Executive summary.................................................................................................................... ix About the author......................................................................................................................... xiii Acknowledgements.................................................................................................................... xv Introduction............................................................................................................................... ..... xix PART ONE: UNDERSTANDING WHY COMPANIES ARE ENSNARED IN COSTLY LITIGATION....................................................................................................... 1 Chapter 1: The Five Cs of Business Litigation Risks............................................... 3 Creating a business litigation risk profile.................................................................. 4 The closely-related regulatory risk profile................................................................ 8 Assessing commercial litigation risks – a five-part framework.................... 10 PART TWO: CORPORATE GOVERNANCE LITIGATION RISKS – CLAIMS FROM SHAREHOLDERS AND OTHER CONSTITUENTS OF THE BUSINESS ................................................................................................................... 15 Chapter 2: Basics of Corporate Governance Litigation ..................................... 17 Understanding shareholder litigation – a useful metaphor ........................ 18 Four recurring themes of corporate governance litigation ........................... 23 Seven legal concepts useful to understanding corporate governance litigation............................................................................................................................... ...... 27 Chapter 3: Ten Sources of Corporate Governance Lawsuits............................ 37 1. Irreconcilable differences between ill-suited business partners......... 37 2. Failing to maintain the formalities and other best practices .............. 39 Contents iv Contents 3. Giving employees equity interests resulting in dual sets of obligations........................................................................................................................ 41 4. Disputes over informational rights of shareholders, members and partners ............................................................................................................................. 42 5. Misleading constituents through fraudulent statements or omissions .......................................................................................................................... 44 6. Breach of fiduciary duty claims............................................................................. 47 7. Failing to make reasonable inquiries concerning risks to the company............................................................................................................................ 52 8. Failing to implement a code of ethics and effective corporate compliance program .................................................................................................. 53 9. Commingling and other separateness issues............................................... 55 10. Dealing with creditors and facing insolvency .............................................. 56 PART THREE: LITIGATION RISKS FROM COMMERCIAL CONTRACT DISPUTES........................................................................................................... 61 Chapter 4: Core Issues in Breach of Contract Litigation.................................... 63 The six issues raised in contract-based litigation claims................................. 70 Conclusion............................................................................................................................... .. 89 Chapter 5: Strategies for Managing Litigation Risks Arising from Commercial Contracts............................................................................................................. 93 1. Manage the contracting and approval process......................................... 93 2. Formalize informal agreements ......................................................................... 95 3. Be aware of the risk of preliminary agreements and agreements to agree............................................................................................................................. 96 4. Scrutinize the scope of express indemnity provisions............................. 97 5. Address termination scenarios and the risk of precipitous terminations .................................................................................................................. 98 6. Specify which contract terms survive termination.................................... 99 7. Craft time limits and cure provisions that are appropriate.................. 100 8. Consider how joint venture duties arise.......................................................... 101 9. Include an effective integration clause .......................................................... 102 10. Guard against claims that a contract was fraudulently induced .... 103 11. Prevent claims that a contract was modified by subsequent conduct and effectively modify written agreements............................. 104 v Avoiding and Managing US Business Litigation Risks 12. Preclude claims for extraordinary damages ................................................ 106 13. Control where the battle will be fought and jurisdictional waivers............................................................................................................................... 109 14. Ensure favorable law will be applied................................................................. 110 15. Consider the pros and cons of arbitration .................................................... 111 16. Decide whether an attorney fee provision is beneficial ......................... 120 17. Determine whether there are strategic benefits to waiving a jury trial ............................................................................................................................... ....... 121 Chapter 6: Lawsuits Arising from Negotiations and Implied Obligations............................................................................................................................... ....... 125 Surprise contract formation ........................................................................................... 128 Liability for bad faith during contract negotiations ......................................... 132 Misuse of confidential information obtained in negotiations .................... 137 Coercive negotiations constituting economic duress....................................... 139 Practical ways to reduce the risks of claims arising from contract negotiations ............................................................................................................................ 140 Avoiding claims for breach of the implied covenant of good faith and fair dealing...................................................................................................................... 145 PART FOUR: CUSTOMER CLAIMS INCLUDING CONSUMER PROTECTION CLASS ACTIONS, PRODUCT LIABILITY, AND BREACH OF WARRANTY CLAIMS................................................................................. 151 Chapter 7: Customers Presenting Consumer Protection and Class Action Risks............................................................................................................................... ...... 153 US class actions – a tough pill to swallow............................................................... 155 Overview of US class actions ......................................................................................... 156 The rise in pre-filing settlements ................................................................................. 