Playing defense
What to do if your small business gets sued
by Liz Wolf For a brief moment, Rick Schaffer wondered if his business would survive.
“We never really expected anything like this to happen and it really isn’t something that a small business prepares itself for,” he says.
“The worst thing that came out of the whole thing is that our reputation was tarnished and we lost some business because of it, business that we had to make up. It’s not a pleasant thing to go through … and it’s not over yet.”
About three years ago, Schaffer’s Delano-based USAquatics Inc., a swimming pool design and consulting firm, was named as a third party in a lawsuit over a local swimming pool project. For the 12-year-old small business and its eight employees, the suit (which is still in the courts) has taken a toll on their time, money, reputation and energy. And according to Schaffer, there’s no end in sight.
“We know that we aren’t guilty of any wrongdoing. The problem is really between the client and the contractor, but we’ve been attached,” says Schaffer, project administrator for the firm. “Since the lawsuit was filed, then they have brought up flaws in the design, but we’re fighting. We feel things will turn out for us in the end, but the process has been exhausting. It’s something I wish we were a little more prepared for.”
Small businesses face a possible threat that they don’t often plan for or have the resources to fight. Lawsuits are damaging to all companies, but especially to small businesses, which usually have limited funds, little legal experience and a dependency on keeping a solid reputation for business to boom.
“Lawsuits are dangerous for small businesses,” says David Henningson, an attorney and owner of Maple Grove-based Henningson & Snoxell, a firm that specializes in representing small businesses. “That’s why small-business owners need a plan. They need to know what to do to avoid getting involved in a lawsuit and what to do if they happen to find themselves in one.”
So, what is the most important thing a small-business owner can do to avoid facing a lawsuit?
“Write it down!” Henningson says. “You have to remember that a lot of small-business owners are good at what they do, but they’re not as good at business. Small-business owners, at least at the start, have a tendency to make a lot of verbal arrangements between friends. No. 1 rule: I don’t care whether it’s internal business or external, write it down and make copies.”
When working with clients, this means spelling out in plain English all expectations, terms, procedures — anything that might cause confusion or could be disputed in the future. This also includes writing out safeguards for what happens if an arrangement doesn’t work out.
Internal strife
Many small-business lawsuits are internal, involving disgruntled employees, partners that feel they aren’t getting enough, and so on. Spelling out roles, expectations, disciplinary actions, codes of conduct and company policies is vital.
Attorneys also stress the importance of annual reviews, agreements between partners or employees and employers. And all of this needs to be down in writing and signed.
“I know it sounds basic, but you wouldn’t believe how many business owners neglect to do this,” Henningson says. “Whether you’re talking about clients or employees, it’s hard to be held accountable for something if everything is down, clearly defined and signed.”
That’s the policy at Minneapolis-based Arthouse, a small-but-growing design and print shop. President Cindy Koppelman says that attention to detail is necessary for her industry.
“In order to avoid getting caught on the technicalities, sometimes you need to state the obvious,” she says, adding with pride that the firm has been lawsuit free. “It’s important to know how to write the appropriate details in a contract and then to have a ‘terms of service’ that not only backs up your word, but also protects you.”
Beyond that, the two other important strategies, attorneys say, is to do your homework on prospective clients, partners or employees (have they caused legal trouble before?) and also to keep in constant communication with them. That means everything from checking on a client’s satisfaction with how an agreement is playing out to making sure employees are comfortable at work.
“These are little things that many small-business owners think they don’t have time for, but they’re important,” says Alfred Marcus, professor of management and strategic operations and a small business expert at the University of Minnesota’s Carlson School of Management. “It really comes down to business basics. The more careful you are, the more professional you are, the safer you are.”
In your corner
Preparation is important, but the back-up is even more so.
“The best advice is to have a good attorney that you are working with before anything even happens, somebody that is helping you with paperwork, contracts, advice, and if a lawsuit happens, you’re ready,” says Holly Newman, an attorney with Minneapolis-based Mackall, Crounse & Moore. “And if you’re facing a lawsuit and you don’t have an attorney, get one immediately.”
Newman says she sees many business owners wait too long to involve an attorney.
“And it’s really a shame, because if you ask any attorney, 99.9 percent of all cases can be settled,” she says. “An attorney can help you not only get your case together, but also help you determine the likely cost and more important the chance you have at winning.”
Beyond hiring legal help, experts also say that a first step when facing a lawsuit should be to check business insurance policies to see if the insurance companies are obligated to help. Many small-business owners don’t do this because they fear having insurance claims on their record, but legal experts say to remember that this is why the insurance companies are there.
“You need to call your agent right away as insurance companies usually have timelines set for a claim to be valid,” Newman says. “Don’t be afraid of them. They are a viable alternative.”
Another alternative, which applies directly to Minnesota (and a few other states) is mediation services. According to Minnesota law, almost all civil cases must go through an outside mediator before going to court, mainly because court dockets are full and many of these cases settle.
Attorneys recommend looking at early mediation, being proactive about that part of the process to not only try and settle a suit quickly, but also to see what kind of a case the plaintiff might present. It will help in determining if this particular case is one to fight.
Perhaps one of the biggest pieces of advice should a lawsuit be filed is don’t delay. Tackle the problem as quickly as possible and then form a plan for how the situation will be handled, both from a legal perspective and also publicly and internally.
Get aggressive
Remember, if it’s a civil suit, chances are it’s available to the public and word can spread quickly, especially if the company is located in a suburb or a smaller city. Such was the case with USAquatics.
The company does a majority of its work with smaller communities and when the company was named as third party on a lawsuit, word spread quickly.
“We did lose a lot of business initially,” Schaffer says. “The towns were talking to each other and they don’t get the whole story. They just know that they don’t want to work with a designer and a consultant that’s getting sued. That’s why we had to be aggressive in getting information to our customers.”
USAquatics sent letters out to past, present and potential clients explaining the situation and denying any wrong-doing. The firm also attached a list of successful projects and contacts that gave them strong recommendations. Legal experts applaud this move.
Have a plan
“It’s important to be up front and honest about a suit, with your attorney, your employees, your clientele,” Henningson says. “Have a plan.”
That could mean hiring an outside public relations firms to be the spokespeople on the issue. That also means figuring out who in the company needs to know how much. There are not apparent rules for this kind of process, as it depends on the type of case, the size of the company and the nature of the lawsuit. The only important thing is to have a plan.
“That’s what it really all comes down to,” says Newman, of Mackall, Crounse & Moore. “Lawsuits are not something that small businesses think about and they really should. As a small-business owner, it is your responsibility to be ready. It could mean a lot to the future of your business.”
[contact] David Henningson, Henningson & Snoxell: 763.560.5700; dhenningson@hennsnoxlaw.com. Cindy Koppelman, Arthouse: 612.321.0950; cindy@arthouseprint.com. Alfred Marcus, Carlson School of Management, University of Minnesota: 612.624.2812. Holly Newman, Mackall, Crounse & Moore: 612.305.1450; hjn@mcmlaw.com. Rick Schaffer, USAquatics Inc.; 763.972.5897; info@usaquaticsinc.com.
