Class Action Lawsuit

What is a Class Action Lawsuit?

A class action is a type of lawsuit where one or more individuals sue on behalf of a larger group of people who have been similarly harmed by the same entity. Instead of dozens or hundreds of separate lawsuits, all the claims are aggregated into a single case.

The purpose is to provide a more efficient and economical way to resolve disputes, particularly when the individual damages for each person are too small to justify a solo lawsuit. For a lawsuit to be certified as a class action, it must meet several criteria, including:

• Numerosity: The class of affected individuals must be so large that it would be impractical to join every single person in the lawsuit.
• Commonality: There must be a common question of law or fact that applies to all members of the class.
• Typicality: The claims of the representative plaintiffs must be typical of the claims of the rest of the class.

Does a Class Action Not Apply to a Small LLC?

This is a critical point. While your small LLC might not be the typical target for a massive, multi-million dollar class action lawsuit that you see in the news, it would be a mistake to assume they don't apply to you at all.

The scale of a class action is relative to the size of the "class" of affected people. For a large corporation, a class might be millions of customers. For a small business like a local marketing agency, a "class" could be a group of employees, a group of clients, or even a group of users of an app you developed.

For example, a class action could be filed against your agency for:

• Wage and Hour Violations: If your team members who are social media or sales specialists are misclassified as independent contractors when they should be employees, or if you fail to pay overtime properly, a group of current or former employees could file a class action.
• Client Contract Disputes: If you had a standard contract that was found to have an unfair or misleading clause and you used it with a number of clients who all suffered the same harm.
• Digital Marketing or App-Related Claims: A group of users could sue if an app you developed for a client had a data breach, or if a digital marketing campaign made false claims that harmed a group of consumers.

While it is less common for a small business to be the target of a class action, the possibility is very real, and the financial and reputational consequences can be just as devastating as for a large company.

Key Aspects That Apply to You and Risk Mitigation

As a small business owner, the most important aspect of class actions that applies to you is the concept of risk. Your LLC structure provides a layer of protection by separating your personal assets from the business's liabilities, but it doesn't make you immune. The key is to implement proactive risk mitigation, which aligns well with your agile methodology of continuous improvement.

Here are some key aspects that apply to you and some practical steps for risk mitigation:

1. Maintain Your LLC's "Corporate Veil": The limited liability protection of an LLC can be "pierced" if you fail to maintain a clear separation between your personal and business finances.

   • Risk Mitigation: Keep separate bank accounts and credit cards for your business. Document all major business decisions and transactions. This is a foundational step.

2. Ensure Compliance in All Business Practices: Class actions often arise from systemic issues, such as a consistent failure to comply with employment laws or consumer protection regulations.

   • Risk Mitigation:
     • Employment: Since you are delegating tasks to a team, make sure your employment agreements and practices are fully compliant with federal, state, and local wage, hour, and classification laws.
     • Contracts: Have a lawyer review all standard contracts you use for clients and vendors. This includes website terms of service and privacy policies for any digital products you develop.
     • Intellectual Property: Make sure you are not infringing on any trademarks or copyrights in your marketing campaigns or app development.

3. Proactive Risk Identification and Management: This is where your agile mindset can be a huge asset.

   • Risk Mitigation:
     • Regular Audits: Conduct regular internal audits of your business practices to identify and address potential legal vulnerabilities before they become a problem.
     • Strong Policies: Develop and enforce clear, written policies for everything from data privacy to client communication. For example, if you're handling social media accounts for clients, have a clear policy on what kind of content can be posted and the process for getting client approval.

4. Appropriate Insurance Coverage: A single lawsuit, let alone a class action, could bankrupt a small business due to legal defense costs alone.

   • Risk Mitigation:
     • General Liability: This is a good starting point, but it may not cover all legal claims.
     • Errors and Omissions (E&O) Insurance: Also known as professional liability insurance, this is crucial for a professional services business like yours. It protects against claims of negligence or mistakes in the services you provide.
     • Cybersecurity Insurance: Given your focus on web and app development, this is highly recommended. It can cover costs associated with a data breach or other cyber incidents.

By understanding the risks and taking proactive measures, you can apply your principles of agile development and project management to build a resilient and legally secure business foundation.