Litigation

Litigation is the process that occurs when a court is asked to determine a dispute between two parties. In criminal cases, those parties are the government and a defendant, and the “dispute” begins with law enforcement officers charging the defendant with a crime. Civil cases, on the other hand, involve two private parties and begin when the plaintiff, the party wronged, serves a statement of claim on the defendant, the party who committed the wrong. Civil litigation usually arises after attempts to resolve the issue privately have failed. Most of the litigation that corporations find themselves involved in is civil in nature.

This entry first discusses the criminal law and the criminal justice system’s process. It then talks about civil lawsuits and the litigation process. It concludes with a discussion of examples of litigation that corporations might find themselves facing.

Criminal Law

Criminal law involves crimes against society. Defendants are charged with a crime and prosecuted by a district attorney. They are found either innocent or guilty. If guilty, they face potential fines, jail sentences, and probation. Clearly, corporate officers and employees can be charged with criminal offenses. But what about the corporation, which is an artificial entity? A corporation cannot physically commit a crime. Nor can it go to jail. As early as 1909, however, the U.S. Supreme Court held that because corporations could be held accountable for the misdeeds of their employees in civil actions, they should also be held responsible for their crimes.

It should be noted that corporations will not be responsible for the actions of employees who sought their own personal gain. Martha Stewart, Inc., for example, was not charged with lying to investigators about insider trading; only Martha Stewart herself was. But if employees use illegal means to boost the organization’s profits and benefit shareholders, the corporation may be charged. For example, in 1987, Beech-Nut Nutrition Corporation was charged and convicted of knowingly adulterating one of its products, an apple juice for babies, because its president and vice president were aware of and condoned the action. Beech-Nut was fined $2 million as a result.

But why bother prosecuting a corporation when the actions are really those of employees? One reason is that the threat of criminal liability acts as a deterrent. It is relatively easy for a corporation to blame a few rogue employees for bad behavior, but if the entire corporation is seen as committing a criminal act, the damage to its reputation can be insurmountable. Guilty corporations are usually subjected to fines, as was the case with Beech-Nut, but sometimes they are put under probation, which means that a judge oversees aspects of the business for a period of time.

The Criminal Case

Following an investigation by law enforcement officers, a defendant is arrested and taken before a magistrate for a preliminary hearing. At that time, the nature of the charges is presented to the magistrate. If the magistrate decides that there is probable cause or sufficient evidence to warrant a trial, he or she will set the terms of the defendant’s release or bind the person over for trial. The next step is for the defendant to be officially charged with the offense and arraigned on it. An arraignment involves the reading of the charge and a plea of guilty or not guilty by the defendant. The matter then moves toward trial before either a judge or a jury. At trial, the prosecution must prove that the defendant is guilty beyond a reasonable doubt. That onus is a heavy one to protect innocent people from incarceration by the government. The defendant and the prosecuting attorney can agree to a plea bargain at any time before the conclusion of the trial to settle the matter.

Civil Law

Civil law, on the other hand, involves disputes between two private parties. Lawsuits are initiated by a plaintiff, who believes that he or she has been harmed by a defendant’s actions, if the two parties have been unable to resolve their differences. The purpose of a civil lawsuit is to restore the plaintiff to the position he or she was in before the wrong occurred. Obviously, it is not always possible to do that. When it is, the plaintiff will seek equitable relief, which will require some action on the part of the defendant. For example, if the plaintiff is suing because he or she was sold a defective product, the court can order the defendant to provide a replacement product. When it is not possible to restore the plaintiff to the position he or she was in prior to being wronged, the defendant is required to pay monetary damages. A defendant in a civil action is found either liable or not liable for the damages caused to the plaintiff. As indicated earlier, corporations can be sued civilly for harms caused by their employees in the course of their duties.

Civil Litigation Process

The plaintiff starts litigation by serving a statement of claim on the defendant. The claim must set out the facts that establish the injuries suffered by the plaintiff and attribute those injuries to the defendant’s actions, and ask for monetary or equitable relief. If the matter is not resolved, the plaintiff begins the discovery process, in which the defendant is sent a list of questions called interrogatories, seeking information about the dispute. In addition to reviewing copies of relevant documents, the plaintiff may depose the defendant in person. The deposition is recorded by a court reporter. If the defendant chooses to challenge the lawsuit by filing an answer or a counterclaim, he or she is also permitted to depose the plaintiff.

The discovery process may be completed in a couple of weeks, or it may stretch out over several years depending on the complexity of the allegations. In most states, the parties are required to attend a settlement conference to see if the matter can be amicably resolved. If it cannot be, it is scheduled for trial before a judge or a judge and jury to decide whether and to what extent the defendant is responsible for the plaintiff’s injuries. The trier of the case (either the judge or the jury) must decide the outcome based on a preponderance of the evidence; that is, the winner will be the side that establishes the more probable version of the events. At any time, the parties can settle the matter, and civil cases are often settled prior to or even during trial. Once a settlement is reached, litigation ends.

Corporate Civil Litigation

Corporations regularly find themselves subject to civil litigation either as plaintiffs or as defendants. Some examples of the legal issues that may arise include contract law, intellectual property infringement, and product liability.

