How to Protect Your Business From Lawsuit (6 Avoidance Tips)

No business is 100% safe from lawsuits. If you’re a small business owner, understanding litigation risks is one of the most important ways you can be prepared for a worst-case scenario.

This comprehensive article will explore how to protect your business from lawsuits so you can take the proper steps to avoid damages.

How Does a Lawsuit Affect a Company?

There’s no upside to business litigation. Regardless of which side “wins,” lawsuits damage reputations and destroy profits.

Small business lawsuits negatively impact a company by:

• Costing finances, resources, and time: Many small businesses have a limited budget to handle litigation. Attorney costs add up quickly, and the time, resources, stress, and emotional tolls can be strenuous. For some small businesses, a time-consuming lawsuit means bankruptcy.
• Damaging relationships and reputations: Legal disputes often sever ties between conflicting parties. They also tarnish a company’s reputation, thereby affecting customers, business partners, distributors, shareholders, investors, and other parties involved with the company.
• Driving down sales: Public perception has a direct impact on marketing and sales. Lawsuits accusing fraud, intellectual property theft, discrimination, and other harmful practices can cripple a company’s image in the public eye for years while costing more time and money with rebranding campaigns.

However you look at a small business lawsuit, the results aren’t pretty. Even if you survive the financial burden and win the court case, your company may never recover from the backlash.

Common Types of Small Business Lawsuits You May Face

Every year, complainants file more than 100 million cases in state trial courts and 400,000 in federal courts. In 2020, civil case filings grew 16% in the U.S. district courts.

Some of the most common types of legal action small businesses are likely to face include:

1. Product Liability

Even with QC protocols, faulty products slip through the cracks and wind up in customers’ hands. If that product breaks or somehow causes an injury, the purchaser may sue you for damages and medical expenses.

2. Workplace Accidents

No matter how careful you are, accidents happen. If you don’t address a potential liability immediately, employees or customers can take legal action against your business for even the most basic accidents, such as falling on an unsalted icy sidewalk.

3. Work-Related Vehicular Accidents

You can still be subject to a lawsuit even if the accident doesn’t happen on your property. If, for example, your employee goes to meet with a client or runs a business-related errand and is involved in an accident, you’re still liable because the employee was conducting business on your behalf, especially if you don’t have commercial auto insurance.

4. Premises Liability

Your business must offer sufficient security and protection. This includes locks, lights, security cameras, and even proper landscape maintenance to ensure visibility. If your premises are deemed insufficiently safe for any reason, an attorney can come after your business if someone is injured or killed on your property.

5. Malpractice Claims

Malpractice is an instance of incompetence, negligence, or omission that causes harm. Complainants can file this type of legal claim against your business for any number of reasons, whether the error was intentional or not.

6. Breach of Contract

If you promise to do something in a contract and then fail to do it, you’re liable. A breach of contract doesn’t necessarily mean you intentionally violated the terms. In some cases, the lawsuit can boil down to precise word choice and punctuation. For example, in 2018, a missing comma in a Maine dairy company’s contract cost the business millions of dollars when drivers sued for unpaid overtime wages due to the ambiguity of the terms.

7. Workers’ Compensation

In many cases, a workers’ compensation insurance policy will cover the costs of an employee’s medical treatment, rehabilitation, and lost wages if they are injured at work or while performing a work-related task. If you don’t have an insurance policy already in place, the state can impose a hefty fine and punishment on top of the medical costs.

8. Customer Discrimination

Businesses that refuse to serve a customer on the grounds of religion, race, sex, age, sexual orientation, or disability may find themselves facing a discrimination lawsuit. For example, a Colorado court recently fined a bakery owner who refused to make a birthday cake for a trans woman.

8. Employee Discrimination

Former, current, or prospective employees are within their rights to sue your company if they feel they faced discrimination based on their sex, race, age, sexual orientation, disability, religion, or pregnancy status.

9. Worker Harassment / Sexual Harassment

In the wake of the #MeToo movement, workers are more likely to report cases of sexual harassment than they were in the past. Sexual harassment can be seemingly innocent actions such as unwanted physical contact or a joke told in poor taste, but the consequences can be costly. Other forms of workplace harassment such as bullying, gaslighting, etc. also open the door to legal action.

10. Intellectual Property Theft

Trademarked and copyrighted material is legally protected. If your logo or business name is already in use, another business can claim that you stole it from them and sue you for damages.

What Are the Different Ways to Protect Your Business and Avoid a Lawsuit?

Fighting a lawsuit is much more difficult than taking the proper steps to prevent small business litigation in the first place. The good news is you can take measures to avoid a lawsuit. No amount of preplanning can guarantee litigation prevention, but you can greatly reduce the risks.

