Commencing a Lawsuit: Evaluating Whether to File Suit in Federal Court

By: Michael Bahler and Mike Stefanelli

Deciding whether to commence a federal lawsuit requires the attorney to evaluate the potential client, analyze the applicable legal and procedural landscape, and examine the possibility of resolving the dispute without litigation. Failing to consider these issues before bringing suit can expose the attorney to financial and reputational risk and result in prompt dismissal of the case.

Evaluating the Client

When presented with a potential new matter, immediately:

• Run a conflicts check to determine if you are ethically or otherwise prohibited from representing the client
• Determine whether the client can pay your fees
• Consider whether representing the client would harm your reputation
• Formalize the attorney-client relationship with an engagement letter, if applicable

Conduct a Conflicts Check

Before meeting or discussing a new matter with a potential client, obtain a list of all parties who are involved or have an interest in the dispute, including corporate entities and counsel representing any of the parties. Determine whether any adverse party currently is or has in the past been represented by your firm on any matter.

Many law firms have records departments that will perform the conflicts search upon receiving the relevant party names and other information. If you do not have this option, look to your firm’s database of past and present clients to check for conflicts.¹

Local professional conduct rules dictate when you are ethically barred from taking a case and whether or how to waive a conflict (such as by obtaining informed consent).

Also consider business concerns that may weigh against accepting the matter, such as if your firm regularly represents the potential client’s business competitors, or if the potential client is deeply involved in an industry that is at odds with that or your firm’s institutional clients.

Consider the Potential Client

Once you clear conflicts, research the potential client before discussing the dispute further or accepting representation. Search the internet and public court dockets and ask colleagues or friends for information in an effort to uncover any red flags, focusing on the potential client’s:

• Financial background and solvency. Determine whether the potential client can afford your services. An attorney may not always be able to withdraw from representation for non-payment, and the process of withdrawing is time consuming and expensive.
• Reputation and character. Representing an unreliable or untrustworthy client poses significant challenges and may even expose you to Fed. R. Civ. P. 11 sanctions. In addition, representing an unsavory client might harm your professional reputation.

Consider the following information (if applicable):

• Previous representation on the matter. Find out why the representation ended and take note if it was due to nonpayment or unrealistic client expectations. Also try to determine if the client was uncooperative or untruthful with prior counsel.
• Whether a business is in good financial standing. For publicly-traded companies, look at historical share values and public filings. For public and private companies, search the internet and ask around for information relating to the business.
• Officers, directors, or members. A company’s reputation is often linked to that of its officers, directors, or members. Research these individuals and evaluate whether their reputations speak to the company’s financial status, reputation, or credibility.
• Bankruptcy. Current or past bankruptcy filings are red flags for fiscal problems and instability. If the bankruptcy has been resolved, obtain current financial information about the potential client.
• Employment. A client’s employment status, occupation, and employer will give a sense of his or her professional background and salary.
• Repeat litigation. Filing numerous lawsuits may indicate that the person or entity is advancing frivolous claims. While a client who is a repeat defendant may also raise concerns, this fact is less informative in industries rife with litigation, such as banking and health care.

Gather Information and Conduct Legal Research

Research the factual, procedural, and legal underpinnings of the case to decide whether to commence an action in federal court.

Ask your client for all information relating to the dispute, including:

• What happened
• When it happened
• How it happened
• The resulting damages
• The existing evidence and where it might be located (including physical items, documents, and electronically stored information)
• The identity of any witnesses
• Whether the parties have attempted to resolve the dispute
• The client’s goals and motivations

Once you’ve obtained the necessary information from the client, conduct research to determine:

• The elements of each potential claim
• Whether a ripe controversy exists and your client has standing
• The applicable statutes of limitations and/or repose
• Your adversary’s possible affirmative defenses and counterclaims
• Whether your client must exhaust administrative remedies before bringing a lawsuit
• Whether your case involves any contractual dispute resolution provisions
• Whether it makes financial sense to bring suit

Elements of the Claim

Researching the elements of the potential claims help identify the facts needed to prove your case and whether the relief sought is available. Consider whether:

• The law supports your claims
• You have (or can discover) the necessary evidence to prove each claim
• When researching the claims, keep in mind the likely litigation costs and assess whether the dollar value of the case justifies these costs

Ripeness and Standing

Consider whether the claims are ripe for adjudication and whether the client has standing to bring them. Ripe claims present actual cases or controversies and are not simply hypothetical or potential disputes. Standing is established by showing that:

• The plaintiff has suffered an injury in fact and has a legal right to seek relief. The injury can be physical, emotional, financial, or an injury to plaintiff’s civil rights as long as it is particularized to the plaintiff.
• The plaintiff’s injury can be traced to the defendant and is not the result of a third party. This is generally established by including a sentence or two in the complaint linking the plaintiff’s injury to the defendant’s acts.
• The plaintiff’s injury would likely be redressed by a favorable decision. The court must be able to remedy the plaintiff’s injury in some way, such as by issuing a temporary restraining order or injunction, or by ordering the defendant to pay damages.

