So, You’re Being Sued

by David Sederholt4 Min Read

Restaurant owners and managers represent a target rich environment for lawsuits. Customers, employees, vendors, insurance companies and even the general public pose risk of being sued.  As a blanket statement, I would recommend that you retain and keep a good relationship with a lawyer that you trust, but many restaurateurs can’t afford that luxury and retain counsel on an “as need” basis.  So from a layman’s perspective, there are general rules to follow if you find yourself served with a subpoena.

Whether you are in the right or dead wrong - guilty or not - being named as a defendant in a lawsuit is a no-win situation. What you do immediately following your being notified can make a great deal of difference in the outcome. Every lawsuit is different and needs to be treated uniquely. With that being said, there are certain strategies that are essential to the defense of any lawsuit.

Don’t be naïve and believe our justice system is fair, logical or inspires actual justice. The lawsuit filed against you is often embellished, and may include numerous allegations that range from creative to outright false. This is quite a common practice and should not cause you alarm. 

Rule #1 – Stay Calm

Emotion driven responses lead to mistakes, miscommunications and worse. An emotionally fueled desire to prove one's innocence is costly and often results in a bad outcome. Keep your wits about you.

Rule #2 - Never Admit You Are at Fault

Say nothing about the situation until you speak to your lawyer. This includes casual conversation even to trusted employees.  Sometimes what you state to these trusted individuals can be turned against you in a lawsuit.  Don’t put yourself or them in this situation.

Rule #3  – Keep Quiet

It is important to direct all management and employees not to discuss the litigation or dispute with anyone– either internally or externally. The last thing you want is an employee discussing the lawsuit or transaction in an email or by any other means, which could lead to the portrayal of wrong actions taken by your company. This happens all too often, innocently.

Rule #4  – Preserve Evidence

Once your company is put on notice of a lawsuit or potential lawsuit, you have what lawyers call an “affirmative obligation” to ensure that no potential evidence is lost or destroyed. This includes physical evidence, electronically stored information, documents etc. It can go badly for litigants if a party loses or destroys evidence, referred to as spoliation, even when it is not intentional. Immediately collect and preserve all potential evidence. Consult an attorney on this.

Rule #5 – Don’t Procrastinate - Retain Counsel

Once you are sued, do not delay in retaining legal counsel. Every court in the country imposes deadlines, and every defendant has a limited amount of time to respond to a lawsuit. In most jurisdictions a defendant is only provided 20 or 30 days to respond. If you miss the deadline to respond, a default judgment could be entered against you. So you must act promptly, and notify your insurance carrier (see below) or immediately retain counsel to represent you in the lawsuit.

Rule #6 - CAUTION – Beware of Your Insurance Company

This can present some real challenges for business owners as in most cases you should report the lawsuit to your insurance carrier as your coverage probably includes the cost of legal defense.  Once notified, the insurance company is supposed to assign or refer you to a lawyer that they have approved for this type of litigation.  This is how they contain costs and the insurance company has negotiated a discounted rate for legal fees. If for some reason you choose to proceed with your own attorney, you may find your insurance provider will not cover all or a portion of these legal fees for your defense.

This lack of response could leave you in a tight spot if the insurance company fails to address your request quickly enough to meet your court deadline. If they don’t provide you with an approved attorney before your deadline to respond you go into default judgment – aka “you lose”. This may force you into making the decision to hire your own attorney to keep respond in a timely fashion and keep you from a default judgment.  Just beware that your insurance carrier is not always your friend, nor working in your best interest.  Their prime motivation is to contain cost and avoid paying out money.

The other caution you might heed is that in many cases the insurance company my quickly decide to settle a lawsuit that you could win.  They are trying to contain costs and by settling the case, they are implying your guilt.  In doing so, this will result in a negative charge against your history and you will be paying additional premiums for years to come. Insurers never really suffer a “loss”.

Rule #7 – Try to Anticipate Potential Vulnerability and Practice “Best Efforts Defense” 

There are many things that a well-run restaurant can do to show a court that you have taken measures to prevent the issues you are beings sued for.  Written Polices and Procedures to address the full spectrum of operating protocols must be created. Training and testing particularly in the most sensitive areas such as employment law, discrimination and sexual harassment law as well as liquor liability prevention. Food handling and product liability practices can save the day if a customer sues over food poisoning.  This all takes time and research but it can save your business.

Litigation is all around us in the restaurant business. Product liability, liquor liability, slip and fall, employment / labor actions, sexual harassment, vendor lawsuits, tax issues – the list is long. Whatever is thrown at you build your case on facts and recognize your weaknesses.

David Sederholt

David Sederholt

@sfscapital | LinkedIn | Website | Email

Serial entrepreneur David Sederholt has conceptualized, launched and built numerous companies in a variety of sectors including the restaurant industry. Newly retired Chief Operating Officer at Strategic Funding, he owned and operated over a dozen restaurants including the Rattlesnake Southwestern Grills, which he founded and took public.

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