Economists worry about a recession in the next year. (E.g., per Fortune, NPR , CNBC, and MarketWatch.) Whenever the next downturn arrives, businesses should be prepared for increased litigation and regulatory action. Start now by updating contract terms to anticipate tighter budgets and by preparing your team for scrutiny from regulators, customers, and counterparties.

Downturns Yield Upticks

Increased litigation and regulatory activity typically accompanies recessions. Revenues slow, forcing businesses to reevaluate their contracts. Stock prices fall and disgruntled investors pursue shareholder and derivative claims, as well as actions against advisers and brokers. Political pressures prompt rigorous investigations by regulators and self-regulatory organizations. Budget reductions compel layoffs, and unhappy ex-employees level blame, and legal claims, at former employers. Bankruptcy filings trigger litigation over receivables, and disputes erupt over earn-out provisions in M&A agreements. Even businesses lucky enough to avoid direct investigation or litigation still receive third-party subpoenas for documents and testimony.

Five Proactive Steps

Before the next recession, businesses can take action to mitigate the impact of a potential downturn. Happily, this preemptive “downturn diligence” also makes sense in boomtimes.

First, reassess significant contracts. Proactively reassess existing significant contracts, and be mindful about new contracts over the coming months.

• Performance and Termination—Scrutinize minimum-performance obligations that may be difficult to meet in a downturn. Ensure flexibility for termination or modification in the event of economic necessity. Consider whether there are benefits from post-termination rights to return unused goods and services.
• Dispute Resolution—Avoid conferral and mediation requirements that delay dispute resolution and create costs. Consider swift arbitration schedules or litigation venues with accelerated procedures, like the Eastern District of Virginia.
• M&A—Ensure performance and earn-out terms allow for flexibility in future budgeting and business needs during a downturn. Confirm valuations and projections reflect robust analysis for a changing and uncertain environment.

Second, prepare for regulatory actions. Take steps now to reduce costs and better position your defense for regulatory matters and attendant litigation.

• Procedures/Training—Robust preventative policies and procedures, coupled with periodic training on sensitive matters, such as the FCPA, can help businesses demonstrate they are responsible “corporate citizens.”
• Potential “Red Flags”—Regulators expect businesses to proactively address problems, particularly for hot-button issues. And multiple agencies offer lucrative whistleblower rewards for individuals who report misconduct. Businesses should quickly investigate potential concerns and implement appropriate remedial action.
• Public Disclosures—Company statements are among the first things adversaries and regulators scrutinize. Ensure public statements—to consumers, lenders, insurers, and investors—are complete, accurate, and account for anticipated consequences of downward economic pressure.
• Document Retention—Reduce significant document-review burdens and costs by identifying applicable retention obligations and considering protocols to clear unnecessary documents. Yet also ensure retained files contain important evidence, such as documents showing clients received risk disclosures, documenting the rationale for suitability / investment advice recommendations, and other extrinsic evidence.

Third, consider personnel. Taking steps now to bolster workforce morale may help avoid ill-will during downtimes. At the same time, businesses may want to ensure flexibility to make staffing changes.

• Employment Terms—Be explicit in contracts and manuals about whether employment is at-will or subject to certain terms. Ensure that performance and bonus plans will make sense in a volatile economic environment.
• Documentation—Ensure that personnel files are complete and current, reviews accurately reflect employee performance, and performance concerns and improvement plans are documented and tracked.
• Whistleblowers—Businesses and their personnel are best situated to identify and remediate potential issues. Encourage concerned employees to report concerns internally, without fear of retaliation, so the business can thoroughly investigate and appropriately remediate the matter. Better to first address problems internally than through regulators, like the SEC, that offer whistleblowers hefty incentives and can impose costly penalties.
• Trading –Market volatility may increase the perception that trades constitute unlawful insider trading. Provide insider trading training, and individuals should consider implementing a Rule 10b5-1 plan.
• Employee Witnesses—In a downturn, increased litigation and regulatory activity will expose key employees to interviews, depositions, and trials. Consider offering “dry-run” testimony training and, once issues arise, provide individual counsel for officers, directors, and other key employees. Also remind employees about email best practices, lest careless wording later look like a smoking gun.

Fourth, protect the intellectual property. Guarding the IP portfolio will position the business to defend against infringers and trolls during a recession.

• Patents / Trademarks—Inventory intellectual property, ensure appropriate protection, and investigate potential infringements.
• Trade Secrets—Establish procedures limiting access to valuable trade secrets, particularly from departing employees.
• Licenses—Review licensing agreements to ensure they contain built-in protections in the event underlying economic conditions change.

Fifth, proactively control costs. Careful budgeting should not deprive you of professional services necessary to make sound strategic judgments in a downturn.

• Insurance—Review policies and indemnification obligations for coverage of downturn-related risks, including for internal investigations, regulatory investigations, third-party subpoena responses, and cybersecurity events.
• Value-Oriented Outside Counsel—Because modern telecommunications enables attorneys to serve clients anywhere, consider whether counsel outside major markets may offer you a better value proposition. By proactively building ties with firms at various price points now, you can ensure the right-priced firm will know your interests and be ready to protect them in a downturn.
• Systems—Upgrading document management systems, so that the collection, review, and production processes flow more easily, may help reduce legal costs. Companies should also assess their current device usage, data privacy, and cybersecurity policies.

Conclusion

Whether the next downturn comes this year or years from now, planning today for a more onerous regulatory and litigation environment will put your business a step ahead of the competition when trouble comes.

Brian Neil Hoffman, partner with Holland & Hart, counsels entities and individuals through government and internal investigations, and complex litigation matters. Paul Swanson, of counsel with the firm, advises technology companies of all sizes on commercial litigation, intellectual property, and appeals.