Frivolous lawsuits are filed almost every day. If your business has been the subject of a frivolous suit, you have probably spent considerable amounts of time and money in its defense. This unfortunate reality is not news. What may surprise you, however, is that many of the costs associated with your company’s defense were incurred before a judge even considered the merits of the underlying lawsuit.
As business owners know, fighting a lawsuit can be more expensive than settling the case out of court. As a consequence, enterprising plaintiffs know that they can bring a lawsuit with no real chance of winning, yet still extract thousands of dollars (or more) from a besieged defendant who will pay them to simply go away.
In an ideal world, our legal system would throw out these baseless lawsuits without requiring a defendant to spend time and money in responding to the allegations. However, that is not the case. Rather, so long as someone is able to pay the fee associated with filing a Complaint, he or she can require your business to respond to any charges — no matter how baseless — without a judge even reading the pleading!
For example, under the Federal Rules of Civil Procedure, anyone who can pay the filing fee to sue your business can unilaterally command you to appear and defend your company. If you do not mount a defense, your company faces a default judgment in the plaintiff’s favor. This is a questionable policy, as it imposes unnecessary costs on the private sector and our judicial system.
As a matter of fact, federal judges are already required by law to dismiss every lawsuit which appears on its face to be frivolous or malicious, without requiring a response from the named defendant. However, this is only the case when the lawsuit is filed by a person who is too poor to pay the customary filing fee. Thus, if two plaintiffs filed frivolous lawsuits which were identical in all respects, but only one could afford to pay the filing fee, only the lawsuit filed by the less wealthy person would be dismissed without requiring a response. This is an absurd result.
Nevertheless, you can take some affirmative steps to help guard your business from frivolous lawsuits. First, if you own a business, consider forming a corporation or limited liability company (“LLC”) in order to protect your personal assets from lawsuits related to your commercial activities. Another step you can take to protect your business is to ensure that you have purchased sufficient liability insurance. Indeed, umbrella/excess liability insurance can cost as little as $150 for an additional $1,000,000 in coverage for claims such as defamation, false arrest or invasion of privacy. It is also prudent to consider inserting a “loser pays” provision into business contracts. Such provisions may dissuade frivolous litigation because they impose significant costs on a plaintiff who is unsuccessful in his lawsuit.
Undoubtedly, every citizen deserves and is entitled to his or her day in court. And defending your company against frivolous lawsuits may be an unfortunate cost of doing business. Of course, in federal court a defendant can seek to sanction a lawyer who is found to have filed a frivolous case. (Sanctions are much harder to obtain in state court.) However, if your company is faced with a lawsuit (frivolous or otherwise), it is important to seek legal counsel as soon as possible.Back to news