I've Been Sued ' And I Feel Fine, Because I Was <i>Prepared</i>

Then there's resignation ' followed by reality. How much will all of this cost, win or lose? (With the expense of litigation, it can be hard to tell the difference.)

Finally, there is practical business. What should I do next, to try to control the costs, and, not so incidentally, to win? (With luck, winning and controlling costs won't be incompatible goals; all too often, they are polar opposites.)

After all, going to court isn't just about winning ' it matters that you win at the least cost. You must, in the words of one client, try to avoid the “lawsuit hemorrhage” of fees and costs.

In other words, before either side's attorneys' meter begins to run, thinking seriously about whether paying a settlement will save you money in the long run. No matter how ridiculous or baseless the claim against you may seem, it will cost your firm real money to defend the case, even when your firm is totally in the right.

With 20/20 hindsight, settling before either side has paid or incurred fees may, in the long run, cost less and be easier for the plaintiff to accept (because her attorney can move on to the next case). Deciding that you want to stop the bleeding after outspending your legal budget won't ever get back what you have already paid.

Look at the Bright Side

To help you not be overwhelmed by all of these negative thoughts, consider a more positive perspective. Many e-commerce firms struggle to survive, or just get noticed. Being sued means just that someone has decided that it is worthwhile to spend money to take money away from you. While Main Street businesses often framed their first dollar, perhaps today's tech firms should proudly display the first complaint against them.

So what steps should you take when you get the complaint against you? First, assuming you will fight the case, don't panic. Most important, don't do something stupid in a rash effort to make the case go away. For example, don't destroy evidence (such as deleting e-mails), or intimidate witnesses. Getting sued is now routine in our litigious society. There is no reason to transform a losing case against you into a winner because you did not follow the rules.

Therefore, a big part of “don't panic” is knowing what to expect. For e-commerce firms (and their executives) who may have had only a short business career, dealing with trial lawyers (other than in the sunny context of a deal that gets everyone paid) may be a novel experience.

To get ready to defend yourself, prepare to be ready to answer the questions your attorney must ask immediately. If you are well prepared for that first call, then you can start to avoid fees from the onset of the case (not that there won't be plenty of fees along the way).

In this article, I propose practical strategies for handling the case, from the client perspective. Finally, I provide ' at no charge ' the very expensive lessons learned by clients who have contested a case to the (often bitter) end.

Finding Out

So, let's begin at the beginning. How do you know you were sued? A nasty attorney's letter threatening to sue isn't enough; it may be just a bluff to see whether you will settle without the expense of the complainer filing suit.

But even filing a complaint with a court isn't enough. The complaint must actually be “served” on you, meaning that it is delivered to you. Even so, the television drama of “avoiding service” is a fiction: If the process server doesn't find you at your regular place of business, courts will generally allow service by mail or even by publication in a newspaper (whether the target knows it or not).

That means you can save some time up front, because you don't have to plan to avoid the process server, or refuse to answer the door or phone; indeed, you may not be served that day, but it won't take long. In fact, trying to avoid service may create its own liability.

Global Concerns

For firms in e-commerce, which, quite often, may buy and sell throughout the world, international aspects of determining whether you have been served are even more complex. Although a detailed discussion of service process under The Hague Convention (the treaty governing procedure for cross-border lawsuits) is well beyond the scope of this article, businesses should know that just getting papers from a foreign court generally doesn't count, especially if you just get them from the opponent.

In the United States, the Department of State has been designated (by treaty) as the agency delegated to receive service of process. The State Department in turn has subcontracted that function to Process Forwarding International (PFI) of Seattle (see, http://bit.ly/MK4iFa and www.pfiserves.com/homepage.html).

Unless your firm receives a foreign complaint directly from PFI (or at least through a local sheriff or constable acting on behalf of PFI), you have not effectively been sued. Unfortunately, you may have to pay the cost of a formal legal determination just to find out you have gained the privilege of spending money to defend yourself.

