Business Being Sued? What to Do Next

No entrepreneur wants to find themselves facing business litigation; for many, that’s their worst nightmare. So understandably, many business owners might find themselves gripped by panic when they receive a legal letter.

Regardless of whether it’s a lawsuit from a former client, vendor, supplier, or a disgruntled ex-employee demanding collection for unpaid wages, a lawsuit will cost a business owner money. And there are expenses regardless of whether the business loses or wins the case. Legal fees are, of course, pricey.

Most business owners facing a lawsuit feel upset, angry, overwhelmed, and unsure what to do next. Naturally, they want to keep their company afloat and do what they can to preserve their business reputation. This guide walks through a few tips for what business owners can do when they’re facing a potential lawsuit.

One quick note first, though: these tips aren’t intended to be legal advice for individual business owners; they’re general tips and considerations. Business owners who are facing an active lawsuit should consult a professional attorney for specific advice about their unique situation. That individualized expertise is invaluable.

Determine what the legal action actually entails

Getting a formal document from a third party is frightening. That yellow envelope could have severe consequences. But getting a legal notice doesn’t always mean that the business is being sued; there are various types of legal actions. It’s essential to verify what the letter is before panicking too much.

Demand Letters

A demand letter is not a formal business lawsuit. Instead, a demand letter is a preliminary step from a person making a complaint against the business; they’re formally asking for restitution and correction. For example, maybe an independent contractor wants to dispute back pay or get monetary damages for harm that befell their equipment during the work project, so they send a demand letter.

Could a demand letter turn into a lawsuit? Sure, but it doesn’t start that way. If the demand letter is responded to appropriately, both sides could reach an amicable solution and settle out of court.

Usually, it’s best practice for a business owner to contact their attorney to have them review and respond to the demand letter with their own formal letter. They can address the facts and help both sides reach a settlement without having to proceed to an actual lawsuit.

Formal Complaint and Summons

A formal complaint is usually delivered by a third party who’s designated as the agent for service of process (sometimes called the process server). They might even deliver that dreaded “You’ve been served” line. If a business receives this formal complaint notice, it’s proof that the company is indeed being sued in a court of law. A summons will accompany that notice, and it’ll detail the claims being made against the business, the deadline to respond, and which court will hear the lawsuit.

Some business owners might be tempted to ignore a summons in hopes that the problem will just vanish. Or maybe they’ll try to pretend that they didn’t receive the notice, or they’ll skip out the back door when the process server shows up.

It’s imperative not to dodge receiving a legal summons or ignore it. A business entity can still be sued, even if they don’t take possession of the summons. Often, state courts will allow plaintiffs to give notice in other ways if traditional service of process doesn’t work. For example, sometimes a plaintiff can publish a complaint in a newspaper instead, which upholds their legal requirement to notify the defendant. If the business still ignores the summons, the lawsuit could proceed without them. In that case, the court would likely make a default judgment against the company (and those judgments usually don’t favor the missing defendant at all). This can even happen in cases that the organization would have won outright if they’d showed up to defend themselves.

Steps to Take When Facing Business Litigation

A new business owner shouldn’t panic if they find themselves facing a business lawsuit. Here are some essential steps to take when a formal complaint comes through.

1. Have an attorney review the lawsuit

As soon as a business owner receives legal papers, they should request legal counsel from their licensed attorney. A good lawyer will check that the information listed on the lawsuit is correct, such as the caption, service information, and the correct company information. If that information is incorrect, the clerical error could cause the lawsuit to be dismissed or delayed.

Depending on the situation, after reviewing the allegations, an attorney may put a preservation order or litigation hold in place. This legal action states that the company’s financial data (particularly the data related to the lawsuit) must be preserved and compiled. These documents can include letters, official correspondence, emails, voicemail messages, and photos.

Business members should not destroy any of these documents until they’ve consulted with the attorney. It’s not unheard of for a company to accidentally lose a document that could have proven its innocence because of a simple administrative mistake.

2. Avoid direct communication with the plaintiff

After a lawsuit is filed, a business owner should generally avoid direct negotiations with the other party. Often, statements that the owner believes are “off the record” could be taken out of context and used against the business to its detriment. That’s why both the plaintiff and the defendant should rely on their attorneys to be their liaisons for legal discussion.

The delay between when the lawsuit is first communicated and when it’s filed (after all, there’s always a delay since courts are always navigating other lawsuits) is often the best time to try to resolve contentious issues. Legal pros usually call this settling out of court.

In some cases, a business owner still needs to continue doing business with the plaintiff while the dispute’s ongoing. For example, an employer whose employee is disputing denied benefits or other contract breaches might still need to work with that individual. In that case, both parties need to ensure that the ongoing business doesn’t stem into a discussion about any portion of the lawsuit.

Notify the insurance company

Even though it’s time-consuming, it’s generally wise for a business owner who’s facing a lawsuit to notify their insurance company about the lawsuit. They should also ask about how much their business insurance coverage is. Many general business liability policies cover third-party injury claims and some accusations of defamation. If a business owner purchased a good professional liability insurance policy, they’re probably insured if their clients allege that the business’s product or service caused financial losses.

Of course, no business insurance policy protects against everything. If a brand is facing a class action lawsuit, they might find that their policy isn’t big enough to cover the whole settlement. But it’s important for a business owner to get clarity about their coverages before they walk into a court case.

In some cases, an insurance policy might cover attorney fees, court costs, and the judgment or settlement if the business is found liable during the case. If that’s the case, the insurance company will probably handle a lot of the details like assigning and paying for legal counsel.

Even if the insurance company does handle these details themselves, it’s prudent for business owners to keep their own attorneys informed about the case.

3. Make decisions and proceed

Most lawsuits filed in the United States have deadlines for written responses to a complaint and summons. Usually, that deadline is about 30 days, but the letter will contain the exact deadline.

Within that deadline, the business’s attorney will need to respond on the business’s behalf with the following information:

Denial or admission of the allegations by the plaintiff
Defenses and counter-claims against the plaintiff and other defendants
Whether the defendant wants a jury trial or an alternative resolution, such as an out-of-court settlement.

To properly prepare a reply, a business owner needs to consider these points:

Whether they fully understand the nature of the claim
Weigh the potential liability and business exposure
Consider the costs of litigation as compared to a cash settlement resolution
Review the litigation plan and exit strategies
Explore any alternative dispute resolutions

Depending upon the details of the case, a business owner’s attorney may suggest filing a motion to seek an immediate dismissal of the complaint instead of answering the plaintiff’s attorney. The judge will then either grant or deny the motion.

Don’t ignore the lawsuit

It’s already been said once, but it bears repeating: no LLC or corporation owner (or any other business owner, for that matter) should ignore a lawsuit. Failing to respond doesn’t make the problem go away; it just makes it worse later on. If an entrepreneur acts quickly, they might be able to strike a deal out of court. At minimum, they can take the right steps to prepare for the case and avoid a costly default judgment.

Many lawsuits are won by a plaintiff simply because the company in question failed to respond by the date set in the summons.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.