How Some Corporations Strategically Deploy Contract Breaks

Laws require companies to honor their business contracts with third parties, but it is not always practical or even possible for smaller companies or individuals to vindicate their legal rights.

Some companies cannot afford to litigate, especially when paying expensive commercial lawyers by the hour. Legal fees can soon reach or exceed millions of dollars. Bigger companies sometimes use these litigation costs to bully smaller companies or individuals into re-negotiating a contract or simply living with the breach.

In a recent high-profile case, I represented musical artist Flo Rida in a breach of contract dispute. We sent an initial letter to Celsius demanding issuance of certain stock. The company responded by denying that the stock was due, and then threatening to sue Flo Rida for repayment of certain guaranteed royalties.

In other words, the company not only refused to offer anything to settle—it also demanded that Flo Rida pay it money or it would file suit against him. Flo Rida decided to forge ahead, and the eventual result was an $82.6 million verdict against Celsius.

Strong-Arm Tactics

Still, this kind of threat from a multibillion-dollar company would make anyone hesitate. I suspect these kinds of threats often end litigation right there.

In general, based on my experience in commercial cases, big companies often use these tactics—the threat of countersuit and leveraging the high cost of litigation—because they work.

Lawyers are taught that it is unethical to use this kind of leverage to get out of legal obligations. But something has changed in the law and in business over the last few decades.

Some big companies today think it is appropriate to breach contracts that become economically disadvantageous because there is nothing inherently ethical or moral about honoring a contract. And it is acceptable to use financial leverage to get away with it.

Protections to Take

Smaller companies and individuals can try to protect themselves by spending more time and resources on draft clearer contracts. It is important to be intimately involved rather than leave the job to the lawyers, and know and understand every term in the contract—from both a legal and business perspective.

Another possible protection would be to find a litigation lawyer to review the contract in addition to a contract lawyer. Someone with experience in contractual disputes may see problems no one else does. I’m not sure why, but this is almost never done.

No matter how hard a smaller company works to protect itself, it may still have to deal with a breach. Many companies give up on litigation once they understand the cost—very few companies explore commercial contingency representation.

In this kind of fee arrangement, the attorney does not get paid unless the lawsuit is won. When Pennzoil Corp. sued Texaco in the 1980s, the company decided it could not afford to pay lawyers by the hour, so it pioneered with its lawyers this kind of commercial contingency arrangement instead. Yet almost 40 years later, almost no small companies use it or are even aware of it.

At What Cost?

Even with creative attorney fee arrangements, sometimes litigation is just not worth the cost.

This is particularly true where there is the possibility of future revenue from other deals—which will be lost because of the litigation—or reputational risk. Celebrities must weigh the potential financial benefits of winning a lawsuit against the effect the litigation will have on the celebrity’s brand and career, as well as on future endorsement deals.

Companies understand these concerns and leverage them to their advantage, so it is wise for celebrity clients to consult a lawyer with previous experience representing celebrities—the issues are unique.

Flo Rida’s lawsuit against Celsius was more than a dispute over money. For him, it’s a matter of fairness and respect. He entered the endorsement deal favoring long-term equity over short-term cash, and when that equity became worth what he had always hoped—when a small local South Florida company became hundreds of times more valuable in part from his own branding efforts—he could not let it go. He understood the risks, costs, and potential benefits of the litigation, and made the decision that was right for him.

The legislature and the courts could act to help reduce litigation costs and increase the penalties for intentional breach of contract.

Justice Neil Gorsuch explores ways to decrease the cost of litigation in his book, “A Republic, If You Can Keep It.” But because of current campaign finance laws and recent judicial decisions regarding bribery prosecutions, it seems unlikely that anything will be done to decrease litigation costs or increase the penalties for intentional breach.

The legal system works quite well for the most massive corporations, and they spend staggering amounts of money to keep it that way.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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John Uustal is a founding partner of the Kelley | Uustal law firm, where he oversees ncomplex litigation and leads a team of trial lawyers who have won some of the largest verdicts in the country.

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