How to Avoid Being Sued

 

1. Failing to Maintain Corporate Formalities

Businesses that fail to maintain proper corporate formalities expose their shareholders to potential liability by creating an opportunity for plaintiffs to argue that the court should "pierce the corporate veil." Corporate formalities include having bylaws, a board of directors that meets regularly, regular shareholder meetings and a stock ledger reflecting stock ownership in the company.  If a court pierces the corporate veil, plaintiffs may be able to pursue recovery against, not only the business, but its shareholders as well.

 

2. Failing to Properly Document Business Agreements and Transactions
Documenting commercial transactions and understandings creates a road map for business relationships while simultaneously establishing the parties' expectations. When businesses fail to keep appropriate records, changes in circumstances and differing recollections can create controversy between the parties, which can, and often do, erupt in litigation. These types of disputes are often avoidable if there is a paper trail that can speak authoritatively to the parties' original intentions.

 

3. Failing to Protect Trade Secrets and Confidential Information

While businesses expend substantial time and resources developing proprietary competitive advantages, it is equally important that efforts are made to protect confidential information. In fact, the law imposes unique obligations on businesses to proactively take steps to protect their trade secrets. For example, if a former employee brings a trade secret to their new employer, the former employer may have to resort to litigation to enforce its rights to the trade secret, and it may prove more difficult if the proper steps to document and protect the proprietary information have not been taken.

 

4. Failing to Choose an Appropriate Dispute Resolution Mechanism

Absent a clearly articulated arbitration provision stating the manner in which a dispute between the parties will be resolved, a business will be required to litigate in state or federal court. Litigation, as opposed to arbitration, is an inherently public process, which could result in exposure of a business' trade secrets.

 

5. Failing to Select a Forum to Resolve Disputes

Businesses that operate nationally or globally could incur substantial, even insurmountable, legal expenses if made to litigate wherever they conduct business. A plaintiff could be entitled to pursue claims against a national or global business in a variety of jurisdictions if the parties' agreement is unclear or silent about the location where disputes will be resolved.