According to a recent report from the National Federation of Independent Business (NFIB), frivolous lawsuits cause headaches for a lot of companies, but small businesses are sometimes the most frequent targets and also end up being particularly hard-hit as a result.
“Frivolous lawsuits create a climate of fear for America’s small businesses,” said the report. “While some claims are legitimate, a large percentage are completely without merit.” However, small businesses that are sued still have to defend themselves, and this defense is often more costly to both the businesses and their customers.
According to the NFIB, Rule 11 of the Federal Rules of Civil Procedure, which was passed in 1993 and designed to help prevent frivolous lawsuits, has been hamstrung by changes over the years that loosened its effectiveness. “Because of the changes, parties and their counsel are allowed to avoid sanctions simply by withdrawing their frivolous claims within 21 days,” said the report. This change has removed the disincentives for attorneys to file frivolous suits.
If an attorney and client withdraw their frivolous claim within 21 days, what’s the purpose of filing it in the first place? The goal is the hope of a lucrative settlement. “Small businesses are the target of many frivolous lawsuits, because trial lawyers understand that a small business owner is more likely than a large corporation to settle a case rather than litigate,” said the report. “Often, small business settlements are less than $5,000, but even $1,000 settlements are significant for businesses. Settling cases results in higher business insurance premiums for small business owners.” According to the NFIB, small businesses pay an estimated $35.6 billion each year out of pocket to settle claims.
For these reasons, NFIB is supporting a congressional bill, H.R. 758, the “Lawsuit Abuse Reduction Act of 2015.”
In her testimony on the bill, Amanda Austin, vice president, public policy, for NFIB, noted, “H.R. 758 would help to significantly reduce the filing of frivolous lawsuits and motions by amending Rule 11 of the Federal Rules of Civil Procedure.”
According to Austin, under the current law, even if a frivolous lawsuit is withdrawn or dismissed, the victim is still left with legal expenses that can easily add up to thousands of dollars. “Therefore, it is of critical importance that H.R. 758 would provide those who are hit with frivolous lawsuits with a reasonable opportunity to seek reimbursement for their legal expenses,” she said. “Particularly in today’s economy, the ever-rising costs of healthcare and excessive federal regulations, frivolous lawsuits can result in lost jobs and increased financial hardship.”
According to the results of an NFIB survey, 84 percent of members agree that attorneys should face mandatory sanctions if they bring forth a frivolous lawsuit. “H.R. 758 would also provide that, once a judge finds that a claim is frivolous under existing legal principles, the court must impose a sanction,” said Austin.