In a classic example of what not to do, fellow blogger Michael D. Young tells how iFreedom Communications International Holdings Ltd wound up with a whopping $4.1 billion arbitration award against it in a case involving the termination of a senior level employee without cause.  That’s not a typo.  Seriously, its billions with a big bucks capital B.

In an interview on the topic with the National Law Journal, Young explains how iFreedom ended up on the nosebleed section and had the arbitration award affirmed by a Los Angeles Superior Court judge.  It makes for interesting reading and offers some great legal literacy lessons:

1. Legal literacy lesson #1: Arbitrations are not dress rehearsals.  They are the real deal and can be as binding as a jury trial, if not more binding.  After this decision, you’re bound to see more arbitration clauses including a right of appellate review.

2. Legal literacy lesson #2: fail to produce requested documents at your peril.  If you watch a lot of TV crime dramas and think you have the right against self incrimination — you’re absolutely right — in a criminal case.  But in a civil context, you do have a legal duty to produce self incriminating documents and if you don’t produce them the law rightfully assumes you failed to do so because they’re highly incriminating.  That means ”they can’t prove it” can work against you the same way those missing minutes did on the Watergate tapes. 

Here the defendant failed to produce requested financial information.  The financial data was important because the plaintiff’s compensation agreement said he was going to be paid a commission of 5% of gross sales.  There was also a sweetener in the agreement that provided for commissions to be paid on an ongoing and permanent basis if the employee was terminated without cause. 

Without the company’s financial documents, the arbitrator and the plaintiff looked to available public information about the company’s sales.  What they found was a letter iFreedom sent to its shareholders announcing a monthly revenue of $535,000 and a growth rate of 10% per month.  The information caused the numbers to multiply into the eight figure range very quickly.

3.  Legal literacy lesson #3: know the rules.  Not knowing that negative inferences could be made in a civil case from missing evidence probably had a lot to do with the fact that iFreedom fired its attorney and the owner elected to represent the company.  If you don’t know the rules of evidence and of court, it’s probably best you hire someone who does to represent you.

4.  Legal literacy lesson #4: recognize when you’re in over your head.  One of the challenges of any leadership position is to “know” your limits and what’s outside your area of expertise.  This is a corollary to lesson #3.  When faced with a legal issue, particularly a lawsuit, you need to be represented by competent counsel.  A lawyer would have been able to advise iFreedom about the potential for punitive damages that could, and in this case did, triple, the underlying base award — and that’s how it got to $4.1 billion.

5. Legal literacy lesson #5: check your ego at the door.  Don’t have a hissy fit and not show up at the arbitration the way iFreedom did.  Putting your head in the ground ostrich style only make your hind quarters stand out as a bigger target than it already is.

Avoid iFreedom’s pitfalls and you’ll put yourself and your company in a more defensible position.