[Editor's note: Today's guest blogger article is a follow-up on last night's Ask the No Nonsense Lawyer interview with Kathy Lang.  Special thanks goes to Ms Lang and the firm of Dickinson Wright.]

The Anticipation of Litigation:  Five Critical Steps to Manage Risks and Costs

By Kathleen A. Lang and Erin J. Stovel

Dickinson Wright PLLC

In today’s economic climate, no company can afford to waste its resources – human or financial.  However, when litigation is threatened, an initial investment of resources to preserve evidence and prepare the defense is critical.  In fact, by taking the proper steps when first notified of a potential claim or litigation, the risks of litigation can be better managed, and the overall exposure and costs spent in litigation can be limited.

 1. Investigate. Often there is notice of a potential claim or litigation long before a lawsuit is filed. Such notices can include demand letters, law enforcement/regulatory inquiries, or an event itself may suggest future claims (such as the occurrence of a personal injury while on a business property or the termination of a problematic employee). However the initial notice of a potential claim is received, it is important to first ascertain and memorialize all of the critical information that may be relevant; such as who the key players are and whether there are documents that relate to the claim. Since there can be significant time lapses between the first notice of a lawsuit and when a lawsuit is actually commenced, it is usually a good idea to interview the important people as soon as possible in order to preserve their best recollections before memories fade.

2. Preserve Evidence. Today many lawsuits do not focus on the merits of a claim, but rather discovery battles over the preservation of evidence before and during litigation. During the initial investigation, steps should be taken to locate, preserve and prepare to produce all information (if it later becomes necessary), including electronically stored information, such as e-mail and data stored on computer hard drives, networks, servers and certain backup media that is, or may be, relevant to the subject matter of the potential litigation. Although not an exhaustive list, the following steps should be considered:

 a. Suspend all protocols that relate to the routine destruction of electronic and hard copy data that may be relevant to the litigation. This includes the overwriting and recycling of archive or backup tapes routinely used for storing and retrieving information. This is typically accomplished with the circulation of a “litigation freeze order” or “litigation hold.” As a general rule, a litigation hold does not apply to inaccessible backup tapes such as those maintained solely for disaster recovery purposes. Counsel can assist you in preparing and implementing a litigation hold.

b. Notify the key players who likely possesses relevant hard copy and electronic information, and instruct them (a) not to destroy any such information, (b) to preserve indefinitely all such information, whether stored in active or archived files, including on PDAs (e.g. Palm Pilots or BlackBerrys), laptops, computer systems or networks, and (c) to place any later-created relevant information into a separate electronic file appropriately labeled.

 c. Appoint a person who will be responsible for implementing, supervising and enforcing these safeguards. Counsel should meet with the person so designated to more fully explain the scope of that person’s responsibility and the current state of the law.

 3. Assess the Risk. Assess the merits of the potential claims with counsel. A detailed assessment of claims may lead to opportunities for an early resolution of a claim before engaging in protracted litigation.

4. Ensure Litigation Prerequisites Are Exhausted. Prior to the commencement of litigation, there may exist certain prerequisites that must be exhausted (administrative remedies, contractual requirements, pre-suit notice). In highly regulated industries, for example, there may be administrative regulations barring litigation, or certain steps that a party must take prior to going to court.

 5. Comply With Orders. At the commencement of litigation or afterwards, the court may issue orders relating to the production of information. Full compliance with any such orders will be extremely important. It is also very important that you notify counsel immediately if you become aware of any potential compliance failures, regardless of their perceived severity. Fulfilling all of these obligations will reduce the likelihood that discovery and document preservation issues will unduly impact the litigation.

While no company desires to be involved with litigation, these precautionary steps can help to manage the risks and costs of litigation.  Often it is important to have counsel involved in this initial phase in order to manage the process and look for other specific measures that should be undertaken to protect the client in the event of litigation.  This initial investment of resources in these types of preparatory actions can result in savings, both in terms of the overall exposure if litigation arises and the costs of litigation.

Lawsuits typically increase during a recession, but according to a recent article that is not the case during this recession (except for bankruptcy and employment suits of course). 

What’s different this time around?

According to the report, Elizabeth Scully, a partner at Baker Hostetler, says the high cost of electronic discovery has a lot to do with it.  “It’s a much more expensive process than it was even a few years ago,” she says.

Scully’s observation is definitely true.  The costs are huge these days, particularly since so much correspondence is conducted by e-mail which tends to be an unstructured document in most organizations.  By unstructured I mean that it is not filed the same way a paper document would be, where documents with different titles but related to the same subject matter or project still find their way into a single file folder. 

E-mail is different.  When searching e-mails, relevant documents get identified through broad electronic search terms that often pull up a lot of junk and in the final analysis still need to be read by people to narrow down the relevant universe.  It’s labor intensive. 

But Scully’s observation isn’t the entire story.  Corporate counsel James Shomper at E.I. du Pont de Nemours and Co has a slightly different take on the subject.  He cites du Pont’s own experience with the effectiveness of resolving disputes short of litigation. In 2008, for example, he says close to half of the company’s disputes involving money or other assets were successfully resolved outside of the courtroom and litigation.  In du Pont’s view it saved money and business relationships.

I’m encouraged by these developments.  If you’ve been reading this blog you know that I’m not a fan of litigation precisely because it is costly and no one really wins.  One side merely loses less. 

Sure, litigation is a necessary component of the business arsenal.  But it is better used as a strategic rifle shot than as a machine gun spray.  The best way to accomplish that is to create a system that embeds legal literacy into the corporate culture so that potential problems can be identified early and resolved while they’re relatively small and inexpensive.

Perhaps the silver lining to this recession being more proactive about managing their legal risk and resolving problems before they cause irreparable damage to valuable business relationships.  It’s the mark of both legal literacy and mature leadership.

Today I was reminded of a bad date I went on many years ago in the pre-cell phone age.  We were supposed to meet in front of a Greek restaurant for dinner.  We were both on time and we both thought we were at the front entrance.  Mine was on the pedestrian mall side.  His was facing the street.  The error wasn’t discovered until much later that evening when he accused me of standing him up.  Needless to say, it was all down hill from there.

Today’s reminder of the non-date from hell came courtesy of Monica Hesse’s fun article in today’s Washington Post about how communication styles can sabotage relationships.  Some people prefer text messaging to e-mail.   Others prefer Twitter or a phone call.  If, for example, they ignore their voice mail while waiting for a text message they might as well be standing at the wrong restaurant entrance. There is more opportunity than ever before to get it wrong.

Now imagine if that were to happen in a business context. 

Misunderstandings can easily arise due to terse text messages or lengthy e-mails that lack the intonations of a human voice and body language.  For customers who have little patience, those misunderstandings can quickly escalate from dissatisfaction to conflict to litigation.   

The lesson for businesses interested in controlling their legal risk is to choose their business communication channels wisely (rule #3).  To avoid creating a smoking gun document you’ll want to strive for clarity and accuracy (rule #7); but, to be “heard” and maintain a strong customer relationship you need to be in synch with your customer’s communications preferences.   The best legal risk management strategy marries the two concepts and strengthens the business relationship in the process. 

It’s a win-win.