5 Reasons to Sue in Business Litigation
Even in the most contentious of business disputes, the first step is typically to seek an informal resolution. In most cases, it will be in both parties’ best interests to avoid the burdens of litigation; and, with level heads, open minds, and sound legal advice, oftentimes disputing parties can find a way to come to terms and move on.
But, in some circumstances, litigation is unavoidable. Whether it is necessary to seek emergency relief or negotiations have reached an impasse, sometimes the only choice is to take your dispute to court. While it should be noted that even these types of disputes can be (and often are) resolved via settlement, the following are among the issues that are most likely to require complex business litigation.
Contract and Commercial Disputes that Commonly Result in Business Litigation
I. Breach of Contract
Contract disputes are among the most common causes of action in business litigation. There are many varieties of contractual disputes, including failure to meet contractual obligations, non-compliance with specific contractual clauses, and breaches of implied covenants. Below are several examples of contractual disputes.
A. Payment or Performance Obligations
Perhaps the most basic form of contractual dispute arises when one or both parties fail to live up to their payment or performance obligations. From disagreements about the scope of work to differing interpretations of delivery and payment timelines, numerous obligation-related issues have the potential to end up in court.
In a typical contract, one party (the “Payor”) agrees to pay another party (the “Payee”) a certain amount of money in return for the Payee’s commitment to providing a good or service to the Payor. For example, the Payor may agree to pay $100 for the Payee’s television. In this situation, the Payor has a payment obligation of $100, and the Payee has a performance obligation of providing the television. In another example, the Payee may agree to paint the Payor’s fence for $75. Under this scenario, the Payee had a performance obligation to paint the fence, and the Payor had a payment obligation to remit $75. If either party fails to live up to its end of the bargain, the other party may have a legal cause of action for breach of contract.
In reality, contract disputes are rarely that simple. For instance, the Payee may deliver the television to the Payor, but the Payor may determine that the television is defective and refuse to pay $100. Here, the Payee may believe it has a cause of action for breach of contract because the Payor did not meet its payment obligation, but the Payor may also believe it has its own cause of action for breach of contract because the Payee’s delivery of a defective television did not satisfy its performance obligation. Likewise, a dispute may arise if the Payee paints a smaller section of the fence or uses a lower quality of paint than the Payor anticipated and the Payor thereafter withholds some or all of the promised fee.
To prove a claim for breach of contract, a plaintiff must prove each of the following elements:
- A valid contract existed;
- The plaintiff performed or attempted to perform its contractual obligations;
- The defendant breached the contract; and
- The plaintiff incurred damages as a result of the defendant’s breach of the contract.
Wright v. Christian & Smith, 950 S.W.2d 411, 412 (Tex. App. – Houston [1st Dist.] 1997).
Notably, bad faith is not an element of a breach of contract claim. R.R. Comm’n of Tex. v. Gulf Energy Exploration Corp., 482 S.W.3d 559, 575 (Tex. 2017). Therefore, the breaching party may be legally liable to the non-breaching party even if the breaching party did not intend to breach the contract and otherwise acted in good faith throughout the transaction. In the context of the examples above, if the Payee’s television broke before its delivery – due to no fault of the Payee – the Payor may still have a claim against the Payee if it incurred damages due to the Payee’s failure to deliver a working television.
B. Breach of Confidentiality
Confidentiality breaches by vendors, customers, and employees will often lead to litigation as well. Many business contracts, including employment contracts, vendor contracts, and services contracts, include confidentiality clauses that prevent one or both of the parties from detailing specified information. Typical examples of protected information include the terms of the agreement, information about the parties’ business practices or products, valuable data, such as customer lists, or legally protected data, such as patient medical information.
1. Monetary and Liquidated Damages
Where one part has wrongfully disclosed confidential information, the non-breaching party may sue to recover the financial damages it incurred as a result of the breach of confidentiality. Examples of such damages include loss of business, unfair competition, and reputational harm.
