6 Habits of Business Owners That Will Get Them Sued

February 10, 2015

There are some clients that I know, no matter what advice we give, no matter what we do, they are bound to enter into the courtroom. It is as if they are destined without any ability to avoid it.

The funny thing is that it is not the industry, nor the business climate, or even luck that gets them there. Some businesses, just do not get it and probably never will.

Some of it is ignorance, but mostly it is avoidance, but they all have certain habits in common:

6. They Underestimate the Cost of a Lawsuit

If you have been in business long enough, you have at least dipped your toes in litigation. Even without being in business,  many of you likely have been deposed, subpoenaed, and even gone through a trial.

Ask anyone who has gone through it. Litigation is hell. The risk is not just losing the lawsuit. It is not just the legal fees that will likely cost six figures through trial for most business litigation matters, but the lesser known cost is what is just as bad.

Many business owners underestimate the time that they and their employees will have to devote to preparing discovery or appearing at a deposition or hearing.  Little do they know the stress it can have on management and company culture in general.

If productivity is important to you, say goodbye. Efficiency during a lawsuit for a small business is nonexistent.

Avoid litigation at almost all cost. Very seldom does litigation actually make business sense. If you do not understand the cost of litigation, you will not give any importance to avoiding it.

5. They Lack Empathy with Employees

Employees are by far the biggest risk of a liability to any business. Those employers who are unable to relate to their employees are bound to create a company culture that is toxic.

Complying with each and every labor regulation under local, state, and federal law is virtually impossible for even large businesses that have dedicated HR departments. Your business will not be perfect.

The reality is that if your employees are happy, they are much less likely to file a suit for some minor labor law violation. Even in a case where a serious liability exists, an employee who perceives to have been treated fairly even after termination will produce positive results.

Of course, this is not always the case, but it is not a coincidence that the same employers get into legal trouble time and time again. They do not have better or smarter lawyers. They have empathy.

Minimizing employee legal risk starts at the hiring process and ends in the termination process, but your established policies matter even more. Too many times do employers implement policies that are in attempt to solve a problem that ignore other underlying issues.

Worried about employees faking an illness? Some employers may choose to subject such employees to grade-school policies of requiring a doctor’s note. Other may just focus on creating a work environment that makes employees want to work or even an open policy that gives employees flexibility to take breaks from work when they need it. It is not to say that a doctor’s note policy is archaic or not needed, but for some employers, it may be just missing the point.

Treat your employees like family. It is not how you perceive your treatment but how your employees perceive your treatment. A great company culture will minimize legal liability even when there is legal liability.

4. They Fail to Consider the Impact of Their Actions

The founder of Skiplagged, a site that takes advantage of hidden city airline pricing for consumers, gave an explanation to why United Airlines and Orbitz decided to file a lawsuit against this airfare search engine saying:

“Skiplagged is actually my side project so I haven’t really thought much about the business type.”

Yes, not much thought at all. Not only did Aktarer Zaman, owner of Skiplagged, not think of the repercussion of encouraging users to violate the terms of airline fare rules, but he failed to operate the site through any entity resulting in Zaman being sued personally.

Do not Operate Your Business in a Vacuum. Is your startup a market disruptor? Do not expect to displace a competitor without making an enemy that will do whatever it can to beat you back down.

3. They Ask the Wrong People for Legal Advice

Some of the worst business lawyers are Google, CPA’s, Reddit users, and “my family’s trust and estates attorney.” The issue is not that Google will not give you the correct answer or that CPA’s do not give great guidance on entity formation.

The reality is that there is too much subtlety in the law that it is often not obvious that certain advice is wrong. Even beyond any subtlety, there is also just a lot of misconceptions about the law out there.

The worst is online forums that aggregate and qualify advice based upon popular vote. Quora and Reddit are classic examples for this.

It is hard to use a real world example without putting some random user on a troll blast, but you can take a few moments and review some business related subreddits and find some real world advice on legal problems. Sometimes great advice, but many times the advice leads the original poster into unknown legal pitfalls.

For example, one user asks (changed for anonymity): “I have a minority owner that is not pulling their weight, how can we get rid of him?”

The highest ranked comment advises to sell all the assets to a new entity without the minority owner for a small amount of money, effectively kicking the minority owner out of the business.

Probably not good practical advice either, but what the other up-voters miss is that as soon as the new entity is successful, it will become worth it for the former minority owner to sue for minority oppression and if successful, disgorge the other owners from ill-gotten gains.

For some reason, Reddit is full of this advice.

Rely on the advice of those you pay to protect you. Free advice, whether it comes from an online source or a friend, is helpful to know whether there may be an issue, but do not rely on it unless you are paying for it.

2. They Fail to Seek Help Early Enough

The difficult part of lawyering is not understanding or applying the law, but knowing what law to understand or apply. For some businesses, not engaging in legal help early enough could just be a waste of time.

This firm has reluctantly buzz killed more than a handful of zealous entrepreneurs with seemingly great ideas until they found out the legal obstacles.

Granted, lawyers tend to be gatekeepers, per their job description, that often stifle innovation and progress. Waiting too long, however, can result in more than just a waste of time and/or money if the whole business model may not be compliant with the law. Once a law has been broken or a breach of a term has occurred, no attorney can unring that bell (most of the time).

Seeking legal advice is a part of the planning process. Even if it is just a quick phone call giving an attorney the opportunity to confirm whether there are some red flags or major issues to consider.

1. They Are Just Plainly Arrogant

CEO’s and founders need to be confident, but it is the overconfidence (or arrogance) that really gets them into trouble. All businesses make mistakes, but when the decision makers have egos that may be damaged from conceding even the most minor matters, the wronged party tends to escalate.

Arrogance gets in the way during the litigation process. This firm has witnessed first hand a 14-month battle of egos between two CEO’s of competing companies (one of whom was our client). The result? Our client ended up with six figures in legal fees and settling for a walk-a-way (where both parties dismiss and go their separate ways). The net result was 14 months of stress, distraction and bad publicity and some litigation attorneys who had a nice job for a year.

Just take a look at Uber and what a $41 billion valuation can do to a CEO. They have made a ton of PR and legal mistakes, but it is the manner for which they did it that garnered the attention of class action attorneys and city prosecutors.

Check Your Ego at the Door. Business is personal, but that does not mean you have to act like its personal.

How to Keep Your Business From Being Sued


Nasir N. Pasha is the managing attorney of Pasha Law, providing essential legal services and support to businesses and corporations in California, Illinois, New York, and Texas. He oversees all of the firm’s operations and is a pivotal force in maintaining client relationships and ensuring that each transaction is brought to its best possible conclusion.

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Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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