If there is evidence of a common complaint that has been ignored over a period of time, this is fruitful breeding ground for high verdicts and even punitive damages.
 

Get legal assistance up front

Legal advice may not be cheap, but it’s a lot cheaper than ignorance. Getting legal help as soon as a problem is identified is undoubtedly going to save money in the long run. Corrective action can be taken, problems can be avoided, and amicable resolutions may be hammered out with the correct legal advice. Remember, this is not your field of expertise, so get professional help.
 

Be litigation savvy

Warnings are the last desperate refuge of the plaintiffs’ bar. When there’s really nothing wrong with the design, and when the product has been made to that design, then the only theory left is inadequate warnings. Warnings are a very subjective and qualitative field in which there seems to be no real science. Still, the legal system has forced people to issue elaborate and sometimes ludicrous warnings to cover even the most improbable scenario. Anyone who has purchased a ladder, power mower, a bottle of medicine, or any electrical appliance has seen just how far manufacturers and sellers go to try to ward off the spurious claim of inadequate warnings. Unfortunately, it is a fact of life that must be addressed by knowledgeable professionals, and the best defense is a design that has been evaluated and found to be adequate in accordance with existing (though flimsy) standards in the field. Nonetheless, it’s hard to overestimate the foolishness of the public. One of the semantic traps is that if the danger appears so blatantly obvious to the supplier, then why wasn’t it identified somewhere in the instructions?

The same holds true for design. Nowadays, the public seems to believe that every idiot has the right to purchase and operate even the most dangerous of equipment. If you make it idiot proof, someone will come along and make a better idiot.
 

Legal Inoculations

If you have practiced the above steps and still foresee potential legal issues, there are preemptive techniques to avoid another party from contacting a lawyer. Below are some tips to neutralize the situation.
 

Have appropriate insurance.
This is the best source of peace of mind for any business, and it is important to have the right type of coverage and the appropriate coverage limits. All primary policies include the duty to defend, which will provide you with a lawyer selected and approved by your insurance carrier at no additional cost to you. Still, underwriters are adept at writing exclusions, and it’s important to be sure that your risks are actually covered. A current example is in the area of moisture and mold, where the insurance industry was suddenly paying for complete home rebuilds on the basis of relatively small and likely harmless mold activity. Public hysteria fed into this, and the net result is that policies are now being written that explicitly exclude mold-related claims.

In addition to obtaining the right coverage, it’s important to keep insurance policies for an extended length of time. Statutes of limitations on written contracts may be four years or more, the exposure period in construction may be 10 years or more, and coverage may be provided by a number of policies in the intervening years. Do not depend on your broker to maintain a long and complete history — there is nothing worse than purchasing coverage and being unable to locate proof of that coverage when it is needed years later.
 

Implement a record retention plan.
The business world is overflowing with data, which is due in part to the growth in technology. Therefore, it’s important to file and keep key information for at least as long as you are at risk on that subject. Balanced against this must be a rational retention policy that allows for the appropriate destruction of records after a reasonable period of time. Such a policy must reflect the nature of the business, and it must be documented and implemented rigorously. In court, such a policy must be defensible and not appear to be the shredding of necessary records. The policy must look fair to pass the test in court.


Consider arbitration clauses.
Alternative Dispute Resolution (ADR) was once disfavored by the courts because they felt it was an intrusion on their territory. With budget restrictions, court congestion, and a perceived need to speed cases along, the judiciary has reversed its long-standing opposition and now almost universally favors anything that will get a case off the docket and out of the courthouse. Arbitration clauses can be very effective tools when used appropriately. As with prenuptial agreements, one side or the other will probably try to break this clause later.
 

Stock-pile litigation ammunition.
Certain documents will predictably be helpful and perhaps essential for a successful defense in court. The following is a brief list of the types of documents that are most likely to be needed for a successful legal defense.

            - Regulation compliance documents       
            - Contracts
            - Insurance (Yours + Certificates of Insurance + Additional Insureds )
            - Testing
            - Quality Control
                        • Standards
                        • Production
            - Expert consultation reports
            - Customer feedback
                        • Warranty claims
                        • Serious complaints (with response)
            - Product improvement policy
 

Avoid self-inflicted wounds.
If a case draws public interest, it is essential to limit public statements. For most companies, public statements denying responsibility, or explaining “problems,” are greeted with great skepticism and given little weight. In general, they simply serve to keep the issue in the newspaper without actually achieving any important positive effect. Nonetheless, if a defense attorney approves a public statement, keep it short, simple, and unambiguous.

