What to Do Before I Sue: A Thoughtful Approach to Resolving Commercial Disputes

ASA members call us from time-to-time about commercial transaction issues.  They may tell us that a part is not good.  They may complain that someone did not pay for a part.

We appreciate knowing about these issues because it helps us recognize industry trends that reflect opportunities for ASA to help the industry improve.  For example, in response to concerns about non-payment by non-US customers we increased our education about Ex-Im Bank receivables insurance as a mechanism for mitigating this risk.  When calls reveal a pattern of fraud, we’ve been able to share that pattern with the FAA and/or Justice Department, which makes it easier for them to address the issue and protect safety.

We also appreciate the opportunity to assist our members.  When there is an airworthiness issue we share advice and where necessary we share FAA contact information.  When there appears to be a criminal issue we share appropriate law enforcement contacts.  And sometimes looking at the transaction in a different way reveals a solution that satisfies all of the parties

But occasionally I am asked to make recommendations about litigation.  I’ve been asked questions from time to time about how to balance the pros and cons of suing.  My opinion in this area is based not just on my trade association experience, but also on 25 years of experience as an industry lawyer who has been involved in both trial-level and appellate-level litigation.  The advice in this article is intended for those who feel that they have been wronged in a commercial transaction (defending an accusation brought against you represents a different analysis).

Protect the Innocent to Protect Your Relationships

I often recommend that you begin by examining what you need to do to mitigate your situation. Mitigation can help you but it can also help your innocent business partners.

For example, if you have a customer that is also an innocent victim of the transaction, then it can be a good idea to make sure that your customer is satisfied so that you do not lose a customer because of a business partner’s fault. Losing a customer in addition to being disadvantaged by the transaction imposes a double penalty on you.

And consider the possibility that your business partner may not be as “guilty” as you think.  Gather all of the facts before you decide on a course of action in order to make an educated decision about how to handle the issue.

Don’t Sweat the Petty Stuff (and Don’t Pet the Sweaty Stuff)

I also implore my friends to examine the cost-benefit relationship in the transaction.  How much would it cost to walk away from the issue, rather than suing?  And how much will it cost to obtain the remedy you want?  You should consider the value of your time as well as the value of the assets involved.  If you will invest more to fix the situation than you would recoup, then it might not be a worthwhile investment of your time and energy.

Make sure you know what remedy you are actually seeking before you pursue a particular course of action. Are you seeking financial remuneration? Seeking to protect your reputation? Fighting on principle alone?  Knowing what you want to achieve can influence the remedial path you follow.

There are often many options available in a transaction-gone-wrong.  Reporting, resolution, and suing are just three options – your actual fact pattern may suggest other options as well.

Reporting

If there is a safety issue then you can report the party to the FAA.  You can also report a party who engages in fraud or misrepresentation for selling articles using misleading information in violation of 14 C.F.R. Part 3.  One of the defenses to such a claim is airworthiness (of the article) so the FAA would need to find that the article was not airworthy as represented.

Aircraft parts fraud is a very serious offense.  It has its own statue: 18 U.S.C. § 38.  So the US Justice Department can become interested in any issue that threatens public safety.

One advantage to reporting your issue to the government and letting the government handle it is that your costs are minimal.  However, government lawyers are often overwhelmed with work, though, so there may be some cost on your end if you want them to be successful.  One good way to help them being successful is if you assemble data to support their efforts.  Asking your aviation lawyer to draft a white paper explaining the relevant peculiarities of aviation law and practice can help keep the government on the right track and can make it easier for them to bring the case efficiently.

Two problems with reporting to the government and expecting them to handle the case are (1) you do not have any control over the outcome because it is the government’s case and (2) a successful outcome for the government does not return your money; any fines go into the government coffers (a government victory may contribute favorably to the liability determination in your subsequent lawsuit to recover, but the government fines may also leave nothing to pay your subsequent judgment).

