What’s one thing you must do for your small business before the end of the year? The short answer is: Buy a legal audit. Buy it now; perform it in 2020. The ROI is better than anything you’ll find on Wall Street. Here’s why.
I’ve been representing businesses in litigation for 18 years. I love it. I love the battle. The chess moves. The psychology. The theater. The winning. (The losing not so much). Litigation is why I went to law school. To compete. To be a gladiator. To attack the bad guys and defend the good guys.
You know who hates litigation? Our clients. Even when we win, they lose. Even when we knock it out of the park and do everything right, they’ve still spent months and years in courtrooms and conference rooms, giving testimony, getting prepped, giving information, producing documents, reviewing documents, explaining documents.
And that’s just the time suck. Then there’s the expense: $300 - $500 per hour, which adds up really quickly. A lawsuit will cost our clients anywhere from $50k to $500k through trial.
Then there’s the stress. My job is to stress out the other side and their job is to stress out my side. The lawyers don’t get stressed, of course. This is what we do for a living. No. It’s our clients who get all the stress. Everything’s public and court filings can say nearly anything without regard to the actual truth, so long as there’s some basis for saying it. So when our clients are accused of malice and fraud and theft and a whole parade of horribles, they just have to sit there and take it. And they have to take it to the office and to their homes, totally distracted while they’re talking to their employees and their investors and their families, explaining to all of them why the court filings are full of crap.
And yet, it’s often so avoidable.
Waiting to react means you’re a sitting duck
I believe that for hundreds of years, most lawyers have been hired the same way—reactively. Clients don’t want their lawyers starting the clock when the phone call starts so they don’t call them in the first place. They wait until the summons comes in the mail telling them they’ve been sued. They wait for the cease and desist letter telling them their business is engaged in some kind of infringement. Then and only then do they make that panicked phone call to their lawyer. “I’m in trouble,” they say. “I need you to get me out of this. How much is it going to cost me?”
By then it’s too late. They’re already in it. And they’re feeling vulnerable and embarrassed and pressured. They’re unlikely to shop around. They just want the one lawyer they know to make the problem go away. The lawyer tells them how much it’ll cost and the client writes the check. They’ve already lost. They’re in the litigation casino. They’re feeling the pain and they’re going to be feeling it for a while.
In my 18 years of practice a couple of things have become clear to me: First, most business lawsuits I’ve litigated could have been prevented if my client had been proactive instead of reactive. Second, they would have spent a fraction of the cost of one lawsuit by being proactive. And third, all they had to do was ask their lawyers some basic questions.
Three key questions
Scoping, quoting and starting the legal audit comes down to three questions. These are the questions you need to ask your lawyer right now:
- Who can sue me?
- For what?
- What can I do about it?
That’s it. Three questions. That’s your starting point for the discussion I want you to have with your lawyer about a legal audit in 2020. Here’s how the rest of the discussion should go.
Who can sue me?
The universe of plaintiffs is small. In my entire career, handling hundreds if not thousands of lawsuits, I’ve only found six primary categories: Customers, vendors, owners, competitors, employees and the government. That’s it.
The shortest answer is “anything.” Anyone with $250 can file a lawsuit. But the question isn’t “how can I prevent every lawsuit?” That’s impossible. The better question is how can I avoid (a) predictable lawsuits which I’m either (b) going to lose or (c) spend a ton of time and money trying to win? That question can be answered.
Ask your business lawyer that question, and ask her to break the answer down into the six categories of potential plaintiffs from two paragraphs ago.
Likely to sue group no. 1: Customers. What are my customers (or invitees) likely to sue me for? Breach of contract, injury from using my products, violating consumer laws, false advertising.
Likely to sue group no. 2: Vendors. What are my vendors likely to sue me for? Breach of contract, primarily.
Likely to sue group no. 3: Employees. What are my employees likely to sue me for? Discrimination, violating the Family Medical Leave Act, the Fair Labor Standards Act, safety rules, a handful of other laws.
Likely to sue group no. 4: Competitors. What are my competitors likely to sue me for? Unfair competition, trademark/patent/copyright infringement, stealing trade secrets, violating non-compete agreements with their former employees.
