What to do When Your Small Business gets Sued – Small Business Show 145

The Small business show episode 145 for Wednesday, November 15, 2017. Greetings, folks and welcome to the small business show here at BusinessShow Co the show by, for and about small business owners. Sponsor for this episode is Storyblocks. We're@storyblocks.com SBS you get their triple play bundle. Their triple Bundle for just 1:49. We will tell you more about that in a moment. Here in Durham, New Hampshire, I'm Dave Hamilton.

And in Lafayette, California, I am Shannon Jean. How are you?

I'm good. How are you?

Good, good. I'm good, I'm good. We're starting to get, it was 46 degrees here today, which, you know, we pay a little extra for good weather out. There's a fee and it comes in many shapes and sizes and we've talked about some of those on the show, you know, the taxes and charges and fees of California. But yeah, it's getting a little chilly.

Yeah, yeah. And we're even recording this maybe a week earlier than you're hearing it, so. Yeah, that's right. So we're, yeah, it was in the year today, so.

Wow. See, that's crazy.

It is weird. We've had a really weird fall so far.

Interesting.

Yeah, it'll be like, you know, cold 40s having a fire in the fireplace every night. And then all a sudden it's like, wait a minute, it's 70 degrees. Like, oh, okay. Yep. Got a different clothes. Let's go.

Okay, that's interesting.

Yeah, yeah, yeah, yeah.

That's wild. That's wild. So that's cool. So, hey, one of the things I was rolling around topics for show and things to talk about and you know, if you, if you're a business owner at, at some point someone, I, I, I was looking at my notes and, you know, someone is either going to threaten to sue you or, or they are going to sue you. And I thought, hey, we should talk about this on the show since it kind of comes up from time to time you get some kind of demand letter, different things, and we can, you know, I thought we'd start about talking about how to reply based on what type of person is either threatening to sue you or is already suing you.

That's interesting. Yeah, yeah.

And what I mean by that is, you know, hopefully you're not getting sued by a customer. That, but maybe you are.

Maybe you are.

Yeah, you could certainly could be. I've never had that happen. Well, actually, I'll back that up. We'll talk about it in a minute. A Few examples. Unfortunately, I have a few. But you know, after 25 years in business, it's. I guess that's. I have a pretty good rate, but a ratio. But, you know, if it's a customer suing you, I would imagine, you know, I would say you're going to reply a certain way versus like a supplier, which maybe you're going to be a little more hardcore on or something, or an entity versus like the IRS or. Yeah, I mean, I think it's, it's. Your reply is kind of contextual, if you will. Meaning that you need to get some advice on. Do you want to. Are you trying to keep things friendly? Because. So you can resolve them in a quick manner and, and maybe it also depends on what they're asking for.

Right, right, right.

You know, hopefully no one's threatening to sue you if it's some very inexpensive issue that you could resolve by just giving them their money back or something like that.

Well, you know, you said something to me years ago, more than a decade ago, maybe a decade and a half ago. Where. And up until actually very recently, I've never been sued. Our businesses have. Have never, ever. Which I suppose is a good thing. You know, almost 20 years in. Personally, I've been sued once and that's actually still ongoing. It's. But it's about a business thing. It's really just a personality clash and it probably shouldn't talk a whole lot about it because it's still pending. But that's the only time I've personally been sued, either personally or with the business. But you told me something years ago when I was in a position where we were really against a wall with somebody and they sort of held the keys to the ad serving engine that we used in our business and weren't going to let us use it anymore, even though we had made a deal with them. We helped them develop it and they said they'd give us a license and new people came in and said, you know, tough. We don't like. Yeah, we don't like that deal. That's a bad deal for us now. Like, well, yeah, no kidding now, right? That's why we made a deal.

Yes, yes, yes.

