At some point all companies and their founders are sued. There are a variety of reasons why these lawsuits happen. Unfortunately, not all of those lawsuits can be avoided—even with the best practices. The best course of action for any business owner is to create a strong defensible position and to understand their risks. The following are some of the most common lawsuits that small businesses face and tips on how to avoid them:

  1. Fights between Owners

Relationships can sour even when a business flourishes. The ability to bring a lawsuit and the reasons for bringing them can vary dramatically. The following are some examples of such in-fighting and insights on how the owners could have avoided the situation:

  • In Wessin v. Archives Corp., shareholders brought a lawsuit against Archives for alleged waste and theft of company resources to pay personal debts. This expensive litigation may have been avoided if the owners had:
    • Implemented checks and balances. The best accounting practices require division of responsibilities or at least double-checking by multiple parties. This prevents undisclosed dipping into the cookie jar. 
    • Clear communication. People invest in companies because they want to make money. Communicate and document all expectations of compensation from the company—including those actions that are prohibited.
    • Maintained a high level of transparency. People are most likely to feel wronged if there was something that felt secret or hidden about the action. Avoid this feeling early on by putting everything in the open and allowing people to air their grievances.
  • In Evans v. Blesi, the court found that Blesi used intimidating tactics in obtaining a majority share of stock and forcing resignation of Evans.  Evans recovered $381,136 in lost wages and $250,000 in punitive damages. This may have been avoided if the parties had followed these principles:
    • Treat your partner with respect.  The court noted that Blesi did everything in secret, including conferencing with lawyers and preparing legal documents. Evans was brow-beaten until signing a letter of stock transfer without the advice of a lawyer. This leads to my second suggestion.
    • Lawyer up.  If there is a breakdown in communication with those who owe a duty as a fiduciary, then there is a possibility of getting duped or induced to sign something you would not ordinarily want to sign. Someone who knows the law and who is engaged to represent your rights is critical to have on your side to prevent unwanted litigation.
    • Avoid doing business with friends.  Evans and Blesi were college classmates, close friends, and business associates.  This appears to have been one-sided in this case and the takeaway here is that close friendships can cloud business judgment.
  • In Bolander v. Bolander, shareholders basically claimed a breach of contract. An expensive lawsuit ensued and the court spent a lot of time looking at the ambiguous written agreements between the parties. This may have been avoided if the parties had attempted to:
    • Resolve ambiguities. There were a lot of documents that did not seem to fit together consistently. Poorly written agreements were worse than no agreement in this case.
    • Consider the context. Business does not happen in a vacuum. The court, the lawyers, and the parties all spent a lot of time and money looking at the entire situation. Don’t forget that these details matter.
  1. Disputes in the Workplace

Regulations can only go so far in preventing disputes in the employment context and sometimes spur litigation. In 2015 for example, the Equal Employment Opportunity Commission (“EEOC”) reported 89,385 individual charge filings. While individuals often file charges for multiple types of discrimination, that number is actually lower than the enumerated types of discrimination taken together. Here are some examples of large discrimination settlements.

  • Coca-Cola ($192 million). The suit alleged a corporate hierarchy where black employees were overrepresented at the bottom of the pay scale.
    • $36 million of that settlement included sweeping changes; namely granting monitoring powers to a panel of outsiders. Had an independent panel been engaged from the beginning, the claim to the other $156 million may have been avoided.
  • Home Depot ($104 million). The suit alleged Home Depot discriminated against women in hiring, promotions, job assignments, and compensation in West Coast stores.
    • While Home Depot did not admit fault in the settlement, it took steps to implement new procedures for the advancement of women throughout the company. 
  • State Farm Insurance Co. ($157 million). The class in this case consisted of 814 California women who contended that they were denied jobs as sales agents because of their sex.
    • After settling, State Farm implemented a 10-year policy setting aside 50% of new agent jobs in California for women.

The moral here is that every company should have clear policies surrounding equal employment opportunities and fair practices.  Fairness is difficult to measure in business and compliance is often only the beginning. Companies must also implement measures to hold people accountable and promote a culture of openness so that people can step forward when things are not right.

  1. Contract Disputes

Agreements often result in conflict when expectations are not met. Reasons for a deal falling apart can range dramatically including things like failing to deliver, non-payment, to issues of timing. The way the agreement is construed by the court may also depend on the circumstances. For example, here are some contract disputes that provide lessons for every business:

  • Overleveraged assets. Sports Authority collapsed shortly into its reorganization attempts because of the conflict with the creditors holding liens in its inventory. The company had no choice but to shutter its doors because it could not reach agreement with this key constituency.
  • Verbal agreements. Wedding season may be winding down, but that only means that it is the beginning of reordering season. How, what, and when items are reprinted is all a matter of contract that can lead to expensive complications.   
  • Cybersecurity. The breach for Target may have happened back in 2013, but the litigation continues. This is an important reminder that sometimes, the contract does not need to be written or directly communicated to provide certain expectations and rights.

About the Author

Dan Spicer is a third-year law student at Mitchell|Hamline School of Law in St. Paul Minnesota. He is currently an extern at Loop Legal in Minneapolis—a firm specializing in business law. Dan has experience in arbitration, intellectual property, and legal research/writing through his current work at National Arbitration Forum. In his spare time, Dan likes to spend time outdoors with his wife and beagle. You can view Dan’s LinkedIn® profile.