Most people think that lawsuits happen to other people and other businesses. That is, until it happens to you.
Even the most responsible, savvy business owner is not immune to the potential that an injured client or greedy plaintiff’s attorney will file suit against the company. The truth is nearly half of all small businesses are involved in some type of civil litigation every year. But there are some ways you can help make the process easier on yourself and mitigate the financial and emotional stress. Read on below to find out what to do in case of a business lawsuit.
When can a lawsuit happen?
To assess your chances of being sued, the first step is to figure out where you could potentially be liable or otherwise legally and financially responsible. Since the goal of a civil lawsuit is to end a dispute between two parties (businesses, nonprofits, and individuals), it’s important to be aware of the “civil wrongs” that lead to these cases. Contract disputes are a very common source of liability for businesses. Other civil wrongs small businesses encounter are called “torts.” These could be property torts, liability torts, dignitary torts, infringement liability, and negligence. Other problems could involve employment law, taking into account the many stages of the hiring and management process. Some other case may involve intellectual property rights, like copyrights, patents, and trademarks. Because if you use another firm or individual’s IP for your own business, you could be liable for theft and money damages.
What steps can you take to prevent a lawsuit?
As with most things in life, it’s a good rule of thumb to prepare for the worst but hope for the best. For most businesses, it’s wise to have insurance against a possible lawsuit. General liability insurance typically serves as the first line of defense for lawsuits against small business owners. It will usually cover lawsuits related to false advertising, property damage, claims of an injury on your property, and similar occurrences that may prompt a lawsuit. And depending on the exact nature of your business, you may require more specialized insurance.
Another good way to be prepared for a lawsuit is to have a lawyer you trust on retainer. If you’re looking to find a lawyer after you’ve already been hit with a lawsuit, it can be difficult to find a reputable one. Instead, you’ll want to do your due diligence in advance in order to find a lawyer who is qualified and experienced in small business lawsuit cases. This might require paying a monthly fee so that when you do call, your retained counsel will pick up the phone.
How to handle things if your business is sued.
First, realize that just because you receive a letter from a lawyer does not necessarily mean you have a lawsuit. In other words, the first step is figuring out if you are actually being sued. Lawyers typically issue you what is called a “Demand Letter” or “Cease and Desist Letter” before a lawsuit. This letter will usually provide some of the facts (from their side), their demands, and the consequences of not heeding their demands. They are generally seriously phrased and official looking. If this is what you received from a lawyer or law firm, you haven’t been sued quite yet. But it’s best to reach out to attorney as early as possible.
But if your small business is hit with a lawsuit, your immediate first call should usually be to your lawyer, hopefully one who understand you and your company. As long as you trust your lawyer (and, if you don’t, it’s a definite sing you need a new one), allow him or her to guide you throughout the process and give careful consideration to any advice he or she provides. Remember there’s no point trying to cover anything up, as dishonesty will only hurt your defense. Be honest with your lawyer about the allegations and stick to the facts. Your attorney is there to help you win the case, not to judge you.
Following your lawyer, your second call should usually go to your insurance company so they know the situation and are put on notice. Read your policy carefully regularly so you know the correct steps to take so you don’t waive coverage. Hopefully, they will confirm that your general liability insurance will help protect you both for attorneys’ fees and money damages.
While it is true that all lawsuits are created equal, it is, however, fairly common for a settlement to be the best course of action for a small business owner. Winning a case could be more expensive than settling, so don’t let pride affect your decision-making. Alternate dispute resolution (ADR), such as mediation or arbitration, can be a viable way to resolve issues while avoiding the costs of trial provided both parties agree to it. Ahead of time, you can also write provisions into your contracts that require disagreements to be solved through binding arbitration—almost eliminating the chance of going to trial. Because once you step into a courtroom, the legal fees will start to increase significantly and there is more risk that a judge or jury will not decide in your favor. And even if you’re not at fault for anything, the cost of going to court can put a financial strain on your business both in terms of financing litigation and opportunity cost of being away from running your business.
After the lawsuit is over.
Once the lawsuit is settled, consider taking a closer look at how to avoid this type of litigation in the future. You may want to review the reasons why this lawsuit happened so you can take steps on how to prevent future lawsuits. Think about your business in the long term. Because even if you didn’t do anything wrong, making a few adjustments to avoid additional litigation should be well worth it.