What is a Threat of Legal Action?
Threatened legal action is precisely what it sounds like. Threatened legal action may be indicated by receipt of a letter or formal notice that a lawsuit or similar legal action will follow if an outcome is not obtained to the business transaction the threatened legal action relates to, or receipt of a document indicating commencement of legal action, where both possibilities are present. Common situations where such a threat or action may occur include contract disputes, before- or post-litigation mediation , serious collection matters where in-person contact or in-transit communication has broken down and an escalation has become necessary, and, of course, where existing litigation is ongoing and discovery of the underlying cause for the legal action is forthcoming by the other side such that it is reasonable to predict there will be subsequent legal action based upon the discovery of that cause. In such circumstances, an individual or business entity should consider whether their response should be taken in-house or whether use of an outside dispute resolution expert or lawyer is better-suited for the situation.
Typical Causes of Threatened Actions
Typically, threatened legal action arises out of a legal issue with a counterpart party. The most common situations that precipitate legal threats include contractual disputes, employment issues, property disputes, and defamation claims. Contractual disputes usually involve a disagreement about a provision of an agreement, a refusal to perform an obligation, or interference with performance. Employment issues include violations of employment agreements, discrimination, overtime and wage issues, and harassment. Property disputes often involve boundary disagreements, landlord-tenant issues, neighboring property disputes, damage to improvements, etc. Defamation issues usually involve the senior executive or other employee making a statement about another entity or its leadership/student body. Additional circumstances that may precipitate a threatened legal action include (in no particular order): intellectual property ownership issues, non-compete issues, issues concerning approved or denied insurance claims, violations of licensing agreements, or failure to make payments due.
First Steps on Receiving a Threat of Legal Action
While being threatened with a lawsuit does not always result in an actual lawsuit, it is crucial to take these threats seriously. Even if a lawsuit has not been filed yet, victims of threats of legal action need to plan a course of action to avoid facing a case in court, even before consulting an attorney. Finding a way to mitigate any real or potential damages through the use of alternative dispute resolution can be preferred to facing a lawsuit. A lawsuit can be both an expensive and time-consuming fate. This is why it is necessary to have a plan of action ready should you be threatened with legal consequences. It is imperative that defendants take immediate action: The most important aspect of your immediate response is to be aware of the details of the threat. It will be necessary to document every detail that you know about the threat so that you can then assess its legitimacy. Create a written summary of the phone call or email in which you were threatened and make sure to obviously exclude any written language that was used. Maintain this in a place with careful privacy as you will likely need to go back to your record later to refresh your memory on the details. The next step is to contact a legal professional to guide you through the process of the impending action. Before approaching counsel, ensure that you have reviewed your file and organized it in a manner where you can quickly assess the details. As with most claims, there is a statute of limitations, so once you have both the cause of action and begin recognizing the threat, it is crucial to reach out to an attorney and inform them of the situation.
Legal Rights and Protections
Individuals or businesses threatened with legal action often have rights and protections customers may not realize, including consumer protection laws, anti-harassment statutes, and even remedies to challenge unjust or vexatious threats of legal action.
Consumer Protection Laws
The federal Fair Debt Collection Practices Act (FDCPA), and many state consumer protection laws including Ohio’s Consumer Sales Protection Act (CSPA), provide options to consumers threatened with litigation – especially alleged breach of contract or debt collection litigation. The FDCPA, for example, protects consumers from harassment or abusive language relating to collection actions, and provides consumers with a full range of protection from aggressive and unscrupulous litigants and collection attorneys. Among other things, debt collectors cannot use unfair practices, harass, oppress, or abuse someone in connection with a debt collection, and deceitful or misleading conduct is prohibited.
Anti-Harassment Statutes
Even non-consumer transactions, such as manufacturer-supplier disputes or payment for services, are protected from undue pressure or intimidation prior to the filing of a lawsuit. For example, Ohio law prohibits harassment or coercion to collect a debt or enforce a right.
Procedural Protections Against Vexatious Threats
If threatened litigation escalates into an actual lawsuit, other remedies may be available. In Ohio, for instance, a complaint seeking to collect consumer debt that is based on contact made outside the limitation period is subject to dismissal upon a motion filed at any time before final judgment; a consumer may also recover attorney fees upon a successful motion to "dismiss or grant judgment on the defense of expiration of the statute of limitations." Regardless of whether a consumer can prove the debt is indeed stale, the threat of motion practice may deter debt collectors from pursuing stale claims. Similar procedures and protections are available for other types of alleged claims against consumers, including matters relating to commercial transactions, security deposits and landlords, and other types of debt collection claims.
In some cases, businesses faced with repeated threats of legal action may have the option of seeking an injunction against the threatening party. In Ohio: "’A clear request for threatened injury will constitute a request for injunctive relief, and will support a mandatory injunction.’" Such a remedy may be appropriate in circumstances where threats of future litigation are made to coerce, harass, or intimidate the threatened party, where the threatened parties are numerous, and there are no realistic remedies available in state court.
In addition to seeking injunctive and other forms of relief under statutory provisions or the Rules of Civil Procedure, civil litigants may also pursue monetary damages against a party that maliciously or unjustly threatened legal action.