(In some places, like Pennsylvania, where I practice, there are even ways to start a suit other than by filing a complaint, such as the filing of a summons. In some ways, receiving a summons, although shorter and easier to read than a complaint, is worse than getting a complaint, because it tells you only that a lawsuit has been started against your business, and by whom, but nothing about what you may have done that caused the suit to be filed. You have to delay your business decisions and wait until the plaintiff gets around to filing the complaint, the sole goal of which may well have been to interrupt your business.)

Detailing the Process

The opposite, however, is true from the perspective of a firm planning to use litigation as a tactical tool to achieve a business result. The speed and trivial cost of a summons procedure can often be the most cost-effective way to send a message to a rival, or to intimidate a former employee who has gone into competition in the na've belief that her old employer would not react.

Your lawyer will also need to know when and how you got the complaint. If you are not sure because it came in through your mail room, and took a few days to get routed to your desk, then it will be worth your while to find out exactly when it arrived ' and how. This information is critical for counting the number of days your counsel has to file an answer (or other pleading) with the court so that you do not get a judgment against you “by default,” that is, for failure to respond to the summons in the time allowed by the rules. She will also need to see exactly what you received, and, as important, any materials ' contracts or correspondence (including e-mail) ' relating to that matter.

Critical Legal Step ' Insurance

Moving beyond the housekeeping of defending against the complaint, you must also attend to several critical legal steps. Whether or not your firm has a regular attorney, you may have insurance coverage for the claims against you. Now is the time to learn why you made the smart choice by not buying the cheapest insurance policy, but rather made a careful decision with an experienced insurance professional on what coverages and carrier to pick.

Generally, carriers demand immediate notice of the claim. In fact, whenever you receive anything suggesting that you may soon be sued ' a threatening letter or phone call, for example, or knowledge of harm caused by your firm's products or services ' you should seriously consider notifying your carrier. This notice lets the attorney assigned by the carrier to act immediately to respond to the suit, and not lose opportunities to defend it that may not be available later. (But it should be kept in mind that coverage is not usually available for routine contract disputes, unless they involve specialized businesses for which additional coverages are available, such as advertising injury coverage.)

If you decide that you don't want to risk a premium increase, and delay notice ' to see whether you can settle the claim yourself, for example ' you may find that the carrier denies the coverage for which you paid. It will claim that it has been “prejudiced” by your delay in giving prompt notice of the possible claim.

If you are wondering whether you have coverage for the typical kinds of claims that may be filed against you, speak with your agent. If not, investigate the incremental cost of a policy that would provide such protection to your firm for next time ' and then buy that coverage. Knowing that someone else will pay your legal fees (less a deductible, of course) can be a great comfort. The move of acquiring the proper insurance coverages also allows you the luxury of planning a defense based on your lawyers' advice, rather than on what you can afford.

For e-Commerce e-Specially

The proliferation of digital data in all businesses has also led to the creation of special rules for handling not only electronic evidence, but all evidence in a case. However, where you are sued can make a big difference, because rules for digital evidence in federal and state courts are not the same.

In federal court, for example, the Rule 26(f) “meet and confer” conference about exchanging evidence occurs very early in the case. Typically, your IT director must attend. Because electronic discovery has become one of the greatest cost-drivers in litigation, this conference may be a way to plan, with the court's help, what costs can ' and cannot ' be avoided.

In contrast, some state courts still recognize that not all cases need blank-check legal budgets; instead, they recognize the burden of imposing the cost of digital-evidence tools on parties who may simply be unable to afford them. The risk of planning for a small case, however, is that the “smoking gun” evidence may exist only in a place you chose not to look so that you can save costs. For example, in my own practice, the ability to look back to comments in the metadata of earlier drafts of documents, created by people in firms that did not invest in tools to strip out metadata, has unearthed embarrassing comments by junior personnel that were at odds with the formal statements made by senior executives. In contrast, those who limit e-discovery to cut costs may never find the “smoke,” much less the “gun.”

Discovery Is Costly

In addition, while people's natural business instinct is to fight a case at whatever cost, today's technologies for locating and reviewing the terabytes of data routinely created in the ordinary course of business can quickly transform a small case into a very expensive one, unless the parties agree on a rational plan for handling electronic evidence at that conference. (If the parties have a great disparity in financial resources, it is not unheard of to use this process to make it impossible for one side to continue in the case, regardless of the merits.)

