Taking the Path Less Traveled: Why Tech Companies Might Think Twice Before Litigating a Breach of Contract

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Taking the Path Less Traveled: Why Tech Companies Might Think Twice Before Litigating a Breach of Contract. This week, let’s pause to consider why a tech company might consider alternatives, like pre-dispute mediation, before suing a customer for breach of contract.

When technology transactions sour, we often see clients (or adverse service providers) leap to consider litigation as the first, necessary course of action when the other side breaches their contract. It’s not hard to see why: a glaring hole, or red ink, on the P&L where there should be a nice profit would make anyone mad, especially if the provider (or customer) has gone above-and-beyond to satisfy the other party.  It gets worse if the provider’s work product or intellectual property is being used without payment, or if a customer’s own obligations or needs are unfilled.  Plus, the one thing that digital communications cannot do – help people calm down – allows the aggrieved party to choose much too quickly to go down the well-traveled path of lawsuits.  We’ve been there, many, many times. Perhaps you have been, too?

Particularly for tech companies, however (or buyers of technology products and services), the non- or less-litigious path may be a much better choice.  Here are some of them (and if you’ve experienced others, we would enjoy hearing from you):

1. Cost: Litigation can be absurdly expensive. Legal fees, expert witnesses, and court costs can add up quickly, and the process may take years to resolve. Worse, the cost of “distraction” is usually as much or more than the cost in dollars.  That’s true for all kinds of businesses, but for tech companies, who need to keep their focus on continued creativity, innovation, and efficient delivery, it is especially critical. The same is often true for tech companies’ customers. Time spent working with lawyers, gathering documents, preparing testimony, and simply gnawing on it all takes time and attention that is very hard to recoup.

2. Rapid Technological Change: By the time a case reaches trial, often the technology in question may be outdated or obsolete. This phenomenon can make it difficult to assess damages, and generally, it reduces the value of pursuing litigation.

3. Complex Subject Matter: Technology contracts often involve complex and specialized subject matter.  Sometimes those contracts aren’t drafted clearly, and even they are, often parties have not clearly specified the details in statements of work that are critical to the dispute.  Judges and juries may struggle to understand the terms of the deal, the conduct of the parties, and other nuances of the case, increasing the risk of an unfavorable or unpredictable outcome.

4. Confidentiality and Trade Secrets: Tech companies rely on the protection of their trade secrets and intellectual property. Litigation risks exposing sensitive information, and therefore may put a company's competitive advantage at risk. Alternative dispute resolution (ADR) methods, like mediation and arbitration, may offer more confidentiality, but many of the same issues remain.

5.  International Considerations: Tech contracts often involve parties from different jurisdictions or the transfer of technology across borders. Litigation can become more complex due to the need to navigate multiple legal systems, regulatory frameworks, and enforcement mechanisms.

6.  Potential for Future Collaboration: Litigating a breach of contract may strain or damage valuable business relationships.  Customers often consider the backgrounds of their technology service providers, and may choose to pass on a deal with a provider that is perceived to be overly litigious.

7.  Specialized ADR: In ADR proceedings, tech companies can choose arbitrators or mediators with specialized expertise in the industry or specific technology, increasing the likelihood of a fair and informed resolution.  This may be particularly advantageous in cases where the technology is novel, such as in blockchain or AI transactions or disinformation cases, for example.

A Less-Traveled, but Better Path?  Here are some possibilities:

1. Letters.  Yes, letters.  The only “letters” most lawyers write these days are demand letters, often written for audiences other than the recipient (i.e., to impress or at least excite the client, to intimidate the other side, to impress each other or interest the press, etc.). Of course, you have to be clear with the other side about what the problem is and what your client expects, but not every demand letter needs to sound like it was written with a flamethrower; in fact the most effective ones rarely do. Consider writing something that includes a firm demand and a brief, clear explanation of why, but which also invites genuine discussion of the problem with a view to straightening things out.

2. Old-Fashioned Conversations. Never underestimate the value of an old-fashioned conversation. Timing is important (the sooner the better), and the choice of participants is even more important (if at all possible, have the conversation take place between people whose own conduct will not be at issue or disputed; that “separation” or “distance” will go a long way).  It may not lead anywhere immediately successful, but it may open some cracks or possibilities to explore. Besides, you might learn something – or your counterparty might. (For example, either side might discover weaknesses in its own position that it hadn’t realized, sooner and cheaper than if it had learned later when it was already deep into the sunk-costs of litigation. Or, a party might focus on risks whose extent it hadn’t previously thought about, such as the risks of taking a provider’s IP and work product forward and “finishing it”  – i.e., making derivative works of a foundation the party had never paid for.)

3. Pre-Dispute Mediation.  Why not?  In almost every jurisdiction, you have to go to mediation anyway before you’ll see the inside of a courthouse.  There’s nothing wrong with trying it sooner rather than later, especially when the parties already know most of what they would merely confirm in discovery – as they commonly do. 

4. You can always Escalate.  This is not a choice of sue-now-or-never. Leading off with a firm but cordial outreach doesn’t mean you can’t escalate matters if your efforts don’t bear fruit. You can, but if you try this first, you may find that your lawsuit will be more focused, less distracting, and perhaps even easier to resolve.  

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Hosch & Morris, PLLC is a boutique law firm dedicated to data privacy and protection, cybersecurity, the Internet and technology. Open the Future℠.