Business Advice

Mauve Morpho Business and Actionstep Consulting

8 Ways to avoid your business getting sued (much)

By Nic Perry, last updated August 16, 2021

There is no surefire way to avoid getting sued at all. In the US, people can sue for just about anything, but you can take steps in your business to make sure that lawsuits are less likely to happen and if they happen, are limited in scope so you don't have to worry about a bad business decision leading to the loss of your personal assets like your house.

Obviously, this is all general advice, for more specific advise, schedule a call with Mauve Morpho or your business's personal attorney

Choose a legal entity with liability protection

The most important first step in protecting your personal assets is to have a legal entity that provides liability protection. If you are a sole proprietor, you can absolutely be sued for everything you have. You can read more about the different legal entities in this article about the different options for legal entities. The short version is usually to create an LLC for your business. Mauve Morpho can help you decide what option is best in your specific scenario.

Keep your business totally separate

This is really an extension of the first point. If you fail to keep your business totally separate, someone suing you may be able to "pierce the veil" and come after your personal assets. To avoid this, you need to make sure everything is in order and separate. All your business registration paperwork and founding documents need to be complete and safely filed away, preferably with signed dated paper copies as well as scans.

The second part is to keep your business separate. At the most basic, this means having a business account that is never used for personal payments or anything remotely close to personal payments. Instead, any payments for personal things need to come as disbursements from the business. I always suggest erring on the side of caution. If you ever have any doubt, at the very least pay it personally then have the business reimburse you. Keep in mind, anything the business owns can be sued for, so, for instance, if you live and work from the same place, you are better off paying for the place personally, then formally charging your business rent with a written lease. If your business owns the building, it might save you a little on taxes, but it opens up the building to be something which can be lost.

Use contracts

Contracts are another essential way to avoid lawsuits by making sure everyone is on the same page before you even begin. Contracts with your customers and suppliers (when it makes sense, not for retail customers obviously) are a sign of professionalism and help establish the relationship. Make sure you actually read these contracts though, to make sure you aren't agreeing to something you will regret later. If you are a big enough company to afford it, having lawyers look over any major contracts is a great way to avoid any unpleasant surprises. Nic Perry of Mauve Morpho is not an attorney, but he did write contracts for a major healthcare IT company full-time for several years and can be a great half-way step for businesses struggling to justify the cost of an attorney to review their contracts for red flags.

You can usually find template contracts online to start from in creating your own contracts, but make sure you carefully review them and change them to fit your business and how you want to do business.

Have an Attorney

If funding allows, having an attorney you trust available when you need them is a huge help in avoiding costly mistakes that lead to lawsuits. You may choose to have a generalist, or ideally, you'll know someone to contact for contract review, another for HR issues, and another for legal structure questions.

Once you have an attorney, err on the side of using them or at least asking a resource like Mauve Morpho whether or not it is a good time to check with an attorney. A few big and common ones are lease contracts, major partnership contracts, your own internal contracts, firing an employee with cause, and creating new legal entities, trademarks, patents, or copyrights.

Avoid Trademark Infringement

Trademark infringement should be straightforward, but sometimes you might not even realize that cool catchphrase you thought of is actually something you heard a couple months ago on the radio. Whenever you are naming a business or coming up with major marketing catchphrases, make sure you at the bare minimum do a basic web search for those things to make sure you aren't copying someone. Try to search for near variations too, in case there is something close enough to be a problem. The usual rule is if it is close enough to confuse a customer, it is too close. So "Soda Coke" would be a horrible name for a new soda company, but "Coke Industrial Aeronautics" could probably pass the test. However, if you really want to avoid getting sued, avoid even being that close, especially to a major brand; some major brands are very aggressive in going after anything that could dilute their brand even in the tiniest portion.

If you can afford it, a more in depth search is a great way to make sure you don't accidentally land near an existing brand that just has a poor web-presence. This is also why lots of companies have odd names, like Mauve Morpho - it helps make sure they are totally unique with no risk of brand confusion or dilution.

