Responding the Right Way to a Lawsuit against Your Small Business
You just received a summons and complaint filed against your company by an employee, vendor or supplier, client, or customer. What you do in immediate response may have a profound effect on what follows. To position your company for the best possible outcome, here are five things to keep in mind in every case.
1. Do Not Communicate or Reach Out in Your Own
Your first instinct may be to try to communicate with the plaintiff—the person who brought the suit. You may or may not have had prior communication with this person. You may have questions to ask, explanations to offer, or solutions to propose. This often is a bad idea. Anything you say to the plaintiff or the plaintiff’s lawyer can be used against you later, and the uses to which your statements may be put may not be obvious or even intuitive. It almost always is important to understand the legal landscape presented by the claims and the lawsuit before attempting an informal resolution.
2. Preserve and do not Destroy Information Related to the Lawsuit
You may discover something damaging in your records—electronic documents, voice mails, texts, paper files. All such records, as well as any physical objects related to the claim, such as products or machinery—are evidence. Do not destroy any of it, no matter how bad you think it may be! You should not alter, delete, remove, shred, move, or destroy any evidence related to the lawsuit. As we previously discussed in another article, any deletion you did before the lawsuit that was done without any intent to destroy evidence (e.g. deletion under a regular deletion protocol) is likely to be legal. But after you have notice of the lawsuit (and often as soon as you anticipate that there might be one), there is a duty to preserve such evidence; any failure to do so can carry serious consequences, including monetary sanctions, adverse presumptions regarding the issues in the case, unfavorable jury instructions, or potentially even the entry of a judgment against you.
3. Explore Whether Insurance is Available
Look into whether there are insurance policies that may provide coverage. Don’t assume. It may be that a policy you think would not apply actually does (and, unfortunately, vice-versa). An attorney can help you review the policy to determine whether there is coverage and work with your carrier. Even if coverage ultimately is not available, your insurance carrier may have a duty to defend the lawsuit.
4. Do not Ignore It
You should never ignore a lawsuit. You have a limited timeframe to respond to the lawsuit, which typically is within 20 days of being served. You should immediately contact a lawyer, especially one who is experienced with your type of case, who can explain the process and advise you of your options, including negotiation, mediation, and other resolution strategies as well as available defenses and counterclaims.
If you don’t respond to the complaint, the plaintiff can get a default judgment against you from the court for the full amount requested in the complaint. (If a default judgment is entered against you, there may be ways to undo it, but it’s generally unlikely and never easy.)
5. Consider Taking Pre-lawsuit Precautions
Most lawsuits are not frivolous. Generally they reveal issues that could have been avoided or made less severe had they, and their legal consequences, been addressed before the lawsuit was filed. Remember that an ounce of prevention is worth a pound of cure. Legal advice at the first sign of a dispute or a problem usually costs much less than legal representation in a lawsuit. If you address issues regarding key business documents and processes when they are created, such as purchase-and-sale or supply agreements, non-compete and non-disclosure agreements, warranties, employee handbooks, or severance agreements, you are much less likely to have an issue or claim arise unexpectedly later.
In addition, when a particular situation appears to be headed south, the sooner a lawyer is involved, the better your chances of putting your company in a good position should litigation arise. Too often we have been retained only after a lawsuit has been filed, where we might have been able to either prevent it or put the client in a better position to defend it had we been involved during the events leading up to suit.