Indeed, having clients who have invested in modern digital security tools may be as important to the result of the case as anything the lawyers do. If “bad” evidence doesn't exist because of precautions taken by a firm's IT department ' routine deletion of old files or e-mail, for example, or stripping of metadata from anything that leaves the office ' then no legal strategy will be needed to undo the damage such evidence can cause. When considering an investment in security technology and data policies, in the words of the classic oil filter commercials, “you can pay me now, or pay me later.”

Litigation Holds

Once a suit has been filed, though, such planning is moot ' you have to live with the evidence that exists ' or lose with it. In particular, as more routine business information is created and stored electronically, businesses who have been sued must know that they have a legal duty to impose a “litigation hold” (see, “'Can't Touch This': Or, How to Stop Worrying and Love the Litigation Hold,” in the September 2008 edition of e-Commerce Law & Strategy; http://bit.ly/KqjJ1s).

The litigation-hold doctrine requires firms to preserve evidence for use by the court and other parties as soon as it appears likely that a claim will be made against a firm.

More than Just e-Mail

And the “duty to preserve” doesn't stop with e-mail ' it applies to all relevant business records, in whatever format they are generated and maintained. Whether in the format of e-mail, faxes, GPS geo-location data or Tweets, the proverbial smoking gun could be in any of them; and woe to you if the other side finds that critical piece of evidence that you did not turn over voluntarily.

In this digital age, don't forget that your firm probably still has paper files that also must be turned over in discovery. Similarly, check home computers and other places where damaging work files may lurk until discovered in litigation.

When You'd Rather Fight

Some assets are worth fighting for, particularly irreplaceable intellectual property (see, for example, “IP Litigation: What Is It Good For? Absolutely Not Business,” in the September 2009 edition of e-Commerce Law & Strategy; http://bit.ly/KDsiL3; and “Betting on Litigation: As in Poker, when Protecting Business Rights, Know when to Hold, Fold Or Just Walk Away,” in the November 2006 edition of e-Commerce Law & Strategy; http://bit.ly/KDsnP7).

But litigation can have other costs, besides what you must pay out in cash, such as diverted time and attention, or a reduced comfort level for the risk inherent in a new venture. One less obvious implication of litigation is the effect on financial statements, and auditors' reply letters. Many tech firms obtain reviewed or audited financial statements early in their existence to build a track record of verified results for future investors, as well as for current customers and vendors (see, “Dressing Your e-Business Up for Success,” in the June 2008 edition of e-Commerce Law & Strategy; http://bit.ly/PJkNSf.)

Non-Replies and Non-Answers

Still, long before a judgment has been rendered, your counsel will have to give your auditor an annual update on the lawsuit, and, most important, notice of whether the auditor should record a liability on your company's books for it (whether as the result of a loss, or simply the cost of defense).

Typically, because litigation often plays out over many years, and “success' can have many dimensions, counsel will reply with a canned “non-answer answer” to comply with the joint rules established by the legal and accounting professions for this process (see, http://bit.ly/MKCbWi).

For example, consider the following common “non-reply” reply:

Investigation and discovery are continuing. Management intends to contest the claim vigorously. It is too early in the litigation to formulate a specific estimate as to the likelihood of an unfavorable outcome, or the amount of any potential loss. The Company's insurance carrier has issued a reservation of rights in this case.

At some point, however, your counsel will have to give an honest but negative assessment. Consider the effect such a report may have on your new investors, lenders or customers, who may contact you with concerns about your firm's ability to survive.

But the questions you don't hear about after a “qualified” audit report may be worse. (A financial statement is “qualified” if it expresses a negative opinion, whether on a particular matter or on the company's ability to remain in business, and that whether as a result of the particular case, or general business results.) Even if the qualification is not highlighted in the news, or in any securities filing, rest assured that your competitors will make sure that your customers are asking questions about it.

Therefore, you must carefully consider your best course should you have such a Hobson's Choice. It may be to proactively notify those to whom you think the issue will matter, so that they hear about it with your own spin ' without any perception that you hid a problem. After all, like the boy who knows he has done something wrong, will you be penalized, more or less, if you publicly acknowledge the problem, rather than having to explain it after the fact once it has been “discovered” and announced to the world?

