Legal and Regulations

Avoiding common business lawsuits

Learn about the most common small business lawsuits and some actions you can take to help prevent them.

Published: February 18, 2013
Updated: January 19, 2017

Lawsuits and claims often come as a surprise. As a small business owner, you may not be aware of the many legal consequences that can result from actions related to your business or how to protect yourself from lawsuits that can be costly to defend.

Fortunately, having a basic understanding of the most common types of lawsuits small business owners face may help you find a solution to your legal issues. While you should always consult with your legal counsel to get specific advice, here are several common business lawsuits and how you can work to avoid them:

Trademark infringement

A trademark includes any word, name, symbol, or design that identifies a product or service (think product names, logos, and slogans). The trademark owner typically invests time, marketing, and money into developing a trademark, and under the law it's protectable intellectual property, meaning it derived from the work of the mind or intellect. Anyone who tries to profit from someone else's trademark — either by using it or something similar — without permission, may face legal action.

Before using someone's trademark on your website, blog, Facebook page, or any type of promotional material, it's a good idea to talk to your attorney. Never assume the trademark owner will be flattered by your use, won't discover it, or won't care — the opposite is far more likely.

Copyright infringement

Copyright protects original works of authorship: writings, blog posts, images, photographs, artwork, and more. Using another person's — or organization's — original work without permission is called infringement and if the copyright holder finds out, he or she can send a demand for damages in an amount he or she deems fit.

An original work is protected automatically from the moment of creation. A copyright notice is not necessary for the owner to protect a copyright as a general rule. It is also unnecessary that the copyright be registered with the U.S. Copyright Office. Therefore, it may not be acceptable to use something just because you see no copyright notice or because it's not registered. Before contacting a copyright holder directly to discuss the use of his or her work, talk to your attorney to determine the best course of action.

Wrongful termination

Lawsuits by former employees are a reality of doing business today. Discharged employees can seek damages for "wrongful termination" against a former employer.

Consider these options for protecting your business from these types of claims:

  • Employee manual: Work with your attorney to draft a manual or review your existing one. This ensures that all of your employees fully understand and accept the conditions of employment and the standard code of conduct within the workplace. Also, remember to check it annually to keep it up-to-date.

  • Contract or job-offer letter: Once approved by your attorney, either document can be used to outline the terms and conditions of employment. If employment at will (i.e., whether an employee may be terminated at will in case of cutbacks, etc.) or the terms of severance payments are not clear, these topics could lead to legal claims later on.

  • Non-disclosure agreement: This can help ensure any confidential information remains protected if an employee leaves. This document can be particularly important for "knowledge businesses" where confidential information — such as customer lists, custom software, or unique internal processes — is key to your competitive advantage.

  • Employment practices liability insurance: This can help protect businesses from fees and potential damages when employees pursue employee-related legal actions. One significant benefit of coverage is that the insurer is typically obligated to provide a defense. Since the cost of defending a lawsuit can easily run into five or six figures, having an insurer provide legal counsel to defend a single claim may justify the cost of premiums several times over.

The outcomes of legal claims greatly depend on the facts and circumstances specific to each situation. Every case is different, every business is different, and even state law can be different, so always consult with your own attorney. You should also consider consulting with your insurance agent for important coverage details. The biggest benefit comes from being proactive and getting legal advice in advance so you can avoid legal entanglements down the road.