Getting sued is a small business owner's worst nightmare. Here's what to do if it happens to you.
- If you're sued, the first thing you need to do is contact a business attorney.
- 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 follow every step of the process carefully.
- Common types of business lawsuits include breach of contract, slip-and-fall accidents and other premises liability, and discrimination.
- This article is for small business owners who have been sued, or who worry about being sued.
Your small business is being sued. Now what? Lawsuits can be filed by employees, clients, vendors or even another business, but no matter who filed it, or if you win or lose, a lawsuit against your company can cost you a lot of money. Business News Daily spoke with legal, human resources and insurance experts to compile a step-by-step guide to help you through your lawsuit, as well as 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.
Step 1: Review the case with an attorney
The first thing you should do when you receive the suit papers is review them carefully with an experienced business lawyer. Braden Perry, a partner and attorney with Kennyhertz Perry, advised checking 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 Krishna Narine, a partner and attorney at Lauletta Birnbaum. "Such records include documents and 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 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 reminded business owners that anything they say regarding the lawsuit can be used against them, so you should not contact the plaintiff at all.
"Once a lawsuit has been filed, you should not communicate with the plaintiff at all," said John R. O'Brien, a retired Chicago-based attorney of 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."
Key takeaway: 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.
Step 2: Inform your insurance provider of the complaint
A variety of business insurance policies exist to cover companies in the event of a lawsuit. Ted Devine, CEO at 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 employer's liability insurance, which is included in some workers' compensation policies. [Read related article: Business Insurance Coverage You Should Have (But Might Not)]
"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 advised 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
Certain types of lawsuits may indeed be covered by a general liability policy, but do not assume that this is the case. Turner said that business owners should 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.
Key takeaway: If you have general liability insurance for your business, it may cover your legal fees. Contact the insurance provider to inform them of the lawsuit and find out if your specific case is covered.
Step 3: Decide how to proceed and respond to the complaint
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 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 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," said O'Brien. "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 an immediate dismissal of all or part of the complaint in lieu of an answer. A judge will grant or deny the motion.
Regardless of what you decide, have an attorney check your response or motion before sending it to make sure 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 will win the case, and whatever judgment the court makes against you will be enforced.
Key takeaway: Work with your lawyer to respond to the lawsuit within the allotted time frame. If you fail to respond in time, the plaintiff will automatically win the case.
Step 4: Find a defense attorney (if you don't have one)
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 thoroughly researching attorneys 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?
DO NOT: Stick with a poor communicator
As with any important business matter, clear, consistent communication is the key to ensuring litigation goes as smoothly as possible. Legal defense is expensive; therefore, you want 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, 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.
Key takeaway: Hire a lawyer that is familiar with the type of claims being filed against you. Choose a lawyer who is upfront with you and gives you frequent updates about your case.
During and after 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. 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 must 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 [Read related article: How to Write an Employee Handbook]
- 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
Key takeaway: Don't hide information from your lawyer, and respond to them promptly. Also, take preventative steps to avoid copycat suits, such as updating your company handbook or providing anti-harassment training to employees.
Most common types of business lawsuits
Some types of business lawsuits are more common than others. Below is a brief breakdown of nine of them.
1. Breach of contract
This type of lawsuit alleges that you failed to carry out the terms of a contract. For example, failing to deliver goods, failing to pay for goods after you received them, delivering damaged or incorrect goods, revealing trade secrets, etc.
2. Slip-and-fall accidents
If someone slips falls on your business's property, whether it's on ice, a wet floor, or the person trips over something, your business could be held liable.
3. Premises liability
Tina Willis, a personal injury attorney and owner of Tina Willis Law, said that these lawsuits come into play when someone is seriously injured or killed, usually by a third party, at a business location. This could be due to a lack of locks and/or security cameras, untrimmed bushes, or no or poor lighting.
4. Auto accidents
If your company car is involved in an accident, especially if it's driven by one of your employees, your business can be held liable. This could be a case for commercial auto insurance, though, and not litigation, Willis said.