1. Avoid Employment Discrimination and Labor Lawsuits

Two of the top lawsuits against small businesses are employee discrimination and wrongful termination. To protect your small business from an employee civil lawsuit:

• Understand state and federal labor laws. Before you start implementing policies in the workplace, make sure you know which laws apply to your business. Laws against workplace harassment, employee privacy violations, and discrimination should drive the enforceable policies you set.
• Know the legal terminology. “I didn’t know what the law meant” isn’t a disclaimer that will hold up in court. The burden lies on you to know the legal definition of harassment, discrimination, retaliation, etc. and comply with the laws.
• Hire a Human Resources (HR) consultant. Small and medium-sized businesses (SMBs) are more susceptible to employment lawsuits than large companies are because many SMBs don’t have HR consultants on staff. An HR consultant will help ensure your business remains compliant with the ever-changing local, state, and federal laws.
• Have a competent lawyer on retainer. Don’t wait until you’re already grappling with a lawsuit. An employment lawyer can be a preventative measure by drafting employment contracts; reviewing policies; providing legal counsel on layoffs, termination, furloughs, hiring, and employee benefits; assisting with negotiations; researching employment practices liability insurance, etc.
• Clearly communicate with your employees. Make sure employees understand the expectations in their job description. Draft a comprehensive employee handbook and encourage an open-door policy to address issues before they become lawsuits.
• Implement a complaint procedure and discipline plan. Establishing a proper method for complaints will give you extra protection so you can prove whether an employee filed an official complaint before seeking legal action. A uniform discipline plan will help you avoid an Equal Employment Opportunity Commission (EEOC) lawsuit.

2. Protect Your Intellectual Property

If you have intellectual property that you want to protect, you need to take necessary precautions. Consult your lawyer to discuss options for asset protection. Your legal representative may recommend seeking patents for inventions, trademarks for your brand and logo, and copyrights for written work. They can also help you understand how to serve or respond to a cease-and-desist letter.

Any employees or independent contractors involved in creating intellectual property should be granted ownership in a written agreement. This preemptive action can help mitigate potential legal issues about the intellectual property rights in the future.

3. Proactively Address Cybersecurity and Privacy

Viruses, hacks, and ransomware have become serious issues in today’s digital business world. To maintain digital privacy, you should:

• Invest in cyber insurance. Cyber insurance is a type of insurance that typically covers most lawsuits related to data breaches, including financial losses, intellectual property theft, and privacy risks. An insurance agent can help you identify how much protection you need.
• Limit account access. Every employee and contractor on your payroll shouldn’t have access to every single business network and computer system. Set the proper user permissions and minimize who has unrestricted access.
• Back up your files. Cloud backups provide extra security so you can remotely access and recover your files in the event of a power outage or technology breakdown. In addition, you should also keep hard drives in a safe, off-site location.
• Maintain customer, employee, and business confidentiality. Sensitive identifying information must remain strictly confidential to avoid lawsuits.
• Stay up to date with security software. Missing critical updates can make your computer system more susceptible to viruses and other attacks.

4. Negotiate Written Contracts

Any agreements you make should be in writing. Have a business lawyer review all of your contracts and recommend specific clauses to give your business extra protection from a lawsuit.

For additional legal protection, include a pre-suit mediation requirement in all of your contracts. This type of clause is a contractual provision that requires parties to mediate a dispute before filing a lawsuit.

5. Separate Your Finances

If your business operates as a sole proprietorship, a lawsuit may pose a risk to your personal assets. Establishing a limited liability company (LLC) is the best way to address that risk.

An LLC is a hybrid solution that separates business and personal assets. It provides the support of a corporation while still retaining characteristics of a sole proprietorship without the personal liability and risk of your home or real estate.

6. Utilize Business Lawsuit Insurance

Invest in insurance to protect against lawsuits. A business insurance policy offers packages to protect property, income loss due to business interruption, and liability.

Here’s How to Protect Your Business from Lawsuits in 3 Ways

When it comes to protecting your small business with general liability insurance and knowing how to avoid lawsuits, follow these basic guidelines:

1. Keep Accurate Records

Your best defense is to maintain thorough documentation to prove your case in court. If you took precautionary steps and kept accurate records, you’ll be in a leveraged position with a strong case for negotiations.

2. Separate Your Bank Accounts

Don’t mix your business and personal accounts. Our recommendation is to structure your company as an LLC or corporation rather than a sole proprietorship so you can keep your assets separate and protect your personal resources in the event of a lawsuit.

3. Consult with a Lawyer You Trust

Employee and consumer protection laws are always changing, as are intellectual property regulations. Small business owners have enough to worry about without trying to keep up with the legal aspects.

Developing a close connection with a legal adviser comes with more than enough benefits to offset the retainer fee. Touch base regularly, even if it’s just a quick message on LinkedIn to keep the connection active.

Facing Small Business Litigation? Talk to the Experts on Lawsuits Against Businesses

If you’re concerned about how to avoid getting sued or you’re in the process of fighting a lawsuit, the best course of action you can take is to consult an expert for legal advice. In the event of a lawsuit, you need a powerhouse in your corner to represent your company’s best interests.

At Cuento Law Group, we’ve helped a diverse range of clients protect their businesses. Our law firm is board-certified in international laws and here to give you peace of mind with minimal legal fees.

Contact us to learn how we can help you and your business.

Our Conclusion on How to Avoid a Lawsuit

The best way to handle business litigations is to take every precaution to avoid them in the first place. Ignorance is not an excuse from the law in the eyes of the courts, so make sure you fully understand your legal responsibilities and comply with them. Google is great, but it’s no substitute for expert advice.

FAQs