My Company Has Been Threatened With a Lawsuit. What Do I Do Now?

A threat is not a lawsuit

Being told "you will hear from my lawyer" or receiving a letter that says suit will be filed is unpleasant, but legally nothing has happened yet. A lawsuit begins when a petition is filed with a court and served on your company. Only then does a deadline to answer start, and only then can a default judgment follow if you do nothing. What happens after service is covered in what happens if you get served with a lawsuit in Texas.

Two things do start with the threat. The first is your legal duty to preserve evidence. The second is, in many cases, a contractual deadline under your insurance policies. Everything else is strategy.

Step one: preserve everything

Texas law requires a party to preserve relevant evidence once it knows or reasonably should know there is a substantial chance a claim will be filed. A credible threat of suit meets that test. From this point, deleting emails, wiping a departing employee's laptop, letting messages auto-delete or "cleaning up" a shared drive can be treated as spoliation, with consequences that range from an adverse jury instruction to the exclusion of your own evidence.

Send a written instruction to the people involved to keep everything about the dispute, suspend automatic deletion for the relevant mailboxes and systems, and secure the devices and accounts of anyone who has left or is leaving. What the duty covers and how to carry it out is set out in what a litigation hold requires of your company.

Step two: check insurance

Commercial general liability, professional liability, directors and officers, employment practices and cyber policies commonly define a "claim" to include a written demand for money or services, and they require notice within a stated time, sometimes as short as a few weeks. Late notice is a standard ground for denying coverage. Read each policy's definition of claim and its notice condition, and if there is any chance the policy responds, give notice through your broker in writing. Whether coverage is likely is covered in whether your business insurance will cover this lawsuit.

Step three: stop informal contact about the facts

The instinct is to call the other side and straighten it out. Resist it. Anything you or your employees say about what happened can be repeated in a deposition, and Texas Rule of Evidence 408 protects only offers of compromise and statements made during compromise negotiations, and even those only against use to prove the validity or amount of the claim. A conversation that was not a negotiation is not protected at all.

Tell the people in your company who deal with the other side to route any communication about the dispute to one person, and to keep doing business, if business continues, in writing. If the other side has a lawyer, your contact with that lawyer should go through yours.

Step four: read the claim against your records

Gather the contract, the invoices, the emails, the texts, the meeting notes and the internal communications about the matter, and read the threat against them. Answer four questions in writing, for your own file:

1. What exactly is being claimed? Money, and how much; an action, such as stopping conduct or returning property; or something undefined.
2. What legal theory does it rest on? Contract, fraud, fiduciary duty, trade secrets, non-compete, DTPA, employment statute. Each carries different exposure and different procedural rules. A DTPA damages claim, for example, requires 60 days' written notice before suit under Business and Commerce Code § 17.505.
3. Is any of it true? A threat built on a real unpaid invoice is handled differently from one built on a misreading of a contract.
4. Where would the case be? A forum selection or arbitration clause in the contract may decide this. So may the parties' locations and the amount, which can put the case in state court, federal court or arbitration.

Step five: assess exposure with a litigator

At this point a litigator can tell you what the threatened claim is worth to the other side, what defenses you have, what counterclaims you may have, what it would cost to defend, and whether the threat is likely to be carried out. Threats from a litigation firm with a draft petition attached are different from threats in an angry email, but both deserve the analysis. What to bring to that first meeting is covered in preparing for your first meeting with a litigator.

The options once you know where you stand

Respond

A written response that states your position, corrects errors and declines or accepts what is demanded. Most threats deserve one. The decision whether to respond at all is covered in the guide on whether to respond to a demand letter.

Negotiate

If part of the claim is valid, resolving that part early is almost always cheaper than litigating it, and Texas law rewards it: paying the just amount owed within 30 days of presentment cuts off the other side's right to attorney's fees on a contract or services claim under Civil Practice and Remedies Code § 38.002.

Wait

Some threats are never carried out. Waiting is a legitimate choice when the claim is weak, the amount is small, and the threat comes from someone with no lawyer and no history of filing. Waiting is a poor choice when the claim has merit, when fees are accruing, or when the other side gains by delay.

File first

In some situations the threatened party is better off in court on its own terms. If the dispute turns on the meaning of a contract, Texas Civil Practice and Remedies Code chapter 37 allows a party whose rights are affected by a written contract to seek a declaration of those rights. Filing first can also secure a preferred forum where the contract allows a choice, and in a trade secret or non-compete dispute it may be the way to obtain an injunction. Filing first is a significant step with costs of its own, and it is a decision to make with counsel, not in reaction to a letter.

Example

Suppose a Dallas software reseller receives an email from a former sales manager saying he will sue for $85,000 in unpaid commissions and that his lawyer will be in touch. The company's owner forwards the email to the controller with a note to "find out what he thinks we owe him," then calls the former manager to argue. A week later a letter arrives from a lawyer. Had the owner instead issued a hold notice, pulled the commission plan and the sales records, checked the employment practices policy (which requires notice of any written demand within 30 days), and sent the file to a litigator, the company would have learned within days that the plan's terms cut off commissions on deals closed after departure, that about $9,000 was in fact owed under the plan, and that paying it promptly would end the fee exposure on that amount. Instead the phone call becomes a disputed account of what the owner "admitted," and the forwarded email becomes a document the company has to explain.

How to tell if the threat is serious

No single sign is conclusive, but litigators weigh these: whether a lawyer is already involved and from what kind of firm; whether the letter states a specific legal theory and a specific amount; whether a statutory notice has been given, which signals that counsel is following the steps required before suit; whether the other side has sued before; and whether the other side has something to gain by filing beyond the money, such as an injunction or a public record. A vague threat from a frustrated counterpart is usually a negotiation tactic. A specific one with a deadline and a statute cited usually is not.

What you can safely do today

• Write down how and when the threat was made, and by whom.
• Issue a preservation instruction to the people involved and suspend automatic deletion.
• Read your insurance policies' definitions of "claim" and notice deadlines, and notify where there is any doubt.
• Collect the contract and records without altering them.
• Tell your team not to discuss the facts with the other side, and to keep ordinary business communications in writing.
• Decide who will handle the response and when, before the other side's deadline, if any, arrives.

Tina Wysk advises Dallas businesses that have been threatened with suit, from the first letter through filing or settlement, as part of her pre-litigation practice.