5. Discrimination against employees
There are laws against employee discrimination, including disability, race, age, gender identity, sex, pregnancy status and religion. If a case is brought against your business alleging any of these things, you could be heading to court.
6. Discrimination against customers
Your business cannot discriminate or refuse service to customers for all of the protected categories listed above. There have been well-publicized examples of this in recent years, such as bakeries refusing to make wedding cakes for same-sex couples.
Cases of bullying, sexual harassment (including inappropriate jokes or pursuing an employee), physical attacks, and psychological aggravation can constitute harassment. There have been several high-profile cases recently resulting from the #MeToo movement.
8. Employee injury or sickness
Workers' compensation covers the costs of an employee 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. [Read related article: Worker's Compensation: What SMBs Need to Know]
9. Intellectual property rights
Using songs, photos, logos, etc., that don't belong to you could result in an infringement suit against you by the owner of those items. You could be held legally accountable for stealing. [Read related article: Copyright Infringement: Are You Stealing Intellectual Property?]
Key takeaway: Most businesses are sued for breach of contract, on-premises accidents or injury, auto accidents, discrimination, harassment, or IP infringement.
Business lawsuit FAQs
What are business lawsuit settlements?
For many small business owners who are sued, their insurance company often reaches a settlement, said Willis. This is when the plaintiff, the party who filed the civil lawsuit, agrees to accept a reduced sum of money than what they could recover in a jury trial. A business owner can settle a business lawsuit to avoid the danger that a jury could award money damages above the insurance coverage amount. Settlements happen frequently in class-action lawsuits, where an entire class of people have sued 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 elaborated.
What types of courts hear business lawsuit cases?
Willis said that plaintiffs can file lawsuits in several different types of courts, including small claims court (though lawsuits in small claims court are much less concerning because there is a cap on monetary damages), state 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.
What will a business lawsuit cost me?
If the business owner has the appropriate insurance coverage, a lawsuit will cost the business owner only the amount of their insurance premium and deductible, Willis noted. However, if a lawsuit goes to trial, it can cost a small business owner anywhere from $50,000 to $100,000, according to Ian Kelly, vice president of operations for NuLeaf Naturals, as well as other legal experts. However, it could be much higher than that. The sum of money a business pays depends on the dispute and severity of the allegations.
Key takeaway: Business lawsuits are expensive and may cost a small business owner $50,000 or more. In many cases, it may be less expensive for the business to pay a settlement than fight it in court, even when the business is innocent.
Real-world examples of business lawsuits
Dispute over photo usage
Sometimes, people threaten to sue your business to get something from you that they want. In some cases, it is legitimate, and in some cases, it is not. Janice Wald, a blogger and blogging coach ran into the threat of a lawsuit with her blog. Here is her story:
"I have a disclaimer on my blog that all content, once sent to me, is mine. 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 story above seems like the best-case scenario, but Lori Cheek, founder and CEO of Cheekd, was not so lucky. Cheek put the trademarks, technology and patents in place for her business to ensure she was protected.
"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.' But that day also put in the cross hairs 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 said she had never met the therapist, and the first time they met or spoke was due to the lawsuit.]
Despite this fact, 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 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 rights issue," said Cheek. "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, the result of being a victim in what is seen as an "epidemic" of frivolous lawsuits.
"The lawsuit claimed that I 'stole intellectual property' to start my own business on the side. 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."
The main takeaway Torres wanted other business owners to know is that public knowledge, such as marketing funnels and SEO knowledge, cannot be used as a claim of intellectual property; still "the lawsuit set me back around $50k in legal fees," said Torres.
Yungi Chu, owner of HeadsetPlus.com, related his story about being sued by a former employee:
"I was recently sued by a former employee. He was fired due to consistently missing and arriving late for work. As a small business, I can't afford to have an employee that's so unreliable. [Chu received a letter from an attorney seeking more than $100,000 in damages.]
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. 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."
Key takeaway: Small business owners may be sued by business partners, former employees or even random individuals. Contact an attorney for help resolving your legal issues.
Additional reporting by Marci Martin and Nicole Fallon. Some source interviews were conducted for a previous version of this article. Some stories have been edited for length and clarity.