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Start Your Business Startup Basics

You're Being Sued: A Guide to Handling a Business Lawsuit

You're Being Sued: A Guide to Handling a Business Lawsuit
Credit: Paul Matthew Photography/Shutterstock

You hoped it would never happen, but in the back of your mind, you knew it could: Your small business is being sued.

Whether it has been filed by an employee, client, vendor or even another business, a lawsuit against your company will likely cost you a lot of money, whether you win or lose. It's normal to feel overwhelmed, upset and indignant, but if you want to keep your business and its reputation intact during this time, it's important to handle every step of the process carefully.

Business News Daily spoke with legal, human resources and insurance experts to compile a step-by-step guide to help you through your lawsuit, along with critical mistakes to avoid along the way. Please note that this article does not replace professional legal counsel, and if your business is being sued, we urge you to consult an attorney before taking any action.

The first thing you should do when you receive the suit papers is review them carefully with an experienced business lawyer. Attorney Braden Perry of Kennyhertz Perry said that you should check the caption and service information on the lawsuit to ensure that it contains the proper entity or person associated with the issues. If this information is incorrect in any way, you may move to dismiss the action in its entirety, Perry said. If it is correct, you should proceed with reviewing the allegations and put a litigation hold, or preservation order, in place. This requires the company to preserve all data that may relate to the legal action.

"It is extremely important that you preserve all records that have any relationship to the case, no matter how tangential," said attorney Krishna Narine of Meredith & Narine law firm. "Such records include documents, electronic material such as email and Web pages, photos, videos and voice messages. If you have a document destruction policy, suspend it until you have consulted with your attorney. In addition, if appropriate, take pictures and/or video and be sure to include identification of the time and date of those images."

Many of our expert sources reminded business owners that anything they say regarding the lawsuit can be used against them. For this reason, you should not attempt to contact the plaintiff before you've thoroughly reviewed the suit. From there, all communications with the opposing side should be conducted through your attorney and the plaintiff's.

"Once a lawsuit has been filed, you should not communicate with the plaintiff at all," said John R. O'Brien, a Chicago-based attorney. "The time for talking things out and resolving issues amicably ended when they filed suit, so all communication should be through your company's attorney.

If the plaintiff is someone that you must communicate with — a current employee, or another company that you have an ongoing business relationship [with] — you should make clear that you will not discuss the lawsuit with them."

A variety of business insurance policies exist to cover companies in the event of a lawsuit. Ted Devine, CEO of online small business insurance agent Insureon, said third-party injury claims and accusations of defamatory remarks about a competitor are typically covered by general liability insurance. Client allegations that your work caused them a financial loss are often covered by a professional liability policy. Suits from employees may be covered by employment practices liability insurance or employer's liability insurance, which is included in some workers’ compensation policies.

"Should the suit fall under the umbrella of what your policy covers, it's common for your benefits to pay for attorneys' fees, court costs and any settlement or judgment you're found liable for paying," Devine said.

If you believe one of your current policies does cover the suit, get in touch with your insurance provider as soon as possible.

"Most insurance policies require that suit papers be promptly forwarded to the insurer ... to preserve any insurance coverage," said David Turner, a partner at Schulten, Ward & Turner. "If the suit is covered, the insurer or counsel retained by the insurer will defend the lawsuit."

Turner noted that companies should keep their general counsel advised of any claims against them, even if an insurance company is involved in defending the case.

Certain types of lawsuits may indeed be covered by a general liability policy, but do not operate under the assumption that this case is covered. Turner advised business owners to consult with their insurance provider to confirm whether or not the lawsuit is covered, as the specific circumstances of the suit may exclude it from the policy.

When you receive a lawsuit, you are issued a deadline to submit a written response to it, typically within 30 days, although this may vary from state to state. According to a blog post on the Foster Swift law firm website, your answer should include the following items:

  • Admittance or denial of each of the plaintiff's allegations.
  • Your defenses and counter/cross-claims against the plaintiff or other defendants.
  • Whether you want a jury trial or an alternative resolution (e.g., an out-of-court settlement).

Before you respond, there are a few important things you need to consider.

"You need to understand the nature of the claims against you and the potential liability and exposure to your business so you can make a business decision on how to proceed with the case," said Jessica Gray Kelly, a partner at Sherin and Lodgen. "Litigation costs can rise quickly, so if the claim is only for short money, or there is a nonmonetary way to settle the dispute, that may be a better business option for the company."

Kelly recommended asking your lawyer to explain the litigation plan, potential exit strategies and estimated costs at different stages of the proceeding. You should also discuss whether it makes sense to propose alternative dispute resolution to the plaintiff.

