How and Why Lawsuits Happen

Part I of the Protecting Your Business Series

 

By Mike DuBose with Blake DuBose

 

“You have been served. Have a great day!” Many years ago, I stood in shock as a court summons was pressed into my hand. The ensuing lawsuit would span six months, causing major distractions to my personal life and my companies. Fortunately, my business and I eventually won the suit, but I vividly remember the feeling of being served to this day!

For entrepreneurs like me, lawsuits often seem to come out of nowhere, and they can drag on for months or years, even if you are not guilty of anything. Legal troubles can also tarnish personal and corporate reputations, wipe out family savings, and cause negative health effects from the prolonged stress they bring to the body and mind. Unfortunately, no one is exempt: any individual or family, for-profit company, government agency, homeowners’ association, house of worship, or non-profit can become entangled in a lawsuit if someone is injured (or perceived to be harmed).

In a National Federation of Independent Businesses article, M. Duffy reported, “In our litigious society, any business can get sued—by a customer, an employee or another company. The number of ways of getting sued is mind boggling—ranging from discrimination and injuries to intellectual property infringement and contract disputes. A lawsuit is expensive, disruptive and can sink your business in legal fees.”

Recently, one of my vice presidents told me that he goes to work every day “wondering what will fall out of the sky!” In one such unexpected incident, we received a letter alleging that our businesses had violated some outdated patent by using fax machines and scanners. The letter demanded thousands of dollars to settle out of court. Fortunately, through our research, we discovered that it was just a (technically legal!) “patent troll” scam to trick scared companies out of money. Although there was just a small risk of an actual lawsuit (and no guarantee that the patent trolls would win if it did go to court), many small businesses comply with such demands. They’re so afraid of litigation that they’d rather pay a bogus fee than risk going to court!

 

What causes a business to be sued?

The potential for lawsuits is nearly endless, but businesses are in particular danger of lawsuits related to their interactions with employees, vendors, customers, and consumers. Online legal resource Justia.com tracks lawsuits filed across the US. According to its records, there were nearly 5,000 contract disputes; 5,600 personal property cases; 5,300 civil rights suits; and 3,400 labor lawsuits filed in South Carolina in 2014. Another emerging segment is intellectual rights lawsuits, of which South Carolina courts saw 647 cases last year.

Lawsuits can result from negligence, freak accidents, or a combination of both. One South Carolina restaurant experienced this when a defective oven undercooked meat. It was not post-checked by kitchen staff with a thermometer, and one customer died from eating it and many others got very sick. Millions were awarded to the plaintiffs, wiping out both the business and the assets of the family that owned it! Over thirty years in business, I have seen many more lawsuits and EEOC complaints where business owners—some who were guilty, others who were innocent, and some who folded far too early—were sacked for small fortunes.

Most of the common mistakes that lead to business owners being sued fall under the following categories:

Personal injury and exposure: Company owners, corporate officers, members of a board of directors (for-profit and not-for-profit), or those who own high-risk items such as pools, trampolines, boats, and cars often do not realize the potential risks associated with just living their lives! Even if you’re just a normal person, hiring contractors to perform work on your property could expose you to a lawsuit if someone is injured, or you might accidentally kill someone in a wreck, resulting in a serious liability case. Basic insurance will not usually cover all the lawsuit fines and damages, which means your personal assets could be taken by plaintiffs.

Weak contracts and proposals: Some businesses lack well-defined, understandable, and lawyer-reviewed contracts, allowing misunderstandings and ambiguity to creep in. In the 1980s, I used to shake hands and make verbal agreements, but over time, the person I shook hands with would disappear and I was suddenly faced with a new decision-maker who had different contractual expectations and requirements. Since then, I have learned the importance of having a clear, thorough, and mutually agreed upon document for every agreement. Contracts should be updated frequently as new threats and issues arise, with language to protect you and your company even in unlikely situations. The standard contract for one of my companies started as a three-page document, and it is now at nine! We continue to edit and expand it as new liabilities arise. However, we try to build in safeguards that protect not only our companies and staff, but the client as well, so it is fair rather than one-sided.

Employment law blunders and employee complaints: Employees are another frequent source of lawsuits. According to the United States Equal Employment Opportunity Commission (EEOC), there were 88,778 formal employee complaints filed against employers and managers in 2014 (some of which represented groups of people). EEOC charges may cite several reasons, but the major areas addressed were: retaliation, or punishing an employee for things like revealing company wrongdoings (42%); race (35%); sex (29%); disability (29%); age (23%); national origin (11%); religion (4%); color (3%); and the Equal Pay Act (1%).

JoAnn Moss ([email protected]) is a certified, experienced human resource specialist who our companies utilize as a consultant. She reported that some of the most legally dangerous employee-related mistakes she has witnessed include:

• Incorrectly classifying employees as exempt or non-exempt under the Fair Labor Standards Act and SC wage and hour laws. An example might be hiring a non-exempt administrative assistant who cannot work more than 40 hours in a week without overtime pay and calling him or her a professional, exempt employee, then requiring work beyond the 40-hour limit without overtime pay.
• Not keeping accurate records of time worked by non-exempt employees. This leads to incorrect payment of wages and provides insufficient documentation if the employee challenges the company.
• Incorrect, incomplete, or lack of documentation under US Department of Homeland Security The agency is tightening up on illegal aliens, and specific paperwork and documentation must be completed and verified before hiring.
• Lack of a legally compliant employee handbook and/or inconsistent enforcement. This can lead to lawsuits under (but not limited to) the Civil Rights Act, Age Discrimination in Employment Act (ADEA), Family Medical Leave Act (FMLA) (when a business has 50+ employees), and Americans with Disabilities Act (ADA). Even small businesses with 15 or more employees fall under the ADA, which requires companies to provide extensive accommodations for individuals with disabilities, including pregnancy. The handbook should also explain disciplinary procedures and standards of behavior to help avoid employee claims that they were unaware of performance problems. Our Columbia-based litigation attorneys John Koon and Stephen Cook (koonandcook.com) noted, “The employee handbook should outline how to be aware of and deal with dangers in the workplace to reduce the chances of a lawsuit.”

