Whether it is a knock on your door or an official looking envelope in the mail, it is a physical blow when you receive the complaint, the document that announces you have been sued. A knot in your stomach, nausea, a rising heart rate as you realize that it is time to fight (or flee). I still remember the pulsing fear, powerlessness, and anger of sitting around the table and letting the news sink in. Reading and re-reading. Just trying to understand how it happened and what it means. Do you really deserve it?
No matter how much you like your lawyers, the cash that you bleed to pay their bills over the course of the lawsuit will be painful. It can shake the trust of your employees, partners, and customers. It almost always interferes with day-to-day operations in some way, as you and key employees deal with discovery, depositions, and managing the case. Even if you win, the money, time, and anxiety it will cost will damage your business and disrupt your personal life. I have seen lawsuits kill businesses, age business owners, and drive people out of the business world forever—lucky ones retire, others go elsewhere in search of money and meaning.
It’s the American Way, Land of the Lawsuit. As much as I frequently marvel at how ridiculously litigious our society is, I understand that it is largely a problem born of the sheer complexity of our world and an American value that people can and should be held accountable for the damage they do. I am not a litigator. I don’t go to court. My goal is generally to keep my clients (and readers) out of court by being proactive risk managers and masters of negotiation and legal compliance. But, in some ways, my efforts are futile. If you build a substantial business, you will be sued. It is only a matter of time before someone perceives that you have wronged them and uses a lawsuit to let you know how they feel. As much as I dislike litigation, it is a necessary evil for a civil society. The alternative is physical violence and gangster-style competition. We are fortunate to have a relatively just, if expensive, legal system to resolve our disputes.
So, where do these lawsuits come from?
Torts-The Duty to Avoid Injuring Others
Fundamentally, our society recognizes that everyone has a duty of care to avoid injuring others. The area of law governing this duty to avoid injury is called “tort law.” This is in addition to criminal law. There are certain injuries, like assault and murder, that we have empowered the government through the police to enforce. But there is a separate system of legal actions that individuals who have been injured can take. So, O.J. Simpson could be found not guilty in a criminal trial, but still be held liable for more than $45M in damages by the estates of the murder victims in a separate tort case. Tort law is more far reaching than criminal law in many cases. Criminal law tends to focus on intent, but tort law focuses on causation and foreseeability. No one was going to bring a criminal case against McDonalds for serving super-heated coffee that injured a customer, but it was a basis to bring a tort lawsuit. Negligence and product liability drives much of our lawsuit culture.
Businesses and the people who work for them are subject to this duty of care. As a business owner, you are responsible not only for your own torts, but many of the torts of your employees and other agents. With each new person involved in your business, your risk multiplies. You won’t always be there to supervise, communications breakdown, judgment lapses. Much like driving a car is so risky that we require car insurance, the risk of accidentally hurting someone when operating a business is so high, that it is foolish to do so without some sort of liability insurance to address this risk.
Contracts-Private Law by Mutual Agreement
The other major source of lawsuits for businesses comes from contracts. The notion of a contract is simply a binding agreement between people that you can sue to enforce. Essentially, you are agreeing to do something on the understanding that you can be compelled to do it or have to pay the damages if you don’t. The way that we get that compulsion or damages is by suing the person who broke the agreement. In this way, businesses make their own laws and empower themselves (and others) to use the courts to enforce them. I realize that when you put it that way you may be thinking that you don’t want anything to do with contracts. But, in fact, it is how business gets done. Trust only gets you so far. And, if the contract is done properly, you shouldn’t need to get a court involved. The parties will do what they agreed to.
The confusing part about contracts for most business owners is that they think they need to sign a lengthy written agreement that says “Contract” at the top for contract law to apply. This isn’t true. Many verbal agreements are enforceable as contracts and a casual e-mail can function as a written contract in the eyes of the law. So, if you think about your business and all of the customers, suppliers, and other stake holders that you interact with and make promises to and deals with, you are constantly creating these tickets to sue. Sooner or later, someone will fail to keep to an agreement and there is a chance of a lawsuit if the other person can’t be satisfied.
Policies and Procedures-Controlling and Creating Internal Risks
One major way (other than insurance) that businesses deal with tort risk, contract risk, and all of the other compliance with Federal, State, and Local law, is the creation of policies and procedures within the company. There are many reasons for developing such policies, most related to business systems and efficiency that are unrelated to legal risks. But within the organization, they function as a type of internal law and may have their own process for creation (executives set the policy) and enforcement (people get fired for not following them). Development of good policies is one of the best risk management tools a business has, but there is also a dark side.
When I was teaching Business Law, I shared a case where a bar was sued when one of its customers got beat up in the bathroom by some gang members. As often happens in a Business Law classroom, the students immediate split into those who thought that made sense and those who were outraged that a business owner could be held liable for the criminal acts of random patrons. But was we delved further into the case, we talked about the fact that the bar had a problem with gang violence and had gone so far as to develop policies about not allowing in patrons wearing gang colors. That policy was not enforced on the night in question and violence ensued. It was impressive watching the students who had denounced the lawsuit as ridiculous change their minds based on the details of the case. While there is no outside agency that enforces businesses internal policies (in most cases), it can be used to demonstrate causation, foreseeability, and breach of a duty of care under tort law. I have seen compliance with internal policies used in contract, intellectual property, employment, and a wide variety of regulatory law suits to demonstrate the reasonableness (or lack thereof) of a business’ actions.
So, not all law is detailed in Federal, State, and Local rules and regulations. There is also a common law system that places the duty to avoid injuring others, your contracts with others, and your internal policy commitments on the stack of your legal responsibilities.
As I’ve said before, there is just a big pile of law and your business is sitting under it. It would be best if you figured out early how to carry that weight.
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