Client Alerts - Business Litigation Jun 02, 2020

Businesses Should Take Steps to Protect Themselves in the Event of Litigation

As Western New York Reopens, Businesses Should Take Steps to Protect Themselves in the Event of Litigation

The COVID-19 pandemic has rocked the business world. Some companies have slowed (or shut down) based on stop-work orders or government mandates, while others ramped up to service “essential” industries with increased demand. In either case, however, nearly all companies navigated new challenges of remote-service transitions, opportunistic competitors, and supervising off-site employees. All the while, the inevitable disputes arising in this period of flux have been in legal limbo, as New York State courts limited their operations to “essential” matters, effectively bringing new civil business lawsuits to a halt.

However, this has recently changed. On May 25, 2020, New York State courts lifted restrictions on non-essential civil cases. This permits new lawsuits addressing the vast majority of business disputes, including breach of contract, non-payment for services, non-compete violations, intellectual property infringement, fraud and self-dealing.

The result could very well be a deluge of new lawsuits throughout and beyond June. Businesses should get their affairs in order now, whether they have a claim requiring legal counsel and the court’s intervention, or if they anticipate being served with a lawsuit.

To that end, businesses can take preemptive (and relatively simple) measures now – and implement them – ideally, in coordination with counsel. This includes:

  • Conduct an IT audit. One size does not fit all, and rarely do all e-mails need to be reviewed, particularly for large companies. That said, at a minimum, review login and logout times. Where suspicious patterns appear—particularly when they coincide with other suspicious trends—a deeper review may be warranted.
  • Review accounts receivable. Has a longstanding, reliable client suddenly stopped paying? In that case, reach out to get a dialogue going. Has a historically inconsistent client stopped making payments? In all likelihood, payment is not forthcoming, and the business should plan accordingly. It may be time to instruct outside counsel to send a letter demanding payment (and, if applicable, late fees, interest and reasonable attorneys’ fees).
  • Communicate with employees. Does the business have any reported concerns regarding competitors, or suspicious conduct of co-workers? Loyal employees are often a critical source for helpful information. While it is possible that remote operations reduced the amount of discussion time, checking in with employees is worth the extra effort.
  • Employees who left the business right before or during the COVID-19 “PAUSE.” Check LinkedIn and other social media to see where they are working now. Review any non-compete agreements for such former employees, and consider whether they have been (or may soon be) violated. Even if they are not subject to a non-compete agreement, some employees have a duty of loyalty to their former employer. In either case, if they were (or still are) using this pandemic as their cloak for disloyal conduct, investigating and documenting such conduct early might help to stop such efforts before they gain momentum.
  • Drafting critical e-mails and other correspondence. Consult with outside counsel for important pieces of written communication, particularly if they are sensitive. Counsel can assist with messaging advice to accurately communicate the position of the business and to avoid statements that could be misinterpreted or misconstrued.
  • Preservation letters. During the shutdown and related circumstances, businesses may be especially vulnerable to irregular recordkeeping. If the pandemic kept a business from commencing a lawsuit or vindicating its rights, the business may consider sending a letter from its attorney demanding that the adversary preserve all records relevant to the case. If it turns out they failed to do so, the letter may be an important tool when litigation moves forward. Also, take heed if a lawsuit against the business is expected—bad recordkeeping can be as damaging as bad records, so do not let the pandemic cause a lapse in record preservation practices. Consult with outside counsel about whether current preservation practices will properly protect the business against a claim of spoliation.
  • Consider any special accommodations made during the pandemic. Take stock of any “interim” arrangements or modifications to existing agreements (extended deadlines, forgiven defaults, reduced supply contracts, quotas, etc.), and be sure they are well-documented and appropriately articulated. Regardless of what may have been said when such arrangements were reached, informal promises may quickly evaporate depending on the economic climate. Likewise, review current contracts for force majeure or “act of God” provisions. The terms of such provisions may impact whether the pandemic, or related government shutdowns, will excuse performance under the agreement.

Taking these and other steps not only provides a preemptive advantage in subsequent litigation, but may also reduce anxiety during this stressful time. Preparation on the front end may prove invaluable as disputes unfold. As always, businesses should confer with outside counsel to take appropriate action.

Additional Assistance

For further assistance, please contact Tristan D. Hujer at (716) 504-5728, thujer@phillipslytle.com; William V. Rossi at (716) 847-7022, wrossi@phillipslytle.com; a member of the Coronavirus (COVID-19) Response Team; or the Phillips Lytle attorney with whom you have a relationship.

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