Another source of self-inflicted wounds is the company memo. It is important to teach business people and engineers what to write and, more importantly, what not to write. Some of the most spectacular verdicts have resulted from a well-intended but nevertheless poorly drafted memo (e.g., the Pinto gas tank fiasco).

Above all, avoid cover-ups or anything that even looks like a cover-up. First, they seldom work, and second, if they are uncovered, it can be devastating to your defense. To minimize this risk, businesses must tightly control knowledge of any impending or actual litigation, limit access to a small group, and let it be understood that no one is to correspond or offer unsolicited suggestions.

Finally, the digital age has brought e-mail, and e-mail has brought its own Pandora’s Box of problems. Nowadays, company e-mail is a perpetual booby trap for any company. Jocular remarks, jokes, or even misguided efforts to help are all going to be potentially discoverable if an adversary gets access to the database. Control, limit, and purge e-mail to the greatest extent possible.

In the business litigation scenario, it’s important to know that depending upon the word processing and e-mail software, the recipient of a document may be able to uncover all of the changes made during the drafting, including language that may have been discarded or commented upon.
 

How to win if you are sued
If the above steps have been followed and a company or individual persists on taking you to court, then there are several steps to take to win a lawsuit.
 

Have a positive attitude.
For businesses not inured to the process, receiving a summons and complaint can send a shockwave that creates a negative attitude and fosters defeatism. While a quick, cheap settlement is a popular myth, it is important to know which battles can be fought successfully and which should be settled. In certain instances, a settlement may be the wisest course of action to eliminate further risk and cut off litigation expense.

In recent years, only about 5 percent of civil litigation actually went to trial, and only about 3 percent went all the way to verdict. The pressures and opportunities to settle have increased over the years, as litigation has become more protracted, complex, and costly. While the negative effects of a publicized defeat are obvious, the cumulative effects of tough litigation stand — and some successful defense verdicts — should not be underestimated either. For example, Disneyland had a reputation of refusing to settle any contested claim, and it achieved a remarkable track record of winning at trial. This, no doubt, discouraged many potential litigants and attorneys from attempting to extort money from the theme park.


Form a key players group.
Preparing for possible litigation should include the formation of a group of key players who know each other ahead of time and have a clear mandate to take action if litigation becomes a reality. This includes a knowledgeable insurance agent, a real litigation attorney, and a person selected by the company to be the spokesperson and focal point of litigation activities.
 

Have an action plan in place.
All businesses should have a litigation action plan that is thought out in advance and ready to go as an off-the-shelf item. In most cases, plaintiffs will have spent a year or two gathering information, interviewing witnesses, researching the Internet, checking with competitors, and otherwise putting all the basic blocks together before filing and serving a lawsuit. Defendants are always at a disadvantage in these cases, so a rapid action plan should include at least the following items:

    * A system to alert the appropriate management people;
    * A plan to freeze, gather, and protect key documents;
    * Systems to tender the defense to any appropriate insurance and involve counsel at the earliest possible time;
    * A procedure to create and protect a confidential litigation file; and
    * Guidelines to advise and counsel employees about the requirements of litigation.
          

Damage control.
The plaintiffs’ bar has become very adept at employing the media to soften up defendants and tilt the playing field to its advantage. The media usually finds itself on the side of the claimant by virtue of existing bias and because plaintiffs generally have more to gain from publicity than defendants. Still, litigation in a public forum may require some response, and this needs to be carefully planned with defense counsel before any public statement is released. There is always a substantial risk that the statements will be misinterpreted in the media and those who give them will suddenly find they’re on the witness list.
       

Set up an early defense meeting.
It is imperative that the action team meet with defense counsel as early as possible to review the complaint, evaluate the issues, and get control of the situation. Such a meeting needs to be candid so the defense counsel is never blind-sided by unfortunate documents, unhappy former employees, or related claims and lawsuits from the past. It is also essential to raise all potential defenses and cross-claims with counsel so an appropriate pleading can be drafted and filed within the time limits allowed.
 

Prepare for discovery.
Almost all civil litigation is won or lost during discovery. In general, this process does more for the plaintiffs than for the defendants because there’s generally more to learn about the product/service or the corporation that there is to learn about the individual making the claim. Accordingly, a single point of contact must be established, and that person must be supported in his or her efforts to locate documents, identify witnesses, and support defense counsel.