Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi About the author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi Commercial litigation avoidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii Effective management of business litigation . . . . . . . . . . . . . . . . . . . . . . . . xxiv Foreign companies facing US litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxvi A California emphasis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxvii A litigator’s unique perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxviii Assumptions and audiences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxix 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 . . . . . . . . 11 Part two: Corporate governance litigation risks– claims from shareholders and other constituents of the business . . . . . . . . . . . . . . . . . . . . . 17 Chapter 2: Basics of corporate governance litigation . . . . . . . . . . . . . . . . . . 19 Understanding shareholder litigation – a useful metaphor . . . . . . . . . . 20 Four recurring themes of corporate governance litigation . . . . . . . . . . . 25 Seven legal concepts useful to understanding corporate governance litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Chapter 3: Ten sources of corporate governance lawsuits . . . . . . . . . . . . . 39 1. Irreconcilable differences between ill-suited business partners . . . 39 2. Failing to maintain the formalities and other best practices . . . . . . 42 3. Giving employees equity interests resulting in dual sets of obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4. Disputes over informational rights of shareholders, members and partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5. Misleading constituents through fraudulent statements or omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 6. Breach of fiduciary duty claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7. Failing to make reasonable inquiries concerning risks to the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8. Failure to implement a code of ethics and an effective corporate compliance program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 9. Commingling and other separateness issues . . . . . . . . . . . . . . . . . . . . . 59 10. Dealing with creditors and facing insolvency . . . . . . . . . . . . . . . . . . . . . 60 Part three: Litigation risks from commercial contract disputes . . . 65 Chapter 4: Core issues in breach of contract litigation . . . . . . . . . . . . . . . . 67 Navigating troubled waters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Is there an enforceable contract? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 How and where is this dispute going to be resolved? . . . . . . . . . . . . . . . . . 79 What are the substantive contract terms? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Are there statutory overrides for the contract or specific terms? . . . . . 84 Were the contractual duties performed or excused (breach)? . . . . . . . . . 88 What are the remedies for a breach of contractual duties? . . . . . . . . . . . 91 Chapter 5: Strategies for managing litigation risks arising from commercial contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 1. Manage the contracting and approval process . . . . . . . . . . . . . . . . . . . . 97 2. Formalize informal agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 3. Be aware of the risk of preliminary agreements and agreements to agree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 4. Scrutinize the scope of express indemnity provisions . . . . . . . . . . . . 101 5. Address termination scenarios and the risk of precipitous terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 6. Specify which contract terms survive termination . . . . . . . . . . . . . . . . 104 7. Craft time limits and cure provisions that are appropriate . . . . . . . 105 8. Consider how joint venture duties arise . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 9. Include an effective integration clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 10.Guard against claims that a contract was fraudulently induced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 11. Prevent claims that a contract was modified by subsequent conduct and effectively modify written agreements . . . . . . . . . . . . . . 110 12. Preclude claims for extraordinary damages . . . . . . . . . . . . . . . . . . . . . . . 112 13. Control where the battle will be fought and jurisdictional waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 14. Ensure favorable law will be applied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 15. Consider the pros and cons of arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 117 16. Decide whether an attorney fee provision is beneficial . . . . . . . . . . . 126 17. Determine whether there are strategic benefits to waiving a jury trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Chapter 6: Lawsuits arising from negotiations and implied obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Liability for bad faith during contract negotiations . . . . . . . . . . . . . . . . . . 141 Misuse of confidential information obtained in negotiations . . . . . . . . 145 Coercive negotiations constituting economic duress . . . . . . . . . . . . . . . . . 147 Six practical ways to reduce the risks of claims arising from contract negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Avoiding claims for breach of the implied covenant of good faith and fair dealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Part four: Customer claims including consumer protection class actions, product liability, and breach of warranty claims . . . . . . . . . . . . 161 Chapter 7: Customers presenting consumer protection and class action risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 US class actions – a tough pill to swallow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 Overview of US class actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Basic requirements of a class action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 The history and policies behind federal and state consumer protection statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 The role and duties of class action lawyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 How class action lawyers make their millions . . . . . . . . . . . . . . . . . . . . . . . . 171 Why class counsel fee awards are exorbitant . . . . . . . . . . . . . . . . . . . . . . . . . 172 How class actions are settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 The rise in pre-filing settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 The California class action framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 The interrelationship between state consumer protection claims and federal regulations . . . . . . . . . . . . . . . . . . . . . . . . 183 Chapter 8: A framework for identifying consumer class action risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 What is said about the product or service? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 What is not said about the product or service? . . . . . . . . . . . . . . . . . . . . . . . 198 Facts pertinent to health and safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 What is said about the price, including fees and charges? . . . . . . . . . . . . 200 What is said about competitors or the market? . . . . . . . . . . . . . . . . . . . . . . . 204 What is said about the transaction? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 FTC’s “Click to Cancel” rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 How are the advertising statements conveyed? . . . . . . . . . . . . . . . . . . . . . . . 210 Chapter 9: Additional litigation risks specific to product sales and distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Breach of warranty claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Express warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 Implied warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 Modifications and disclaimers of warranties . . . . . . . . . . . . . . . . . . . . . . . . . 228 Overview of the Magnuson-Moss Warranty Act . . . . . . . . . . . . . . . . . . . . . . 