The Dangers of Class Action Lawsuits for Businesses

Legal and liability issues are something that remains in the back of every business owner’s mind. Owning and running a business naturally comes with risks and rewards, and potential liability and legal cases happen to be one of those risks. When it comes to law suits, class action law suits are the epitome of a business owner’s nightmare.

According to Brown and Charbonneau, class action lawsuits occur when multiple individuals claim to suffer damages from the same wrong. These individuals come together to file a single lawsuit against the company. Products that fall short of their promised performance, employee discrimination, and injuries suffered due to negligence could all potentially be in a class action lawsuit.

The main purpose of a class action lawsuit is to seek monetary damages or equitable relief. According to Newsome Melton, equitable relief is a court order requiring the defendant to either do, or stop doing, something- such as engaging in deceptive marketing practices.

What makes a class action lawsuit so potential dangerous is the magnitude of the potential damages. A single ruling in a class action suit could mean paying damages to hundreds of individuals. Many businesses choose to settle a class action lawsuit out of court, however even a settlement can prove expensive.

In order to avoid such lawsuits, some companies have introduced arbitration clauses in their consumer contracts that specifically bar class action lawsuits. As a result, consumers lose their right to use the court system to pursue a remedy and waive their right to band together in a class action. Instead, they must take their individual cases to arbitration, which is less expensive and much less public.

In an attempt to protect consumers, the Consumer Financial Protection Bureau (CFPB) passed a rule preventing certain companies from using arbitration clauses in consumer contracts to get consumers to waive their right to a class action lawsuit. However, this rule was overturned in 2017. According to Forbes, analysis shows that arbitrators rule overwhelmingly in favor of corporations.

In place of the overturned rule, the CFPB issued a rule stating that businesses could continue imposing arbitration demands, however, contracts could not contain wording that would force consumers to give up their right to a class action.

Since there is no way to prevent consumers from brining a class action lawsuit against a business, it is important for business owners to take every precaution available to protect their assets. Bolt Insurance has suggested the following precautions:

  • Incorporate the business. This separates the owner from the actual business liabilities, protecting personal assets and finances.
  • Separate business and personal finances.
  • Purchase liability insurance. General liability insurance may not be enough to cover a class action lawsuit. Consider professional iability insurance, which further protects against different cases of class action lawsuits. When getting this insurance, be sure that somewhere in the policy it states, “right and duty to defend.”
  • Consult an attorney. A good attorney can further help safeguard against potential lawsuits.

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Founder of Tork Media; a combination of sites I own, a publishing company, and my rather large obsession with fitness (aka: Nanohydr8).