Five of the Costliest Legal Mistakes You Can Make

A recent poll revealed something we all secretly knew. More than half of the people who make a list of New Year’s resolutions fail miserably when it comes to following through… and nearly one in five blows it within the first 24 hours. 

There are some lists, however, that you would be wise to tuck away. As lawyers, we are often asked about the kinds of legal mistakes people commonly make that are either costly to resolve, or impossible to undo. Many, if not most, of these mistakes involve being “penny wise and pound foolish.” Then again, diplomacy aside, some of these mistakes are just plain stupid. And yet we see them made again and again.

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If you must make a list of resolutions for 2014, try this list of the Top 5 legal blunders to avoid. Although they may not sound as exciting as dropping 20 pounds, or getting around to organizing your basement, we promise that your year will turn out all the better for being safe rather than sorry.

Hitting the “Reply All” (and Send) Button When You Don’t Mean To

We’ve all done it. We receive an email that has been cc’d to a group of other recipients who may be friends, (or not), or co-workers (or not), or—in a business situation—on “our side” (or not). Often we are tempted to make a snarky comment to one of the other recipients, but instead mistakenly hit the “Reply All” button. Oh no! Well, you can’t take it back. Usually this is just embarrassing, but in the context of a business transaction or litigation, it can be devastating, especially if the “Reply All” reveals confidential information, such as strategy or facts unknown to the unintended recipient(s). Imagine you are selling a company and you receive an email from one of the bidders. Your “Reply All” message, intended for only one of your partners, says, “I hope the dope doesn’t know he’s bid twice what anyone else has.” Enough said. Bid withdrawn!

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Venting on Social Media

Social media is a blessing and a curse. Venting your rage at someone or damning something online may feel good at the time, but before you tweet or post in anger, consider the consequences. If the target of your rage is a person or group of people, or even a company (indeed, especially a company), you could be sued for harassment, libel or defamation. Most of the time, you cannot undo what you’ve written, which will live forever somewhere on the Internet. Rage, exaggerations, negative commentary or false statements—these can lead to reputational damage, negative employment consequences, and a costly legal mess. You may recall in the headlines the case where Donald Trump sued a contestant in the Miss Universe Pageant (which Trump owns) for making defamatory statements about the pageant on Facebook. Trump won a $5 million judgment! Even those without such means can take to the Internet and respond in kind, or file an action publicly in the courts. A few words can cost you thousands.

Failing to Document Contractual Relationships

Ah, trust. How quaint. So-called “handshake” agreements are very dangerous things. This becomes frighteningly apparent when a dispute arises among the parties. It can be very difficult to establish the existence of a valid oral agreement (as opposed to an agreement in writing). And even if an oral agreement is established, its terms are often difficult to interpret or define. It is not uncommon for us to see a client who believed he or she was a “partner” in a business only to discover he or she had no rights at all. Or, take someone who thought he or she had purchased or sold an order of goods or services, only to discover the other side was not obligated to provide or pay for the order at all. Handshakes are yesterday’s news, today’s blues. “Get it in writing!” We like to see written agreements as road maps, with clear directions and goals on which the parties can agree at the outset of the relationship are reasonable and fair. In nearly all cases, both parties benefit from putting pen to paper after that handshake. 

Using Legal Documents Downloaded from the Internet

Really? Think you can save some money this way? Think again. This is not a matter of professional jealousy or “guild mentality.” We are constantly having to do remedial work, which is far costlier than the original work that might have been performed, for clients who have used downloaded documents. The fact of the matter is that there is very little that is “cookie cutter” in legal relationships. A well-drafted legal document requires the attorney to fully understand the circumstances and desires of the client and, the client’s counterparty, to suggest key provisions or alternatives that should be in a contract—be it an employment contract, a lease, or a limited liability company operating agreement. The location of the parties is relevant; the place of business is key; and many laws vary from state to state. We have found that these “one-size-fits-all” documents are incapable of that. In addition, they often contain poorly drafted language or outright errors. A lay person attempting to modify a document to suit his or her circumstances can often miss key issues or alternatives that are available to a competent attorney. The result can be disaster when key elements work in favor of the other party or the document itself is invalid. 