And I had no idea what to do. And I was on the phone with the guy and I just kept pushing at him, which was totally the wrong thing to do. But I was green. I didn't know. And I'm like, man, you can't treat me like this, dude. We had a deal. I was just appealing to logic and human nature and there was no responsiveness from him whatsoever. And he said, well, it's free country. Sue me. And it was like a light went off in my head. It was like, of course that's what you do when this happens. And we had deals on the web going at the time, and I mentioned it to you as I kind of had this realization, like, yes, that's exactly what I should do. If he hadn't said that to me, I don't think we ever would have sued that company because it just wouldn't have crossed my mind. And I would have just taken it and figured out another solution, and it would have been less good, and who knows where the business would have gone. So, as one does, you go to your friends for counsel. And I went to you and you. And this. I think we. It was like it was going to happen. I was just telling you, hey, yeah. And you said, making a long story slightly shorter, man, lawsuits are like spiders. He's like, it sounds like you have a good case, but it doesn't matter. It's going to get into every aspect of your life.

That's correct.

And it's true whether you're suing someone or being sued, once you're locked in on that. And this is like, especially true of me because I have a very. Like, the law is a hobby of mine. People tell me I should have been an attorney, but. But I'm not.

Right.

But I like the law. I like how. How it can be interpreted. I like how clear it is. I mean, there's a lot of things about it that I really like. And so I can get way too deep into. Into these things and the nuances of it and all of that. And. But. But even if you're not like me, it's still going to, you know, the stress of it that the.

Yes.

Yep. It. They drag out forever.

They do.

And you, you know, you just. When you've sort of freed your mind of it, it's right back in front of you. And. And it's an emergency now.

You know, I would argue that you should do everything within your power to either not have someone sue you, obviously, or not sue anybody else. Because I think the number one thing it does is it requires you to take your eye off your business.

Totally takes your eye off the ball.

Yeah. And there's just no way around it. And not only there. I mean, there's tons of other negatives. Right. It's extremely expensive. I mean, if somebody owes you $5,000 calling an attorney and tell them you're going to sue Them, whatever, it's a lost cause. If you have a good attorney, they're going to say, look, you, unless somebody owes you about 30 or $40,000, it's probably not worth it to have me involved. Now there's lots of, I'm sure lots of, you know, guys out there or attorneys out there that would take your money, but you're going to wind up, I think upside down. And I think that also the worst.

Thing in my opinion, if it's not a six figure potential judgment, it's not worth it because you're going to lose. Even if you, like you said, at 30 or $40,000. Right. Okay. You get.

Yeah. You're going to be, you're going to be even. Right?

Yeah.

By the time you pay your attorney.

But even if you get them to pay your attorney and you still, you walk out with your 30 or 40 grand, like how much of your time did you put in to earn that 30 or 40 grand?

Yeah, that's right.

Versus what you could have done with that time elsewhere. You know, you've got to be against a wall. There needs to be. It really kind of needs to be the last resort.

The opportunity costs are tremendous. That's. There's a second part that most people don't think about. Even if you win, then you have to collect and you could have the best judgment in the world. But if someone doesn't want to pay you, they are going to expand an incredible amount of energy and you know, weave this way and that way and it can be very difficult to collect on a judgment. That's why there are companies out there that will buy your judgments and at a discounted rate, you know, and as I've seen advertisement for them, you have a judgment, we'll come buy it, cash you out and we'll go collect because they know it is very difficult.

It's a full time job to collect.

It is a full time job.

Yeah. You one, one piece of advice I will give to those of you listening is find out what the collection laws and the debt laws are like. In the state where the person that or company that you're suing exists. It doesn't matter where you sue them. It matters where they are or where their bank is. When it comes time to collect. You could be in the least debt, you could sue them in the least debtor friendly state. But if they live in a debtor friendly state, that's what matters. And a lot of states you can have a judgment against somebody for their entire life and literally no legal recourse. To actually collect on it.

Yeah, yeah, that's right. That's right. It can be very, very difficult. Yeah.

Talk to your attorney about that.

That's right.

I got a judgment paid once, and my. My attorney still to this day says I can't. Like, it doesn't make sense to me that. That you got all that money.

That's great.

Yeah. But it was like, you know, we. We sued somebody that was being egotistical and. And stupid, which was the whole reason we had to assume, because they wouldn't talk. And this was not the ad server thing. This was a different thing.

Sure.

And they ignored everything. I mean, they never showed up to court. Like, they ignored the whole process. And so then we collected on them because they ignored that, too. But that's actually a good thing to talk through is the process of what that looks like so that if you're on the receiving end of these things, you know what it looks like early on. So you mentioned at the beginning of the show a demand letter.