Other Resolution Options

You should examine whether your loss is something covered by an existing insurance policy.  In such a case, your rights typically are subrogated to the insurance company, meaning that the insurance company may have the right to pursue your rights in order to seek their own reimbursement.  Subrogation standards can vary based on the jurisdiction and the language of the insurance contract/policy, so it is important to work with an attorney to understand how your rights are affected if you accept a settlement under an insurance policy.

You should also examine whether mediation or arbitration is an option.  Do your standard terms and conditions include an arbitration clause?  Is the other party willing to consider alternative dispute resolution on a voluntary basis?  I have been involved in alternative dispute resolution both as an attorney and as a non-binding arbitrator.  I find that if the parties are both willing to engage in the process as a mechanism to settle the dispute, then there is a real chance at successful resolution.  But if one or both parties are not serious about the process then the process may be less likely to lead to resolution.

Lawsuit as a Last Resort

Unfortunately, it can the case that your business partner is unresponsive, or is otherwise unwilling to provide redress to your grievances.  The business partner might have good faith belief that it is not at fault.  The business partner might simply have a difficult personality.  In such a case, you may have no reasonable way to recover other than suing the business partner; but this doesn’t mean you have to sue (you can always move on).  You should weigh the decision carefully.

Before bringing a lawsuit you ought to consider these questions:

  1. Do you have a clear right to recovery (if you sue then are you likely to win)?
  2. Does the other party have legitimate counterclaims (it is rather disappointing to sue for $200,000, only to face a $1,000,000 counterclaim)?
  3. Is there another alternative available, like mediation or arbitration (including mandatory alternative dispute resolution required by a contract) and is it something that could yield a successful outcome?
  4. Is the other party the sort who will settle or who will make you go all the way through a lengthy litigation?
  5. Usually you need to pay your own attorneys’ fees:
    1. Will the attorneys fees be more than the potential recovery?
    2. Is there a fee shifting statute or clause in a contract that can permit you to recover your attorneys fees if you are successful?
  6. Where do I need to sue?  Can I sue in my home state or must I sue elsewhere?
  7. What is the timing on the suit?  Have I gone beyond the statute of limitations?
  8. Is the value of the case enough to justify my considerable investment (in terms of sleepless nights and worrying, and time spent supporting the lawyers with information, in addition to the legal fees)?
  9. What are your real goals?  Is there some specific settlement position that you would be willing to adopt to make the litigation go away?  Are you litigating over the principle?  I find that some principled litigants start questioning their own principles when the attorneys’ bills start to arrive; so consider how much you are willing to invest in your principles.
  10. If you win then does the other side have the resources to satisfy the judgment?  It is a hollow victory to win the lawsuit and then find that there are no assets to satisfy the judgment.

There is no magic combination of answers that will lead you down one path or the other; but answering these questions can hep you focus on what is important to you, and whether a lawsuit might be something to consider.  It is often the case that an experienced attorney can help you review the known facts in light of these questions, and can provide useful guidance on the weight that each of these questions might reflect in an analysis.  It is better to hire an attorney for the very limited purposes of analyzing whether a lawsuit is a reasonable option, than it is to jump into litigation with both feet and then find out that it was not the best course of action.

ASA Wins Traceability Case

This week, ASA won an important victory in court for its members.  We used the court system to remove language from FAA Guidance that could have adversely affected the industry.

Recently, FAA published an Unapproved Parts Notice (UPN).  This is not unusual.  But what was unusual was a statement in the UPN that appeared to impose a new traceability requirement on distributors.

The UPN was published by the Scottsdale (Arizona) (Manufacturing Inspection District Office and it stated, in relevant part:

“A distributor (seller) is required to provide sufficient documentation to ensure traceability of their parts to an FAA-approved source.” [hereinafter the “legally incorrect language”]

LEGALLY INCORRECT

This statement misstated the law.  There is no FAA requirement for traceability.  The FAA Chief Counsel’s office has repeatedly stated this in numerous Chief Counsel’s opinion letters.[1]

Furthermore, no record-keeping requirement may be imposed by an agency without an OMB Control Number.[2]  Because the FAA has no requirement for traceability, the FAA has never applied for an OMB control number for a traceability requirement.  Thus, the FAA has not met the legal prerequisites for imposing such a traceability requirement.