Avoid Copyright Infringement

Copyright is a funny thing - pretty much everyone knows what it is in the abstract, but most business owners don't actually understand it enough to avoid a lawsuit. Everything anyone writes or creates in inherently their work, and you cannot use it unless they give you permission or it is old enough to enter the public domain. EVERYTHING. That funny meme someone made and tossed on Reddit? It's an artwork they could choose to copyright or protect via lawsuit even if they don't formally copyright it.

The biggest culprit for businesses is images - you want great images for your website and social media, and you want to just use images you find online, because that's easy and cheap - except it isn't. Using these images can get you sued, get your website closed, or get your social media pages banned. To avoid this, stick to using CCO artwork - this is a special Creative Commons license that allows for free, non-attributed commercial use. There are other acceptable options out there where you can use their content as long as you give them credit, and those can be fine too as long as you strictly follow the guidelines.

The best way to stay extra safe is to keep a record of every image you use, what CC0 source you got it from, and when.

Fair Use is the big exception. Maybe you want to have a podcast reviewing new albums and without at least a little audio here and there, you know it's going to be dry and tough to follow. The good news is, Fair Use was designed especially for that. Fair use is the use of copyright material in a limited and transformative way so that you are mostly making something new. For example, in our analogy, if you were to use let's say 4 different 6 second clips from throughout a song in that half hour podcast, most would agree that is Fair Use. However, and it is a big however, just because it is legally allowed, doesn't mean you won't get sued for it anyway. Writing to you from mid-2021, there was recently a boxing match with a big YouTube celebrity where the company sponsoring the fight has appeared to go after anyone who even talked about the fight in depth. Most agree that the courts would toss most if not all of these cases out, but for a small business, it can still be devastating and not something they can afford to fight. If you need to make a habit out of Fair Use, learn all you can about it, use as little as you can, and expect that at some point it is still going to be a problem. Save for that eventuality, keep extensive records, and try to make friends with an attorney who might be willing to handle a few early pre-court responses without it being terribly expensive.

Avoid Interference

When I say interference, I'm actually talking about a legal term called "Tortious Interference." Tortious basically just means something someone could legitimately sue over and you be held at fault. Interference is efforts of a business to interfere with how another business does what they do. Obviously that would apply to criminal activity like sabotaging your competitor, but it also applies to things that could feel harmless.

Let’s say you just left a business to go start your own doing basically the same thing. If you were already Facebook and LinkedIn friends with your former clients and they reach out to you to work with you instead, you are on fairly safe footing (unless you had an enforceable non-compete). However, if you went around friending all of them as you left or sent out messages to them letting them know you just opened your shop, that could be interference since you are leveraging knowledge you shouldn't have to try to come between another business and their customer. This would be even worse if you referenced knowledge you have from before like, "I know you were never happy with our turnaround times, I'll guarantee you in writing that we'll keep it to half what they did" Now, that doesn't mean you can't go after new clients and win them away from competitors, but you need to focus on pitching your thing in the best way you can, not in underhanded or iffy ways to get in between your competitor and their client. This would also apply to trying to make them look bad, fake calls, etc. Most of what will get you in trouble will probably feel a little slimy if you are an ethical person - listen to your conscience and you'll probably be ok. Focus on running your business as well as you can, not taking down the competition.

Avoid Slander and Libel

We have all seen ads that take a dig at competitors. These aren't disallowed and can be effective sometimes. However, slander and libel are when you write or say things that are not true. Slander and libel are both things you can absolutely be sued for, so if you are going to say or write something negative about a competitor, make sure you can back it up with proveable facts. Even then, if your competitor is a lot bigger than you, they could still use the opportunity to sue you in an effort to bankrupt your company fighting their frivolous suit.

If you really want to be safe, not to mention build a great reputation, when you can't find a nice way to say what you think, be as graceful and say as little as possible. Instead of telling a potential client your competitor's product is "worthless" just say that you believe you have a better product for their needs. That's nothign that will ever get you sued and keeps the potential client from feeling bad about having liked that product before.

Need some advice?

If you are worried about any of these situations or want to talk more about protecting you and your business from lawsuits, contact Mauve Morpho to schedule a time to talk about your business and how you can better protect your business and your assets.


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