I Didn't Forget

Finally, I promised to share expensive lessons learned by clients who decided to defend a principle, rather than litigate on a budget. In one case, a small tech firm sued an employee who defected to a competitor, in violation of a non-competition agreement signed by all employees. The employee immediately countersued for substantial amounts of allegedly unpaid compensation and benefits he claimed he had never been paid. After rejecting numerous settlement offers, the firm eventually settled on a “walk-away” basis, because by that time, the legal fees had far exceeded any likely lost business due to the defection.

In another case, involving an acquisition allegedly aborted in bad faith to avoid incurring a $200,000 break-up fee, the litigation took a nasty turn because the people involved in the family-owned business viewed the claim as a challenge to their integrity. Much like the employee litigation, legal fees over avoiding the $200,000 charge are now approaching $1,000,000 ' a high price for integrity.

In both of these cases, getting sued shifted the clients' perspective from “business decision-making” based on costs and alternative uses of money and time ' what are the likely damages and the cost of litigation, and the potential settlement amount ' to “legal thinking,” in which right and wrong are divorced from cost. However, absent a fee-shifting statute, the costs of the legal system can never be recovered.

So, while the law doesn't, in theory, consider the cost of litigation, and who must pay them, who pays the costs matters in the real world, a lot, especially to smaller, uninsured firms (like many e-commerce players). Your firm may be able to survive the “best shot” of a lawsuit, but not the bills you receive from your attorney and trial consultants.

Rather than always absorbing someone else's “best shot,” though, consider instead learning to “roll with the punches” and always explore settlement options from the start of each case, on an economic basis. People in sophisticated firms view litigation as just another form of competition (albeit expensive), much like (according to Chinese leader Zhou Enlai) war is just a form of diplomacy.

It's the day every businessperson in America dreads: the day someone decides to sue you.

First, there is shock. There must be a mistake; what could you have done wrong? Your mind races, imagining all the horrible consequences you have seen on bad ' and good ' television.

Next, you get mad, really mad. How could they do this after all my company has done for them? This is even more galling, when you are sued by a former employee, or customer, you tried to treat right.

Then there's resignation ' followed by reality. How much will all of this cost, win or lose? (With the expense of litigation, it can be hard to tell the difference.)

Finally, there is practical business. What should I do next, to try to control the costs, and, not so incidentally, to win? (With luck, winning and controlling costs won't be incompatible goals; all too often, they are polar opposites.)

After all, going to court isn't just about winning ' it matters that you win at the least cost. You must, in the words of one client, try to avoid the “lawsuit hemorrhage” of fees and costs.

In other words, before either side's attorneys' meter begins to run, thinking seriously about whether paying a settlement will save you money in the long run. No matter how ridiculous or baseless the claim against you may seem, it will cost your firm real money to defend the case, even when your firm is totally in the right.

With 20/20 hindsight, settling before either side has paid or incurred fees may, in the long run, cost less and be easier for the plaintiff to accept (because her attorney can move on to the next case). Deciding that you want to stop the bleeding after outspending your legal budget won't ever get back what you have already paid.

Look at the Bright Side

To help you not be overwhelmed by all of these negative thoughts, consider a more positive perspective. Many e-commerce firms struggle to survive, or just get noticed. Being sued means just that someone has decided that it is worthwhile to spend money to take money away from you. While Main Street businesses often framed their first dollar, perhaps today's tech firms should proudly display the first complaint against them.

So what steps should you take when you get the complaint against you? First, assuming you will fight the case, don't panic. Most important, don't do something stupid in a rash effort to make the case go away. For example, don't destroy evidence (such as deleting e-mails), or intimidate witnesses. Getting sued is now routine in our litigious society. There is no reason to transform a losing case against you into a winner because you did not follow the rules.

Therefore, a big part of “don't panic” is knowing what to expect. For e-commerce firms (and their executives) who may have had only a short business career, dealing with trial lawyers (other than in the sunny context of a deal that gets everyone paid) may be a novel experience.

