Standing Strong Against Business Shakedowns Many small businesses fall prey to unscrupulous lawsuits. Don't let yours be one of them.

By Rich Mintzer

Opinions expressed by Entrepreneur contributors are their own.

The owners of a small auto repair business in Arcadia, California, received a minor citation from the Bureau of Automotive Repairs for leaving the date off an invoice. The correction was made, and the business owners carried on with business as usual--until a group of private attorneys threatened to sue them, unless the auto repair business paid them a $2,000 "settlement fee," claiming unfair business practices.

In Northridge, California, a woman decided to purchase a new blender from an appliance store and selected one at the bottom of a pile of five boxes rather than ask for help reaching the top blender. When the other four blenders fell on her, she sued the store for not warning customers about the danger and for stacking the boxes too high, claiming she now had carpal tunnel syndrome along with neck, shoulder and back pain.

While playing basketball, a teenager in New Hampshire went up to dunk the ball and got two of his teeth caught in the basketball net. He sued the net manufacturer and ended up settling out of court for $50,000.

These are just a few examples in a growing wave of shakedown lawsuits hitting small businesses nationwide which are costing a cumulative $88 billion per year in settlements and attorney fees, according to Mark Cole, president of Citizens Against Lawsuit Abuse in Houston, Texas. In some cases, businesses have been forced to lay off employees and even close their doors as litigation continues to spiral out of control, rivaling baseball as America's favorite pastime.

"It's the worst part of our business," says Beth Thieme, vice president of Amigo Mobility International Inc., a family-owned Bridgeport, Michigan-based company that manufactures three-wheeled scooters used by elderly or disabled shoppers in grocery stores. It was Beth's husband, Al, who built the first Amigo power-operated vehicle in 1968 and started selling them to stores in 1970. In recent years, the increase of frivolous lawsuits have put a crimp in the company's profitability.

"We've had our share of shakedown lawsuits where someone was just looking for settlement money," says Beth, who otherwise enjoys their rewarding business. "At 2.3 miles per hour, an individual weighing nearly 300 pounds will tell me they were catapulted out of the equipment. You know what? It didn't happen--it couldn't have happened."

Like most business owners, Beth understands legitimate injuries can and do occur. But she'd like to see the laws changed to cover only the true economic damages incurred. "I pick and choose which battles are worth fighting," Beth says, offering a recent claim by a woman who broke her wristwatch on one of the scooters as an example. "I was happy to send her the cost of the watch--even a little bit more. However, she was also asking for a two-year membership to a health club, which had nothing to do with breaking the watch on the scooter. This is what we have to deal with."

"Landmark" Shakedown
For Kathie Reece McNeil, a fraudulent shakedown lawsuit was the last thing on her mind when she fell in love with--and purchased--the Aztec Hotel in Monrovia, California, six years ago on what was once the original alignment of the famous Route 66. The hotel, which originally opened in 1925, was not only the most ornate hotel in the small city, but it would become a place where celebrities dropped by on their way to Palm Springs. Clark Gable, Tom Mix and Wyatt Earp, among others, stayed at the historic inn.

"I [got hit by] a lawsuit in 2003, claiming that on January 1, someone visited the hotel and was discriminated against because she was in a wheelchair and there was no access for her," McNeil explains. At the time, McNeil was busy working with both state and federal government agencies to preserve the wonderful old treasure.

"A structural report was going to be filed [with the State Historic Office of Preservation] regarding exactly what we needed to do to restore the hotel. Until it was completed, I couldn't make any changes to the structure," explains McNeil, who was leaning on the experience and guidance of state and national historic preservation offices as well as the Route 66 Preservation Foundation, which was administrating the grant to do the structure report.

Upon calling the attorney who was representing the plaintiff, she was shocked to learn that he wanted $18,000 to make the suit "go away." However, he couldn't promise they wouldn't sue her again, since she couldn't make the necessary changes immediately.

Instead of paying off the attorney, for months, rather than pouring her heart and soul into the hotel, McNeil spent hours researching the case, asking everyone who worked at the hotel if they'd ever even seen the woman on the premises. Not only had no one seen her, but she claimed she'd been there at 10 a.m. to hear a band play.

"We didn't have a band playing on the morning of New Year's Day," notes McNeil, who smelled something fishy, especially when she heard the plaintiff's conflicting reasons for being at the hotel. "She claimed she was also meeting her son there and, at another time, that she was there to open Christmas presents."

McNeil would later see a deposition from the plaintiff's son, claiming she was there to meet him. Upon closer inspection of the deposition, she noticed the name was that of a homeless man whom McNeil had allowed to stay one night at the hotel as a courtesy. Now aware that something definitely seemed askew, McNeil searched files available at the local courthouse in Pomona, California, and found that the man had been arrested for felony charges, including some for drugs and fraud.

Eventually, McNeil won the case because neither the plaintiff nor her son was found to be credible and it became obvious that the woman had never been at the hotel when she claimed to be. Yet McNeil couldn't afford to celebrate her victory, having run up $102,000 in legal fees to fend off the opposing counsel and handle the case. "I'm still paying it off," says McNeil, who only now is starting to finally enjoy the historic hotel she'd so desired.

But shakedown lawsuits aren't only served by unknown plaintiffs. Disgruntled employees are also very happy to jump on the shakedown bandwagon. Carole Ross, an attorney with the Del Mar Heights, California, office of the Sheppard, Mullin, Richter and Hampton law firm, points to many cases in which people take no personal responsibility for their actions and seek money due to a company's "evil motives."