Negotiation and Settlement Strategies
The key in responding to a threatened legal action is to negotiate a reasonable settlement at an early point. This means you don’t wait for the other side to sue you or for a demand letter to come from a third party. A prompt response, demonstrating a willingness to work with the other side to try and resolve their concerns preserves your settlement options and keeps the cost of any litigation you may face to a minimum.
Negotiation and settlement options vary depending on the nature of the matter and the stage of the potential dispute. You likely already know that most lawsuits and other forms of legal action are required to be disclosed to potential purchasers and lenders. Buyers and lenders will want to consider the merits of the threatened action in determining the deal terms they wish to pursue. The threat of a legal action – even one which has little merit – may have a dramatic impact on the purchase price or on the degree of indemnity protection afforded by the seller.
Once a lawsuit is issued, the degree to which the matter is disclosed will have a significant impact on the perception buyers and lenders may have of the matter. A lawsuit can lull buyers and lenders into a false sense of security due to their belief that the reported status of the action means it has some legitimacy and corporate counsel is now seized of the matter – even if they are not.
A lawsuit also precludes settlement or negotiations from proceeding as promptly as they might if a claim has been simply issued. Litigation can be a plodding process, often extending well beyond the time-certain closing date and possibly well beyond the time-certain dates for interim stages of the litigation. Buyers and lenders will be wary of significant changes in a threat as it morphs to become a lawsuit . A buyer or lender may well question why the seller did not address the matter promptly at the outset, and react accordingly in determining its level of risk comfort.
Mediation is a great way to settle a matter provided the other side is motivated to settle. Generally, parties on both sides of the dispute (or even other parties with only a tangential interest) can attend the mediation and bring a representative who has the authority to settle. In this way, the representatives can usually decide the matter at the mediation, although pre-existing positions will have some bearing. It is key to have a good mediator – someone who can be an effective co-conductor of the mediation and expound upon the merits and shortcomings of both sides of the matter, so as to foster some consensus.
Arbitration is less useful to address a threatened or existing legal action. An arbitrator or panel of arbitrators will have the power to make a binding decision and would likely see some advantage in doing so notwithstanding the lack of a compelling factual predicate for his/her conclusion. Nonetheless, some arbitrators are better than others, with some being quite aggressive in requiring a disciplined approach to consider the matter and addressing issues as they arise before they are blown out of proportion.
Directly negotiating the matter is perhaps the least palatable option, given the generally low regard people tend to have for lawyers and the notion they may be partaking in a theatrical production in the negotiations to win sympathy and buy time from the affected party. If you believe you can avoid litigation and conclude an amiable settlement with the claimant without scorning them, it may have value.
When to Defend in Law
When the claim being threatened is of a serious consequence, whenever possible, you should NOT ignore the threat, but take professional advice about the circumstances and whether you need to mount some sort of defence. For example, if your financial position was such that you were facing potential bankruptcy proceedings, then you should not leave it to the last minute before attempting to get a supplier’s high court judgment retracted, preferably by convincing the supplier that there is no money in the company, it is being improperly pursued at their cost, or by suggesting what could be done to help them avoid bankruptcy proceedings.
When people within your business suggest leaving the issue to settle itself (as many do) or that "lawyers will sort it out", take their comments with a pinch of salt, perhaps even check up on whether you have the insurance that will help you out or the funds stashed away to afford the legal advice needed. It is never an appropriate alternative to try to avoid a problem or to ignore it; always take legal advice, be it formal or informal counselling until the matter is satisfactorily resolved, preferably without the need to go to any form of trial.
Case Studies: Reviewing Past Threats of Litigation
Jenna was excited to start her own clothing line. But one day, she received a letter from one of her suppliers. They claimed that Jenna’s new name and logo too closely resembled their own. "We demand that you shut down your business immediately," the email warned. Afraid to proceed, Jenna reacted quickly. She paid an attorney to draft a quick response to the supplier. The attorney carefully pointed out how many other companies use a similar name and how Jenna’s new logo is completely different. One day later, the supplier retracted its letter. In this case, Jenna’s quick reaction helped to settle the issue.
Fred was running a successful credit repair company. He received a letter from an attorney representing a company who claimed that Fred had copied their online advertisement but changed a few words. "Please cease and desist all use of this advertisement template," the attorney emailed Fred. However , that wasn’t the real problem. The company that Fred was charging $30/month to help clean up his customers’ credit reports didn’t even exist. Fred had received this letter although the company was never real. This was just an attorney trying to make a quick buck off an unsuspecting victim. Fred contacted an attorney who sent a letter back to the claimant notifying him of the fraudulent action. Fred was concerned that the claimant would continue his efforts to defraud others so he contacted his local news station to alert them to the problem. Fred’s quick action may have prevented another victim.
Konspek Sanitary Products, Inc. developed a disposable cloth known as NST (New Soft Technology). They shipped their product under the name NST to Hewlett Packard and its’ exclusive distributor. After receiving a "cease-and-desist" letter from a law firm representing a digital printing company, Konspek decided to cease using the NST mark as the name of their product, but never requested court approval for the name change. Later on, a state court held that HP and the distributor were still liable for infringement because HP’s distribution of the product under the NST mark continued despite HP’s informed consent as to the mark’s invalidity.
Although the injunction against the use of the NST mark was not entered by consent, HP voluntarily agreed to a settlement to avoid the decision of the Fourth Circuit (HP, however, did not admit liability).