How We Survived Getting Sued in Our First Year of Business
The big lesson we learned: Break up your projects, to minimize the pain should one of them get sued.
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When people talk about starting a business, oftentimes they'll say something like, "We need to be careful, so we don't get sued." But, deep down, they don't foresee that ever happening; and, unfortunately, it does happen. A lot.
I know, because in my first year of starting a business, which I thankfully still own, we were sued by a company with deep pockets, years of experience and two high-end law firms on retainer.
And, back in those days, all we had to call our own were a sub-lease and a handful of employees.
Overall, it was a terrifying and expensive process, but our company survived. We made some mistakes, but we also got some things right, and today, looking back, I realize that the whole process would have been easier had I known some of the key insights that I'm now prepared to share about my first -- and, hopefully, last -- lawsuit.
How it happened.
Zilker Ventures was the initial name of the company I launched. But it was totally restructured in the wake of the lawsuit: We retained our entities, Zilker Ventures, LLC, and ChooseWhat.com, LLC, keeping Zilker as the top-level holding company for ChooseWhat, which in turn owns five other entities, each with its own website project.
All these efforts date back to 2007, in Austin, Texas, when our goal was to create a Consumer Reports-style resource for entrepreneurs through a series of websites. Our first website went live in early 2008, and saw immediate success, so we went on to launch two more that same year.
Then, in late 2008, our troubles began: Zilker received letters alleging we were violating a trademark with one of our websites, FaxCompare.com. The core of the dispute was that we were using a word that the plaintiff had trademarked to describe a general service type in addition to its brand name. We were also bidding on that word via Adwords and Bing.
The plaintiff alleged several other complaints -- including unfair marketing practices -- and eventually added patent infringement to the list. We disputed that any violation had occurred, and hoped the letters were simply a threatening tactic. Unfortunately, they were not.
And, eventually more letters arrived, notifying us that we were indeed being sued. To call this scary is an understatement; that's why we initially looked into finding a fast way to settle and move on. But it became clear that going the settlement route would ruin our business.
My partner at the time, Gaines Kilpatrick, and I believed that we had done nothing wrong and that we had a case, even though we would be going against a company with more resources than we had.
We also knew that because we were young, we didn't want to handcuff ourselves to a one-sided agreement that would impact our ability to grow the way we wanted to. So, we decided to risk losing the whole thing rather than be hamstrung from the start.
After all, we didn't have much to lose.
Our first step was to find a lawyer who specialized in online trademark disputes but wouldn't bill for endless hours. We found the right fit through an industry contact. There were a few factors that made Traverse Legal right for the company: its up-front quote for the work that needed to be done; expertise in the legal area in which we were involved; and access to the technology that would help us efficiently share information between our base in Austin and that of the firm, in faraway Traverse City, Michigan.
Our lawyer laid out all the relevant information from the legal perspective, and, using Basecamp, updated our project as the case moved forward, so that we could see what the firm was working on. That visibility was extremely helpful.
Even with clear communications, however, the legal process moved slowly, taking almost a year in the end -- during which we couldn't afford to stop running our business. We needed an operational plan so that Zilker wouldn't languish while we worked through the lawsuit.
We responded by having my partner focus on the lawsuit, while I focused on the business. That decision helped keep Zilker from floundering, although we still needed all hands on deck for responding to time-sensitive discovery requests.
That was one of the biggest challenges for us. But it was critical for us, as the smaller company in the lawsuit, to keep the judge from postponing our trial date. We had fewer resources than our opponent and knew we couldn't afford to let the process drag on.
In the end, our perseverance paid off. As the court date approached, we were able to reach a settlement (the terms of which I'm not legally free to disclose). The settlement set up a deal that worked for both parties; we both got what we needed to move forward with our respective businesses.
My advice, should you find yourself in a lawsuit
While our company made it through the process, one of the most time-consuming and worrisome parts was those overwhelming discovery requests. We had never been through this process before, and had no idea how to efficiently produce the documents that were required by the court.
Even at that early stage, our company ended up having to search, review, properly mark and reproduce hundreds of thousands of pages of material. We were going up against a much larger legal team that could process information incredibly fast, and any mistakes were noticed immediately and reported to the court.
In hindsight, I wish that we had developed a process to help streamline production of those documents. For our emails, I would have submitted to the plaintiff, and requested approval for, a list of keyword searches that we would run through our email clients (Outlook and Google Apps), as well as the format by which we would produce the emails before actually doing the work. I would have done the same for our server and each of our company's computers.
Lessons, learned the hard way
A lawsuit is scary and costly, but we came out of ours with some important lessons learned:
Map out a plan. If you too get caught in a lawsuit, mapping out a plan to help keep your business on top of the court deadlines and discovery requests and understanding the biggest costs up-front will save you time and prevent nasty financial surprises.
Don't rush to settle.The first was to stick to our position and be prepared to fight all the way to court. We made a mistake early on in seeking a settlement too early in the process, and the opposing party took advantage of that.
When you're in a lawsuit, the whole process is a negotiation until you go to court; our premature desire to settle gave the opposing party leverage and a major negotiating advantage. Fortunately, we made that mistake only once, and were eventually able to maintain our position and gain a workable outcome.
Separate your projects into different business entities whenever possible. That way, a lawsuit against one doesn't put everything at risk. Zilker's websites were all connected and had no legal insulation from one another when the lawsuit hit, which meant they were all affected by the process.
Keep hold of your emotions. While it's hard not to worry when you're being sued, another piece of advice is to try not to let emotions get the better of you. There are serious lows to the process, and hopefully some highs, too. But the pendulum swings fast, and if you're trying to keep a business going, it's best not to let any of the highs and lows impact you too much.
Don't burn your bridges. Finally, if the outcome is a settlement, you should come up with a policy for working with the opposing party in the future. Chances are, you might have to continue dealing with that company -- or at least co-exist in the same industry -- so, if at all possible, try to set yourself up for a healthier working relationship.
Battling a lawsuit is hard work, but it is possible for a small business to fight and survive. Doing so will require planning, cool heads and a legal team that is the right fit for your business. With those factors in place, your business will be in a position to not only survive, but to thrive moving forward.