To get ready to defend yourself, prepare to be ready to answer the questions your attorney must ask immediately. If you are well prepared for that first call, then you can start to avoid fees from the onset of the case (not that there won't be plenty of fees along the way).

In this article, I propose practical strategies for handling the case, from the client perspective. Finally, I provide ' at no charge ' the very expensive lessons learned by clients who have contested a case to the (often bitter) end.

Finding Out

So, let's begin at the beginning. How do you know you were sued? A nasty attorney's letter threatening to sue isn't enough; it may be just a bluff to see whether you will settle without the expense of the complainer filing suit.

But even filing a complaint with a court isn't enough. The complaint must actually be “served” on you, meaning that it is delivered to you. Even so, the television drama of “avoiding service” is a fiction: If the process server doesn't find you at your regular place of business, courts will generally allow service by mail or even by publication in a newspaper (whether the target knows it or not).

That means you can save some time up front, because you don't have to plan to avoid the process server, or refuse to answer the door or phone; indeed, you may not be served that day, but it won't take long. In fact, trying to avoid service may create its own liability.

Global Concerns

For firms in e-commerce, which, quite often, may buy and sell throughout the world, international aspects of determining whether you have been served are even more complex. Although a detailed discussion of service process under The Hague Convention (the treaty governing procedure for cross-border lawsuits) is well beyond the scope of this article, businesses should know that just getting papers from a foreign court generally doesn't count, especially if you just get them from the opponent.

In the United States, the Department of State has been designated (by treaty) as the agency delegated to receive service of process. The State Department in turn has subcontracted that function to Process Forwarding International (PFI) of Seattle (see, http://bit.ly/MK4iFa and www.pfiserves.com/homepage.html).

Unless your firm receives a foreign complaint directly from PFI (or at least through a local sheriff or constable acting on behalf of PFI), you have not effectively been sued. Unfortunately, you may have to pay the cost of a formal legal determination just to find out you have gained the privilege of spending money to defend yourself.

(In some places, like Pennsylvania, where I practice, there are even ways to start a suit other than by filing a complaint, such as the filing of a summons. In some ways, receiving a summons, although shorter and easier to read than a complaint, is worse than getting a complaint, because it tells you only that a lawsuit has been started against your business, and by whom, but nothing about what you may have done that caused the suit to be filed. You have to delay your business decisions and wait until the plaintiff gets around to filing the complaint, the sole goal of which may well have been to interrupt your business.)

Detailing the Process

The opposite, however, is true from the perspective of a firm planning to use litigation as a tactical tool to achieve a business result. The speed and trivial cost of a summons procedure can often be the most cost-effective way to send a message to a rival, or to intimidate a former employee who has gone into competition in the na've belief that her old employer would not react.

Your lawyer will also need to know when and how you got the complaint. If you are not sure because it came in through your mail room, and took a few days to get routed to your desk, then it will be worth your while to find out exactly when it arrived ' and how. This information is critical for counting the number of days your counsel has to file an answer (or other pleading) with the court so that you do not get a judgment against you “by default,” that is, for failure to respond to the summons in the time allowed by the rules. She will also need to see exactly what you received, and, as important, any materials ' contracts or correspondence (including e-mail) ' relating to that matter.

Critical Legal Step ' Insurance

Moving beyond the housekeeping of defending against the complaint, you must also attend to several critical legal steps. Whether or not your firm has a regular attorney, you may have insurance coverage for the claims against you. Now is the time to learn why you made the smart choice by not buying the cheapest insurance policy, but rather made a careful decision with an experienced insurance professional on what coverages and carrier to pick.

Generally, carriers demand immediate notice of the claim. In fact, whenever you receive anything suggesting that you may soon be sued ' a threatening letter or phone call, for example, or knowledge of harm caused by your firm's products or services ' you should seriously consider notifying your carrier. This notice lets the attorney assigned by the carrier to act immediately to respond to the suit, and not lose opportunities to defend it that may not be available later. (But it should be kept in mind that coverage is not usually available for routine contract disputes, unless they involve specialized businesses for which additional coverages are available, such as advertising injury coverage.)

