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Updated Apr 19, 2024

How to Handle a Business Lawsuit

Business owners are vulnerable to lawsuits. Learn common lawsuit types as well as how to handle one, deal with insurance and protect your company.

Mark Fairlie
Mark Fairlie, Senior Analyst & Expert on Business Ownership
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If you’ve been in business for any period of time, you know anyone can sue your company for any reason whatsoever. Frivolous and fraudulent claims happen every day. Of course, there are also legitimate scenarios in which you might be sued, such as an older client who slips, falls, breaks their hip and sues you for medical costs. 

Regardless of why you’re being sued, handling the situation methodically will protect your business and minimize damages.

How to handle a business lawsuit

How you handle a business lawsuit is important. Your goal is to settle the suit advantageously for your business. Lawsuits can be time-consuming. Ensure you do what you need to do efficiently so you can still focus on generating revenue. 

Follow these key steps to handle a business lawsuit. 

Step 1: Confirm the named defendants.

Make sure the lawsuit documents list the correct business entity. If you have a business entity, such as a limited liability company (LLC) or C corporation, make sure the company name is correct. You may be personally named in the lawsuit as well but remember that the reason you have a business entity is to separate liability. The plaintiff must have a clear-cut reason to include you personally in the case. 

Step 2: Gather all records.

The first thing you’ll want to do is gather all records relevant to the case. This includes contracts, email correspondence, receipts and anything else about the client. Don’t make a judgment on whether you think the data is relevant to the case or not. Gather it and create a file to take to an attorney for review. 

TipBottom line
It’s better to give your attorney too much information and let them decide which details are relevant to the case. You might not be thinking strategically as an attorney would. Collect all the data you can and hand it over.

Step 3: Call an attorney.

Companies should hire an attorney to make sure they have general commercial legal support when they need it. These types of subscription services help ensure business owners are obeying all the rules and regulations that apply to them.

Hiring a business lawyer, however, is essential to defend your company when someone takes action against you. While you can defend your own business and act as your own counsel, this is a high-stakes strategy that most lawyers and judges would probably caution you against.

If your business doesn’t already have an attorney, get in touch with one. Review the lawsuit’s details with them and put a plan in place. 

Keep in mind that attorneys tend to specialize in certain areas, so ask your attorney if they are experienced with your type of case. You may find yourself referred out or shopping for a specific type of attorney. Don’t settle for just anyone ― find someone who has been down this road before and can advise you properly. 

FYIDid you know
Refrain from responding to the plaintiff about the lawsuit. You don’t want to say anything that could be misconstrued or used against you. Wait for direction from your attorney, who will likely respond on your behalf.

Step 4: Notify your insurance company.

Your insurance carrier will handle some lawsuits, so call your provider. For example, if someone’s laptop is broken at your place of business and they sue, you can turn this case over to your insurance carrier. The carrier will provide a legal defense for you and settle the claim or pay any judgment found. That’s why you have insurance.

Insurance covers many types of lawsuits, including copyright infringement, libel and slander, general liability claims, commercial auto insurance claims and professional liability claims. 

It’s in your best interest to call your insurance carrier and see what’s covered and what isn’t. Many business owners would be surprised to find out that their insurance covers many common litigation issues. When your carrier covers a lawsuit, you don’t need to retain legal counsel; the insurance carrier will do this for you.

Did You Know?Did you know
A business owner's insurance policy bundles liability coverage into a single policy, so small businesses can save money by paying one premium.

Step 5: Decide how to proceed.

When someone sues you, there are several ways that you (or your attorney) can respond. There is often a deadline to reply to the initial court filing to respond to the situation. 

You could admit to the actions you are accused of and pay the claim. You could deny the claim. You could also counter-sue the plaintiff. Compile your defense and determine whether you want a jury trial, a judge trial or mediation. Remember that you or your insurance company can offer a settlement if you want to remedy the case quickly and move on. 

Talk to your attorney about the pros and cons of each option and how you should proceed. While no one likes to settle, especially if they feel they’re in the right, it’s sometimes the best way to keep legal costs down and save precious time and energy. 

Step 6: File a response.

Work with your attorney or insurance company on your response to the claim. This will include documentation that supports your side of the story. Make sure to do this within the given timeframe, usually 30 days. 

Be completely honest with your attorney and don’t hold back any details. They are on your side and are there to help you. If they don’t know all the details, they risk being blindsided by something that comes up in the case. 

What types of disputes can lead to a business lawsuit?

All business owners should be aware of the common lawsuit types that may affect their business. It doesn’t matter if you’re right or wrong. If you’re sued, you must defend yourself and that takes time, energy and money. 

