Your small business is being sued. Now what? Lawsuits can be filed by employees, clients, vendors or even other businesses, but no matter who filed it, or if you win or lose, a lawsuit against your company can cost you a lot of money. We spoke with legal, human resources and insurance experts to compile a step-by-step guide to help you through your lawsuit, as well as a list of missteps you should avoid.
Please note that this article does not replace legal counsel. If your business is sued, we urge you to consult an attorney before taking any action.
If your business gets sued, your first reaction is likely to be an emotional one. That’s a normal response, and it’s important to process your feelings. But it’s even more important to take swift action. Follow the steps below to start the legal process on your end.
When you receive the lawsuit papers, the first thing you should do is review them carefully with an experienced business lawyer. Braden Perry, a partner and attorney with business and litigation law firm Kennyhertz Perry, advised checking the caption and service information on the lawsuit to ensure 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 your company to preserve all data that may relate to the legal action.
“It is extremely important you preserve all records that have any relationship to the case, no matter how tangential,” said Krishna Narine, a partner and attorney at Salmon, Ricchezza, Singer & Turchi. “Such records include documents and electronic material, such as email and webpages, photos, videos and voice messages. If you have a document destruction policy, suspend it until you have consulted with your lawyer. In addition, if appropriate, take pictures and/or video, and be sure to include identification of the time and date of those images.”
DO NOT communicate directly with the plaintiff.
Many of our experts stressed that anything business owners say regarding the lawsuit can be used against them, so they shouldn’t contact the plaintiff.
“Once a lawsuit has been filed, you should not communicate with the plaintiff at all,” said John R. O’Brien, a retired attorney from the Chicago-based firm O’Brien, Watters & Davis. “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 relationship [with] – you should make it clear that you will not discuss that lawsuit with them.”
If your business is sued, contact a business attorney to review the case. Do not contact the plaintiff to attempt to resolve the issue on your own.
A variety of business insurance policies exist to cover companies in the event of a lawsuit. Ted Devine, CEO of executive management consulting firm 771 Advisors, 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 employers liability insurance. [Learn how to choose small business insurance.]
“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 covers 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 & Weiss. “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 apprised of any claims against them, even if an insurance company is involved in defending the case.
DO NOT assume your insurance will cover the suit.
A general liability policy may indeed cover certain types of lawsuits, but do not assume this is the case. Turner said business owners should consult with their insurance providers to confirm whether the lawsuit is covered, as the specific circumstances of the suit may exclude it from the policy.
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 who can defend your case. However, depending on the situation’s complexity, you may want to seek 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 an employee brings a case, 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 thoroughly researching attorneys and getting recommendations from trusted colleagues. From there, you can evaluate the quality of the attorney by asking questions such as these:
DO NOT stick with a poor communicator.
As with any important business matter, the key to ensuring litigation goes smoothly is clear, consistent communication. Legal defense is expensive, so you need a knowledgeable, forthright attorney. Krugel said to be wary of lawyers who won’t give you a straight answer or who attempt to withhold information from you.
“If a lawyer can’t explain something to you in plain English, run away,” he said.
Keith Dennen, an attorney with Farris Bobango, added that a good lawyer should provide you with frequent status reports in addition to copies of all important pleadings and correspondence about the case.
Hire a lawyer who is familiar with the type of claims filed against you. Choose a lawyer who is upfront with you and gives frequent updates about your case.
When you receive a lawsuit, you’re issued a deadline to submit a written response. Deadlines vary from state to state, but they typically fall within 30 days of receipt. Your answer should include the following items:
There are a few critical factors to consider before you submit a response:
“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 Freeman Mathis & Gary. “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 an alternative dispute resolution to the plaintiff.
“[Ask about] the pros and cons to proceeding with the lawsuit,” added Merlyne Jean-Louis, a business and entertainment attorney at Jean-Louis Law. “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 affect your options for resolution. If the claim is not covered, you should determine approximately how much it will cost you to both defend yourself and pay the ultimate judgment should you lose the case, O’Brien advised. He also noted 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 said. “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 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 an immediate dismissal of all or part of the complaint in lieu of a response. If you decide to file a motion seeking dismissal, you will have to explain why you believe all or a portion of the case against your company is invalid. A judge will grant or deny the motion after the plaintiff responds.
