Lawyers, Litigation and Recession: Thoughts for Small Businesses

Posted on August 19, 2008


In business circles, the common question these days is “How is the economy affecting your business?”  For each person and business, the answer varies.  The legal profession is no exception.  Ask most lawyers about the economy and you often hear – “We will be okay, there is usually an increase in litigation, which will help our business”.  When litigation increases, small business owners must take heed.

First, some empirical thoughts as to why litigation remains steady or increases in hard economic times:

  1. When one business is unable to pay its obligations, the solvent parties will often dispute who has to pick up the obligation.  For example, two people guaranty the debt of a company; company fails; debt is called; parties fight over who should pay the bank.
  2. A tightening economy leads to a tightening labor market which leads to layoffs and staff reductions, which leads to more employment litigation.
  3. A distressed business or individual has “nothing to lose”.   When a lawyer reviews a case, an important part of that analysis is the counterclaim.  Particularly in business litigation, an injured party may have injured the other party, and the counter suit or threat of counter suit deters litigation and encourages settlement. However, when someone is close to bankruptcy, they are not worried about a counterclaim.  If they get a million dollar verdict against them, they just bankrupt; if they prevail, then they can keep going.

Second, some ideas as to what a small business owner can/should do about it:

  1. Good risk analysis. Look at all your business relationships – suppliers, vendors, customers, stakeholders, etc.  Think through the exposure your company has if one of those were to disappear.  Have you made accommodations to help a supplier? That may give you plenty of goodwill, but how much money can you lose? What happens if a shareholder files for personal bankruptcy?
  2. Review documentation/contracts. Business is often done with relationships, which is often necessary and proper.  However, if one of your business relationships is in bankruptcy or receivership, you will not be dealing with your contact.  The oral relationship will be lost or seriously compromised.  Does the paper trail hold up? What do you have in writing?
  3. Don’t ignore problems. That nasty letter you received from an attorney; that disgruntled customer; the letter from the licensing bureau; they are not going to go away.
  4. Pay your taxes. Seems simple, but we have seen some business owners when faced with the choice between paying a mission critical account and taxes (particularly payroll taxes); the IRS should always be paid and if you are making that choice, you need to review your financial viability with competent professionals.

Links on the business of law firms:
If Recession Comes, Will Firms Be Hit?
Does Your Law Firm Have What It Takes to be Recession Resistant?

Mike Goodrich, Goodrich Law Firm, LLC