All of these laws are complicated, and it can be a challenge to remain compliant while still managing employees and ensuring appropriate behavior. Most businesses need the help of a competent human resource department or outside HR and legal experts to stay on the right side of the law.

 

How does the lawsuit process work?

Mistakes involving any of the aforementioned issues (or some in other areas) are common trouble spots that can result in business leaders being sued. But how does a case move from one person’s real or perceived injury to another being required to pay a judgment or settlement? In general, lawsuits tend to follow the following steps, according to several defense and litigation attorneys we interviewed:

Initial meeting: The plaintiff (person who believes he or she has been injured) meets with a lawyer to discuss the facts of the situation. The attorney will assess the pros and cons of taking the case and decide whether or not to represent the plaintiff. If so, they will work together and develop an offensive strategy. Based on the merits of the case, the lawyer may contact the party that injured the individual or organization to try to settle out of court, or legal staff may pursue the case without warning the opposing party.

Filing the lawsuit: The litigation lawyer files a petition with the court outlining the plaintiff’s grievances. The opposing party generally has 30 days to respond. At this point, the parties may agree to go into arbitration or settle out of court, or the opposing party may respond in writing, which triggers the litigation lawyer to prove his or her case.

Discovery: Each party is entitled to investigate the other side’s position through a process known as discovery, which is normally the most important and time-consuming part of the lawsuit. This phase can be executed by submitting written questions or conducting formal interviews (depositions) with people on both sides of the issue, including witnesses, experts, lawyers, and key individuals. These depositions are normally videotaped or transcribed by a professional stenographer and can be used in court. This phase of the lawsuit will likely determine the settlement and trial value of the case.

Mediation and arbitration: Lawsuits cost a huge amount of time, money, and effort, so it’s no wonder that many businesses try to avoid them at all costs. In many cases, the issue can be settled through mediation or arbitration, all without stepping into the courtroom. In a Smart Business Magazine article, Monte Mann, legal partner at Novack and Macey, LLP, said, “As a business litigator who makes a living in the courtroom, it may be surprising to learn that I also spend a great deal of time in the boardroom—working with clients on ways to avoid litigation well before it arises.”

In mediation or arbitration, opposing parties agree to meet and attempt to reach a mutually satisfactory settlement out of court. (It can also be court-ordered by the presiding judge or required by a contract they signed that contained a specific mediation or arbitration clause.) Sometimes, the parties enlist the help of a third-party certified independent arbitrator either assigned by the court or agreed upon by both sides. This person does not know the individuals involved in the case and has been trained to listen to both parties, weigh the facts without bias, and offer an opinion. Both parties may then sign an agreement to accept the outcome, choose to follow the path laid out by the arbitrator with the option to go to court later, or reject the solution and continue on to court.

Trial setting: If mediation or arbitration does not work, then the court will set a date for the trial. The court may schedule up to 10 or 15 cases for the future at one time, and they will begin with the oldest case first and work through the group.

Trial: The trial may take place one of two ways: in the presence of only a judge and both sides with their legal staffs, with the judge rendering the verdict; or by jury, where 12 jurors are selected and agreed upon by the judge and attorneys to hear the case and render a verdict. During the trial, both sides present their evidence to the court and/or the jury. In a jury trial, after the evidence and closing arguments are made, the judge instructs the jury on its responsibilities and gives them specific questions and issues to consider. The jury adjourns and reaches a verdict, or if there is no jury, the judge renders his or her verdict.

Post-verdict: Once the trial is over, the court issues its judgment, which may require a fine, monetary award for damages, or for one party to take a certain action. Both sides have a set amount of time afterwards to ask the court to grant a new trial or appeal the verdict. If there is no appeal and the plaintiff has won the case, the defense must pay the money awarded. If there is an appeal, the process restarts with its own timetable and phases.

The bottom line: Nearly everyone is at risk of being sued at some point in their lives, but business owners face even greater odds due to their involvement with employees, vendors, contracts, consumers, and other companies. It’s important to thoroughly understand the typical reasons for business lawsuits and how they take place so that they can be avoided (or managed properly when they do occur).

See our next segment in this three-part series for strategies that can help avoid business lawsuits.

 

About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes. You can e-mail us at [email protected].

Mike DuBose, a University of South Carolina graduate, is the author of The Art of Building a Great Business. He has been in business since 1981 and is the owner of Columbia Conference Center, Research Associates, The Evaluation Group, and DuBose Fitness Center. Visit his nonprofit website www.mikedubose.com for a free copy of his book and additional business, travel, health, and personal published articles.

Blake DuBose graduated from Newberry College’s Schools of Business and Psychology and is president of DuBose Web Group (www.duboseweb.com).

Katie Beck serves as Director of Communications for the DuBose family of companies. She graduated from the USC School of Journalism and Honors College.

 

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