Because the damages caused by a breach of confidentiality can be extremely difficult to evaluate with the particularity needed in court, contracts with confidentiality clauses typically include a liquidated damages clause. Liquidated damages clauses specify an amount of damages that a breaching party will owe the non-breaching party in the case of a breach of contract. These clauses save the parties and the court from a protracted legal battle over the value of nebulous concepts such as damage to a business’s reputation.
2. Injunctive Relief
In the event of a breach of confidentiality, companies often must act quickly to curtail the distribution of their confidential information. In many cases, this means seeking emergency relief in the courts in the form of injunctions. Injunctions are court orders that prevent a person or entity from doing something. In the event of a confidentiality breach, the non-breaching party may request that the court order the breaching party to stop using or disclosing confidential information.
Injunctions are considered an extreme remedy because they typically bar a party from doing something that the party would otherwise have a lawful right to do. Nonetheless, once an injunction is put in place, courts take them very seriously. As injunctions are court orders, violation of an injunction is considered contempt of court. Courts have wide discretion for punishing violation of court orders, including judicial sanctions and even having the violator put in jail.
There are forms of injunction that vary in severity: temporary restraining orders (TROs), preliminary injunctions, and permanent injunctions.
TROs are the fastest and easiest injunctions to obtain, but they also are the least enduring. TROs are appropriate in emergency situations where the breaching party’s conduct threatens imminent damage to the non-breaching party unless it is immediately stopped.
In Texas, TROs may be issued with or without notice to the party against whom they take effect. However, Texas law imposes additional restrictions on TROs granted without notice to the non-moving party. The party requesting the unnoticed TRO must prove to the court that it will suffer immediate and irreparable harm if it must wait for the court to conduct a hearing on the TRO request. Tex. R. Civ. P. 680. If an unnoticed TRO is granted, unless good cause is shown, it cannot have effect for longer than fourteen days and it can only be extended once for a similar period of time. Id. The effectiveness of an unnoticed TRO will automatically terminate upon the expiration of its set term. Id. Under other circumstances, the court will only grant a TRO after the non-moving party has been notified and the court has conducted a hearing on the injunction. Id.
b. Preliminary Injunctions
Preliminary injunctions (also called “temporary injunctions”) have a longer duration than TROs. They are often used to prevent a party from either doing something or stopping something during the pendency of a litigation. See e.g. Jon Scott Salon, Inc. v. Garcia, 343 S.W.3d 532, 534 (Tex. App. – Dallas [5th Dist.] 2011). For example, where a professional athlete challenges a league-imposed punishment through the court system, the athlete may seek a preliminary injunction to prevent the league from enforcing the penalty until disposition of the court case. Preliminary injunctions are also regularly used in intellectual property cases.
A court may only issue a preliminary injunction after the non-moving party has been notified and offered the opportunity to participate in a hearing on the matter. Tex. R. Civ. P. 680-81. Great Lakes Engineering, Inc. v. Andersen, 627 S.W.2d 436, 437 (Tex. App. – Houston [1st Dist.] 1981). Preliminary injunctions do not have maximum time limits or automatic extinctions. In fact, they may be parlayed into permanent injunctions if such action is consistent with the court’s ruling in the underlying case.
c. Permanent Injunctions
Permanent injunctions are similar in nature to preliminary injunctions, but they are intended to remain in effect indefinitely. The issuance of a permanent injunction is considered a court’s final judgment on a matter.
C. Breach of Non-Competition and Non-Solicitation Covenants
Non-competition and non-solicitation covenants are important contract provisions that protect companies from having their own goodwill, employee development, and customer lists used to compete against them. However, there are limitations on the enforceability of these types of provisions – limitations which vary from one state to the next – and questions surrounding the enforceability of non-compete agreements in particular will often lead to litigation.
1. Covenants Not to Compete
Non-competition clauses are used place restrictions on employees’ ability to work for their employers’ competitors or the seller of a business’s ability to compete with the buyer’s business. Because they restrain free trade, non-compete covenants, particularly in employment contracts, are generally disfavored and they will not be enforceable unless they are reasonable in scope. Each state defines reasonable in a different way. For example, in California, essentially any non-competition clause in an employment contract is deemed unreasonable and thus unenforceable.