Most importantly for our members, the FAA has not defined uniform traceability requirements for aircraft parts.  They have made traceability recommendations in the Voluntary Industry Distributor Accreditation Program of AC 00-56A, but even these recommendations fall short of the requirement established in the UPN.  Because there is no uniform traceability standard, an FAA pronouncement of a requirement for “sufficient documentation to ensure traceability of parts to an FAA-approved source” would create real problems for the industry,, as there are still many (new) legacy parts in inventories that do not have this sort of documentation because it was never required or anticipated when the parts were first manufactured.

This misstatement of the law could have a very real effect on the industry.  Many people in the industry have been wrongly told by FAA employees and others that the FAA has a traceability requirement.  The fact that the Chief Counsel’s office has repeatedly had to state that there is no such requirement[3] gives testament to the persistent recurrence of this issue.

ASA made it clear to the FAA that we do not represent Classic Aero LLC and have no relationship to Classic Aero LCC (the target of the UPN).  Our sole interest was in correcting the text that misstated the law.

The UPN specifically called out parts distributors as an affected party; and it also directed the industry to comply with the recommendations and provide the FAA with additional information concerning the referenced parts,[4] including the means used to identify the source and the action taken to remove them from service.

REQUEST FOR CORRECTION

We asked the FAA to rescind the UPN and reissue it without the legally incorrect language.  We pointed out that removing the legally incorrect language about traceability would do nothing to change the emphasis of the UPN, but it would remove an apparent order to provide documentation that was inconsistent with US law.

Unfortunately, a trade association like ASA Only has a 60 day window to appeal an order of the FAA.  The FAA was unable to provide ASA with a constructive reply within this window so we sued the FAA.

LAWSUIT

ASA filed suit against the FAA on the 60th day of its window.  The ASA Board agreed that this language set a dangerous precedent and imposed a documentation requirement that the industry could not uniformly and conclusively meet for all aircraft parts.

Soon after the suit was filed, we got a phone call from FAA Attorney Richard Saltzman.  Saltzman had done his homework and in his first call he reported that he had discussed the matter with the FAA’s subject matter experts.  And they agreed with ASA.

Not long after this, the FAA issued a replacement UPN that omitted the legally incorrect language.  ASA then rescinded its lawsuit, having gotten what we’d requested.

This is the way we like to win a case: prove to the FAA that there is a better way; and then work together to find a solution that works best for the industry.


[1] E.g. FAA Legal Interpretation Letter from Rebecca B. McPherson Assistant Chief Counsel for Regulations (July 8, 2009) (“the regulations do not require “back to birth” records in order to determine the life status of life-limited parts”); FAA Legal Interpretation Letter from Rebecca B. McPherson Assistant Chief Counsel for Regulations (Aug. 6, 2009) (“there is no Federal Aviation regulation that requires traceability of an aircraft part to its origin”); FAA Chief Counsel’s Interpretation 1992-36 (June 1, 1992) (explaining that “[a] complete audit trail to the origin is not needed for all life-limited parts”).

[2] See, 44 U.S.C. §3512 (preventing the imposition of a penalty for failure to comply with an information collection when the information collection does not comply with the requirement to display a current OMB control number); see also United States v. Hatch, 919 F.2d 1394 (1990) (finding that the Paperwork Reduction Act defense could be raised at any time in a proceding); cf. 5 C.F.R. 1320.5(c) (preventing an agency from imposing a penalty for failure to comply with a collection of information when the public is otherwise protected, as when the agency has failed to comply with the requirement to secure an OMB control number).

[3] See supra note 1.

[4] Coincidentally, this request also appears to be inconsistent with the Paperwork Reduction Act, in that it neither includes an OMB Control Number nor does it advise the respondent that compliance is voluntary.

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