Yep.

And you know what? I want to take a minute and let's talk about our sponsor here first, and then we will talk through that process. That sound good, man?

That sounds good to me.

Okay. Our sponsor for this episode is Storyblocks, where@storyblocks.com SBS you can go and sign up for what they call their triple bundle. So Storyblocks is three services in one. It's. You get images, you get video, and you get audio. And you can use these things any way you desire. They are all royalty free. You can use it for commercial stuff. You can use it for personal projects. You need an image for your website.

You need Facebook ads.

Facebook ads. Right. You need video, like for B roll behind a promo video that you're putting together. You need audio for that same thing. All of it is right there. There's 400,000 images, 150,000 videos, 100,000 audio clips. And here's the thing. Normally each one of these costs 149 a year, which, let me tell you, is very, very aggressively priced. Well, because we're sending you there, you get all three of them for 149 bucks for your first helping you live your charmed life. It is living your charmed life. Now here, I'm going to extend things out a little bit here, Shannon, because you have a very relatable story topic.

I do, I do.

About why someone might want to sign up for one of these services. You want to tell us quickly for.

Yeah. So as a small business, you're always looking for Images and graphics and things for your blog, your Facebook, whatever you're doing. And if you have employees, well, they are out there doing those things too. So I got a letter from one of these image places. I won't mention any names here.

Thankfully, it wasn't Storyblocks.

That's what you said. No, it was not. It was some giant corporate place. And they said, hey, you've been using this image in your blog for something like eight years. We've calculated that it's been seen like 36,000 times, and based on that, you owe us about $10,000. And at first I looked, I was like, well, this is ridiculous. And like, I'm kind of a procrastinator about things like this. I tossed it in the corner of my desk and I'm like, well, that's stupid. I'm not going to do anything with that. But it kept kind of accelerating and eventually got this demand letter said, hey, if you don't pay, going to sue you. And so I realized I had to pick up the phone. And the thing about it is this picture was a photo of a plug in the wall. That's all it was.

But you couldn't yourself.

Absolutely. But it was easier at the time for one of my employees, a great young guy, you know, who was at the time no longer employed by me, but he was a graphics guy and he was getting things going up and he went up and did a Google search or something like that and grabbed it the web and. And pushed it out to, you know, it's. And it sat in the blog forever. And even though I had already deleted it when I, you know, I got this letter, I went. And I can't even find it, what it was. I start talking with them, okay, great. Here's this picture of a plug in the wall. And I got it. I got rid of it off the thing, but it didn't matter.

Doesn't. It doesn't matter. Well, here's the thing. If you, if you had had a license for that, the way the way storyblocks works is if you, let's say you do the year subscription and you take a picture of the plug or whatever it is, you put it on your website, even once your subscription expires, that image, that's yours forever. Yeah, it's yours forever because you got it during the valid term of your subscription, it's yours forever. Check it out. Go to storyblocks.com s t o r-y dash b l o c k s dot com SBS because we're the Small business show. And that's where you get the deal to get the triple bundle for 149 bucks. Our thanks to Storyblocks for sponsoring this episode.

Yeah, yeah, and that brings up a good point, is, you know, when you had something small like that, do you even need an attorney in the first place? Right. And I mean, thankfully, I was able to negotiate it down to. For, like, 800 bucks. And I still was, you know, had to, like, bite my tongue as I was writing the check, and it just really. It just really made me angry. And you said something earlier I want to go back to about ego. If, again, if you have a good attorney, one of the first things they're going to tell you is, get your ego out of this situation.

Yes.

The lawsuit, the demand. And also, I. I hate to say this, but you have to get your sense of justice out of it, too.

You do. And that's my biggest problem, is I seek justice with this stuff.

You can totally get justice if you want to pay for it.

Correct.

So if you want to write a big check and you're going to fund your attorney just to drill down, you absolutely may be right. But.

But a good attorney, you will lose.

You can just as easily lose because that's correct or because, again, a good attorney is going to tell you, hey, Dave, we don't know what's going to happen. We don't know if we're going to get a jury that's going to have this, or maybe it just goes to the judge and he has a bad day and eats, you know, has a bad breakfast and doesn't feel good and he's angry. You just don't.

