What should you do when your small business gets sued? Here are 6 things to do, plus 3 things not to do . . . and 5 ways to protect your business from future litigation.
You thought you had taken the steps to protect your business, but you got served with a lawsuit. Frivolous or warranted, it’s important to take all litigation or threats of litigation seriously and to seek out the resources to resolve the issue. At this stage, you may feel frustrated, helpless, and even angry. According to the U.S. Chamber Institute for Labor Reform, 43% of small business owners report having been either threatened with or involved in a lawsuit.
1. Anticipate the Suit
A small business lawsuit will usually be preceded by a legal demand letter, which may be written by the person or entity, or by their attorney. A demand letter will usually contain a demand that your business take a corrective action, and it will make the threat of a lawsuit, but a demand letter is not a lawsuit. Send all demand letters to your attorney – if you have one – for review. Your attorney can evaluate the credibility of the letter and advise you whether or not they think a response is warranted. A true lawsuit will arrive in the form of a “formal complaint” that is typically delivered by a process server; it can also be delivered by the sheriff. It is not worthwhile to try to avoid this person – they will eventually find you.
2. Open the Complaint and Review It
In the event of a lawsuit, it is important to review the details of the suit, and quickly, because you may have a narrow time frame within which to respond. Hearings can be set to occur in just a few days or weeks.
3. Get Legal Advice From A Licensed Attorney
Without a doubt, the first thing you should do if your business is sued is to take information about the lawsuit to an attorney or law firm you trust. If you don’t have one, ask industry peers for a referral. Many attorneys will do a free or flat fee consultation where they can review the suit and go over your options with you before requiring a retainer. It’s a good idea to screen multiple attorneys in order to find one who has the right level of expertise, and who is a good fit.
Going over your case with legal counsel will help you better understand the legal context of the situation – for instance, an attorney can tell you whether the other side has a good case, or whether the case is likely to be dismissed. They may provide you with tips on how to make the matter go away, such as offering to settle.
In some cases, you may want to seek out a specific type of attorney. For instance, if the lawsuit involves tax issues, you would want to seek out a tax attorney; for real estate issues, a real estate lawyer,and so on.
Attorney fees can vary, but they should be communicated up front. Attorneys can charge anywhere from $100 – $1000 / hour and typically work on retainer, meaning you pay them a set amount up front and they charge hours off that amount. An experienced attorney can give you an idea of how much a suit will cost, but it will usually be a range. In the case of a fairly straightforward lawsuit or dispute, an attorney may agree to a flat fee.
When you are working with an attorney, it is important to be extremely candid and to share all relevant information with them. Do not hide information from your attorney; it will not serve you well. In addition, do not destroy or try to hide legal documents from the court process – doing so could be illegal.
4. Get Organized
Collect all of the records you have about the person or entity that is suing you and provide those records to your attorney. This information will be relevant to the case and will be an imperative part of your legal defense.
5. If You Have Business Insurance, Alert Your Insurance Company
If your business has general liability insurance (it should), your insurer may provide you with legal representation – depending on the matter – and may even cover the judgment, should the plaintiff win. If your liability policy does provide coverage, the insurance company will usually furnish and pay an attorney to work on your business’s behalf. Check with your insurance agent if you have questions about what your policy will and won’t cover when it comes to lawsuits.
6. Consider Settling
Your attorney will advise you about whether settling the case is the best way to make it go away. Settling a case may make sense if fighting the case would cost you a lot in legal fees and possibly result in an unpredictable or expensive judgment. Settling can seem a bit like giving up, but it is sometimes the most strategic and least time-consuming option that results in the smallest financial loss. Your attorney will help you weigh the pros and cons of a settlement agreement.
3 Things You Should Not Do If Your Business Is Sued
- Contact the person or entity suing your business directly. This could make you less likely to win the case.
- Ignore the lawsuit. This can result in an automatic judgment against your business.
- Let your legal trouble distract you from the day-to-day operations of your business. Lawsuits are common; let your legal team do the heavy lifting and worrying.
5 Steps You Can Take To Protect Your Business In The Event Of A Lawsuit
- Incorporate your business and keep your business separate from your personal affairs and finances. This doesn’t prevent your business from being sued, but it helps shield your personal assets from liability in the event of litigation.
- Get liability insurance. Insurance doesn’t cover everything, but a general liability policy is a helpful shield for many types of lawsuits.
- Have a lawyer in mind. Seek legal counsel before a lawsuit strikes to make sure your business is buttoned up from a legal standpoint.
- Provide great customer service. Keep your customers happy.
- Treat your employees with respect. Employee lawsuits are a common source of litigation for small businesses. Make sure you are complying with all employee-related laws. Create an employee handbook and make sure your employees are aware of your company’s policies and procedures.