If you've been in business for any period of time, you know anyone can sue a business for any reason whatsoever. In fact, frivolous and fraudulent claims happen every day. Of course, there are also legitimate scenarios in which you might be sued, such as an elderly 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.
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. This type of lawsuit might also be accompanied by criminal charges, depending on the circumstances.
- 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.
- 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.
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 an 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 pertaining to 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.
Step 3: Call an attorney.
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 properly advise you.
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 will settle the claim or pay any judgment found. That's why you have insurance.
Insurance covers many lawsuit types, 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.
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 or not 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.
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 properly insured and going over budget and over the top with insurance coverage. You want to insure your most significant risks.
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 can go a long way toward mitigating any situations that might lead to a lawsuit.
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 in your operations. 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 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 effect of any lawsuits that occur. You'll be able to point to your safety measures and show that your business is not negligent.
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.
Business lawsuit FAQs
Here are some common questions about business lawsuits.
What should you not do in a lawsuit?
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.
What happens if you lose a lawsuit and can't pay?
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 send 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.
Can you settle a debt after a lawsuit has been filed?
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.
When should you settle a lawsuit?
Settle the lawsuit if you can resolve the case faster and for less money than it would cost to fight the lawsuit. Remember that a lawsuit costs money, and you'll be paying an attorney for all their time spent on the case, whether that means a quick email response or filing lengthy court documents. If you think the lawsuit's cost will exceed a proposed settlement, it makes sense to settle.