Avoiding and Managing Small Claims Litigation

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By Jessica Taran
| Litigation

Small Claims

Though often imagined to be the province of individuals contesting small-dollar disagreements, small claim matters arise in a variety of corporate contexts. In the commercial context, claims of this size (generally, between $1,500 and $25,000, though the jurisdictional limits of actions heard in Small Claims Courts vary depending on the state and county in which the claim is brought) typically arise from consumer disputes, or disputes among parties to a services contract. In such cases, unless the parties to the dispute had previously contracted to limit such claims to a particular forum, a small claims matter will be brought in a Small Claims Court. To the extent that the defendant company does business throughout the United States, it may find itself hauled into a Small Claims Court in a very inconvenient jurisdiction of the plaintiff’s choice. 

Given this reality, this article will focus first on how to avoid this situation altogether in the contractual context. Then, because it is not always possible or practical to avoid a small claims complaint, I’ll discuss optimal management of such claims, whether through settlement or litigation.

Avoiding Small Claims Before They Arise: Contract Language and Considerations

Any lawyer tasked with drafting or approving a commercial agreement (e.g., a vendor services agreement) should consider whether to include a provision requiring the parties to submit some or all claims, including all small claims, to a private mediation or arbitration forum, such as JAMS or AAA. Lawyers electing to include such language should make sure to define the phrase “Small Claims” for the purposes of the agreement, so that a plaintiff cannot contend that the forum selection clause and the waiver of access to a Small Claims Court does not apply to its particular claim.

Requiring alternative dispute resolution for small claims may have the effect of reducing the prevalence of such disputes. The procedural rules of alternative dispute resolution forums may be (or may appear to be) more complicated and/or less familiar than the streamlined procedures associated with Small Claims Court, which are typically designed to be relatively easily navigable for non-lawyers. Accordingly, foreclosing the availability of the Small Claims Court may discourage certain kinds of counterparties from commencing a small claims proceeding.

Consider the following before including such a clause: 

  • Enforcement risk. Foreclosing the availability of Small Claims Court jurisdiction via contract is not without risk – particularly in a contract of adhesion, in which the counterparty to the prepared contract has little or no ability to negotiate terms (e.g., e-commerce user agreements, institutional loan agreements, non-negotiable vendor terms of service). In such cases, a court may decline to enforce the forum selection provision on the grounds that it expressly requires the counterparty with little or no bargaining power to jump through more procedural hoops in order to enforce contractual rights.  
  • Cost/benefit of reduced publicity. Contracting for a private resolution of all claims including small claims may also serve another important function: keeping fraught proceedings in an alternative forum where they may be more likely to remain truly private. Because no public record is created of claims brought against the company, such a contractual requirement may eliminate or at least limit the ability of a counterparty to catalyze bad publicity for a company simply by filing a small, but public, complaint – and thus reduce the incentive to file such a complaint in the first instance. Of course, it’s important to remember that the diminished publicity goes both ways and therefore may impose some unwanted limitations on the lawyer’s company as well. For example, in some cases the company itself might benefit from publicizing the resolution process of a small claim. In other cases, the company may simply be in a better position to withstand scrutiny and so might be able to use as leverage the threat of publicity via the Small Claims Court process.

  • Financial cost. Another factor to consider in contracting away the jurisdiction of Small Claim Courts is cost. Whether via mediation or arbitration, both JAMS and AAA significantly increase the cost of adjudicating small claims – for all parties involved. Certainly, enhanced cost may deter certain counterparties from bringing a claim. But it also means the lawyer’s company must contend with an expanded expense burden when counterparties do decide to pursue these matters. For companies concerned with such costs, a relatively cost-efficient potential alternative has recently emerged: a private online arbitration platform called www.fairclaims.com (“Fair Claims”). This new online platform is marketed as a private forum alternative to Small Claims Courts for all claims under $15,000. The parties do not need to hire attorneys, posted fees are minimal and the process purports to be relatively swift. As with any arbitration award (including, without limitation any award rendered in JAMS or AAA), the added benefit to the respondent in a Fair Claims proceeding (and, conversely, a drawback to the claimant) is that, even though the decision and award are final and enforceable, in order to collect on the award, the claimant would have to confirm the award in a court. Although the confirmation process is fairly simple, it nevertheless would require the victorious claimant to spend additional time and resources on confirmation of the award into an enforceable judgment.

Small Claims Management: Settle or Defend?

Where the defendant in a small claims action can point to a contractual provision requiring arbitration of all such claims, the defendant can move to dismiss the suit on those grounds. However, where no such contractual waiver exists, the defendant must consider whether to settle or defend the suit. One element of that determination is pure economic analysis – i.e. comparing the cost of the claim against the anticipated out-of-pocket costs of defending it. Beyond numbers, defendants must also weigh overall risk exposure, including reputational concerns and the time its officers, directors, and employees will need to devote to defending the matter. 

When settlement at the outset isn’t a viable or an obviously prudent option, the focus shifts to reducing attorney’s fees. Here, the individual at the Company tasked with retaining outside counsel and managing the claim should prepare the file and a memorandum with a factual analysis of the claim in order to ease the process of onboarding litigation counsel. The memorandum should provide a timeline of events, identify all the key parties and witnesses, and set forth the strengths and weaknesses of the claims. Consider having a template memorandum that can be easily completed for each case by in-house counsel or appropriate non-lawyer employees. 

To further keep costs down, litigation counsel’s resolution strategy should generally include a phone call, and a follow up email or letter, to the plaintiff. More often than not, small claims plaintiffs are simply looking for a forum to air grievances and be heard. Though often overlooked, a phone call is a cost-efficient way to try to resolve such matters quickly. Any confirming or follow-up written communication should set forth all of the arguments in opposition to the alleged claims, so that, in the event settlement cannot be consummated, the communication can serve as an answer to the complaint (in many Small Claims Courts, a formal answer is not required and the Court will readily accept a letter setting forth the defendants’ arguments), and be used as an outline for oral argument.

In the event the parties are able to settle the claim prior to the hearing date, the defendant should insist on a written settlement agreement with a general release. Typically, the settlement agreement should also include a confidentiality clause to prevent the plaintiff from publicizing the facts underlying the dispute or any settlement award. If the settling defendant is based in a different jurisdiction than the plaintiff, the defendant should also consider including a choice of venue/jurisdiction provision and a waiver of personal service on the counterparty with respect to any complaint arising from breach of the settlement agreement (e.g.,if a company based in San Francisco is sued in a Small Claims Court in New York and the San Francisco company agrees to settle the claim, it should consider including a provision in the agreement that the courts in San Francisco shall have exclusive jurisdiction over any disputes arising from the breach of the settlement agreement, and the counterparty submits to the personal jurisdiction of such courts). Finally, it is vitally important for the defendant to notify the court of the settlement. If you rely on the defendant to do so, you may end up with an adverse default judgment for failure to attend the hearing.

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