Do what you can now so your company doesn't wind up in federal or small claims courts.
Litigation addiction in the United States costs small businesses more than $100 billion each year. It's not a matter of if it will happen to your business, but when. Seek legal advice now rather than later and get your liability protection nailed down.
Although the specifics of your business determine the types of litigation you may face, business lawsuits generally fall into one of three categories: You may be sued by another business, by one of your customers or by an employee.
Let's take a closer look at the most common grievances and why they might be leveraged.
1. Breach of contract
This means you failed to carry out the terms of a contract. This can take many forms – failing to deliver goods, failing to pay for goods after you received them, delivering damaged or incorrect goods, revealing a trade secret, etc.
You may be sued by another business, typically for breach of contract, says Israel Piedra, a civil litigation attorney at Welts, White & Fontaine. Customers and employees can also introduce litigation over breach of a contract.
2. Slip-and-fall accidents
The name says it all. Someone slips, possibly on a wet surface, and tumbles or nosedives to the ground. These accidents can lead to serious injuries, says Tina Willis, a personal injury attorney and owner of Tina Willis Law. The costs if you lose can run into the hundreds of thousands of dollars, according to Willis.
3. Premises liability
Negligent security means the business had insufficient protection. Protection can include locks, guards, trimmed bushes, lights and security cameras, according to Willis. These lawsuits come into play when someone is seriously injured or killed, usually by a third party, at a business location.
4. Auto accidents
When one of your employees causes an accident while driving a company vehicle, your business can be held liable. Willis notes that if the business has enough commercial auto insurance, the claim will most likely be handled and the owner won't have to worry about litigation.
5. Discrimination against employees
Charges can be issued because of perceived discrimination due to age, race, gender identity, sex, pregnancy status, religion, or disability, such as in cases of wrongful termination or lack of overtime pay. Employees sometimes file whistleblower lawsuits too, but those are less common, Willis said. U.S.-based small and midsize business have a 12% chance of an employee suing them, according to Insurance Journal.
The Americans with Disabilities Act forbids discrimination against anyone with a disability in the workplace, public life, schools, transportation, and all public and private places that are open to the general public.
6. Discrimination against customers
Refusing to satisfy a customer due to their age, race, gender identity, sex, religion or disability falls under this type of civil case. An example would be a bakery owner who refused to make a wedding cake for a same-sex couple.
Another big workplace issue, harassment, includes bullying, sexual harassment (like telling off-color jokes or romantically pursuing an employee), physical attacks and psychological aggravation. Sexual harassment is reported more now with the #MeToo momentum.
8. Employee injury or sickness
As long as the issue happened at work or is related to work, workers' compensation should cover the costs. Never skimp on workers' compensation, as the costs in fines and punishment (potentially including jail time) can be hefty depending on the state. [Read related article: Workers' Compensation: What SMBs Need to Know]
9. Intellectual property rights
Whether it's your logo, an image you found on the web or the name of your business, another company may say you stole from them. You may then be held legally accountable.
What types of courts hear business lawsuit cases?
Depending on the limit in your state, small claims court will address cases ranging from $3,000 to $10,000 in damages. Any complaint with more monetary costs at stake will likely be tried in a state court. If you've violated the U.S. Constitution or a federal law, you'll probably spend time in one of the federal courts. If you don't want to pay attorney's fees to try a case, you need to safeguard your business.
Protecting your venture against business lawsuits
Conducting business at the highest standards for your product or service ranks No. 1 in avoiding legal grievances. Those standards should include exemplary customer service.
"A lot of claims against businesses come from disgruntled customers, unhappy with the customer service they received," Piedra said. "These claims can be avoided if the business owner bends over backwards to make their customers happy." You also need to make sure your premises are safe and well maintained, he said.
Another way to shield your business is to operate as either an LLC or a corporation and observe the formalities of either distinction. Piedra said you don't want to blur the lines between your personal and business identity.
Of course, the right kind and amount of insurance also guards your company against these legal proceedings. Piedra said he tells his clients to discuss coverage needs with an insurance agent. Don't assume that general liability protection is all you need – this doesn't cover breach of contract or errors made by a contractor, accountant, architect and other tradespeople. Those cases would require specialty insurance such as an errors and omissions policy.
"There is insurance coverage you can buy like errors and omissions or product liability, but many businesses don't have it," Piedra said. "Even if you feel the claim (someone lodges against your business) is baseless, attorney's fees can make settlement the wisest option."
Instead of assuming you're covered, talk with others in your industry about disputes that may arise. Consulting with a lawyer about potential exposure is also a good idea, according to Piedra.
"Even if you think you'll be careful, a catastrophic claim can mean going out of business," Piedra said.
Hiring employment defense lawyers to train your staff, draft employment handbooks, and consult with you before you reprimand or fire an employee is another way to protect your assets, according to Willis, and well worth the attorney's fees.
Corporate entities and assets
If you have established a sole proprietorship, you can be held personally liable for most lawsuits, said Piedra. However, as a corporate entity (which includes corporations, LLCs and other legal entities), you're only held liable under limited circumstances, he says.
"This is called 'piercing the corporate veil' and can occur if your company doesn't keep minutes or hold annual meetings and the corporation isn't sufficiently distinguished from the individual," Piedra said. "But this is quite difficult to prove."
A corporation's business assets often have no protection if a court judgment is obtained against the company, Piedra said. That's why strong insurance coverage is so important. As a workaround, some business owners purchase certain assets personally (or through another business entity) and merely lease them to the main business, creating an extra layer of protection. This way, the business assets can be turned over to an individual and then leased back to the business.
For every lawsuit, Piedra said, many more claims are lodged against a business. These claims may come in the form of a demand letter from a law firm representing a customer or another business, and typically a settlement is reached outside of court by the business or their insurance company, he said.
Negative online reviews
The number of slanderous cases emerging because of negative online reviews continues to rise, as these sources of testimonials (when they're positive) have become vital to small businesses.
"Usually they're not deemed defamation," Piedra said. "Typically, that's considered an opinion – even if the business owner disagrees with the review. Even if the review is blatantly false, it's still difficult to prove, and courts are hesitant to prohibit or penalize for an opinion."
As far as bringing legal action against the reviewer, he says it's not economical or practical for a business to pursue.