Courts, dispute resolution and litigation

Disputes are a normal part of business. Customers refuse to pay, suppliers deliver late, partners fall out and employees claim they were treated unfairly. Most disputes are settled by negotiation, and only a small fraction ever reach a trial, but every negotiation happens in the shadow of the courts: what a judge would probably decide, how long it would take and what it would cost set the bargaining range. This lesson explains how the courts are organized, how a lawsuit proceeds, how limitation periods and costs shape strategy and when alternatives such as mediation and arbitration are better choices.

How the courts are organized

The United States has two parallel court systems. Federal courts have limited jurisdiction. The 94 district courts are the trial courts; the 13 courts of appeals (twelve regional circuits plus the Federal Circuit, which hears patent and certain government appeals) hear appeals as of right; and the Supreme Court hears a small number of cases each year, chosen by granting a writ of certiorari. Specialized federal courts include the bankruptcy courts, the Court of Federal Claims and the Tax Court. Each state has its own system, usually with trial courts of general jurisdiction (often called superior, district or circuit courts; in New York, confusingly, the trial court is the Supreme Court), intermediate appellate courts and a state supreme court, which is the final authority on that state's law. Most business litigation, including most contract and tort cases, is heard in state courts.

A federal court may hear a case only if it has subject-matter jurisdiction: a federal question (a claim arising under federal law, such as a federal antitrust or employment discrimination claim) or diversity jurisdiction (the parties are citizens of different states and more than $75,000 is in dispute). A court must also have personal jurisdiction over the defendant. Under International Shoe Co. v. Washington (1945) and later cases, a state's courts may hear a case against an out-of-state business only if it has minimum contacts with the state such that the suit does not offend traditional notions of fair play and substantial justice; a corporation is generally subject to suit on any claim in its state of incorporation and principal place of business. Contracts often include a forum selection clause and a choice of law clause, which courts usually enforce, even in consumer contracts, unless they are unreasonable or unjust.

Alternative dispute resolution

Alternative dispute resolution (ADR) covers methods of resolving disputes outside the courtroom. Negotiation is direct discussion between the parties or their representatives, and it settles most disputes. Mediation adds a neutral third party who helps the parties communicate and find a solution but cannot impose one. It is quick, relatively cheap, confidential and good at preserving relationships, and some jurisdictions require it for certain civil cases. Arbitration is a private trial: the parties choose one or more arbitrators, who hear evidence and issue a binding award that courts will enforce, with very limited rights of appeal. Arbitration is common in construction, commercial and international disputes because the parties can pick experts as decision makers, keep the process confidential and enforce awards across borders under the New York Convention.

The Federal Arbitration Act (FAA) makes arbitration clauses valid and enforceable, and the Supreme Court has read it broadly. In AT&T Mobility LLC v. Concepcion (2011) the Court held that the FAA preempts state rules that refuse to enforce class-action waivers in consumer arbitration agreements, and in Epic Systems Corp. v. Lewis (2018) it upheld class and collective action waivers in employment arbitration agreements. As a result, many consumers and employees must bring claims individually in arbitration. There are limits. Courts can refuse to enforce clauses that are unconscionable under general state contract law. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 lets employees choose court for those claims despite an arbitration agreement. And some businesses have faced mass arbitration, in which thousands of claimants file at once and trigger large filing fees the business agreed to pay.

Small claims courts

Small claims courts offer a simpler, cheaper process for modest disputes. Procedures are informal, parties often appear without lawyers (some states, such as California, bar lawyers from representing parties at the hearing) and filing fees are low. Limits are set by each state and change from time to time. At the time of writing (October 2026), typical limits include $12,500 for individuals and $6,250 for businesses in California, $10,000 in New York City (and $5,000 elsewhere in New York), $20,000 in Texas justice courts, $25,000 in Delaware and $10,000 in Illinois. Check the court's website before filing, because limits are raised periodically and some states set different limits for particular parties or claims.

Stages of a civil lawsuit

A civil action in federal court follows the Federal Rules of Civil Procedure; state courts have similar rules. The plaintiff files a complaint setting out the claims and serves it with a summons. The defendant responds with an answer, which may include affirmative defenses, counterclaims and third-party claims, or with a motion to dismiss for failure to state a claim. Discovery is extensive: parties exchange documents and electronically stored information, answer written interrogatories, respond to requests for admission and take oral depositions of witnesses under oath. Discovery is often the most expensive stage. Either party may move for summary judgment, arguing that there is no genuine dispute of material fact. The Seventh Amendment preserves the right to a jury trial in federal civil cases at common law, and most states guarantee it as well, so jury trials of business disputes are far more common than in other countries. After the verdict and judgment, the losing party may move for a new trial or appeal, and the winner must enforce the judgment if it is not paid.

A litigation hold is one of the most important management duties. Once a lawsuit is reasonably anticipated, a business must preserve relevant documents, including emails, chat messages and files on personal devices used for work. Routine deletion policies must be suspended for those records. Destroying evidence, called spoliation, can lead to sanctions, adverse inferences that the missing evidence would have hurt the party and, in serious cases, judgment against the party that destroyed it.

Who pays the costs

American courts follow the American rule: each party pays its own lawyer, win or lose, unless a statute or contract shifts fees. Many statutes, such as federal civil rights and consumer protection laws, let a successful plaintiff recover reasonable attorney's fees, and many commercial contracts include a prevailing-party fee clause. Contingency fees, often around one-third of the recovery, are common in personal injury and employment cases, which makes it feasible for individuals to sue large businesses. Rule 23 of the Federal Rules of Civil Procedure and similar state rules permit class actions when a court certifies that common questions predominate and a class action is superior to individual suits. Under Rule 68, a defendant can make an offer of judgment; if the plaintiff rejects it and recovers less, the plaintiff must pay the defendant's court costs (though usually not attorney's fees) incurred after the offer.

Limitation periods

Each state sets statutes of limitations, which vary by type of claim. For contracts for the sale of goods, UCC section 2-725 sets four years from breach, which the parties may shorten to not less than one year by agreement. For other contracts, periods range widely: written contracts carry a four-year period in California and six years in New York, for example. Personal injury claims often carry two or three years. Many states apply a discovery rule, under which the clock starts when the plaintiff discovered or reasonably should have discovered the injury, and some add statutes of repose that bar claims a fixed number of years after an act, such as the completion of construction or the sale of a product, regardless of discovery. Federal claims carry their own deadlines; for example, an employee generally must file a discrimination charge with the EEOC within 180 days, or 300 days in states with their own fair employment agency, before suing.

Judgments, interest and enforcement

A judgment is the court's formal order, usually to pay money. Courts add prejudgment interest from the date the claim arose (or another date set by statute) to the judgment date and postjudgment interest until payment, both usually at statutory rates. Interest matters in long cases: on a large claim, several years of interest can add a significant percentage to the award.

Winning a judgment does not put money in the bank. If the debtor does not pay, the creditor uses state enforcement tools: a writ of execution allowing the sheriff to seize and sell non-exempt property, judgment liens on real estate, garnishment of wages (limited by federal and state law) and bank accounts, and post-judgment discovery in which the debtor must disclose assets. Under the Full Faith and Credit Clause, a judgment from one state can be registered and enforced in another, usually through the Uniform Enforcement of Foreign Judgments Act. A debtor with no reachable assets is judgment-proof, which is why checking a defendant's ability to pay is part of deciding whether to sue.