Mention the words “class action” to a business entrepreneur, then sit back and wait for the cursing.  “Those damn parasites!  Why are they targeting my business?  We run a clean operation here.”

 

Why are they targeting your business?  Because there is money to be made.  Plaintiffs’ class action lawyers are entrepreneurs just like you.  They don’t have a client so much as they have a business plan.  And that business plan is to divert your revenues into their pockets.

 

OK, they do have a client in the technical sense: the named class representative.  Chances are the class rep and the lawyer never met.  The class rep--probably recruited by the lawyer from a website--is just a vehicle into court, a ticket to unleash the full fury of the litigation system—discovery, depositions, and motions just to start--to make the fainthearted buckle rather than defend. 

 

Who gets that money?  The lead named plaintiff?  Nope! Maybe a $2,000 incentive award, probably less.  The class members, the so-called injured consumers?  Ha!  Only those willing to fill out a detailed claim form supported by records proving a $4.99 charge from three years ago.  And what is their reward: a few dollars or some worthless coupons.  Few members of the class ever bother to claim their reward.  Response rates from eligible class members typically run well under 10%.     

 

No, this battle is really about the money that is going straight to the class action lawyers.  Usually the first major skirmish in a class action lawsuit won’t involve any defendants—instead the competing class action lawyers fight each other to be named as the “lead counsel” because that’s where the big money is.  They’ll fight again at the end of the case, dividing up the pot.  It’s quite a spectacle.

 

Is your business vulnerable to a class action lawsuit?  If you engage in high volumes of essentially identical transactions with multiple consumers, you’re a target.  Do you have thousands of subscribers who opt in the same way on a computer platform then get charged monthly through their cell phone accounts?  If yes, you’re a target. Is every transaction structured the same except for the identity of the consumer?  If yes, you’re a target. You’ll be accused of violating state and federal consumer protection statutes, outright fraud, and probably a lot more.

 

Should you quickly settle such a case—get out cheap and early?  Class counsel will be looking for early and easy settlements.  Remember, their business plan is maximizing their gain with little investment of time and resources.  Their hammers?  Your cost of defending. The uncertainty of the outcome.   The specter of a company-killing judgment.  They do this for a living, they know the territory, and they count on your lack of experience and shock at being hit with a class action lawsuit.  You’ll think you’ve fallen down the rabbit hole into an unfamiliar legal maze with byzantine rules and hidden trap doors. 

 

The bean counters will tell you it’s cheaper and safer to throw some money in to settle than pay to defend yourself.  But not so fast, Mr. CFO.  Experienced class action defense counsel know how to turn the tables and make the case a loser in class counsel’s economic model because the same laws that enable class actions also erect some fairly substantial legal hurdles before payday.   When you remove the economic incentive, the smart class counsel (and they are smart) will cut their losses and move on to the next target.  But you’ll need lawyers just as smart.  And nerves of steel.  And a little bit of luck.

 

This post is the author’s opinion only and is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.