Ten Tips for Avoiding and Surviving Litigation

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Having assisted the successful launch and operation of so many businesses we know a thing or two—or ten—about avoiding and handling business litigation.

Warm up your laminator because if you should ever pull a post from a legal blog and put it under your pillow, this is the one. While many of the tips seem self evident, businesses large and small can benefit from a refresher.

Ten Tips for Avoiding and Surviving Litigation

The best way to avoid litigation is to do everything you can from the very inception of your enterprise to protect yourself from potential lawsuits. These five tips will minimize your risk of being sued.

1. Be Diligent During Start-Up.

Entrepreneurs often neglect to form a business entity or, if they do form an entity, they fail to observe corporate formalities such as establishing business bank accounts and keeping business accounting records. This advice holds true whether you are an emerging company or a large corporation that has elected to create additional subsidiaries or operating units.

2. Execute an Agreement Between Founders and Investors.

The management and operation of the venture should be clearly spelled out in an appropriate agreement that governs the balance of power between the founders and any investors. Your choice of business entity dictates the document set that governs the rights and responsibilities of the business founders and its investors (if any). We strongly advise that a full set of governing documents be negotiated and executed at the inception of the business.

3. Insurance, Insurance, Insurance.

Every business should have insurance in place that is effective from the date of formation. The easiest way to obtain the appropriate insurance is to contact a reputable insurance broker and discuss in detail the risks associated with your business. It is very important to select a broker who is able to actively help you evaluate your business risk and tailor your insurance package by extending the coverage limits in specific areas or adding options to cover risks that are inherent to your industry.

4. Protect Yourself From Personal Liability.

In general, business entities shield the personal assets of their owners from personal liability for the debts or actions of the entity (except in the case of a sole proprietorship or partnership). The legal concept of “piercing the corporate veil” describes a judge’s decision to hold an owner, manager or director of an entity liable for the debts or liabilities of the entity. In order to successfully pierce the corporate veil, a plaintiff generally must prove that formation of the business entity was merely a shell and that the entity neglected corporate formalities and protocols, such as not using duly authorized corporate meetings to approve major corporate actions.

5. Understand Applicable Consumer Protection Laws.

Failure to appreciate what consumer protection laws apply to your business can be extremely dangerous. Just one allegedly misleading statement can lead to a mountain of litigation and the ultimate failure of your business. Be very careful with your verbal comments and written signage and very diligent in providing customer/client service. Seek expert advice regarding how local consumer statutes might impact your business.

Even if your business is properly set up and takes all of the necessary precautions to avoid litigation, your business may still be the subject of a claim for compensation or the subject of formal litigation. Here are the five essential tips for how to efficiently, properly and, with a clear head, handle any type of dispute once it arises.

6. Document Everything.

The temptation for any business is to keep things simple and not document important transactions and correspondence. Be diligent. Retain all important documents so that you have a clear record of any transactions and communications with potential claimants.

7. Don’t Procrastinate.

Anytime we receive bad news we want to ignore it. Doing so is a fast track to a lawsuit or even a default judgment. Immediate response to potential claimants often avoids most litigation.

8. Discourage Plaintiff’s Attorneys.

Since many plaintiffs’ attorneys work on a contingent fee basis, they will not take a case if it looks like a loser. Help a plaintiff’s attorney make his/her decision. Convince the attorney his case has no merit.

9. Retain Counsel.

The plaintiff’s attorney\’s best friend is the person or company who tries to represent itself in a dispute. Don’t be this friend. Once you determine that the threat of a lawsuit is real and that you cannot dissuade the plaintiff’s attorney from taking the case, retain an attorney immediately to avoid inappropriate admissions and ineffective strategies.

10. Be Unemotional. Be Shrewd.

If a claim is asserted against your business, you likely will be very angry. Since you must be able to consider your options with a clear head, strong emotions are your worst enemies. Be objective, cooperate with your attorney, understand the costs of litigating versus paying the claim, and develop your strategy accordingly.

Clip and save the 10 Tips in handy .pdf format.