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A couple of years ago, we were presented with an agreement obtained by the Executive Director of a non-profit organization, laudably trying to save his organization money. But in the end, he cost it a bundle and lost his job in the process. The E.D. had fired another senior employee (who happened to be female, older than he, and next in line for the top spot), using paperwork obtained “for free” online. His first mistake (perhaps after the termination decision itself) was having downloaded the Separation Agreement from the Internet. Bad enough the “free” legal form related to a different state—but it was not actually applicable to a senior executive, it omitted legally required terms, and it involved a terminated employee under 40 years of age. In short, it did not apply to the organization’s situation where a female senior officer, 40 years of age or older, was being let go without any prior notice. It was the wrong agreement.

Federal, state and local requirements kick in to require that certain terms be included in a Separation Agreement that has a general release of claims following the termination of an older female…none of which were reflected in the downloaded form agreement the E.D. had obtained. Making matters worse (for the organization), he had already handed the employee whom he was firing the downloaded Separation Agreement during the actual termination meeting. Now that was warm and fuzzy. The E.D. then told the soon-to-be-ex-colleague that the (incomplete and illegal) Separation Agreement was a “take it or leave it” offer that would expire in three days. (What was he thinking?) Among other things, the federal age discrimination laws permit older employees who are being terminated from employment to have 21 days within which to review and consider a Separation Agreement and, after signing, seven more days to revoke it. This was one of numerous omissions in the “free” downloaded version. (We suspect a different agreement was used when the E.D. was later fired.) In the end, the misguided effort to save his organization some money cost the non-profit tens of thousands of dollars to forestall a lawsuit by the ex-employee and fix an agreement that a seasoned employment lawyer in the right state would have taken just a few hours to prepare.

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Founding a Company without Having an Employment Agreement

A company founder/CEO should always consider having an employment agreement, because once the company has taken in substantial amounts of outside money from any sophisticated investor, he or she may become an endangered species. We know of a situation involving a senior executive who was in distress after he had just been fired by the company he founded. Bad enough that he got squeezed out of his own company, but it got worse. Without an employment contract, he had no rights, no severance and no recourse. He had founded a tech company with an innovative concept that was just beginning to achieve wide acclaim. As is the case with many others in his circumstances, he needed more funding and brought in a well-known venture capital firm. The founder still controlled the largest block of stock and thought he was set. He avoided signing an employment agreement because he did not want to be subject to restrictive covenants like non-compete and confidentiality agreements. However, a typical executive employment agreement also contains protective provisions, such as an employment term of years, or severance if things don’t work out—which can be a multiple of the executive’s compensation if he or she is terminated without cause or quits for “good reason.” 

In this case, as is typical, the venture capital firm took two seats on an already small board. The (now fired) founder had handpicked two other directors and, with them and himself as a director, believed he controlled the board. Within less than a year, however, the venture capital firm had co-opted one of the founder’s handpicked directors, and convinced him that the founder was not the right guy for the job of leading the company to success. The company was in an “at will” state where the laws provided that an employee could be terminated for any reason (or no reason) at all, at any time, without notice or severance…which is exactly what happened to the founder, who thought he was pretty crafty to keep away from signing an employment agreement. So much for being the smartest guy in the room.

Still think you’re the smartest guy (or gal) in the room? To read about five more legal mistakes that intelligent people make every day log onto edgemagonline.com. 

• Hiring Unpaid Interns or Otherwise Misclassifying Employees
• Failing to Protect Your Intellectual Property (or Infringing on Someone Else’s)
• Collaborating on Original Work without an Agreement
• Getting Married (or Remarried) without Consulting a Lawyer
• Failing to Take Action When One Employee Is Harassing Another…or Creating a Hostile Work Environment EDGE

Editor‘s Note: Helen D. (“Heidi”) Reavis and Neil Patrick Parent are Partners with Reavis Parent Lehrer LLP, based in New York City. The above does not constitute legal advice; readers are urged to seek the assistance of a qualified attorney in their location in connection with any of the areas of law discussed generally above.