Statutes of Limitations and Repose

Research whether the potential claims are barred by any applicable:

• Statute of limitations. A statute of limitations bars a claim that is filed more than a specified amount of time after the claim accrues, such as six years for certain federal contract claims.²
• Statute of repose. A statute of repose also bars a claim for untimeliness but starts to run from the last culpable act of a defendant (like the manufacturer’s selling of a defective product instead of the accrual of the resulting design defect claim).³ A statute of repose may bar a claim viable under the statute of limitations if the defendant’s last culpable act occurred many years before the claim accrued. Statutes of limitations and repose are usually controlled by state law, though many federal claims include their own statute of limitations.

Affirmative Defenses and Counterclaims

Consider potential affirmative defenses or counterclaims. Affirmative defenses raise new facts different from those in plaintiff’s claims for relief and provide a complete defense, even if the allegations in the complaint are true. Common affirmative defenses include:

• Assumption of risk
• Contributory negligence
• Laches
• Waiver⁴

The defendant generally must assert any counterclaims against the plaintiff that arise from the same facts as the claims in the complaint. Additionally, the defendant may choose to assert unrelated counterclaims against the plaintiff.⁵ Develop a list of possible counterclaims and inform the client that even if it decides later on to terminate the case voluntarily, it still must defend any pending counterclaims.

Factor in the expense of responding to affirmative defenses and counterclaims when assessing the costs of the lawsuit.

Exhausting Administrative Remedies

Some statutes require that the plaintiff exhaust available administrative remedies before filing a lawsuit. For example, Title VII requires that an employee submit a discrimination or retaliation charge to the Equal Employment Opportunity Commission or equivalent state agency before filing a federal lawsuit.⁶ Failure to follow a statutory rule on exhaustion of remedies will result in dismissal of the claim.⁷

Contractual Dispute Resolution Provisions

Review all applicable contracts for clauses governing mandatory arbitration or mediation, forum selection, and choice of law. These clauses reflect the parties’ agreement on how and where disputes should be resolved and what law should apply.

Economics

Make sure that the damages award or equitable relief available for a successful judgment justifies the expenses of bringing the suit. Look at:

• Judgments in similar cases
• The ability of the defendant to satisfy the judgment

Consider preparing a litigation budget and timeline and review it with the client. This document should include an estimate of the costs associated with each phase of litigation as well as the time frame in which you expect each will occur. The budget should clearly state that it is merely an estimate of the attorney’s fees and costs associated with litigation.

You might find it helpful to use a chart or table like the example above to explain the relevant litigation stages and their estimated costs and time frame.

Evaluate Alternatives to Litigation

Even if the client has viable legal claims, consider alternatives to litigation (such as pre-suit settlement or alternative dispute resolution), which generally provide for a quicker and cheaper resolution.

Settlement

Parties with an ongoing business relationship may prefer to resolve their disputes through informal discussions to help maintain a productive working relationship. In other cases, your client (or adversary) may lack a tolerance for litigation and be more willing to discuss settlement. While settlement discussions themselves may be time consuming and unpredictable, a successful resolution can save months or years of litigation expenses.

Informal settlement discussions between the parties are often the most effective option. However, avoid this if your client might inadvertently reveal information that would jeopardize your bargaining position or waive the attorney-client privilege or work-product protection.

Alternative Dispute Resolution

Adversaries do not need a contractual agreement to arbitrate or mediate. If your client is anxious to resolve the dispute quickly and the court docket is congested, arbitration or mediation may provide an expedited path to resolution.

Some clients, however, may prefer litigation if public court filings may negatively impact the defendant and its business.