Texas law recognizes that covenants not to compete encourage employers to invest resources into training and developing employees by protecting them from having the employees be usurped by competitors who have not invested such resources in the employees. See e.g. March United States, Inc. v. Cook, 354 S.W.3d 764, 769 (Tex. 2010). Therefore, Texas courts will enforce a non-compete agreement in an employment contract as long as it is reasonable in time, scope, and geography and it is needed to further a legitimate business interest of the employer, such as protection of trade secrets. Id. at 771; Tex. Bus. & Com. Code Ann. § 15.50.
2. Covenants Against Solicitation
Non-solicitation agreements prevent employees from soliciting or attempting to solicit their employers’ customers, business associates, and employees. In Texas, the enforceability of non-solicitation clauses is subject to the same guidelines as non-competition clauses. Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600 (Tex. App. – Amarillo 1995).
D. Breach of Warranties, Representations, and Indemnity Obligations
The “boilerplate” provisions in commercial contracts – including warranties, representations, and indemnification clauses – are often among companies’ strongest weapons in business litigation. The remedies for breaches of warranties and representations can be substantial, while indemnification clauses can provide for critical shifting of liability from one party to another.
1. Warranties and Representations
A warranty is a description of the character or quality of a good or service through which a seller guarantees that certain facts are, or shall be, as the seller represents them. Chilton Ins. Co. v. Pate & Pate Enters., 930 S.W.2d 877, 890-91 (Tex. App. – San Antonio 1996). What differentiates a warranty from a mere sales pitch or opinion is the seller’s affirmation of fact or promise relating to the character or quality of the goods or services. Paragon General Contractors, Inc. v. Larco Constr., Inc., 227 S.W.3d 876, 886 (Tex. App. – Dallas [5th Dist.] 2007).
To prevail on a claim for breach of warranty, a plaintiff must demonstrate:
- The defendant sold goods or services to the plaintiff;
- The defendant made a warranty;
- The defendant’s representation formed at least part of the basis of the bargain;
- The defendant breached the warranty;
- The plaintiff notified the defendant of the breach; and,
- The plaintiff suffered damages as a result of the breach.
Paragon, 227 S.W.3d at 886.
Where a representation is included within the text of a contract, Texas courts will assume the representation formed part of the basis of the bargain. Id. This is often referred to as an “express warranty.” However, warranties do not necessarily need to be in writing in order to be enforceable.
In order to prove damages, the plaintiff must not only prove that it incurred harm as a result of the defendant’s breach of warranty, the plaintiff must also prove that defendant’s breach proximately caused the plaintiff’s damages. Paragon, 227 S.W.3d at 887. In other words, the plaintiff must show the court that it would not have suffered the damages if the defendant had not breached the warranty.
Indemnity clauses are contractual terms through which one party promises to compensate the other party for any losses or liabilities incurred by that other party. Indemnity clauses generally specify the circumstances under which the indemnification would be triggered, such as the promising party’s breach of the contract or the negligence of the promising party or a third party under the promising party’s control.
Indemnity clauses are strictly construed by the courts to only cover the circumstances noted in the indemnification clause. Ideal Lease Serv., Inc. v. Amoco Prod. Co., 662 S.W.2d 951, 953 (Tex. 1984). Texas courts place additional requirements on indemnity clauses that purport to protect the indemnified party from its own negligence. Pursuant to the “express negligence” doctrine, in order for a party to have enforceable indemnification from its own future negligence, this intent must be stated clearly and unambiguously in the contract and the clause containing this language must be conspicuous within the contract. Green Int’l v. Solis, 951 S.W.2d 384, 387 (Tex. 1997).
Law suits regarding indemnification clauses may arise where the parties disagree as to whether the indemnification clause has been triggered. In such cases, the indemnified party may sue to enforce the indemnity clause, or the promising party may file for a declaratory judgment stating that the indemnity clause is either unenforceable or was not triggered under the circumstances.
