People who own and operate small firms are positioned to have among the most challenging yet fulfilling of all business enterprises. However, experience teaches us that most businesses will be involved in at least one lawsuit, possibly as a plaintiff but more likely as a defendant. This is especially true in the area of employment law, where businesses are vulnerable to suits (or administrative complaints to the EEOC or similar state agencies) from their employees. Do as pilots do: put systems in place to deal with emergencies and then train regularly to put them into effect. In so doing you will put yourself in the best position for success in business disputes, especially unexpected ones.
We recommend taking the following steps to prepare for potential litigation.
Step 1: Find a Lawyer You Trust
A lawyer with whom you are comfortable is one of the advisors that every small business needs. While it is not necessary to have an attorney on retainer, it is advisable to have a relationship with one you trust, and who knows and understands you and your business, to whom you can turn when problems arises. Depending on your situation you might want to have him on retainer as a sort of “outside general counsel.” This is not necessary, however. What is necessary is to invest the time needed to find the right attorney, develop the right relationship, and be confident in calling him or her when you need help.
Step 2: Have Your Insurance in Place
We all know that insurance is necessary for a business. Some insurance, like Workers' Compensation coverage, is required by law. Understand upfront that a general business policy will not provide every kind of coverage. You may be able to get by with the basics. On the other hand, you may need specialized coverage such as employment practices liability insurance (EPLI), directors and officers (D&O), or environmental policies. Most policies will pay for both settlement/judgment liability and defense costs, subject to a deductible. Litigation is expensive. Defense costs even in a simple case can run well into the five-figure range. In a more complex litigation, including employment cases, the costs can be well into six figures. Thus, it is easy to see that for many smaller businesses, all but the simplest cases can be “bet the company cases.” The survival of your business may literally be at stake.
The right insurance coverage is an important shield to help protect your small business. The insurance company will typically assign an attorney to represent you when a claim arises. While these attorneys generally are competent, they will not know your business the way your personal attorney does. And while they have an ethical obligation to represent you zealously, their bills are paid by the insurance carrier. If you think it appropriate, consider asking whether the insurance company will allow you to have your own attorneys, who know your business inside out, to handle the defense at the insurance company's expense. They may or may not agree, but it often makes sense to ask. There are other reasons to keep your company attorney involved in litigation even when the insurance carrier's assigned counsel is used. For instance, many policies do not insure against intentional conduct, and many business lawsuits involve charges of intentional conduct. In these cases, you may need independent counsel to either participate actively in your defense, or just to be your eyes and ears to make sure that things do not go in the wrong direction. Which leads us to another consideration.
Step 3: Consider Whether Your Personal Assets Are at RiskEvery business owner needs to appreciate the potential personal liability that may accompany litigation. Hopefully, you will be doing business as a corporation or LLC to shield your personal assets. The protections offered by the corporate form are critical, but they are not absolute. The court may disregard the corporate form – referred to as “piercing the corporate veil” – to allow a plaintiff to recover from your personal assets. Does this happen often? No, but the risk is real in some cases. Moreover, some statutes impose personal liability on business owners or officers when a corporation fails to meet some legally required obligation. Some wage payment laws, for example, carry this kind of potential. Again, it doesn't happen often, but the risk must be understood because the consequences can be devastating.
Step 4: Putting it All Into Action
So what do you do when the sheriff arrives at your door bearing a summons and complaint? First, you dismiss from your mind any thought of handling the problem by yourself. There's a word for lawyers who try to defend themselves: fools. If it's foolish for lawyers, who are trained and work daily in the law, think about how much more that should apply to people who are not attorneys. I'll let you choose your own description for those who think they can do it alone.
Secondly, you should implement a “litigation hold” to secure all of your information and documents, including everything in electronic format, that might be relevant to the issues in the case. If you know that litigation is a possibility, that hold should be implemented earlier in the process, before you receive formal notice of the litigation. Your attorney can provide details. But understand that this is a critical item that can substantively affect your defense. It's important to get it right from the beginning.
Third, make cooperation with your attorneys a priority from the beginning. Give them all of the relevant information, good and bad. Then let them take the ball and run with it, but stay involved and available as things proceed.
Fourth, in cooperation with your attorneys, promptly file a claim with your insurance carriers to determine whether they will cover the case and provide you with a defense.
In short, understand that being sued is a risk that goes along with running a company. Because the financial damage from a lawsuit can hit a small businesses much harder than a large one, you have to be especially prepared in advance. But if you plan for the contingencies and act on your plan, the risks can be minimized. And you and your business will move forward when the fight is over.