Regardless of your decision, have an attorney check your response or motion before sending it to ensure you’ve addressed everything properly.
DO NOT ignore the suit.
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 may automatically win the case, and whatever judgment the court makes against you will be enforced.
Work with your lawyer to respond to the lawsuit within the allotted time frame. If you fail to respond in time, the plaintiff could automatically win the case.
The litigation process can be long and stressful. The attorneys and HR professionals we spoke with provided some tips to keep in mind throughout the process and beyond.
Some types of business lawsuits are more common than others. Here are brief breakdowns of the kinds of cases you might encounter as a business owner:
This type of lawsuit alleges you failed to carry out the terms of a contract. Some possible breaches of contract include failing to deliver goods, failing to pay for goods after you received them, delivering damaged or incorrect goods, or revealing trade secrets.
If someone slips and falls on your business’s property, your business could be held liable. Your business is especially at risk if the fall occurred as a direct result of dangerous conditions, like wet floors, tripping hazards or an ice patch.
Premises liability lawsuits are filed when someone is seriously injured or killed, usually by a third party, at a business location. This could be due to factors such as a lack of locks and/or security cameras, untrimmed bushes, or no or poor lighting.
If your company car is involved in an accident, especially if the vehicle is driven by one of your employees, your business can be held liable. However, this could be resolved through commercial auto insurance instead of litigation.
There are laws against employee discrimination on the basis of protected categories, including disability, race, age, gender, sexual orientation, pregnancy status and religion. If a case is brought against your business alleging any of these forms of discrimination, you could be heading to court. [Make sure your business is in compliance with ADA regulations.]
Your business cannot discriminate against or refuse services to customers on the basis of any of the protected categories listed above. Cases of discrimination on the basis of sexual orientation have garnered significant media and legal attention in the past few years and would deeply tarnish your company’s reputation if it happened to you. If it does, read our guide to choosing a reputation management service to repair your business’s image.
Cases of bullying; sexual harassment, including inappropriate jokes or comments; physical attacks; and psychological aggravation can constitute harassment in the workplace. In some cases, workplace harassment can lead to both civil and criminal lawsuits.
Workers’ compensation covers the costs of an employee’s injury or sickness if it happens at work or is somehow related to work. Having proper workers’ compensation coverage is crucial to protecting your business from further legal action.
Using songs, photos, logos or other designs that don’t belong to you could result in an intellectual property infringement suit against you by the owner of those items. You could be held legally accountable for stealing their work or closely imitating it without credit.
Different types of business law offenses are subject to various penalties, statutes of limitations and sometimes even criminal charges. Conduct thorough research to understand each of these factors if you’re worried about a potential lawsuit.
Small business owners who are sued often reach settlements through their insurance companies, said Tina Willis, an attorney at Tina Willis Law. This is when the plaintiff, the party who filed the civil lawsuit, agrees to accept a smaller sum of money than they could recover in a jury trial. A business owner may settle a business lawsuit to avoid the risk that a jury could award financial damages exceeding the insurance coverage amount. Settlements frequently happen in class-action lawsuits, in which an entire class of people sues a business, often in federal court. Class-action lawsuits can be brought against business owner defendants in employee lawsuits or even for breach of contract in civil lawsuits.
Willis said plaintiffs can file lawsuits in several court types, including small claims courts, in which monetary damages are capped at relatively small amounts depending on the state; state courts; and federal courts. Federal lawsuits are among the most expensive for business owner defendants because federal lawsuits, and procedural and evidence rules in court, are more complex and time-consuming (for the lawyer) than civil suits in state court.
With the appropriate insurance coverage, a lawsuit that does not go to trial will cost the business owner only the amount of their insurance premium and deductible, Willis said. However, if a lawsuit goes to trial, it can cost a small business owner a sizable chunk of money. An average employee lawsuit could cost a company $200,000, according to Nakase Law Firm, but that’s a generalization. The sum of money a business actually pays depends on the dispute itself and the severity of the allegations.
Lawsuits are expensive, potentially costing a small business owner hundreds of thousands of dollars. In many cases, it may be less expensive for the business to pay a settlement than to fight it in court, even when the company is innocent.