"[Ask about] the pros and cons to proceeding with the lawsuit," added Merlyne Jean-Louis, a New York-based attorney. "Although you may not be at fault or have violated any laws, it is sometimes in the best interest of the business to settle."

Your level of insurance coverage may impact your options for resolution. If the claim is not covered, O'Brien advised finding out approximately how much it will cost you to both defend yourself and pay the ultimate judgment should you lose the case. He also said that counterclaims could work in your favor.

"Ask your attorney if there is a basis for a counterclaim against the plaintiff, or a third party that might bear some or all of the liability," O'Brien told Business News Daily. "For example, if a customer is suing because a product was not delivered on time, or was defective, there may be a supplier whose delay in delivering materials, or defective materials, caused the problem. Or the plaintiff may be filing as a defensive measure, knowing that they have some fault ... and may be simply trying to win the race to the courthouse."

Alternatively, you may wish to file a motion to seek immediate dismissal of all or part of the complaint in lieu of an answer. A judge will then grant or deny the motion.

Regardless of what you decide, be sure to have an attorney check your response or motion before sending it to make sure you've addressed everything properly.

Failure to respond to a lawsuit within the allotted time frame gives the plaintiff the right to file a Request for Default, after another 30-day period. This means the plaintiff will win the case, and whatever judgment the court makes against you will be enforced.

If your company has a lawyer on retainer or your insurance carrier is providing an attorney, you won't need to take this extra step to find someone to defend your case. However, depending on the complexity of the case, you may want to seek out an attorney who specializes in the type of lawsuit you were served.

"You will want to retain counsel who is familiar with the type of claims alleged in the complaint, and if possible, who is familiar with the court in which the case has been filed," Narine said. "For example, defending a slip-and-fall case brought by a customer is substantially different from defending a defective-product case. This can be particularly important if a case is brought by an employee, as there are a wide variety of employer-employee disputes, some of which require very specific knowledge, such as employment discrimination cases."

Charles Krugel, a management-side labor and employment lawyer, advised doing thorough research and getting recommendations from trusted colleagues. From there, you can evaluate the quality of the attorney by asking questions such as:

  • Have you ever handled a case like this before?
  • How much can I expect to pay at the outset, and where will the money go — damages, back pay, front pay, legal fees?
  • Where is this case heading, or where can it go?
  • Do you have testimonials from former clients?

As with any important business matter, clear, consistent communication is the key to ensuring litigation goes as smoothly as possible. Legal defense is expensive, so you want to make sure you're getting your money's worth in the form of a knowledgeable, forthright attorney. Krugel said to be wary of lawyers who won't give you a straight answer or attempt to withhold information from you.

"If a lawyer can't explain something to you in plain English, run away," he said.

Keith Dennen, a member attorney with the Nashville office of Dickinson Wright PLLC, also noted that a good lawyer should provide you with frequent status reports, as well as copies of all important pleadings and correspondence about the case.

The litigation process can be long and stressful, but here are a few pieces of advice to follow throughout the case and beyond.

Don't try to cover anything up. "Be completely honest with your lawyer about the facts, they will come out sooner or later, and it is better for your lawyer to be prepared for them than be caught by surprise." – Jessica Kelly

Be diligent and prompt. "Review the attorney's invoices promptly. Ask questions when you have questions. The more you delay in responding to the attorney's requests, the more it costs you." – Keith Dennen

Stay focused on your business. "Don't lose sight of the fact that you have a business to run, and a bottom line to think about. So put aside any feelings of anger or pride. Oftentimes I hear clients say, 'We didn't do anything wrong, why should we pay this person?' The answer is that winning the case can cost a lot more than settling. You have to make a calculation: Will the company be better off, financially, if it pays the plaintiff $20,000 than if it spends $30,000 to win the case? As the saying goes, 'A bad settlement is often better than a good trial.'" – John R. O'Brien

Protect yourself from copycat suits. "In light of any recent employment lawsuit, you should take proactive steps to create an HR foundation that includes creating or updating your handbook; delivering anti-harassment and anti-discrimination training to all employees and management; creating a detailed complaint procedure that is published to all employees; and providing management training on dangerous areas such as interviewing, discipline and terminations. This will not only make an impression on the current case, but it could also stop later accusers in their tracks." – Joseph Campagna, owner of human resources consultancy My Virtual HR Director

Keep your head held high. "Do not let a lawsuit rattle your entrepreneurial feathers. Remain calm and continue to work in your business's best interests." – Merlyne Jean-Louis

Nicole Fallon Taylor
Nicole Fallon Taylor

Nicole received her Bachelor's degree in Media, Culture and Communication from New York University. She began freelancing for Business News Daily in 2010 and joined the team as a staff writer three years later. She currently serves as the assistant editor. Reach her by email, or follow her on Twitter.