These are some of the types of lawsuits you could face:

  • Breach of contract:A client could accuse you of not living up to the terms of your agreement. Lawsuits can stem from breaches of written or oral contracts. If you fail to live up to the terms of a contract ― or are perceived to fail ― you could face a lawsuit. 
  • Intellectual property disputes:You might be accused of infringing on someone’s copyright or trademark in your advertising materials. Before a lawsuit, you’d probably get a cease-and-desist letter to evaluate whether you are indeed in violation. 
  • Libel or slander accusations:You or one of your employees could be accused of slandering a competitor to gain more market share. 
  • Fraudulent behavior:You or one of your employees could be accused of fraud. Depending on the circumstances, this type of lawsuit might also be accompanied by criminal charges. 
  • Partnership disputes:Partners could disagree about purchase or sale agreements, bylaw violations or compensation issues. While most partners would not expect to have a dispute when starting, these lawsuits are common in the business world. [Related article: How to Dissolve a Partnership Agreement]
  • General liability claims: If someone gets hurt or incurs property damage due to your business operations, you could be sued for those damages ― especially if you don’t have general liability insurance
  • Professional liability claims:A client may say you gave them the wrong advice or otherwise incorrectly performed your professional duties, leading to injury or property damage. This could result in a lawsuit ― especially if you don’t have professional liability insurance
FYIDid you know
Intellectual property is one of the 30 business legal terms we recommend entrepreneurs get familiar with.

How to protect your business from a lawsuit

Protecting yourself from lawsuits is essential. Having a plan in place saves valuable time, energy and critical financial resources. Fortunately, there are ways to reduce your chances of getting sued. 

1. Get the right insurance.

Talk to your insurance agent about common claims your business might face and make sure you have the correct type of business insurance. Insurance can cover many lawsuit claims, but only if you have the proper coverage.

The best liability insurance providers will help you find the balance between being adequately insured and going over budget and over the top with insurance coverage. You want to insure your most significant risks.

Did You Know?Did you know
With lawsuits on the rise, professionals should consider another professional liability insurance type called errors and omissions insurance. This insurance covers claims of professional wrongdoing when providing services or advice.

2. Create an employee handbook.

Employee handbooks are guides on how to represent the business. Create a clear handbook that addresses dealing with competitors, dealing with upset customers and keeping a safe working environment. 

This goes a long way toward mitigating any situations that might lead to a lawsuit as can making sure your employment contract is watertight in the first place. 

TipBottom line
If you want to protect important company information from getting out into the open, consider asking all employees and contractors to sign a nondisclosure agreement.

3. Practice role-play scenarios with employees.

Often, having a handbook isn’t enough. Role-play scenarios with employees to practice how to handle certain situations. This might include anti-harassment training, interview training and diversity training

Role-playing is a great way to walk through what might be said and what can happen. It’s an excellent tool to help employees learn what’s expected of them in key situations. While you can’t prepare them for every scenario, you can prepare them for many. 

4. Adhere to safety protocols.

Develop and adhere to safety protocols to prevent workplace accidents. This might include posting signs when floors have been mopped and are wet to prevent slip-and-fall claims. It could also include workplace safety protocols to prevent employees from getting hurt. For example, you might require safety goggles for anyone who works on specific machinery or a safety hat for anyone who enters the manufacturing plant. 

Preventing injuries is a crucial way to avert lawsuits and mitigate the effects of any lawsuits that occur. You’ll be able to point to your safety measures and show that your business is not negligent. 

FYIDid you know
If an employee is injured on the job, their claims are covered by workers’ compensation insurance. When an employee receives compensation for their injury or illness, they waive the right to sue their employer.

5. Write clear contracts.

Contract disputes often happen because of ambiguity in the written terms. Work with your attorney to develop clear contracts that state exactly what your responsibilities are. This helps reduce the number of claims saying that you’re in breach. Also, if you’re sued, a clearly stated agreement can be helpful to back up your side. 

What to do during and after business litigation

Once you’ve filed a response, it may take time before you hear anything back. In some cities and states, especially in matters of civil law, months or years pass before a case comes to trial.

During litigation

If you have decided not to settle out of court and/or you’ve launched a counterclaim, one of the next stages in the process is discovery. 

That’s when both sets of lawyers request all evidence and information related to the dispute from each other. If the other side is slow to respond, your solicitor may suggest launching a discovery motion with the court to compel the other side to act more quickly.

Both sides will seek to secure witnesses — subject matter experts in particular areas of law like professional negligence, health and safety, malpractice in the case of healthcare businesses and so on — to testify. Both sides may also attempt to lodge pretrial motions to prevent certain witnesses from participating in the process for a variety of reasons as well as get the case thrown out with a summary judgment.

While this is happening, concentrate on running your business normally. Try not to make public comments about the case. Keep in touch with your lawyer and if the other side’s lawyers need something from you, deliver it to your solicitor as fast as possible and let them handle it.

As time goes on, you and/or the other party might become keen to move on. If that’s the case, inform your lawyer that you’re open to negotiations. Likewise, if the other side wants to talk, hear what they have to say. There may be an opportunity to come to a belated agreement without ever having to see the inside of the court.

After resolution

Whatever the result of the case, whether it goes to court or not, take this as an opportunity to learn. Even if you’re not legally compelled to alter your contracts or internal policies, changing them anyway could perhaps prevent this situation from occurring again.