You don't know.

And. And so it could totally go against you. And, you know, again, you have to make it. You have to make a business decision, not a decision about how angry you.

Are or how your ego has to leave.

And it has to leave.

A good attorney will be like a therapist, especially at that stage of things.

That's correct.

Yeah.

Yep.

Yep.

A bad attorney is going to say, yeah, man, let's take it to him. Write me a, you know, $10,000 retainer check, and we'll go. We'll start here.

Yeah. Oh, that won't be the end of it.

That's right. That's right. Go ahead.

No, I was going to say that lawsuit where we. We wound up getting the judgment. The judgment was for about 120 grand of actual damages, and we collected the whole thing and another 30 grand of legal fees, but, you know, we were out of pocket that 30 grand until we got the judgment settled. Right. So we had to pay for that all the way through.

And it can put you out of business.

Well, yeah, it really can.

Your cash flow, we've talked about it here before. Critical cash is. And it takes a lot of cash, and it takes so much of your attention and your stress and this kind of thing. And it can really just impact you in such a negative manner that, again, I think you have to look at it as a business decision, and it may just make sense, even though you just do not want to do it, is to sit down and go, you know what? I'm going to have to just. We're going to. I'm just going to have to eat it or I'm going to have to write a check for something I don't want to write. But you have to, you know, balance those things out together. It's really important.

Yeah. All right, so let's talk through. Let's talk through the process because we promised them. So the demand letter, this is a. This is a smart tactic. And anyone who is being properly counseled will almost certainly start with a demand letter. Really, they'll start with just sending you a bill or asking for whatever it is that they want. And when you say, I don't believe I owe you that, or, you know, whatever, even if you say to them, it's a free country, sue me, you do not expect them to draft the lawsuit the next day and serve you. You will get a demand letter. And the reason you'll get a demand letter is because they're going to want to try and sue you for attorney's fees. That's states. You need to serve a demand letter first, certified mail, so you can prove that it was sent. And in most states, it's 30 days. You give somebody 30 days to respond to the demand letter. And if they don't, or, you know, if it's not worked out in that 30 days, regardless of whether you've talked or not, then on day 31, you can file that lawsuit and include in it, you know, suing for customary and reasonable attorneys fees. Right.

It makes sense.

Again, whether you'll actually get that in your judgment and then whether you'll get that judgment in your bank account. Those are very big ifs floating out there. But without. Without the demand letter, you can't even include that in the lawsuit. Like, the court will say, no, no, no, you didn't give them the opportunity. You know, you sued him. You didn't ask first in any official capacity.

That's right. That's right. And I think when you get that demand letter is, you know, depending upon what's going on, it's certainly worth giving your attorney a call.

That's the day, I would say, when you. When a demand letter arrives, if you haven't spoken to your attorney about this, that's the day to get, you know, get. Get on the phone with your attorney. You do have some time. You've got 30 days. The law provides you that, you know, it's not an emergency, but it is urgent, and you got to figure out a strategy and maybe start talking. Have your attorney talk with their attorney. If it's impossible for you and whomever it is that's suing you to have that business conversation, you have the two attorneys have a business conversation, and a lot of times, you know what? Everybody knows what happens next, and the only people that like it are the attorneys. But if they're working for you, they're not gonna push for that. They're gonna feel it out and see if they can make it work. After that, you file the suit, and then I'll just talk through the process quickly and then we can get there. After that, you file the suit again. You have a period of time where you can and should answer. Generally, that's another 30 days. If you don't answer in those 30 days, as these people that we sued in my example before.

That's bad. That's bad.

Well, then all you do is you file for a judgment.

Yep.

And you will get a judgment because the judge will say, yeah, they didn't answer me either. So the judge writes you your judgment, and then what you do is, well, if they're. If you're being sued, you answer as quickly as possible and you apologize to the judge. But if you are the one doing the suing, you sit as quietly as you possibly can for yet another 30 days for that judgment to become a final judgment. And after that. That takes a lot to undo a final judgment. I mean, a judge has to be the one to grant it, but even the jud has to have. It's not just the judge's prerogative. There needs to be a compelling piece of evidence or a compelling reason for the judge to overturn it, because, you know, you've put in all this time and you followed the process. Presumably they haven't. And then once you get that, then you can go and start the collection process, which is sort of like go back to ground zero and start all over again.

