Business always faces the risk of legal action because of their actions, inaction, products, services, or other actions. The risk of lawsuits usually grows with the size of the business and may come from customers, clients, vendors, shareholders, or other businesses.
Litigation risk is a business, individual or corporation’s likelihood of facing business litigation. Larger businesses confront greater risk because they engage in more activities and have more assets, known as deep pockets, to pay off claims.
Business should have measures to identify and reduce these risks. These usually include ensuring product safety, legal and regulatory compliance and assuring client satisfaction.
Customers may commence litigation claiming dissatisfaction with service and products, loss of service or injury and harm from the business’ operations, employees, products or services. Other businesses and individuals may also file lawsuits for contract disputes and breach of contract and patent and trademark disputes or infringement.
Financial performance and bookkeeping also pose the risk of litigation. Shareholders, for example, may be dissatisfied with company earnings and claim that the company is being mismanaged. Shareholders have sued companies for lack of disclosure if they had earnings because of an error or intentional misrepresentations.
Publicly traded companies must include items in their budgets to cover legal costs because of litigation risks according to generally accepted accounting principles.
When evaluating their litigation risks, a business should consider the costs of litigation and whether other forms of resolution, such as mediation or settlement, are more feasible.
The advantages of winning litigation must be assessed against the costs of losing or just participating in litigation. Any threats to business reputation and goodwill may also play a role.
Startups, for example, often defend against lawsuits from entities claiming that the startup infringed upon their patents. In many cases, startups end up seeking settlement or cease business because the litigation is too costly.