Economic Disadvantages When Being Sued

April 13, 2006

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When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

The combination of three components of our civil litigation system presents a real threat to small business owners who one day may find themselves at the receiving end of a lawsuit:

Attorneys for plaintiffs (the person or entity suing) handle many damage-type cases on a contingency basis. In other words, the plaintiff doesn't have to lay out any money to sue and the attorney only gets paid if his client prevails.
While the person suing may not have to put any money down, the defendant (the person being sued) is paying an attorney an hourly rate to defend himself against the lawsuit. As you can imagine, these hourly rates are substantial and can really add up.
In our civil litigation system, if someone sues you and they lose, as a general rule, they do not have to reimburse you for your cost of defending yourself against their suit. The United States does not have, for lack of a better phrase, a "loser pays" system.

Warning

At this point you may be asking yourself what happens if you're the plaintiff in a civil litigation suit? If a small business owner wants to sue a customer who defaulted on an account, or maybe the owner has a claim against another business, chances are the attorney's fee is still going to be paid on an hourly basis. Attorneys typically take cases on contingency only if there is a great likelihood that the damage award will be large enough to justify the services they provide.

So no matter which side you're on, as a small business owner, there's a serious economic downside to being involved in a lawsuit.