So one thing I want to point Out.

Go ahead.

Just like, you know, you don't want to call and start interviewing accountants on April 1st when you need to file your taxes. You also, if you can avoid it, don't want to be searching for an attorney. When you've gotten that demand letter. You are much better positioned if you already have one, you know, at least that you've spoken to. Maybe they help you set up or give you some advice on how to structure your business. Or maybe you just reached out and you know somebody or someone you've talked to before so you can have a. It's a different discussion when they know you versus, oh, who are you and what is going on. They don't have any backstory.

No, they don't have any backstory. I always went to. I had a lot of clients in my consulting business, and so that's who I would go to. I did a lot of work for attorneys. But you have this relationship and they know, all right, this person. My experience with this person is that he or she is not unreasonable and they're more willing to consider taking your case.

That's correct. Now, they may refer you to someone else who's a specialist in a particular area of law that you need help with, which is fine. But again, it's a soft referral. They're, oh, hey, call this guy and he'll tell him I referred, that kind of thing. And so that's important is if you can, and we've talked about this before, it's kind of on your board of advisors. You should have this attorney there to answer these kinds of questions that you may have from time to time. Maybe he says, don't respond, or I've had it in the past, where he'll say, look, you write a letter, you respond to it, I'll review your response, add a couple of things and then send it. And that's much, you know, less expensive than if he drafts a reply. And sometimes that's all it takes. Sometimes, you know, he's like, hey, you know, go pound sand, or you don't have all the facts or something like that. So Good. Good to have some advice along the way, too. If, if you think this is serious and you get this demand letter and things are not, not progressing, you know, maybe the other guy has, doesn't. Hasn't got his ego out of it, or he is seeking his, his own sense of justice or whatever it is. So you think, wow, we're going to get sued here. It's probably time to talk to your insurance company because you may have Insurance coverage at all different levels. If at a very basic level, you may have insurance coverage that would cover your attorney fees and if you have that, it changes the dynamic, Right, Totally. The attorney, if the insurance agrees that they should be based on the insurance that you've been paying them, they should come in and they have a duty to defend you. And that can change everything. And your, your cash flow will be protected because they're getting, things are getting picked up by that and you need to let them know.

Yeah. That also mean, may mean and oftentimes likely does mean that your insurance company will assign an attorney to the case. You may.

That's right.

May not get to pick your own attorney, but that's okay. Like, that's fine if I'm, if I'm. And thankfully, I've never been in this scenario. But if I'm suing somebody and suddenly, you know, my attorney calls me and says, oh, yeah, you know, I heard from their insurance company's attorney. It's like, oh, no, like, this might not go the way I want it to go. Although the insurance company wants to keep their costs down too. So it works out. You get a settlement.

Yeah. They're highly motivated to settle and they don't have any ego and any sense of just.

Insurance companies are all business. All business.

That. Yeah, that's exactly right. And you know, along the way too is things start happening, letters start coming, you might start getting phone calls. I think it's important that if you have employees, you start thinking about if and, and if you feel you need to talk to someone and mention it to them, maybe your managers, supervisors, whatever, what you want to tell them about this if it's going to be disruptive for them, maybe you're going to be out of the office us a little bit more in the next 90 days as you go down this road and maybe have to fight this battle. And you want them to know what's going on because it's never good.

Both sides of the equation, whether you're suing somebody or being sued. You don't want to bury this stuff under the rug. You don't want to make it an obsessive part of your business because you actually have other business to do.

That's right.

But you want everybody aware because things they can't say, there'll be companies that you tell them, look, if somebody from this company calls or you need something from this company, that has to come through me now because of this. Yep.