164 The California class action framework .................................................................... 165 The interrelationship between state consumer protection claims and federal regulations............................................................................................................... 171 Chapter 8: A Framework for Identifying Consumer Class Action Risks.... 177 1. What is said about the product or service?................................................... 178 2. What is not said about the product or service? .......................................... 186 3. What is said about the price, including fees and charges? .................. 187 4. What is said about competitors in the market?.......................................... 190 vi Contents 5. What is said about the transaction?................................................................. 192 6. How are the advertising statements conveyed?........................................ 195 Chapter 9: Three Additional Litigation Risks Specific to Product Sales and Distribution .......................................................................................................................... 207 Breach of warranty claims .............................................................................................. 209 Product liability claims....................................................................................................... 220 Prop 65 Claims........................................................................................................................ 227 Chapter 10: Strategies for Mitigating Specific Customer Litigation Risks ............................................................................................................................... ..................... 237 Identify and prioritize the greatest customer litigation risks....................... 238 Re-examine regulations that may buttress customer claims....................... 238 Monitor regulatory activity ............................................................................................ 239 Become familiar with relevant litigation trends................................................... 239 Review insurance policies and exclusions ............................................................... 240 Explore indemnity rights and obligations............................................................... 241 Consider SRO guidance, industry, and voluntary standards......................... 242 Assess documentation relating to products or services advertised, distributed, or sold to customers ................................................................................. 242 Consider and utilize customer service data............................................................ 243 Confirm effective assent to contract terms........................................................... 244 Focus on integration clauses and contract modification rules.................... 246 Address arbitration clauses and an effective class action waiver............. 247 Limit time periods to the extent permitted ........................................................... 248 Disclaiming implied warranties to the extent permitted................................ 251 Limit liabilities and remedies to the extent permitted..................................... 251 Consider product recall issues........................................................................................ 252 Consider disproportionate liabilities that arise from incorporating component parts or ingredients in a product....................................................... 253 Negotiate acceptable quality limits and failure rate provisions for large volume sales................................................................................................................ 254 Chapter 11: Claims Relating to Data Privacy and Cybersecurity.................. 259 History and origins of privacy protections.............................................................. 261 A “cradle-to-grave” approach to privacy liabilities.............................................. 262 vii Avoiding and Managing US Business Litigation Risks Privacy regulations applicable to particular industries and contexts...... 280 The ten questions to ask in evaluating risks of data privacy claims......... 282 PART FIVE: COMPETITOR LAWSUITS INCLUDING MISAPPROPRIATION, INTERFERENCE, INTELLECTUAL PROPERTY, AND ANTITRUST CLAIMS..................................................................... 291 Chapter 12: Litigation Risks Relating to Competitors.......................................... 293 The eight most common litigation theories asserted between competitors.............................................................................................................................. 294 Things to consider before suing a competitor ..................................................... 327 PART SIX: CREWMEMBER LITIGATION – CLAIMS BROUGHT BY, BECAUSE OF, OR AGAINST EMPLOYEES ................................................................. 337 Chapter 13: Crewmember Claims and other Liabilities Relating to Employees ............................................................................................................................... ........ 339 The most common claims by employees against employers ..................... 340 Preventing and reducing employment claims...................................................... 362 Claims arising from employees’ tortious actions................................................ 368 When to sue an employee............................................................................................... 371 PART SEVEN: LITIGATION MANAGEMENT AFTER A LAWSUIT IS FILED............................................................................................................................... ............. 381 Chapter 14: The Essentials of Commercial Litigation Management......... 383 Litigation presents a complex set of problems for companies................... 384 Complex problems require creative solutions....................................................... 385 1. Pre-litigation communications and demands.............................................. 388 2. Pleading stage and initial forum fights............................................................ 393 3. Discovery .......................................................................................................................... 399 4. Pre-trial merits determination .............................................................................. 402 5. Trials and arbitration hearings.............................................................................. 403 6. Post-trial motions, appeals, and enforcement of judgments............... 407 viii Contents Chapter 15: Foundational Litigation Management Decisions....................... 413 Choosing and engaging the right flight crew........................................................ 413 Working through the preflight checklist................................................................... 421 Revisiting the flight plan .................................................................................................. 427 Controlling litigation costs .............................................................................................. 428 Chapter 16: Managing the Litigation Process from Discovery to the Conclusion of the Matter....................................................................................................... 437 Managing the three most important aspects of discovery .......................... 437 The landing .............................................................................................................................. 450 Completing the circle.......................................................................................................... 455