Likely to sue group no. 5: Partners and investors. What are my partners and investors likely to sue me for? Violating our partnership agreement, securities laws or state corporation laws.
Likely to sue group no. 6: Government. What is the government likely to sue me for that isn’t already covered by one of the above? False Claims Act violations by government contractors, Fair Credit Reporting Act enforcement in the Consumer Financial Protection Bureau, FTC Act violations for false advertising, violations of the Americans with Disabilities Act for commercial websites, among others. The biggest ones, though, are failing to register in states where you transact business and failing to pay taxes correctly. Last year the IRS assessed almost $23.3 billion in just civil penalties to taxpayers, the majority of which were assessed against entities.
The above list isn’t exclusive, and will depend on your particular industry and locations and products, but I believe that much of the low-hanging fruit is listed, subject to further discussion with your lawyer.
What can I do about it?
If you know who’s likely to sue you and for what, then you have a roadmap for addressing your issues and avoiding a whole lot of pain. Put simply, each of the above likely plaintiffs has a likely claim, and each likely claim has legal requirements. Your conversation with your lawyer should lead to a discussion of what you’re doing that violates those legal requirements, how to do business without violating them, and what you can do to mitigate your risks.
That’s the audit.
Thus, your lawyers should review your hiring and firing practices, your employee handbooks, your customer contracts, your payroll practices and employee classification, your partnership agreements, your sales tax collection and payment practices, among other things. They should be interviewing you and your managers, requesting documents from you and reviewing legal checklists. They should be suing you virtually, confidentially, before the government or a plaintiff’s lawyer sues you in public, for stakes. They should be giving you a report card and then giving you a set of recommendations to plug up your legal minefields.
They should be adding dispute resolution clauses into all of your documents—your customer agreements, your partnership agreements, your employment agreements. Well-crafted, enforceable provisions (they’re not always enforceable so they have to be drafted correctly and in the right contexts) that create waterfall requirements like written notice of claims, an opportunity to cure, a face-to-face meeting, a mediation, and then an arbitration or a courtroom in your hometown, not in the other side’s choice of venue.
In the end, your lawyer should identify, discuss, recommend and then repair. And she should do it now, not after the government, a disgruntled employee or one of other six types of plaintiffs brings it up in a legal document.
How much will this cost?
Before the conversation gets to the “let’s do this” stage, you’ll ask what every client asks: What’s this going to cost me? The answer should conform to your budget, but will be commensurate with your business, its size in customers and employees, its number of locations, its products and services, its industry and regulatory landscape. Ultimately, you should be prepared to spend up to $10,000 for a small company to simply re-draft of your key documents, or up to $100,000 for a complete legal audit of a dynamic, mature middle-market company with multiple locations and hundreds of employees.
But you know what? It’s worth it. First, hiring an in-house counsel will cost twice that. Second, and more importantly, you’re paying for it already.
You’re paying for it by being reactive. When that summons comes in the mail, when the feds come knocking on the door, when the cease-and-desist letter is FedEx’d to you, when you walk into the litigation casino and you start rolling the dice, your money and your time and your serenity are going to start flying.
Cover Your Six in 2020
Hopefully this article equips you and your lawyer with a framework for putting your legal house in order in 2020. If not, though, call us, or go to www.covermysix.com to read more.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first. If you have questions about your particular legal situation, you should contact a legal professional.
Alex Gertsburg is the CEO and Founder of the Gertsburg Law Firm Co., LPA. He can be reached by email at firstname.lastname@example.org or by phone at 440-571-7775.
About The Gertsburg Law Firm
The Gertsburg Law Firm is changing the character of the attorney-client relationship in business from a cost-center to a trusted advisor. Drawing from their complex litigation and transactional experiences as members of large law firms, in-house counsel and as business owners themselves, the Gertsburg Law Firm’s award-winning attorneys provide clients the benefit of business lawyers with real-life business experience in a wide variety of industries. This dynamic results in a comprehensive and innovative approach to business law that is proactive and consultative, ultimately saving clients money in fees and exposure before issues arise. Located in Chagrin Falls, Ohio, the Gertsburg team of lawyers and support staff leverages its knowledge, broad experience and steadfast dedication to both solving and avoiding clients’ business problems, and helping them actually grow their businesses in a way that no other law firm does.