By Patti Singer, originally published in Rochester Business Journal on March 6, 2019.
What to do if you own a small business and are served with a lawsuit
In the excitement of starting your small business and in the daily work of keeping it going, you may not think about something going wrong and getting sued.
“There’s good reason for that,” said Adam Braveman of Harter Secrest & Emery LLP. “You tend to think of the positive, which is not a bad thing.”
Braveman, who represents companies and individuals in commercial and civil disputes at all stages of litigation, said that small business owners should be not consumed by a fear of litigation. “That’s the wrong approach. But having a process in place and thinking about that process is the right approach.”
The legal formation of your business, having good processes for keeping records, knowing where you can turn if you are served and not ignoring that complaint can help when someone threatens to haul you into court.
“It’s an unsettling feeling for sure,” said Tim Fitzgerald, a partner at Harris Beach PLLC, who is involved in litigation strategy for his small business clients. For many of those clients, being sued is a scary new experience.
“I tell my small business clients to take a breath and try and suppress all those emotions that are flooding to their heart and mind—whether it’s anger or stress or fear or competition or retaliation. Step back and try and put your mind in a business owner’s objective mentality,” he said.
Statistics are scarce on the number of small businesses that are sued. A study in 2005 by the Small Business Administration Office of Advocacy that looked at the impact of litigation on small business found that “data and reports available on the volume and type of cases filed in federal and state courts are insufficient to identify either small businesses or litigation costs.”
The researchers used a painstaking approach that cross-referenced court records through PACER with phonebooks to try to identify small businesses involved in lawsuits. Adding to the difficulty is there’s no ironclad definition of what constitutes a small business. The Affordable Care Act set a standard of 50 employees. The Small Business Administration goes by either the number of employees over the past 12 months or the average annual receipts over the past three years. But the classification varies by industry, meaning some businesses such as mining can have more than 1,500 workers and still be called small. Even with some federal guidelines, the image of a small business is one run by a husband and wife or a couple of partners who have anywhere from a couple to a couple dozen employees.
Regardless of the number of small businesses that get sued, the owners reported that litigation cost them a lot of money—which usually came out of the company’s assets—took an emotional toll and changed the way they did business.
Preparing for the possibility of suit can start with the initial business plan. Being a limited liability company (LLC) or a corporation can shield your personal assets.
“In the event you get sued, the LLC is liable, not you,” said Ed Hourihan, a litigation attorney and managing member of the Rochester office of Bond Schoeneck & King PLLC. He said it is not overly expensive to form an LLC rather than establish a sole proprietorship.
Setting up your business invariably puts you in touch with insurance brokers and with attorneys who can start to form the network of professionals you can call on if you are sued.
“The first thing I do when I get a client who is being sued is to take a look at whether the lawsuit can be presented to the insurance carrier to determine whether there is coverage for this particular incident,” Hourihan said.
The attorney who helped set up your business may not be the one to litigate the case but can refer you to specialists in that field. Your lawyer also will tell you that if you get served with a complaint, don’t hope it just goes away.
“You have a certain amount of time to respond to that complaint,” said Chad Flansburg, partner with the Rochester office of Phillips Lytle LLP, where he represents business clients in multiple industries. “If you do ignore it, you can be found liable and held responsible for the relief sought in that complaint.”
Because the clock starts when you were served with the complaint, delays can make it harder for your attorney and more expensive for you.
“Read the complaint and think about the conflict,” said Braveman. “Essentially, your attorney is going to want to interview you about what happened. It’s much easier if (you’ve) thought about what happened.”
While no owner should consider his or her business immune, good relations with clients may prevent a dispute from escalating.
Fitzgerald said owners should be in the business of character and integrity. “Good client skills, being able to listen to your customers goes a long way to preserving a relationship that will help avoid that party feeling they actually have to sue.”
If you are sued, having a system of record-keeping will help you get your hands on contracts, correspondence or other documents. Fitzgerald said to save e-mails because your adversary’s attorney will recover them anyway.
Fitzgerald also recommended talking to employees who are involved in the situation that led to the suit. If the suit may be particularly volatile or damaging to the company, he suggested bringing in a crisis communications team.
While some suits may seem frivolous and your attorney may ask the court for dismissal, local attorneys said most of the suits they’ve seen have had some merit. Just because there is something to the complaint doesn’t mean you will end up in court. “Most lawsuits end in some type of agreed-upon resolution,” Flansburg said.
Attorneys said they advise clients to write contracts with language that stipulates some type of dispute mediation. They said arbitration also is possible, but that may not be a less-expensive alternative.
Some business owners take a lawsuit as a personal affront and vow a scorched-earth response. But that can get expensive. According to the SBA study, legal costs for litigation ranged from $3,000 to $150,000. About one-third of cases costs less than $10,000.
Hourihan said he’s had clients who acknowledged that defending the suit may cost more than the claim is worth, but honor and principle are at stake. He said he tries to impress on them the distraction to their business as well as the financial implications.
“Nobody likes to be extorted,” he said. “I find in business disputes there’s usually merit on both sides. Sometimes the parties need to be sufficiently bruised in some litigation and see some of the bills come across … to see there’s probably a better way.”
Patti Singer is a Rochester-area freelance writer.