Your company has just been sued, maybe by a vendor or another business you owe money to. You are stunned, speechless, and wondering what the heck will happen next? One of the most common business lawsuits is breach of contract. That means someone says you didn’t do what a contract said you’d do. Maybe you didn’t deliver the goods. Maybe you didn’t pay for them after you got them. Maybe you delivered the wrong stuff or goods that were damaged. Maybe you leaked trade secrets. Whatever it is, and whoever filed it - employee, client, vendor, or another business - a lawsuit can be a major expense. The initial steps that you take after a lawsuit is filed are imperative in determining the outcome of the litigation, so let’s begin.
The Very First Step
First, do not panic or go berserk, and do not ignore the papers. You need to read it, at least to see what is being alleged. The very first step you should take is to meet with a competent and experienced business lawyer to examine the papers in detail. You should make sure the caption is correct, i.e. is it the right company being sued, and make sure that the information as to how the papers were served is accurate. If the wrong company was sued or the papers were not correctly served, then you may be able to move to have the entire suit dismissed. If the papers are done properly, then you should sit down with your attorney and go over the allegations. The next step is to put a ”litigation hold” in place - also known as a preservation order. That means that you must preserve all of the documents that relate in anyway to the allegations in the lawsuit. Examples of such documents include: (1) paper documents, (2) emails, (3) web pages, (4) photos, (5) video, (6) voice mail. Keep anything that touches the case, however remotely, and suspend your document destruction policy until you have spoken with your lawyer. Also, in these circumstances, do not contact the plaintiff directly. Everything you say can be used against you. It’s too late for that, now that they have filed the lawsuit. All communication should go through your attorney.
So the next call is to notify your insurance carrier. General liability insurance often times covers certain kinds of lawsuits, like third-party injury claims and accusations that you defamed a competitor. Professional liability coverage often covers claims where a client is arguing that your product or service caused them a financial loss. Certain types of employee claims are often covered by an employment practices liability insurance or employers liability coverage. In general, where you are covered, your benefits are likely to include paying the costs of attorneys’ fees, court costs and any settlements and judgments in the case. In most cases, where you are covered, your policy requires you to forward copies of the lawsuit papers to the insurer immediately to avoid waiving coverage. If you are covered, the insurer will most likely take over the defense of the lawsuit. Sometimes they will appoint the lawyer that it retains to defend the case. In any event, you should always keep your own general counsel informed. Never assume that you are covered. In certain situations, your policy may not cover you. You should always notify your insurer and check with them.
At this point, if you don’t have a lawyer on retainer or if the insurance company isn’t providing one, you should find a defense lawyer who has experience in that type of case. Ideally, you will also want to find one who has defended cases in that particular court. You should definitely do some research and get recommendations from people you trust. Ask the lawyer: have you defended a case like mine? How much will it cost up front? Where does that money go? What are you planning to do with this case? Can I see any testimonials or recommendations? Never select a poor communicator. “If a lawyer can’t explain something to you in plain English, run away.” The right lawyer sends you frequent status reports and copies of important pleadings and correspondence.
Written Response
There is also a deadline for your written response, and that deadline can vary depending on the state; it typically falls within 30 days of receipt. Your response, called an answer, states whether you are admitting or denying the allegations against you, lists your defenses and counter claims (if any), and states whether or not you request a trial by jury or an alternative resolution, such as an out-of-court settlement. Know what the claim against you is, how much money you’re exposed to and what your risks are. Then you can make an intelligent business decision. Costs go up fast in litigation. Depending on the claim, if it’s for short money or if there’s a nonmonetary resolution you can consider, those are sometimes the better business decisions.
Get your lawyer to explain the overall litigation plan, possible exit strategies, estimated costs at each stage. Discuss whether to propose alternative dispute resolution. Understand the pros and cons of proceeding. Even if you are not at fault, sometimes settling can be in the best business interest of the business. If your lawsuit isn’t covered by insurance, ask yourself roughly how much money it will cost to defend yourself and pay the judgment if you lose. Is there a basis for counterclaims against the plaintiff and/or third parties that may be responsible for some or all of the liability? For example, if a customer sues because your product was late or defective, the problem could be that the supplier didn’t ship on time or that they provided defective parts. Or maybe the original plaintiff is suing defensively because they know they’re at least partially to blame for the failure to perform, and they’re trying to get a shot at victory by getting to the courthouse first.
You can also file a motion to dismiss all or part of the case instead of writing a response. In the motion you must explain why the lawsuit is invalid. The judge will then rule to accept or refuse the motion after the plaintiff responds. Be sure to have your attorney review whatever you send. What you must not do is nothing. If you don’t meet the deadline for filing your response, the plaintiff can ask for a default after another 30 days has passed. The lawsuit may automatically be decided in the plaintiff’s favor and a judgment against you will be issued.
Winning Can Cost More than Settling
So what is a settlement? It is the plaintiff agreeing to take less money than a jury might award. Small business owners who are sued often reach settlements through their insurance companies. The business owner or company agrees to pay less to avoid the possibility that a jury will award the plaintiff damages in an amount that exceeds the insurance coverage amount. A properly insured business owner, when their insurance company pays a settlement, pays only their insurance premiums and the insurance deductible. If your case goes to trial it can be costly. One law firm estimates that the average employee lawsuit can cost $200,000, but keep in mind that that number is a generalization. The amount depends on the dispute, the nature and the severity of the allegations.
Don’t lose sight that you have a business to run and a bottom line. Put aside anger and pride. Clients ask why should they pay something they did not do? The answer: winning can cost more than settling. Consider the cost to your business. Is the company better off paying the plaintiff $20,000 than spending $30,000 to win? ”A bad settlement is often better than a good trial.”
A lawsuit can be a stressful experience. Don’t try to cover anything up. Be honest with your lawyer about what happened. The facts will come out in time anyway. It’s better to be prepared than caught by surprise. Be diligent and prompt. You’ll want to review your lawyer’s bills in a timely manner. If you have questions, you’ll need to ask. The longer you wait to respond to your lawyer, the more expensive the lawsuit is going to be. Stay focused on the business. Remember, don’t let a lawsuit get you rattled.
Fighting can be expensive even when you win. One owner was sued by an ex-partner over a claim of misappropriated trade secrets. It was a weak claim and the case was dropped by the plaintiff after about six months. It still cost the owner around $50K in attorney’s fees.
When you have a business lawsuit, you need to act quickly and carefully to make sure the process goes smoothly. Steps you can take include not ignoring the claim deadline, collecting and preserving records, notifying the insurance carrier, and finding a good lawyer. It’s also important to view the settlement process more as a business decision than a defeat, and understand that a bad settlement is often better than a good trial. Most importantly, keep your head up and continue running the business.
