It’s a fact of life for business owners: At some point, you will likely have to confront a lawsuit. The idea of a costly foray into the courts can be the stuff of nightmares. But what to do when it actually happens? Recently, business writer Erin McDermott talked with lawyer Mark A. Mauriello, who has not only owned and operated small businesses in the New York area, but has spent time on both sides of the legal table.
EM: You’ve seen both sides of disputes. In your experience, why do small businesses get sued?
MM: Part of it is lack of knowledge—a glaring error. More often, it’s a monetary dispute. It occurs if there’s a faulty contract that was inadequate to the task. In my experience, it’s often a leverage issue, where someone wants to change the deal, or sweeten the deal, or catch you with a weak flank. And their way of punctuating the sentence is with a lawsuit—which they know ultimately is going to be negotiated out.
A businessman I met once said: ‘Why we write a contract is to remember what it was we said we were going to do when we were still friends.’ You could do business on a handshake if everybody was just honest about what you agreed to. In that regard, your contract is your battlements.
EM: From a lawyer’s perspective, what should a small business owner do when they get served with a lawsuit? What are the first steps?
MM: Get yourself a cup of coffee. Sit down. Take a very deep breath. Get yourself to a calm place and re-read the papers. Stop being angry about it and read it dispassionately and first understand what it says. What are they saying you did or you didn’t do? Don’t worry about not understanding the legalese; just try to understand why you’re getting this. Think as a businessperson: What are they trying to accomplish? Be honest about it: Did this really occur this way? Now write down for yourself in some kind of marginal notes or write a summary of what you really believe happened. Put the paper down and clear your head. Your next call is to your attorney.
If you don’t have somebody that you’ve used in the past regarding commercial litigation, then call your most trusted business colleagues. Ask them for referrals, but more importantly ask them: “What is it that you like about that lawyer? What makes them good at what they do? What was your experience going through a litigation like that?” And just listen. You’ll get a short list. And then you’re going to make contact with them and ask them to do a consult. You’re going to be very clear—and many places don’t do this and they leave it to the very end—about the money involved. You’ll get them the legal papers you were served and you’ll set up a conference. And you need to be prepared to speak the truth. However painful you think that is, that lawyer needs the absolute, dispassionate, objective facts so that a determination can be made about what your options are from there.
MM: The first, and very important, thing is you’ve got a ticking clock. You as a businessperson will have to be aware of what is your drop-dead moment that the proper papers must end up in court. It is surprising, but many cases are lost because people actually just don’t show up in time. The timing is very important—just accept that no matter how much you want to avoid this lawsuit, it has to have your full attention. This has to go to the top of your to-do list for now.
Aside from that? We’ve all watched all those “Law & Order” episodes—every defendant I’ve ever sat with, the first thing they want to do is tell you why this isn’t fair and why they should win the case and then they argue the case. Your lawyer doesn’t want that. The lawyer wants facts, wants you to immediately start gathering the papers. You’re about to put up a defense, so the lawyer is asking you for ammunition. Go to your files. Go to that summary you wrote about why you should win the case and then go get the data, documents, and correspondence that supports those defense arguments. If you don’t know what they are, that’s OK. At least gather all documents that have to do with that underlying controversy—the contract that went bad, the you-said-this-I-said-this, the shipment that didn’t show, the contract that didn’t have the change order. In the businessperson’s files should be all of the information regarding that.
You want to keep tight reins on the legal bills—keep the communication crisp until you look at the money involved and what kind of case this is.
And at this point—and most defendants don’t know this—it’s important that you must not damage, alter, shred, erase electronic documents or anything to do with this case. Anything you’ve said or recorded calls—don’t erase them. It’s as if you’ve froze everything in time. You may not like that information. If you think you have bad or damaging information, your knee-jerk may be to get rid of it. But that’s a very bad thing to do.
EM: Thinking ahead of time on this, how can a small business owner prepare? What are some best practices when it comes to correspondence, data, and other information?
MM: The first rule I ever learned was “paper the file.” What I’d want, as an ‘in-house’ counsel for a small business, are policies that try to prevent suits. Whether you’re preventing a suit or defending a suit doesn’t change the fact that documenting your company’s internal communications are a part of business life.
You paper everything succinctly. There is plenty of assistance out there for document management now. But for small businesses, I tell them to organize your correspondence files in a way that makes it easy to retrieve. It’s similar to what your accountant tells you about organizing for your taxes. Just assume there’s going to be an audit someday and what you would need for that audit. If you have all of this, you don’t even worry about the audit. If you can put your hands on everything that touched the controversy, it will help you build your responses. That’s the essence of what’s going to be argued about.
EM: How do you talk about expenses? What should a small business owner be prepared for?
MM: Most business owners are great at negotiating their supply chain or their cost of goods. I think many people are just intimidated in the presence of a lawyer and they don’t behave the same way they do with their vendors. So, just treat lawyers like vendors. You’re entitled to ask any question—you want to know: “What are you doing for me? How much is it costing?” You need them to respond to your calls. You’re going to vet your lawyer the way you do your vendor—and be bold. Be as upfront as you are with the other things you do because you need to be confident—you are the customer!
Even if you’re with an hourly attorney, make them tell you how many hours something might take. How much time to deal with a pre-trial motion? How much time to develop the answer? Hold their feet to the fire on budgeting time. Nine times out of 10, the guy that’s going to give you that answer is the lawyer you’re going to go with.
And get their strategy first. Hear the options: We’re going to do A, B, and C, or just B and C and possibly A, and how much that might cost and a frank opinion on if you might win. Then you’re making a more informed choice. If you’re being sued for $50,000 and it’s going to cost $45,000 for a defense, you can see the cost-benefit balance easier. You need to see the downside, and a lot of lawyers won’t analyze that for you. Without that frank discussion, how is the businessperson going to know if there are alternative options to throwing money down a bottomless pit? You need to be able to make the other side understand that there’s different solution here, where the parties’ interests intersect and diverge—and now let’s make an intelligent decision here. You have to stay in this like it’s just another business transaction.
This interview has been condensed and edited.
Disclaimer: The opinions expressed therein are solely those of the individual. Since every small business’s situation is unique, entrepreneurs should contact their own attorney before proceeding with any legal recourse.