Lawsuits & Litigation: How to Protect Your Business

As a business owner, it can sometimes feel as though you have a giant target on your back. Knowing that the threat of lawsuits and litigation is ever present, today's business owners must take an active stance to mitigate the risk of becoming a target. But what should you do if avoiding legal action isn't possible? Join me, as I discuss how to avoid lawsuits and what to do if your business is sued.

Lawsuits vs Litigation

Before we go too deep into mitigating your business's lawsuit risks, I need to bring some clarity to the terms, lawsuits, and litigation. How do they differ?

Cornell Law School defines a lawsuit as "a civil legal action by one person or entity (the 'plaintiff') against another person or entity (the 'defendant'), to be decided in a court. Depending on the remedy sought and the venue where the plaintiff files the lawsuit, the case might be heard by a court of law or a court of equity." Once a lawsuit has been filed within a local, state, or federal court system, litigation begins.

On the other hand, they define litigation as "the process of resolving disputes by filing or answering a complaint through the public court system." Basically, the lawsuit is the action and litigation is the process to resolve the action. It can involve securing legal counsel, gathering evidence, giving and hearing depositions, recording and reading affidavits, filing documents, procuring witnesses, and more.?

Litigation of lawsuits between individuals can last a couple of years or more, so just imagine how long litigation between individuals and businesses can last! When I was involved in a “business divorce” many years ago, litigation for my lawsuit lasted nearly seven years!

Lawsuit and Litigation Costs

The average cost of discovery for small businesses involved in lawsuits between 2006 to 2008 ranged from $621,000 to $2.9 million! Therefore, that cost could be even greater for some businesses. I’ve had many clients take customers to small claims court over a lack of payment. Typically, those clients spend between $3,000 to $15,000 for something as “simple” as that. Similarly, I’ve seen small business owners spend hundreds of thousands of dollars year upon year on litigation costs for lawsuits filed against them.

According to Business Practical Knowledge, the "average small business earning $1 million per year spends $20,000 on lawsuits each year.” The same article also references a study by Klemm Analysis Group that “estimates that perhaps as many as 52% of all civil lawsuits target small businesses each year.” So, there is a lot of money at stake here. As a business owner, you must be prepared for the possibility that you will face a civil suit. But what can you do?

Avoiding Lawsuits Against Your Business

Regardless of how nice of a person you are, or how great your business practices are, you're not immune to the dangers of a lawsuit. Aside from the obvious financial burdens that come with litigation, you and your business will be under tremendous stress during this time. Additionally, litigation can have a big impact on the value of your business. With that understanding, it's best to simply avoid lawsuits against yourself and your business. But how?

I like to follow the advice of Patrick Fraioli, Jr. in his article, Avoid Legal Time Bombs:

1. Have an experienced lawyer review your employment practices to expose areas of weakness.
2. Hire an Intellectual Property attorney to protect your IP and help you avoid infringing on others’ IP.
3. Have a lawyer review your business contracts, employee contracts, and employee handbooks for loopholes and problem areas.
4. Hire an attorney to help you develop a document retention policy for electronically stored information (ESI).
5. Know how to look for fraud and implement internal controls to prevent fraud within your business.

One of the most important members of your advisory board is your attorney. If you don't have one, you have a serious blind spot and should resolve that immediately. You can’t anticipate all the risks within your business, but a good lawyer can.?

What Should You Do If You are Sued?

So, ideally, you want to avoid lawsuits at all costs. But what should you do if someone files a lawsuit against you or your business?

1. First, contact your attorney.
2. After consulting with your attorney, it may be necessary to file an insurance claim (for example, you may need to file a claim with the company that handles your malpractice insurance).
3. Then, keep your mouth shut. Don’t speak to anyone who isn't involved in the lawsuit. You don’t want to throw fuel on the fire.
4. Participate, willingly, in any investigation for the lawsuit. You'll need to speak honestly but with caution. Answer attorneys’ and insurance agents' questions well enough to provide the necessary information without providing unnecessary information.
5. Finally, follow your lawyer’s advice about what to do once liability is determined. Let them guide your actions. For example, will you settle out of court, or will you defend yourself in court?

I sincerely hope you never have to face litigation as a small business owner. Speaking from personal experience, being sued is a nightmare. Whether you are culpable or not doesn’t matter. Any lawsuit you face can send you and your business into a tailspin.?

Regardless of how protected you think you are from lawsuits, you should still “lawyer up.” Have your attorney review your contracts, agreements, operations, and practices. Shore up your legal protections to protect you AND the value of your business.