230 Song-Beverly Consumer Warranty Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 The New Jersey pitfall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Product liability claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Chemical exposures in products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 How Prop 65 works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 Prop 65 litigation claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 The problems presented by Prop 65 claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Avoiding a Prop 65 claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 Chapter 10: Strategies for mitigating specific customer litigation risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 1. Identify and prioritize the greatest customer litigation risks . . . . . 256 2. Re-examine regulations that may buttress customer claims . . . . . 256 3. Monitor regulatory activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 4. Become familiar with relevant litigation trends . . . . . . . . . . . . . . . . . . . 257 5. Review insurance policies and exclusions . . . . . . . . . . . . . . . . . . . . . . . . . 258 6. Explore indemnity rights and obligations . . . . . . . . . . . . . . . . . . . . . . . . 259 7. Consider SRO guidance, industry, and voluntary standards . . . . . . . 260 8. Assess documentation relating to products or services advertised, distributed, or sold to customers . . . . . . . . . . . . . . . . . . . . . . 261 9. Consider and utilize customer service data . . . . . . . . . . . . . . . . . . . . . . . 261 10. Confirm effective assent to contract terms . . . . . . . . . . . . . . . . . . . . . . . 262 The rise in consumer class action waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 The other risk – mass arbitrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 The period in which to reject non-conforming goods . . . . . . . . . . . . . . . . 269 The period in which to bring a lawsuit (contractual statute of limitations) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 11. Limit liabilities and remedies to the extent permitted . . . . . . . . . . . . 271 12. Consider product recall issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 13. Consider disproportionate liabilities that arise from incorporating component parts or ingredients in a product . . . . . . 274 14. Negotiate acceptable quality limits and failure rate provisions for large volume sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 Chapter 11: Claims relating to data privacy and cybersecurity . . . . . . . . 279 History and origins of privacy protections . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 A “cradle-to-grave” approach to privacy liabilities . . . . . . . . . . . . . . . . . . . . 283 1. The collection of consumer data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 2. Uses and sharing of consumer data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 3. Disclosures to the consumer regarding their data . . . . . . . . . . . . . . . . 294 4. Responses to consumers’ requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 5. The protection of consumer data from a breach . . . . . . . . . . . . . . . . . . 300 6. The required notices relating to a data breach . . . . . . . . . . . . . . . . . . . . 303 7. The disposal of consumer data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 Privacy regulations applicable to particular industries and contexts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 The ten questions to ask in evaluating risks of data privacy claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Part five: Competitor lawsuits including misappropriation, interference, intellectual property, and antitrust claims . . . . . . . . . . 317 Chapter 12: Litigation risks relating to competitors . . . . . . . . . . . . . . . . . . . 319 The eight most common litigation theories asserted between competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 1. Misappropriation of trade secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 2. Other litigation claims relating to employee mobility . . . . . . . . . . . . 333 3. Registrable intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 4. Other Lanham Act claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 5. Trade disparagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 6. Antitrust violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 7. California’s Unfair Competition Law and Unfair Practices Act . . . . 351 8. Common law interference claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 Things to consider before suing a competitor . . . . . . . . . . . . . . . . . . . . . . . . 354 Part six: Crewmember litigation – claims brought by, because of, or against employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 Chapter 13: Crewmember claims and other liabilities relating to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 The most common claims by employees against employers . . . . . . . . . 368 Preventing and reducing employment claims . . . . . . . . . . . . . . . . . . . . . . . . 392 Claims arising from employees’ tortious actions . . . . . . . . . . . . . . . . . . . . . 398 Unethical or corrupt practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 Part seven: Litigation management after a lawsuit is filed . . . . . . . . 413 Chapter 14: Essentials of managing the six stages of commercial litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Stage 1: Pre-litigation communications and demands . . . . . . . . . . . . . . . . 417 Stage 2: Pleading and initial forum fights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 Stage 3: Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 Stage 4: Pre-trial merits determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 Stage 5: Trials and arbitration hearings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 Stage 6: Post-trial motions, appeals, and enforcement of judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437 Chapter 15: Foundational litigation management decisions . . . . . . . . . . 445 Selecting the right flight crew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445 The economics of litigation management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 Working through the preflight checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 Triangulated litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 Revisiting the flight plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 Controlling litigation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 Chapter 16: Further tips for navigating the litigation process to a successful conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 Depositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475 1. Know the ground rules – the “blocking and tackling” of depositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 2. Know the issues in the case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 3. Know the unpleasant surprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 4. Know what you don’t know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 5. Know what you should know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479 The three problem deponents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 Expert witnesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 The landing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483 Private mediations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484 Court officers and settlement conferences . . . . . . . . . . . . . . . . . . . . . . . . . . . 484 Timing of settlement (the 80/20 rule) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485 A company’s evolving position on settlement . . . . . . . . . . . . . . . . . . . . . . . . 486 Business solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 Alternatives to settlement or trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 Stipulated judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 Closing thoughts on commercial litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 About Globe Law and Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495