New lawsuits are filed every day. Though it’s impossible to keep up with every legal action, it would be wise to stay on top of major litigation in your industry. Even if the case seems small, it can be helpful to learn from other businesses’ legal woes.
Sometimes, people may threaten to sue your business as leverage to obtain their desired outcome in a dispute. In some cases, it is legitimate, and in others, it is not. Janice Wald, a blogger and blogging coach, ran into the threat of a lawsuit related to the content of her blog posts.
“I have a disclaimer on my blog that all content, once sent to me, is mine,” Wald said. “I let a reader guest post. We had actually become friendly, so I was blindsided when she implied that she was going to sue me. She sent me her content and the image for the post, which she had taken herself. I was impressed with her image. We’d had email correspondence about the image. I drew the conclusion that what she wrote meant I could use the photo.
“I used the photo many times as my image for blog posts; then, she contacted me implying she was going to sue me unless I took the image down. I reread my disclaimer saying all content is mine once sent to me. However, my husband and I agreed trying to fight what might be a lawsuit wasn’t worth the trouble. Seeking a compromise, I asked if I could link to her blog from the posts where I used her image. She agreed.”
The situation above was resolved relatively quickly, but Lori Cheek, founder and CEO of the dating app Cheekd, was not so lucky. Cheek put business trademarks, technology and patents in place for her company to ensure she was legally protected, but that decision didn’t necessarily pay off.
“One of the greatest opportunities of my life came when I had the chance to pitch my startup, Cheekd, on an episode of Shark Tank,” Cheek said. “But that day also put [me] in the crosshairs of someone who watched a re-airing of that episode in July 2015.
“Two years later, that individual named me in a $1 million lawsuit that claimed he ‘invented’ the idea behind my company while also accusing his former therapist in the same lawsuit of sharing his alleged invention with me,” Cheek added. … “It took over 10 months and $50,000 to get the case in front of a judge, who dismissed the lawsuit in a pretrial conference.”
Just when Cheek thought that was the end of it, the same individual filed a new lawsuit with the same allegations but was now seeking $5 million and claiming the inventor’s right to her patent.
“Fortunately, the judge dismissed the $5 million claims, but I was still forced to fight the inventor’s rights issue,” Cheek said. “I found myself again fighting to protect all that I have created over the past 12 years by spending over $114,000 to save what is mine.”
Cheek faced a third lawsuit by the same individual for defamation after Cheek went to the press. Today, Cheek’s business is all but destroyed and her funds depleted as a result of the lawsuits.
Jon Torres, founder of marketing firm Brand Lovely, was sued by his ex-business partner over alleged trade secrets.
“The lawsuit claimed that I ‘stole intellectual property’ to start my own business on the side,” Torres said. “The intellectual property was said to be ‘SEO secrets and digital marketing know-how.’ While I did have other businesses on the side, the claim was too weak to hold up in court, and the case was ultimately dropped by the plaintiff. The process was invasive, took a lot of digging through old documents and conversations to build a strong case, and my emails were subpoenaed. The case lasted about six months.”
One takeaway for business owners is that public knowledge, such as marketing funnels and SEO expertise, cannot be used as a claim of intellectual property. Nevertheless, “the lawsuit set me back around $50K in legal fees,” Torres said.
Yungi Chu, owner of HeadsetPlus.com, shared his story about being sued by a former employee who was seeking more than $100,000 in damages.
“He was fired due to consistently missing and arriving late for work,” Chu said. “As a small business, I can’t afford to have an employee that’s so unreliable. It was my first lawsuit. It was shocking in the beginning.
“After I spoke to my attorney, he said he has seen so many of these ‘ambulance-chasing’ labor attorneys demanding large amounts of money; most of them don’t have a case or very little case to work with,” Chu explained. “Many will stretch the truth so it sounds much worse than it is and have little evidence to back it up. That’s exactly what happened in my case. My attorney replied to the legal demand, showing my evidence of his work behavior (workdays missed and the number of tardies), and we never heard back again from the employee or his attorney.”
In short, small business owners may be sued by business partners, former employees or even random individuals. Contact an attorney for help in resolving your legal issues.
Cailin Potami, Marci Martin and Nicole Fallon contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.