Sure, plenty of companies deserve to be sued for wrongful termination. But a disturbing number are victims of frivolous lawsuits initiated by employees eager to jump on the litigation bandwagon. Three CEOs who have felt the sting of wrongful-termination lawsuits told us what they learned from the experience:

? Don't settle. Many large companies handle wrongful-termination suits the easy way -- guilty or not, they settle out of court. But Stephen Swinson, president of $9-million Trigen Kansas City Energy Corp., in Kansas City, Mo., thinks that strategy can be disastrous for small businesses. "You send a message to employees that all they have to do is write a threatening letter and they'll get a check," says Swinson. "Provided you're right, you have to go through with the litigation." Trigen was sued last year by an employee who was fired for poor performance but claimed he was terminated for reporting a labor-law violation. Although Swinson might have spared himself considerable headaches by settling, he instead went to court. The case, which Trigen won, took six months and cost $10,000 in lawyers' fees. But, says Swinson, "it was absolutely worth it because of the message it sent."

? Create written policies. Four years ago George Woelper, president of $4-million Lincoln Tile Co., in Marietta, Ga., fired an employee for insubordination after the company had given him repeated oral and written warnings. Claiming that he had been terminated without cause, the employee filed a complaint with the state department of labor and demanded that the company pay him full unemployment benefits. "We thought we had a simple case," says Woelper. But to his dismay, the DOL agreed with the employee -- a decision that cost the company $10,000 in legal fees and increased insurance premiums. The rationale? The DOL noted that Lincoln Tile had no formal written policy citing insubordination as just cause for termination. It does now. Woelper requires all employees to sign a document that spells out the penalties for bad behavior such as drug use, tardiness, and, yes, insubordination. He feels confident that the agreement, which employees helped create, will shield him against future litigation.

? Stay alert. The CEO of a small California electronics manufacturer, who asked not to be identified, has already spent $100,000 defending his company against a suit from a senior manager who quit and then sued the company for wrongful termination. The CEO says the manager, who was "an excellent performer but caused a lot of trouble among employees with harsh, rude behavior," was angry about some organizational changes. The CEO now realizes that he valued the manager's technical expertise so much that he ignored his predilection for troublemaking. "When we first saw the difficulties he had interacting with people, I should have asked employees to document their complaints in writing, and I should have issued a written warning," he says. From now on, he will.