Impact of Litigation on Small Business

Klemm Analysis Group

2005. [42] pages. Under contract SBAHQ-02-M-0514 

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information and 

analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not necessarily reflect the views of the Office of Advocacy.

Purpose

Litigation costs, unlike other costs of doing business, are seldom estimated on an annual basis. This 

research attempts to shed light on how small business fares under the constraint of litigation and calculates annual litigation costs.

Overall Findings

• Litigation is costly to small business owners 

both in time and money. 

• It modifies the way they do business. 

• Litigation causes emotional hardship within 

small firms.

Highlights

• The impact of litigation on businesses goes well 

beyond the purely financial impact of legal fees and 

damages. Most small business owners are invested 

personally in their businesses; litigation causes not 

just financial loss, but also substantial emotional 

hardship, and often changes the tone of the business.

• Many of the small businesses surveyed tried to 

settle their case prior to trial, but with mixed results. 

Those surveyed explained that the main reason why 

settlement failed was that the opposing party refused 

to meet and negotiate, preferring to go to court. Small 

business owners indicated they would go to great 

lengths to stay out of court, which was their major 

motivation for settlement; an indication that there is a 

hidden cost to the threat of litigation.

• Financial impacts were mentioned by most study 

participants. Legal costs for actual litigation ranged 

from $3,000 to $150,000 with approximately onethird of those providing a response under $10,000. 

Small business owners felt they had to ”recoup” 

these losses by cutting operating expenses, acquiring 

new customers or expanding their services to existing customers. Raising prices was not an option, as it 

would put them at a competitive disadvantage. 

• Most companies used business assets to pay the 

damages. However, in the case of employee complaints, insurance covered some of the damages. 

Owners mentioned that the payment of damages 

nearly put them out of business, which affected them 

for a long period of time as they worked to rebuild 

the business and recoup their losses.

• Small business owners who were surveyed 

became more wary of employees and customers as a 

result of their litigation experience.

Scope and Methodology

This study was conducted with the help of a survey (OMB # 3245-0345). The researchers used the 

annual reports Judicial Business of the U.S. Courts, 

and Federal Court Management Statistics, as they 

provide useful data on district court caseloads, but do 

not identify the types of defendants. For example, the 

reports state that in U.S. District Courts in 2001 there 

were 302,104 cases filed, 295,308 cases terminated, 

and 297,265 cases pending with some cases straddling between 2000 and 2001. They also report that 

the median time from filing to disposition in civil 

cases was 8.7 months, and from filing to trial was 21.6 

months. The research team made use of a micro data 

set on individual case filings to determine the number 

of lawsuits filed that involved small businesses. 

The research team used the PACER (Public 

Access to Court Electronic Records) system to create 

a data set of individually filed cases to determine the 

number and nature of lawsuits involving small businesses. Data on cases filed in U.S. District Courts 

during the 12-month period, July 2002 through 

June 2003, was obtained from the PACER system. 

Members of the research team then determined 

whether the lawsuit appeared to involve a business as 

plaintiff or defendant via telephone books, individual 

business web sites, anywho.com, and directoriesUSA.com. This sample of cases was also used to select 

October 2005 No. 265
a subsample of businesses to contact for a telephone 

interview.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703)605-6000

TDD: (703) 487-4639

www. ntis.gov

Order number: PB2005-108596

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