Contract Law

All business transactions are contracts and subject to contract law. A contract is an agreement between two parties that sets out the obligations of both sides. For a valid contract, an exchange must be made. In most contracts, the exchange involves money for goods or services. The contract spells out the responsibilities of each party, and those terms are binding on each. Lawsuits arise when one party does not live up to its responsibilities or fulfills them in a way that the other party deems insufficient. For example, Just for Feet, an athletic shoe and sportswear retailer, contracted with the advertising agency Saatchi and Saatchi to develop an ad for Super Bowl XXXIII in 1999. The ad that ran produced an immediate backlash, with many in the public calling it racist at worst, insensitive at best. Just for Feet refused to pay Saatchi and Saatchi for the work, so the ad agency sued on the basis of the contract. Just for Feet counterclaimed for $10 million, arguing that Saatchi and Saatchi had not, in fact, fulfilled its end of the contract. Just for Feet argued that it had relied on the ad agency’s expertise and the result was a disaster. Just for Feet later dropped its countersuit and declared bankruptcy.

Intellectual Property Infringement

Intellectual property encompasses three areas of the law: (1) copyright, (2) trademark, and (3) patent. All three protect various aspects of a corporation’s business that are intimately tied to reputation. As a result, corporations tend to be actively on the lookout for infringers.

Copyright

Copyright protects original works of authorship from infringement for a certain period of time. Its purpose is to encourage creativity by ensuring that writers, artists, choreographers, software developers, and so on have exclusive control over the use and reproduction of their works for a limited time. To use the work of others during the time it is copyright protected, consent must be obtained from the author. When the infringement is clear, consent becomes the issue at trial. For example, Beastie Boys sued Monster Beverage over the company’s use of the group’s music in one of the company’s promotional videos. The jury agreed that Beastie Boys had not consented to the use of their music and awarded them $1.7 million for copyright infringement. In other cases, especially involving music, infringement itself is the issue. In 2015, a federal jury ruled in a lawsuit against songwriters Pharrell Williams and Robin Thicke, deciding that their song “Blurred Lines” had copied Marvin Gaye’s song “Got to Give It Up” and awarding about $7.4 million to Gaye’s heirs.

Trademark

Trademark law protects the goodwill or reputation of a company by governing the use of brand names and other words or symbols associated with a product or service. Businesses are prohibited from using someone else’s mark in connection with any goods or services. The act also prevents a business from falsely describing or representing its own goods and services or another person’s goods or services. For example, Hershey sued a Colorado marijuana company for federal trademark infringement because the marijuana company was selling pot-infused candy that mimicked Hershey’s Almond Joy, Heath, and Reese’s peanut butter cups. The infringing candy was named Ganja Joy, Hasheath, and Hashees, and the packaging used Hershey colors. The marijuana company agreed to recall or destroy its candy as part of a settlement agreement with the chocolate company.

Corporations monitor the use of their trademark-protected names or symbols to prevent infringement and dilution. If a mark becomes diluted, it has become generic and is no longer protected from use by others. But in seeking to prevent dilution, corporations need to be careful not to appear overzealous. The public does not always understand the legal complexities of the concepts of infringement and dilution. The golf course Pinehurst Resort, located in the village of Pinehurst, North Carolina, used trademark infringement lawsuits to force a number of businesses in the village to drop Pinehurst from their name, arguing that the name belonged to the company, not the village. The company’s aggressive stance angered many in Pinehurst. In a full-page ad in the local newspaper, the company apologized for being overzealous and for its failure to communicate well.

Patents

Patents grant patent holders the exclusive right to make, use, and sell their patented innovations for a limited period of time. Patents are granted for any process, machine, manufacture, or composition of matter. Because the lawsuits usually involve complex, technical issues, they do not generate the public reaction that other lawsuits do. They also often are between two competitors rather than between a corporation and an individual. For example, in 2011, Apple sued its competitor Samsung for patent infringement, arguing that Samsung had “stolen” some of Apple’s technological innovations for its own smartphone devices. A jury agreed that Samsung’s phones looked and felt almost identical to Apple’s and awarded Apple $1 billion.

Product Liability

When a corporation sells a defective product or a product that causes harm, it can find itself the subject of a product liability lawsuit. Litigation as a result of injuries suffered in a car accident because of a defective automobile part, such as a faulty airbag, is an example of a product liability lawsuit. In most product liability cases, courts apply what is known as strict liability; that is, the corporate defendant will be held responsible for the harm regardless of fault. Once the plaintiff proves injury and that the defendant was responsible for it, the defendant is liable regardless of whether the defendant intended to cause harm.

Litigation and Corporate Reputation

Litigation can directly affect a corporation’s reputation. Suing a competitor for a breach of trade secrets, for example, may not affect public opinion because the two parties are equals. But if Apple, for example, sued a small, start-up company, the public’s perception might be different. In 1990, McDonald’s Corporation sued two activists for defamation after the couple made allegations about the quality of the meat found in the fast-food chain’s burgers. The British court hearing the case found in favor of McDonald’s, but the public thought less of the company for going after the little guy. Although some lawsuits are unavoidable, corporations should weigh the risks to their reputation before bringing any suits.

When corporations are defendants, the damage to their reputation can be swift. High-profile lawsuits garner media interest as soon as they are filed with the court. Even before legal counsel has seen the statement of claim, the media are asking the corporate defendant for a response. By the time the corporation is in a position to make a public statement challenging the plaintiff’s position, the damage has already been done. The public perceives the corporation to be responsible for the plaintiff’s injuries. Apart from the public perception risk, lawsuits are also expensive in terms of monetary and personnel resources. Litigation can be time-consuming. The deposition process can spread out over years and may require the attention of many different corporate departments. Each step along the way to trial can lead to media attention, bringing the issue before the public again and again.