By its nature, fraud is an issue that has a tendency to end up in court. Companies alleging fraud are likely to have suffered substantial damages, and companies accused of fraud are generally not willing to admit to wrongdoing. In the real world, the exact same conduct may be deemed acceptable business practices if a deal works out and fraud if a deal falls through and one or both sides start scrambling to recoup their losses. Therefore, more often than not in fraud disputes, both parties will hold a sincere conviction they have the correct position when entering into pre-suit negotiations.
While settlement is a possibility, in many cases, the parties will need to get through the discovery process before they have a clear enough picture of the potential outcome in litigation to adequately evaluate acceptable settlement terms. (Of course, this is the case in many other types of business litigation as well.)
To prevail on a claim of fraud, a plaintiff much prove each of the following elements:
- A material representation was made;
- The representation was false;
- The defendant knew the representation was false at the time it was made, or the defendant made the representation as a positive assertion without any knowledge of the truth of it;
- The defendant made the representation with the intent that the plaintiff should act upon it;
- The plaintiff acted in reliance on the defendant’s representation; and,
- The plaintiff suffered damages as a result of reliance on the defendant’s representation.
Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 337 (Tex. 2010).
Texas courts have explained what they mean by “material misrepresentation.” “Material means a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions in the transaction in question.” Smith v. KNC Optical, Inc., 296 S.W.3d 807, 812 (Tex. App. – Dallas 2009). A representation is a statement of fact. Id. Therefore, expressions of opinion do not constitute representations for the purpose of demonstrating fraud. Id.
Where a question exists as to whether a statement is a representation or an opinion, courts will look at the circumstances surrounding the representation. Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 276 (Tex. 1995). “Among the relevant circumstances are the statement’s specificity, the speaker’s knowledge, the comparative levels of the speaker’s and the hearer’s knowledge, and whether the statement relates to the present or the future.” Id. Even with this guidance, the differentiation between fact and opinion may not be clear. For example, while a proffer regarding the monetary value of something is generally not considered a representation, it may be deemed a misrepresentation if the speaker knows it to be false.” Id.
III. Intellectual Property Infringement
Similar to a breach of confidentiality, misappropriation of intellectual property is an issue that will often require prompt legal intervention. Companies can actually lose their ownership of intellectual property if they fail to timely initiate litigation, so making the decision to file in court after an intellectual property infringement needs to be a top priority.
Intellectual property rights – trademarks, copyrights, and patents – are among many companies’ most-valuable assets. From the use of a confusingly similar trademark (or outright counterfeiting) to using a patented invention or copyrighted material without a license, there are a variety of intellectual property-related issues which can cause substantial financial harm that is more than sufficient to warrant federal litigation.
Trademarks are designs, symbols, or expressions that identify particular goods or services with their source. Trademarks referring to services are also known as “service marks.” Businesses may register trademarks with the United States Patent and Trademark Office. However, businesses may sue for trademark infringement even if their trademark is not registered.
To have an actionable claim for trademark infringement, a plaintiff must show the following facts:
- The trademark is eligible for protection;
- The plaintiff is the senior user of the trademark;
- The plaintiff’s trademark and the defendant’s trademark are confusingly similar; and
- If an injunction is sought, there is a strong likelihood of confusion between the two trademarks for which there exists no adequate legal remedy.
All Am. Builders, Inc. v. All Am. Siding of Dallas, Inc., 991 S.W.2d 484, 488 (Tex. App. – Fort Worth 1990).
A copyright is a legal right that gives its owner the exclusive right to reproduce, publish, or sell the protected material. Copyrights can protect written material, visual artistry, audio recordings, and software, among other things. Typically, the author of the copyrighted material has the initial ownership of the copyright, although the owner of a copyright can sell it or lease it to a third party. While the owner of a copyright may register it with the United States Copyright Office, a copyright does not need to be registered in order for the owner to be able to enforce its rights against copyright infringement.
