You've Been Sued: What Do You Do?

Everything you wanted to know about being sued,
but were afraid to ask (and don't want to find out the hard way)

Someone enters your business, asks for you, and hands you a sealed envelope stating, "You are served." Prepare yourself for a long, uphill battle. YOU ARE BEING SUED.

The envelope delivered by the deputy sheriff or process server will contain a summons and a petition/complaint. The summons will tell you how, when and where you have to respond to the lawsuit. The petition will set forth the claims made against you. There may be other documents enclosed which deal with court procedures. And yes, you can be sued in a court in a state on the other side of the country, if you have done business in that state.

Facing a lawsuit can be your worst nightmare if you are unprepared. When you get your summons, don't set it aside to think about later. Act immediately. Call your attorney. If you don't have one, find one—quickly! Ask friends and business associates to recommend one. Go online (lawyers.com) or to the library for Martindale Hubbell, a large directory of attorneys, listing biographies, specialties, and locations. Look for an attorney with expertise in your type of case.

This is where a long-term attorney relationship makes good business sense. Discussing things on the phone with your attorney is good preventative medicine. Over the long term, you will save money by keeping an open dialog. The more the lawyer knows, the better it is for the legal health of your business. The defense of a lawsuit will go more smoothly if the lawyer already knows something about your company. And, if you are sued in another state, your lawyer can help you retain counsel in that state.

In lawsuits, there are set time periods for responses. As we all know, business matters take time. Even if you already have an attorney, it may take a few days to get an appointment. If you do not have an attorney, it might take longer to get an appointment. Furthermore, a new attorney will probably want a prepaid retainer, which can range from $1,000 to $10,000 or more. Discussion on this can take a few days. If the lawsuit is in an out-of-town court, a few more days might go by before you retain counsel. While you are doing this, the time is dwindling to respond to the suit or face a default. Prompt attention must be paid to a summons.

Let's back up for just a moment. When you registered your company with the Secretary of State, you designated someone, often your attorney, to serve as your Registered Agent. The registered agent receives all official correspondence regarding the entity. It is his responsibility to notify you immediately if you are being sued. When the registered agent is served, the clock on responding to a lawsuit begins to tick. It may take a few days for him to get the papers delivered to you. Make absolutely sure you know the date by which you must respond. Do not delay!

Don't think for a moment that you are immune from being sued or that you are totally protected because you have insurance. Although insurance covers many business risks, such as employee injury or customer slip-and-fall injuries, lawsuits still arise from these areas. Always notify your insurance agent as well as your attorney. It may take time for your insurance company to agree to defend your case, and it may hire an attorney for you. Your insurance carrier also may tell you it will not defend you. In any event, you need to make sure that a timely response is made on your behalf. As a result, your attorney, not the insurance company's attorney, may have to defend you during this time. If you do not appear and defend against a lawsuit in the time stated in the summons, the plaintiff can, and probably will, take a default judgment against you. A default means you have lost the lawsuit even if you have good defenses to the claims. Again, talk to your attorney!

When you are served a summons, you typically have 30 days to respond. That's not to say you should wait 30 days to act. Your attorney will go to court, enter an appearance by leave of court, and get a trial or response date set. Ultimately, the attorney will file an answer on your behalf. This can be a denial or admission, and, perhaps, a counterclaim. Usually, at least one extension to respond to a lawsuit is granted. That extension buys you time, but the lawsuit will not go away.

The most common suits facing a small business are product quality disputes and billing issues.

A lawsuit can arise when a product fails and causes damages ranging from business interruption to personal injury. If a widget your company manufactured fails to perform, or only partially performs, and causes someone to be injured, you can be sued.

In a case of billing issues, where you have documentation to back it up, the case may be simple to resolve. For example, if there is a consistent shortage on product delivery and your invoice shows you have been billed for 100 cases each month for the past 10 months, but your bills of lading show that only 95 cases have been delivered each time, that should be a reasonably cut-and-dry case. But perhaps your vendor thinks you are just trying to get a discount with false claims of shortages. His credit department has been calling you, and the thought of calling your attorney has crossed your mind. You should know that the other side could beat you to the punch and sue you for nonpayment.

What? He sues you? Yes. It could have gone either way, but he filed first. You will have to file a counterclaim to bring to the court’s attention that your vendor was making short shipments.

Do not talk to the opposing attorney; his duties are solely to his client. Your statements about the case may well be used as evidence against you at a trial. After the shock and anger over being sued have subsided, there may be opportunities for you, with the guidance of your attorney, to negotiate directly with your opponent to resolve your disputes. Always remember that you are in an area that is foreign to you and there are rigid rules, folkways and mores. Your attorney can keep you out of trouble and focused on resolving the matter.

Lawsuits are a part of doing business. Talk to your lawyer about his plans for your case. Certain parts of a lawsuit are fairly low cost; other parts are not. You and your lawyer should discuss at length how much the case could cost you and what you will get for your money. Asking for an estimate and budget on fees and expenses is a good idea. More and more businesses are using budgets for litigation. A written engagement letter setting forth the scope of your lawyer's work and the fees is a sound business practice. Large portions of litigation are unpredictable, but many are not. A budget and schedule of work will help you and your lawyer focus on what you need to do to win the case, or determine that it should be settled.

Preparing for trial is a lengthy process. It usually takes about 18 to 24 months. Be sure to see the June issue that will take you through a step-by-step timeline for the discovery process and preparation for trial.

Authored by: J. Richard McEachern, an attorney with the firm, McEachern & FitzRoy, L.C. Republished by permission of the St. Louis Small Business Monthly, The Source for Business Owners; May 2002