The Threat of Litigation Should Not Be Ignored

Small business owners live with the threat of litigation on a daily basis. Over the last 20 years, employee lawsuits have risen 400% and of those lawsuits, 42% are against privately held small businesses with between 15 and 100 employees. If it goes to court, employees win 67% of the time in State courts and 63% of the time in Federal courts. The news isn’t good for small business owners because this means that unethical lawyers can help employees make charges against the employer and then offer to settle out of court – in essence – extort their employer for thousands of dollars. I’ve personally experienced this and I’ve seen it happen to other friends who are business owners.

Moreover I’ve recently witnessed a company pull back from asserting their rights under a (non-employment) contract because they are afraid of how the other party to the contract might respond – they are afraid that the other party will sue them and they don’t want the public exposure, even though they are clearly in the right. Such fear has driven them to cower and make poor decisions that further weakens their position with the other party in their contract.

The threat of lawsuits changes how we make decisions. It changes how we hire, how we fire, how we sub-contract and how much risk we’re willing to take on. Consider this fictitious example:

“In 2008, I hired Pete as an auto technician. I utilized a legal State job application and job description which asked old Pete if he could perform all the functions of the job. Pete not only assured me he could—he signed all forms saying he could.

Turns out Pete forgot to mention an old back injury. When a co-worker found him on the ground squealing in pain, not only did I wind up in a lawsuit, Pete also called the EEOC claiming I wouldn’t make appropriate accommodations for him. Remember, any time an employee calls the EEOC, there will be a lengthy investigation that will take up a lot of your time.

Pete got an attorney to fight for his rights. “They screwed me! They made my back worse! I told them I had a bad back!”

Turns out that although I had Pete sign the necessary forms before hiring stating he could perform the job functions of an auto technician, the court and legal fees would have gone into the hundreds of thousands. As a small business owner, I couldn’t afford that—let alone a jury award—so I settled with Pete for, well, that’s my business, but it wasn’t pretty. Not to mention, I had the EEOC on my doorstep for two weeks after Pete wasn’t even there making sure I was playing nice and not breaking labor laws. I’ll always remember Pete.”

If you think this is an odd example, think again. Events like this happen every day, which is why small business is so wary of lawyers, employees and the Federal Government. I know of one small business owner that spent $3M defending himself only to have the court side with the plaintiff and awad the plaintiff a $1.2M judgement. He could have settled it for under $1M, but chose to fight it.

Here are some other statistics:

  • Most litigation events will cost between $3000 and $150,000, with on-third of them being under $10,000.
  • Business owners will attempt to “recoup” these expenses by cutting operating expenses, acquiring new customers or expanding their services to existing customers
  • Business owners will not attempt to “recoup” these expenses by raising prices
  • Those who have been engaged legally by an employee or customer are more wary of these relationships as a result of their litigation experiences
  • The average $1M/year business spends $20,000 on lawsuits each year
  • 52% of all civil lawsuits target small businesses

Most small business owners are not aware of the real costs they face if they have never been involved in a lawsuit. But nearly 25% of small businesses are involved in some type of litigation effort within a single year. The median costs of litigation by case type is as follows (from from their Caseload Highlights, Volume 20, Number 1, January 2013):

  • Automobile – $43,000
  • Premises liability – $54,000
  • Real Property – $66,000
  • Employment – $88,000
  • Contract – $91,000
  • Malpractice – $122,000

For many businesses, one $88,000 claim would put them into bankruptcy. And in many of these cases, the small business owner has done nothing wrong. It’s the seriousness of the claim and how it would play in court that often decides whether or not there is a pre-trial settlement.

The two most common areas where small business owners will be sued include:

  • Employee complaints – EEOX complains, workers compensation claims, employee theft. While some of the complains were due to employee negligence, employees still filed claims and/or made demands hoping there would be a financial settlement or an increased level of responsibility/salary to close the matter
  • Business-specific problems/claims – Issues of intellectual property were common for software and technology companies. Issues of customers blaming the contractor for structural problems or results the customer could not initially envision were mentioned by small construction companies.

In the face of increasing litigation in our society, what should a small business owner do to protect their business? We recommend these minimum actions:

  • Have a lawyer assess your employment practices at least every other year. Have employment contracts. Worry about sexual harassment, discrimination and wrongful terminations – especially if you terminate someone for cause without the proper paperwork.
  • Protect your intellectual property by working with an IP lawyer
  • Only contract with corporations, not individuals – avoid the IRS claiming they were employees when they weren’t
  • Manage your contracts faithfully and tightly. For example, if a contract is coming up for renewal, the actively renew the contract or actively end it.
  • Be diligent in how electronic information is stored so that during an eDiscovery process, opposing counsel doesn’t find information that isn’t germane to the matter at hand
  • Be less trusting of employees, customers and other companies;
  • Of the ~20 million civil cases that are filed each year, roughly 60% are concerned with contract disputes, so be sure to write clear, clean contracts. Don’t rely on a person’s word.
  • Be sure to be incorporated and hold the various required board of director meetings each year
  • Be less trusting of employees, vendors, partners and customers

As a Christian Business Owner, this isn’t easy to write – “be less trusting” – yet this is the business climate we live in. You simply must assume that your Christian employees, vendors, partners, contractors and customers will sue you as fast as those who do not claim the name of Christ. I receive no pleasure in writing this, but it is the truth as I understand it.

The worst thing you can do is skip all these suggestions and carry on as usual.

Bill English