If you decide that you don't want to risk a premium increase, and delay notice ' to see whether you can settle the claim yourself, for example ' you may find that the carrier denies the coverage for which you paid. It will claim that it has been “prejudiced” by your delay in giving prompt notice of the possible claim.

If you are wondering whether you have coverage for the typical kinds of claims that may be filed against you, speak with your agent. If not, investigate the incremental cost of a policy that would provide such protection to your firm for next time ' and then buy that coverage. Knowing that someone else will pay your legal fees (less a deductible, of course) can be a great comfort. The move of acquiring the proper insurance coverages also allows you the luxury of planning a defense based on your lawyers' advice, rather than on what you can afford.

For e-Commerce e-Specially

The proliferation of digital data in all businesses has also led to the creation of special rules for handling not only electronic evidence, but all evidence in a case. However, where you are sued can make a big difference, because rules for digital evidence in federal and state courts are not the same.

In federal court, for example, the Rule 26(f) “meet and confer” conference about exchanging evidence occurs very early in the case. Typically, your IT director must attend. Because electronic discovery has become one of the greatest cost-drivers in litigation, this conference may be a way to plan, with the court's help, what costs can ' and cannot ' be avoided.

In contrast, some state courts still recognize that not all cases need blank-check legal budgets; instead, they recognize the burden of imposing the cost of digital-evidence tools on parties who may simply be unable to afford them. The risk of planning for a small case, however, is that the “smoking gun” evidence may exist only in a place you chose not to look so that you can save costs. For example, in my own practice, the ability to look back to comments in the metadata of earlier drafts of documents, created by people in firms that did not invest in tools to strip out metadata, has unearthed embarrassing comments by junior personnel that were at odds with the formal statements made by senior executives. In contrast, those who limit e-discovery to cut costs may never find the “smoke,” much less the “gun.”

Discovery Is Costly

In addition, while people's natural business instinct is to fight a case at whatever cost, today's technologies for locating and reviewing the terabytes of data routinely created in the ordinary course of business can quickly transform a small case into a very expensive one, unless the parties agree on a rational plan for handling electronic evidence at that conference. (If the parties have a great disparity in financial resources, it is not unheard of to use this process to make it impossible for one side to continue in the case, regardless of the merits.)

Indeed, having clients who have invested in modern digital security tools may be as important to the result of the case as anything the lawyers do. If “bad” evidence doesn't exist because of precautions taken by a firm's IT department ' routine deletion of old files or e-mail, for example, or stripping of metadata from anything that leaves the office ' then no legal strategy will be needed to undo the damage such evidence can cause. When considering an investment in security technology and data policies, in the words of the classic oil filter commercials, “you can pay me now, or pay me later.”

Litigation Holds

Once a suit has been filed, though, such planning is moot ' you have to live with the evidence that exists ' or lose with it. In particular, as more routine business information is created and stored electronically, businesses who have been sued must know that they have a legal duty to impose a “litigation hold” (see, “'Can't Touch This': Or, How to Stop Worrying and Love the Litigation Hold,” in the September 2008 edition of e-Commerce Law & Strategy; http://bit.ly/KqjJ1s).

The litigation-hold doctrine requires firms to preserve evidence for use by the court and other parties as soon as it appears likely that a claim will be made against a firm.

More than Just e-Mail

And the “duty to preserve” doesn't stop with e-mail ' it applies to all relevant business records, in whatever format they are generated and maintained. Whether in the format of e-mail, faxes, GPS geo-location data or Tweets, the proverbial smoking gun could be in any of them; and woe to you if the other side finds that critical piece of evidence that you did not turn over voluntarily.

In this digital age, don't forget that your firm probably still has paper files that also must be turned over in discovery. Similarly, check home computers and other places where damaging work files may lurk until discovered in litigation.

When You'd Rather Fight

Some assets are worth fighting for, particularly irreplaceable intellectual property (see, for example, “IP Litigation: What Is It Good For? Absolutely Not Business,” in the September 2009 edition of e-Commerce Law & Strategy; http://bit.ly/KDsiL3; and “Betting on Litigation: As in Poker, when Protecting Business Rights, Know when to Hold, Fold Or Just Walk Away,” in the November 2006 edition of e-Commerce Law & Strategy; http://bit.ly/KDsnP7).

