Venture capitalist Mark Suster recently wrote a great post on startups and lawsuits (and the logic can apply to businesses that aren’t traditionally considered “startups”) and since thrust of his post seems to be about how to keep startups out of court, I wanted to write a little bit on the topic.
The topic should interest anyone who runs a business (even if you are not a VC-funded startup), as litigation can be an unexpected hit to even the most well-run business. I think about this topic a great deal, and want to get a little deeper into the issues he raises and take a sober look at what we can do to separate startups and lawsuits.
Startups and Lawsuits: What We Need to Know More About
Before getting into the topic, I want to highlight some points that Mark Suster makes so that we can get more clarity on the issue, and ideally, improve the legal system. I believe that lawyers have a duty to find ways to improve the legal system, and that begins by asking questions.
- Mark Suster asserts (admittedly anecdotally) that “lawsuits are becoming so prevalent these days”. I would argue that lawsuits have always been prevalent, but I want to know more about the assertion they are becoming more prevalent. I have questions about that. I would like to see some actually data to support the claim. Are they becoming more prevalent across all sectors? Just in startups? Just in startups in a certain sector? Among VC-funded startups? Among startups with whom Mark works? While I trust that Mark has an intuitive sense of these trends, I am not sure that there is a good empirical basis for the claim. I would like that empirical basis so that we can work on solving the problem, once it has been identified. Also, if there is an upwards trend of lawsuits targeting startups, could that be related to an increased number of inexperienced founders getting their companies into trouble?
- Mark Suster offers that “[t]here is not a single case I’ve been involved with in any of the startups I’ve backed that has even a small bit of merit.” This is a bold claim, so I want to know more. The best way to know more would be to get the case names/numbers so that I can look them up on PACER (or PACER Pro, for those with more discerning tastes) and see what claims and facts are asserted. I say it’s a bold claim because if there isn’t a small bit of merit in any of the suits, then they would have been dismissed. That they weren’t dismissed shows that there is at least a small bit of merit to them (and don’t take the lawyers’ word on the amount of merit – defense lawyers seem to claim that ALL cases filed against their client are meritless and frivolous. It’s pretty much copy paste.) I’m not saying that there aren’t meritless cases – there are – but that the term is used with particular abandon.
I raise these points in the interest of identifying the problem, so that we can reduce the number of lawsuits that startups are involved with.
Startups and Lawsuits: How Can We Reduce Them?
I see a big part of my job as keeping people and businesses out of court. I have represented plaintiffs and defendants in both federal and state courts, and it’s stressful, distracting and expensive for all involved. It sucks. If it can be avoided, it should be. Like Mark Suster, I want to see fewer lawsuits and no frivolous suits.
- Mark offers good ideas such as: form a business entity, get contracts, be careful in hiring and firing, etc. These are things that I tell my own clients. Done right, these are the kinds of things that can have the biggest impact on the number of lawsuits filed. As I alluded to above, there are many startups that are founded by inexperienced people who don’t do these things – they tend to be the ones that get sued because they failed to make the investment in getting their legal affairs in order from the start. It’s all about preventative medicine.
- Some commenters have suggested a loser pays system. There are some kinds of claims that do already give a prevailing party legal fees (and one can always include a legal fees provision in a contract that will make the loser pay – on some claims). Would definitely be interested in seeing what other types of legal actions can include an attorney’s fees provision by statute. If there is a penalty for frivolous suits, it makes them less likely to be brought (although it’s also important to understand that lawyers already have a disincentive to file frivolous suits – see Federal Rules of Civil Procedure Rule 11, for instance).
- Alternative dispute resolution. No amount of alternative dispute resolution (this means things like arbitration and mediation) will deter people intent on a shakedown, but they can reduce costs among parties with legitimate issues. No matter what, there will be conflict and alternative dispute resolution can reduce the costs of these issues. Parties should be willing to engage in these processes before resorting to litigation, and that might mean that they will have to refrain from wanting their lawyers to engage in “scorched earth” tactics right out of the gate.
- Empirical study of legal trends. There are some things we can know anecdotally, and some things that we can understand intuitively, but I would argue that legal trends do not fall into those categories. The good news is that we have plenty of data about what cases are filed and what the outcomes tend to be, and what produces those outcomes. I would like to see a more robust application of technology to this data set so that we can better direct legal resources to prevention (for instance, if we are seeing a rise in a particular kind of claim in a particular industry, lawyers should be able to proactively protect their clients from that liability). There are already smart people working on these problems, but we need more (and I think that if done right, a startup focused on this could produce greater than 10x returns).
Anyways, those are my thoughts.