And they may need to step it up and cover you because you're going to be out of the office or not to be on site, whatever it is. So you'll have to have, maybe your managers are going to have to take over some parts of the business that you were doing, you know, and in addition to your employees, you know, getting sued, you know, or suing someone else, it could impact your other relationships, particularly if you're going to get sued. If you're doing any sort of, like, let's say you are. Re upping your, you know, your line of credit, you know, you're, you're, maybe they're set, setting it up a year later or whatever, and you've got to go ahead and reapply again and renew it. That's the word I was looking for. I knew it was out there somewhere. Renewing your line of credit with your bank or something like that, that, well, they have to know you are obligated to tell them if you're being sued. So rather than check a box on a, on a form you're sending to some committee that doesn't know you, you better call, call your banker and talk to your banking relationship person and say, hey, I want to let you know about this. Let me give you some backstory. You know, we are, of course, we haven't done anything wrong.

Yep.

We had a case, yeah, we had a case before where we had provided a bunch of computers for a design company and it was on a lease, I think it was, through GE Capital. It was a bunch of Apple stuff. It was awesome. And we went up and we set everything up and they were, they were. It was a pretty large deal. I think it was, I don't know, 80 or 90 grand worth of systems, Quark Express, all that great stuff back in the, back in the day. That's right. Dating myself. Anyway, so they eventually, I believe, went out of business and, and the leasing company wound up suing them for the rest of the money that was due on the equipment. And they just blanket sued anybody and everybody that was involved in getting the equipment for them. Whether it was the software consultants we had recommended us that provided the equipment through. I think it was GE Capital at the time. And so it was just one of those things where we were so far removed from what was going on, but I had to tell the bank, hey, guys, you know, we're getting sued. Let me tell you, there's nothing to it. You know, we did this. We did everything we were supposed to do. And they looked at it and said, okay, yeah, don't worry about it, you know, but you want to have a conversation.

Yeah. You can get ahead of it, as opposed to them calling you and saying, shannon, we hear you're being sued. It's been going on for six months. Want to.

Yes. Why don't you say anything?

Yeah. Why didn't you say anything? Yeah. It erodes that trust. Yep, that's right.

Right. So you want to have a conversation with them, you know, just like you want to talk to. There may be some other business partners you need to let know. Certainly, you know, we talk about your employees. What about your spouse? You know, you need to have that conversation so they're on board. If you're going to have extra stress in your life and, you know, having that support system in place when you have to go through something like this is really important. And your support from your employees, partners, bankers, your attorney, your spouse, all that stuff can make or break you during what can be a very harrowing experience. I'm telling you.

Don't come out on the other side, though. You'll be good. It'll be fine. And, you know, then you'll be like us. You talk about it like it's not.

Yeah, that's right. That's right. Just remember, they're not the. They are not the defining points of your life. You just have to power them.

Like. Well, you have to decide that they are not.

Yeah.

I mean, they can be.

Yeah.

But that's up to you. You get to pick what you choose to define yourself.

And sometimes something very positive can come out of it, and you can connect with people when they realize there's a mutual beneficial thing. And, hey, we were going to sue you, but maybe now we'll buy you that kind of stuff. You just never know.

That's right.

Anyway, we barely covered it here, but it's just to get you started and to give you a few resources and tips on what to do if you think you want to go after somebody or somebody's coming after you and how. How to respond. And certainly reach out to your accountant. You know, Nolo Press is a great resource for small business owners that will. They have lots of, you know, online stuff about handling lawsuits by yourself if you want to, or, you know, what. Just what to do when things happen. So, you know, you'll power through it.

Yeah, you'll power through. But just remember, keep your eye on the ball with the rest of your business. That's the important part.

It's the hardest thing to do.

It is the hardest thing to do. Yep. Certainly for me. Yeah.

Yeah, me too. Awesome.

All right, well, that's that was heavy enough for a week here, man.

It was. As we roll it, we'll get these out of the way before the holidays, right?

That's right. Yeah. Exactly. Exactly. Folks, make sure to go visit Storyblocks. S T O R-Y-B-L-O-C-K-S.com SBS get yourself that special triple bundle. Deal. Visit us us businessshow co. Right. You can find out everything there if you go to businessshow Co. Facebook. That will get you to our small business support group, which is a great place to check.

Yeah. Come talk to us. Give us your horror stories and your success stories with this stuff.

Keep living that charm life, folks. Take it easy.