But litigation can have other costs, besides what you must pay out in cash, such as diverted time and attention, or a reduced comfort level for the risk inherent in a new venture. One less obvious implication of litigation is the effect on financial statements, and auditors' reply letters. Many tech firms obtain reviewed or audited financial statements early in their existence to build a track record of verified results for future investors, as well as for current customers and vendors (see, “Dressing Your e-Business Up for Success,” in the June 2008 edition of e-Commerce Law & Strategy; http://bit.ly/PJkNSf.)

Non-Replies and Non-Answers

Still, long before a judgment has been rendered, your counsel will have to give your auditor an annual update on the lawsuit, and, most important, notice of whether the auditor should record a liability on your company's books for it (whether as the result of a loss, or simply the cost of defense).

Typically, because litigation often plays out over many years, and “success' can have many dimensions, counsel will reply with a canned “non-answer answer” to comply with the joint rules established by the legal and accounting professions for this process (see, http://bit.ly/MKCbWi).

For example, consider the following common “non-reply” reply:

Investigation and discovery are continuing. Management intends to contest the claim vigorously. It is too early in the litigation to formulate a specific estimate as to the likelihood of an unfavorable outcome, or the amount of any potential loss. The Company's insurance carrier has issued a reservation of rights in this case.

At some point, however, your counsel will have to give an honest but negative assessment. Consider the effect such a report may have on your new investors, lenders or customers, who may contact you with concerns about your firm's ability to survive.

But the questions you don't hear about after a “qualified” audit report may be worse. (A financial statement is “qualified” if it expresses a negative opinion, whether on a particular matter or on the company's ability to remain in business, and that whether as a result of the particular case, or general business results.) Even if the qualification is not highlighted in the news, or in any securities filing, rest assured that your competitors will make sure that your customers are asking questions about it.

Therefore, you must carefully consider your best course should you have such a Hobson's Choice. It may be to proactively notify those to whom you think the issue will matter, so that they hear about it with your own spin ' without any perception that you hid a problem. After all, like the boy who knows he has done something wrong, will you be penalized, more or less, if you publicly acknowledge the problem, rather than having to explain it after the fact once it has been “discovered” and announced to the world?

I Didn't Forget

Finally, I promised to share expensive lessons learned by clients who decided to defend a principle, rather than litigate on a budget. In one case, a small tech firm sued an employee who defected to a competitor, in violation of a non-competition agreement signed by all employees. The employee immediately countersued for substantial amounts of allegedly unpaid compensation and benefits he claimed he had never been paid. After rejecting numerous settlement offers, the firm eventually settled on a “walk-away” basis, because by that time, the legal fees had far exceeded any likely lost business due to the defection.

In another case, involving an acquisition allegedly aborted in bad faith to avoid incurring a $200,000 break-up fee, the litigation took a nasty turn because the people involved in the family-owned business viewed the claim as a challenge to their integrity. Much like the employee litigation, legal fees over avoiding the $200,000 charge are now approaching $1,000,000 ' a high price for integrity.

In both of these cases, getting sued shifted the clients' perspective from “business decision-making” based on costs and alternative uses of money and time ' what are the likely damages and the cost of litigation, and the potential settlement amount ' to “legal thinking,” in which right and wrong are divorced from cost. However, absent a fee-shifting statute, the costs of the legal system can never be recovered.

So, while the law doesn't, in theory, consider the cost of litigation, and who must pay them, who pays the costs matters in the real world, a lot, especially to smaller, uninsured firms (like many e-commerce players). Your firm may be able to survive the “best shot” of a lawsuit, but not the bills you receive from your attorney and trial consultants.

Rather than always absorbing someone else's “best shot,” though, consider instead learning to “roll with the punches” and always explore settlement options from the start of each case, on an economic basis. People in sophisticated firms view litigation as just another form of competition (albeit expensive), much like (according to Chinese leader Zhou Enlai) war is just a form of diplomacy.