To establish a cause of action for copyright infringement, a plaintiff must prove:
- The plaintiff owned a valid copyright; and,
- The defendant copied constituent elements of the original work.
Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361 (1991).
Patents protect inventions and grant exclusive rights to make products or perform processes in a certain way. Whereas copyrights protect creative works, patents protect technical information. Patents have a limited duration, which is generally twenty years from the date the patent application is filed with the United States Patent and Trademark Office. A patent holder may have a claim against another party who uses protected information without authorization. Patent suits are generally the most factually complicated and legally complex of all intellectual property law suits.
IV. Tortious Interference
Tortious interference is a claim against a third party for inducing a breach of contract or other improper interference with a business relationship. Allegations of tortious interference are often joined by breach of contract, fraud, and other claims in complex multi-party commercial litigation.
A claim for tortious interference is justified when the following facts occur:
- The plaintiff has a valid contract or business relationship;
- The defendant willfully and intentionally interferes with the contract or business relationship;
- The defendant’s interference proximately caused the plaintiff’s injury; and,
- The plaintiff incurred actual loss or damages.
Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 (Tex. 2002). Notably, the intent requirement for tortious interference claims is not that the defendant intended to injure the plaintiff; the defendant need only intend to interfere with the plaintiff’s business or contractual relationship. Sw. Bell Tel. CO. v. John Carlo Tex., Inc., 843 S.W.2d 470, 472 (Tex. 1992).
V. Shareholder and Partner Disputes
Even with the best-laid plans, parties that go into business together will often find themselves at odds. Common issues in partnership disputes and private shareholder litigation include misappropriation of funds, breach of fiduciary duties, conflict-of-interest transactions, financial issues, and disagreements over the direction of the business.
At the root of shareholder and partner disputes are the fiduciary duties that directors and officers of corporations owe to the corporation, the shareholders, and each other. The two most important duties directors and officers have are the duty of care, which requires them to act as a reasonably prudent director or officer would in handling the corporation’s business, and the duty of loyalty, which obligates them to prioritize the best interests of the corporation over their own interests.
1. Shareholder Derivative Suits
Ultimately, shareholders are the owners of corporations. Therefore, shareholders have standing to bring a lawsuit on behalf of the corporation in what is known as a “shareholder derivative suit.” Shareholders may bring derivative suits against third parties that have wronged the corporation or against the corporation’s leadership for breach of their fiduciary duties. Shareholder derivative suits are the vehicle through which shareholders can protect the financial investment they have poured into a corporation. See e.g. Perry v. Cohen, 285 S.W.3d 137, 144 (Tex. App. – Austin, 2009).
Before shareholders can bring suits on behalf of the corporation, they must first make a demand to the corporation’s leadership that the corporation file suit on its own behalf, unless such a demand would be futile under the circumstances. See In re Schmitz, 285 S.W.3d 451, 452 (Tex. 2009). The demand must state with particularity the specific act, omission, or other matter that is the subject of the potential suit, and it must request that the corporation take suitable action. Id. at 55.
Officers and directors have a high degree of protection against shareholder derivative suits that attack the performance of their duties. Under the Business Judgment Rule, officers and directors will not be held liable for “actions that are negligent unwise, inexpedient, or imprudent if the actions were within the exercise of their discretion and judgment in the development or prosecution of the enterprise.” Sneed v. Webre, 465 S.W.3rd 169, 178 (Tex. 2014). However, examples of actionable breaches of duties include usurping company business opportunities, self-dealing company business, or performing duties grossly below a reasonable standard of care.
2. Partner Disputes
Partnership disputes can arise from a variety of circumstances – partners may disagree on how to operate a business or how to distribute profits, or one partner may find out that another partner has breached his/her fiduciary duties to the partnership. Because dissension among partners inevitably effects the success of partnership business, in most cases partners would benefit from entering mediation before filing suit. Nonetheless, where litigation cannot be avoided, attorneys can help the partners wind down partnership business, distribute assets, and satisfy pending obligations to help avoid additional litigation with third parties.
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