There may be other fallout from the case that you should get on top of as quickly and confidently as possible. 

You should let your staff, investors and other related parties know what the result of the litigation was as well as the potential consequences of the outcome. If there is a possibility of reputational damage as a result of the case, you may wish to engage with a public relations firm to develop a strategic communications plan to help you rebuild trust with staff, customers and investors. 

If it’s a high-profile case, there are online reputation management firms that can promote and rank positive content about your business so that you can attempt to wrest back some of the narrative about your company.

The most productive medium- and long-term step you can take after litigation is to focus on growing your business. Let the quality of your products, service and aftercare be your most effective marketing technique and statement to the outside world.

Examples of real-world business lawsuits

Businesses take each other to court regularly. Even in well-publicized, high-profile cases, there are lessons that small and medium-sized business (SMB) owners can learn from each one.

Here are three well-known examples.

1. Apple vs. Samsung: Patent infringement lawsui

The world’s two largest phone manufacturers, Apple and Samsung, ended a seven-year-long legal battle in 2018. Apple had alleged that Samsung had copied many of the iPhone’s functions that were patented like the app grid on the home screen and the tap-to-zoom functions.

For SMB owners, this should be a stark reminder that the intellectual property of others must be respected when you’re developing products and services. It’s on you to do the required research to ensure that the innovation or change you want to include in your products and services doesn’t already belong to someone else.

As an example of seemingly trivial processes that large firms can lock in for themselves, Amazon patented one-click buy buttons in 1999 and defended it successfully until the patent expired in 2017. This is though it never was a revolutionary feature or research and development breakthrough.

2. easyJet: A protective brand 

easyJet is a British low-cost airline that flies to over 30 countries. Part of the easyGroup conglomerate, its companies share the same brand elements to convey a uniform corporate presence. This includes the word “easy” in lowercase at the start of a brand name as well as the use of the Cooper Black font and a Pantone 021 background, a distinct orange shading.

The company has sued or threatened many other companies in its long history. Examples include a London pizzeria called “easyPizza,” a curry house called “easyCurry,” a London driving school called “Ezee Drive” and more. They also announced legal action over Netflix’s use of the word “Easy” in the program title of one of its comedy series.

SMB owners should exercise extreme caution when naming their company, products and services. That’s because it seems that there is a David vs. Goliath newspaper headline every other week about a big multinational pursuing a mom-and-pop business. 

You may believe that all publicity is good publicity, but it’s hard to argue that case in these circumstances. The impact of a few column inches informing others of your battle will be short-lived. After that, you have to find the money to change your vehicle wrap, shop signage and website domain name, making it expensive publicity.

3. McDonald’s: An alleged sexual harassment case

In America and the United Kingdom, staff members in some McDonald’s restaurants claimed they experienced sexual harassment in the workplace. At least one case has been settled in America and, in Britain, a group litigation order, the U.K. version of a class action lawsuit, has been launched.

For SMBs, this case underscores the importance of having clear, unambiguous guidelines on staff behavior against discrimination and harassment. Although no amount of training and a culture of whistleblowing will ever be a 100 percent guarantee that behavior of this nature won’t occur, you can mitigate some of the damage by showing that your company made a conscious, ongoing and good-faith effort to prevent it.

Business lawsuit FAQs

Here are some common questions about business lawsuits.
When faced with a lawsuit, refrain from reacting emotionally to the plaintiff. Methodically going through the claim with your attorney and providing honest information is paramount. Don’t exaggerate details. Don’t put off or ignore the claim, either, and don’t talk about the case to anyone outside of it. For example, don’t post anything about it on social media.
If you lose a lawsuit, a judgment is made against you. If you can’t pay the judgment, the person who received the judgment can take action to collect the money owed. This might include a lien on bank accounts or real property. The other party might also engage debt collectors to get the funds. In many cases, when a major judgment is made against a company that can’t pay, the company ends up filing for bankruptcy. This is why it’s critical to have the right protections in place for your business.
Yes, you can settle the case up until the judge offers a decision. Often, the amount you settle for will be less than the original amount demanded. Once settled, you’ll file the settlement details with the court to close the case.
It’s probably a good idea to settle a lawsuit if the cost of defending it in court is likely to be higher than any proposed settlement you’d have to pay out. In addition, you’ll resolve the case faster and pay your lawyer less.

Kimberlee Leonard contributed to this article.

Mark Fairlie
Mark Fairlie, Senior Analyst & Expert on Business Ownership
Mark Fairlie brings decades of expertise in telecommunications and telemarketing to the forefront as the former business owner of a direct marketing company. Also well-versed in a variety of other B2B topics, such as taxation, investments and cybersecurity, he now advises fellow entrepreneurs on the best business practices. With a background in advertising and sales, Fairlie made his mark as the former co-owner of Meridian Delta, which saw a successful transition of ownership in 2015. Through this journey, Fairlie gained invaluable hands-on experience in everything from founding a business to expanding and selling it. Since then, Fairlie has embarked on new ventures, launching a second marketing company and establishing a thriving sole proprietorship.
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