Secure the bag & stop courting disaster
Don’t wait until the process servers are at your front door to fend off a lawsuit. Protect yourself and your business by planning for the worst
You never expect that one of your decisions will lead to your first lawsuit. Ellen Toplin thought she had made the right choice. A young public-relations practitioner in the Philadelphia area, Toplin decided to take on a partner – a writer who had come to her on the recommendation of an acquaintance. It seemed a good fit; Toplin was adept at marketing, and her new partner was a strong wordsmith. What more could you ask for in a PR team? “I jumped into it with both feet,” recalls Toplin.
But it wasn’t long before danger signs appeared. Her new partner wanted to push into advertising, but Toplin wanted to further develop their marketing and public-relations business. This disparity spelled trouble because a full-fledged advertising agency requires greater capital than a marketing consultancy does. The partner was willing to borrow money to cover clients1 media buys and bet the company’s future; Toplin was fiscally conservative. “There were tensions,” she says. “I just tried to take on more of my own duties and not confront the situation. But it really is like a marriage – you need to negotiate your differences, and I didn’t know how to do that at the time.”
After about two years, the friction burst into open conflict. Toplin finally told her partner that she wanted to end the association. Her partner sued, claiming that Toplin cost the little firm its “goodwill” – the difference between the value of their business as a partnership and the lesser sum representing their worth as sole practitioners. Toplin was ready for a courtroom battle, but her attorney advised her to settle the case and move on with her life. She lost plenty in the settlement: her former partner took most of the firm’s accounts receivable and office equipment. The ordeal set her back about $50,000.
But now, 14 years later, Toplin looks back and sees a silver lining to the summons. The forming of the partnership moved her out of her basement into a real office and taught her about running a business. The confrontation also persuaded her to look into deals a little more deeply before committing. Her business has subsequently thrived, and she now employs 13 people.
Lawsuit. The word is one most entrepreneurs rightly dread. Losing a lawsuit may well end a company or force it to start – as in Toplin’s case – almost from scratch. Even a successful defense can bog down a company’s principals with legal minutiae for years, freeze their initiative with uncertainty over the future, and siphon off tens of thousands of dollars in legal fees. But attorneys say that a small business can take steps to ensure it does not confront a lawsuit. And if it does face a legal skirmish, sound planning, and good advice can minimize the damage. Attorneys and small-business people alike note that enduring a lawsuit – while not appealing – can make a company stronger, more focused, and better run.
Owners Make Easy Targets
There are a million reasons why a small company is apt to be sued. Attorneys say that, no matter what the business, all small firms share two traits that make them distinct targets: their size and their nature. Entrepreneurs are likely to make decisions quickly and without lengthy committee meetings, the oversight of a board of directors, or review by subordinates who may have more specialized knowledge of particular issues than the business founder has. Although these qualities make smaller firms nimble, they can leave them legally vulnerable.
A small business may also lack the resources for hiring legal help that may cost hundreds of dollars an hour. “Small businesses usually don’t have a staff attorney and may not feel they can afford outside counsel,” says Thomas Schweich, author of the recently published Protect Yourself from Business Lawsuits (. . . and Lawyers like Me) (Scribner, 1998).
There are several areas where small businesses need to be particularly cautious. Contract law is one, says Schweich. Small businesses often use boilerplate or casually composed contract language that won1t hold up in court. Employee relations is also a legal jungle for small businesses that have no published blueprints of acceptable business practices. “The minute you sign with a larger company, you get an employee packet that spells out guidelines,” says Atlanta attorney Robert J. Kaufman of Kaufman, Chaiken, Miller & Klorfein. “That doesn’t happen in a smaller company.” Kaufman finds that a new company is less prepared than a larger firm would be for a suit involving new employees whose work may be governed by a nondisclosure or noncompete clause from a previous position. The owner may believe that restrictions placed on a new employee by another company are not enforceable – but they are.
Another legal hot potato is intellectual property, whether it’s software, songs, or a company name. “I often find that small companies are sued by larger companies when they adopt a name without first doing a trademark search by a qualified professional,” says Floyd Mandell, an attorney at Katten Muchin & Zavis in Chicago, who specializes in these cases. “Another problem with a small business is that they will call up a general practitioner who doesn’t know a trademark from a patent. [The lawyer will] call the secretary of state’s office to do a quick check. And that isn’t good enough. So the company adopts the new name, uses it for two or three years and builds up some goodwill, then gets a letter saying, ‘Stop using that name or we’ll sue.'”