Where to File a Lawsuit

If you pursue litigation, consider:

• Subject matter jurisdiction
• The advantages of filing in federal vs. state court
• Personal jurisdiction
• Venue

Subject Matter Jurisdiction

Federal courts have subject matter jurisdiction over cases based on:

• Federal question jurisdiction. This exists for any claim arising under federal law (including the U.S. Constitution).⁸
• Diversity jurisdiction. This applies where the amount in controversy exceeds $75,000 and there is complete diversity of citizenship between the parties (no plaintiff can be a citizen of the same state as any defendant).⁹ Different diversity of citizenship rules apply in certain class actions.¹⁰

Federal vs. State

You may prefer to file in state court even if subject matter jurisdiction exists in federal court. While cases are generally decided more quickly in federal court, given the less-crowded docket and available resources, some state courts are known for issuing larger jury verdicts.

Personal Jurisdiction

The specific federal court in which you file must have personal jurisdiction over the defendant. A defendant is always subject to personal jurisdiction in the federal courts located in the state where it resides, though special rules apply to entities. For example, a corporation generally may be sued both in the state where it is incorporated and where it maintains a principal place of business. A non-resident defendant may be subject to personal jurisdiction in a state if either:

• It has continuous and systematic contacts with the state (general personal jurisdiction).
• It has sufficient minimum contacts with the state and the assertion of personal jurisdiction would comport with fair play and substantial justice (specific personal jurisdiction).¹¹
• When identifying would-be defendants, take into account that certain necessary parties must be joined if feasible.¹²

Venue

Venue refers to the particular federal judicial district within the state where the case is filed (e.g., the Southern District of New York). Courts generally enforce forum selection clauses between the parties setting a particular venue for any litigation.¹³

If there is no contractually-designated venue, determine whether any applicable statutes govern venue for your claims. Absent special venue statutes or controlling forum selection clauses, you may choose to file in:

• The district where any defendant resides, if all defendants reside in the state where the case was brought
• The district in which a substantial part of the events giving rise to the lawsuit occurred
• Any district where the defendant is subject to the court’s personal jurisdiction¹⁴

Determine the optimal forum for bringing your claims (if multiple are available), considering:

• Convenience to your client
• The location of witnesses and evidence
• Docket congestion
• The tendencies of judges and jury pools in similar cases
• Applicable procedural rules

Although courts rarely disturb the plaintiff’s forum choice, they strongly discourage forum shopping for improper purposes and will scrutinize the choice if the lawsuit has no real connection to the selected venue.

Michael Bahler is a Content Manager for the Lexis Practice Advisor Litigation team. He began his career as a law clerk for the Honorable Julio M. Fuentes of the U.S. Court of Appeals for the Third Circuit before working as a litigation associate at Kaye Scholer LLP and a trial attorney for the U.S. Justice Department. Michael earned his JD magna *** laude from Boston College Law School and holds a BA from Northwestern University. Mike Stefanelli is a Content Manager for the Lexis Practice Advisor Litigation team. Before joining LexisNexis, Mike spent eight years in private litigation practice, including more than six years as an associate at Paul Hastings LLP and DLA Piper LLP. During his career, Mike litigated a wide variety of federal and state cases, including general commercial, employment, and bankruptcy litigation matters. Mike earned his JD, summa *** laude, from Brooklyn Law School, and his BA from Georgetown University. He is admitted to practice in New York and Illinois.

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1. See, e.g., N.Y. C.L.S. Rules Prof. Conduct R 1.7 (Conflict of Interest: Current Clients). 2. See 41 U.S.C.S. § 7103(a)(4)(A). 3. See, e.g., Conn. Gen. Stat. § 52-577a(a). 4. Fed. R. Civ. P. 8(c). 5. Fed. R. Civ. P. 8(a), (b). 6. See 42 U.S.C. § 2000e-5. 7. See, e.g., Woodford v. Ngo, 548 U.S. 81, 100–03 (2006). 8. 28 U.S.C.S. §1331. 9. 28 U.S.C.S. §1332. 10. See 28 U.S.C.S. § 1332(d). 11. See, e.g., Helicopteros Nacionales de Columbia v. S.A. Hall, 466 U.S. 408, 414-16 (1984). 12. See Fed. R. Civ. P. 19(a); see also 4-19 Moore’s Federal Practice - Civil § 19.02 (2015) (Compulsory Party Joinder Overrides Plaintiff Autonomy to Structure Litigation). 13. See, e.g., Yes To, Ltd. v. Hur, 779 F. Supp. 2d 1054, 1056 (N.D. Cal. 2011). 14. 28 U.S.C.S. § 1391(b).