"It amazes me when I see some of the lawsuits [brought] for wrongful termination or for not even being hired," says Ross. "People will claim it's because 'I'm a woman, over 40, Jewish or some other religion' and list all these reasons on the complaint. It's like throwing darts at a dart board hoping one of them will stick." Ross has helped a number of small-business owners handle such cases.

The Rising Cost of Shakedowns
Although dealing with a frivolous lawsuit can be pricey for entrepreneurs in terms of both time and money, the bigger problem that arises from the many shakedown lawsuits that have hit the courts in greater numbers recently is that these lawsuits affect all small-business owners in the form of higher insurance rates.

"Did you know the Girl Scouts of Metro Detroit have to sell 36,000 boxes of cookies simply to pay for the insurance coverage just in case they're sued?" says Bob Dorigo- Jones, president of Michigan Lawsuit Abuse Watch, a group trying to raise public awareness of the cost such litigation has on all citizens.

"Every person in the United States is paying close to $900 a year in the increased costs of goods and service because of these legal costs," says Dorigo-Jones, who's working in conjunction with Todd Young of the American Justice Partnership on what is called The Victims Project in hopes of gathering more and more examples of businesses that have endured such shakedown lawsuits.

"We reached out to 200,000 businesses and have several thousand responses already," says Young of the new project which will compile a list of the victims of fraud and frivolous lawsuits and use these names in campaigns to the media and the governments to help curb lawsuit abuse. Ultimately the goal is to push for legal reforms that will prevent situations such as the man in Harrisburg, Pennsylvania, who slipped and fell on ice outside of a staple and supply company in a strip mall and sued everyone in sight. The man sustained just $3,000 in injuries but sued the staple and supply company, along with all the strip mall tenants, the landlord, and the developer for $1.7 million. Although the store was eventually released from the suit, the business still had to retain and pay for an attorney.

As if suing a small business for a frivolous claim isn't enough, Andy Kotner, president of San Diego's Citizens' Against Lawsuit Abuse, offers another, more outrageous example of a legal shakedown: A San Diego-based attorney sent out letters threatening to sue entire towns, including La Mesa and Ramona, California. In the letter, he demanded that each business pay $2,500 for not complying with ADA regulations.

"He sent these letters to all 67 businesses in the tiny tourist town of Julian," says an attorney who defended some of the town's small-business owners. "Some of the places he threatened to sue had gone out of business prior to receiving the letter, and in one case, the owner had died." The attorney went on to add that this wasn't about specific ADA requirements that weren't being met but was instead a sweeping lawsuit against every business name registered in the town.

"It's a form of legalized extortion," says Kotner, referring to the manner in which some attorneys are using the fine print in ADA requirements to send "demand" letters and threaten lawsuits.

"Under the California Unruh Act, if you're not ADA compliant, you're committing a hate crime. So if you have a toilet paper dispenser that's a fraction of an inch off what's required or a doormat in front of your entrance, you're now committing a hate crime," explains Kotner, who stands firm that such unwieldy lawsuits must be stopped.

The good news is, in some cases, the shakedown experts have become overzealous, even greedy, and have been shut down. Earlier this year, California Attorney General Bill Lockyer actually filed a lawsuit against the Trevor Law Group. It seems that over the years, the Beverly Hills, California-based law practice had named more than 2,000 collision repair shop owners in lawsuits along with sending thousands of demand letters to small businesses offering not to sue them in exchange for settlements. Following a state investigation, three principles of the firm were disbarred. In another instance, Lockyer filed charges against a second law firm, Brar & Gamulin, that had mass-mailed lawsuit threats to hundreds of ethnic grocery stores and nail salons. The firm was ordered to pay nearly $1.8 million for filing the lawsuits.

As an increasing number of small businesses fall prey to such predatory law suits, an increasing number of them are getting wise and looking to partner with lawsuit abuse and reform organizations throughout the country. But what else can be done to help stop the problem before it affects your small business? Here are a few tips:

  • Make sure you're adequately covered with the right type of and amount of insurance.
  • Post any necessary warnings about safety issues.
  • Stay on top of all necessary business codes and regulations is one preventative step
  • Attorneys and group fighting such frivolous lawsuits suggest voting for politicians who advocate tort reform.
  • If you are sued, don't panic or make any hasty decisions, since plaintiffs and their attorneys are often seeking a quick buck and may simply move on to someone else if you don't respond immediately.
  • Research the law firm suing you to find out if they have a history of similar frivolous lawsuits. If you find similar lawsuits on the books, contact the office of the attorney general in your state
  • Create, print and distribute an employee manual that includes all company rules, guidelines and regulations for your employees. Make sure you include sections on what constitutes grounds for dismissal as well as what's considered inappropriate behavior. Have each employee sign a form acknowledging that he or she has received it.

Do what you can to protect your business, but remember that someone who's determined to sue will do so simply because they can. As business owner Beth Thieme says, you can't fight every battle--you need to pick and choose. In time, as more business owners stand up against fraudulent claims, the shakedown specialists, like those mentioned above, will eventually recognize the increased public awareness of such suits and the repercussions of trying to manipulate and exploit the legal system.

Rich Mintzer is a freelance journalist and the author of several business books. He lives with his family just 30 miles north of New York City in Mt. Kisco, New York.

Rich Mintzer

Author and journalist

Rich Mintzer is a journalist and author of more than 80 nonfiction books, including several on starting a business and a dozen for Entrepreneur Press. He hails from Westchester, New York, where he lives with his family.

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