[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.

For unsuccessful companies, risk is a hot topic in the depths of a recession.  For great companies, it’s a hot topic at the height of a boom.

Geoff Colvin, “Time to Plan For the Next Recession,” Washington Post, September 29, 2009

Managing business risk when times are good is smart advice.  Managing litigation risk before you get sued is also smart advice.  

If you’re wondering about what you should do before you get sued, be sure to join me on Wednesday when Ask the No Nonsense Lawyer interviews attorney Kathy Lang of Dickinson Wright on what to do if you think you’re about to get sued.

This complimentary program starts at 8 pm Eastern (5 pm Pacific) and you can receive the call-in information by submitting a questions at Ask the No Nonsense Lawyer.  Hope to “see” you then and also hope that yours is one of the questions I’ll be asking Kathy Lang on Wednesday. 

Be a great company.  Click here now and get ahead of the liability curve.

It’s hard to digest the Wall Street headlines of the past week:  Lehman filed for bankruptcy, AIG got a huge loan and Uncle Same as a business partner, Merrill Lynch got a new home, and other bank merger talks were in high gear.

It’s the latest after shock of the collapsed U.S. hosing (sic) market.  It’s a collapse that has led to foreclosures of brick and mortar homes and now the collapse of Wall Street’s house of cards.

Some fingers wag and point to the “Housing Bubble” as the source of all our woes, as if there is a Mr. Bubble* out there plotting and planning the demise of Western capitalism by giving us all a “bath.”  Others point to insufficient regulation.  The situation appears hopelessly tangled to Main Streeters, and to a few Wall Streeters too.  But there is probably one thing we can all agree on: we feel betrayed.

There has been a colossal breach of trust involving obscene amounts of money.  Tax payers are now being asked to foot the bill for a financial frat party while those who work at the other end of the salary/bonus food chain are losing their homes and struggling to keep gas tanks full.

Last week I found an interesting piece by Michael E. Lewitt shortly after the Bear Stearns fiasco last Spring.  As an industry insider, Mr. Lewitt provides a fascinating look behind the scenes.  He points to short sightedness, excess leverage in unregulated activities (sounds like Enron’s off the books accounting, doesn’t it?), as well as a narrowly focused notion of fiduciary duty as part of the problem.  The structural problems we’re facing, he says boil down to “bad economic policies and bad political values.”

The blame game will no doubt continue for the next 18 months or more while our policy makers in Washington, including the new administration, figure out what to do.  If Enron and Worldcom have us Sarbanes-Oxley, you can be sure that this debacle will bring additional regulation and oversight too.  It’s merely a question of when.

So what does all this stuff on Wall Street have to do with Main Street and your day-to-day business activities?  Well, it’s food for thought on several fronts:

1.  To what extent is your business turning a blind eye to the ethics of certain profitable activities?  Is overconfidence creating a business blind spot?  Relying, for example, on lax enforcement of certain regulations or the fact that there are no regulations can backfire.  Being accountable to a government regulator is no fun.  But having one look over your shoulder and help you make business decisions, as AIG is about to find out, is even less fun.  Yet, that’s exactly what happens in deferred prosecution agreements.  Big Brother won’t prosecute, but in exchange they become your business “partner” until there is sufficient confidence that you have the necessary systems in place to “do the right thing.”

2.  To what extent are lawyers giving their clients the green light on whatever they want just to keep the clients happy and make a few bucks?  Take for example the case of the alleged Ernst & Young tax shelter fraud:  Wealthy clients asked friendly law firms to write opinion letters assuring them that their tax shelters were “likely” to survive scrutiny if the IRS challenged their legality.  One big firm lawyer has already pleaded guilty to tax fraud charges, another has paid the IRS $39.4 million to avoid criminal charges and his lawyer says his client and the accounting execs were “only guilty of greed.”  He makes it sound like a temporary head cold instead of the character flaw that it is.

3.  To what extent is your business tying compensation to short-term performance and encouraging risky behaviors that jeopardize long term stability?  Take a moment to stand back and examine your business policies and the behaviors they are driving.  Could they be improved to better align company actions with sound business practices and good decision making.

Let’s keep the bubbles in the tub.

*Mr. Bubble is a registered trademark of Ascendia Brands.

By now you’ve probably heard the news that two venerable Wall Street firms hit the skids this past weekend.  Merrill Lynch has a new Daddy in Bank of America and Lehman is the kid no one picked for their team.  They’ve now filed for bankruptcy.

In an interesting OpEd article, William R. Gruver ponders the impact of the 1999 repeal of the Glass-Steagall Act, the ensuing concentration of banking power, and how such concentration contributed to the current crisis on Wall Street.  He looks at the regulatory environment that failed to keep pace with market realities and notes: 

“We need a system that focuses on the prevention of crimes and crises . . . instead of aiming only for after-the-fact discovery and punishment.  Right now, the Securities and Exchange Commission conducts backward-looking audits, searching for past transgressions.  Instead, federal regulators should focus on guiding companies, helping them to adhere to sound principles of risk management and to avoid imprudent business practices”

Gruver’s regulatory recipe sounds like great advice for any type of self-regulation or business compliance effort.  After all, it’s always cheaper to learn from someone else’s mistakes and to anticipate problems before they occur than expect a bailout with unacceptable strings attached.  

So let the current Wall Street debacle provide some pearls of wisdom and ask yourself:  

1. What steps is my company taking to anticipate problems?
2. Could our compliance program use a little tune-up?  If yes, what are we waiting for?