One of the inevitable costs of owning a small business is litigation. Each year, about 36%–53% of small businesses face litigation.
The more your business grows, the more likely you are to face lawsuits. However, there are a number of things you can do to limit your exposure and protect your business.
You probably already understand the value of having written operating agreements for your business to avoid internal disputes. You also probably have contracts with suppliers and clients that make your rights and obligations clear.
But some of the things entrepreneurs are least likely to think about are also the things that are most likely to get them involved in a costly class-action lawsuit.
What Is a Class Action Lawsuit?
A class-action lawsuit is a suit filed by multiple people, who all have the same complaint against the same defendant. Class-action lawsuits have several benefits, such as:
- Efficiently resolving many similar claims in one action;
- Reducing litigation costs;
- Achieving consistent outcomes for similar claims; and
- Allowing people to sue who might otherwise lack the resources.
However, a class-action lawsuit brought against your small business can be disastrous and spell the end of your entrepreneurial dreams.
Common Class Action Suits Involving Small Businesses
There are several types of class-actions that a business may face. To prevent your business from becoming involved in one, it’s important to understand what they are.
As a small business, you are most likely to face a class-action suit stemming from consumer complaints about things like:
- A product causing injury,
- A product not working the way it should,
- False advertising,
- Breach of contract,
- Price fixing or price discrimination, and
- Failure to disclose important information.
Even when your business is small, the number of consumers that can be affected by an error can multiply quickly.
Lawsuits brought by workers alleging unfair or illegal employment practices are another common type of class-action suit.
If your business is small and you have few employees, it is less likely that a lawsuit over your employment practices will turn into a class action. However, you can still face lawsuits from individual employees, and the risk of a class-action will grow as your business expands.
Another common class-action suit involves environmental contamination that causes injury to a large number of people. Even a small business can have a big impact if it fails to comply with environmental regulations.
The Impact of COVID-19 on Class Action Lawsuits
The COVID-19 pandemic has already inspired a number of class action suits and is likely to result in many more. Some of these suits present novel questions of law, and it remains to be seen how they will be resolved.
If you run a gym, do you have to refund customers or extend their memberships based on government-mandated closures? Can you continue to charge cancellation fees if you run an event venue and the government has restricted gatherings? Can you offer vouchers instead of refunds? What if you can’t fulfill certain contractual obligations because you can’t get necessary supplies? If you’re struggling with these and other questions, you should consider seeking advice from a business lawyer.
How to Prevent a Class-Action Lawsuit
The best way to prevent a class-action lawsuit is to be aware of the rules and regulations that apply to businesses and to your industry in particular. You then need to establish policies and procedures to ensure that you comply with those regulations. As your business grows, you may even need one or more employees dedicated to monitoring and maintaining compliance.
Regulatory Laws That Apply to Your Industry
There may be any number of federal, state, and local laws that apply to your industry. For example, environmental regulations apply to numerous industries such as:
- Automotive services,
- Agriculture, and
- Chemical production.
Other industries face regulation because they pose physical risks or may easily take financial advantage of customers, such as:
- Investment services,
- Food and alcohol,
- Healthcare, and
- Automobile sales.
Careful compliance with industry regulations can help you avoid class-action lawsuits.
Consumer Protection Laws
Regardless of your industry, it’s important to understand the many rules in place to protect consumers from unfair trade practices. These include:
- Laws restricting false or misleading advertising;
- Do-not-call laws;
- Privacy laws;
- Laws restricting deceptive pricing, price-fixing, or bait-and-switch tactics;
- Restrictions on selling certain products without FDA approval;
- Rules about fulfilling warranty obligations;
- Duties to warn about unsafe products or unsafe uses; and
- Data security laws.
Marketing restrictions, in particular, come into play in almost every type of business. It’s important to properly train your employees about what they can and can’t say in attempting to sell your products. Deceptive sales or marketing tactics can quickly escalate into a class-action lawsuit.
State and Federal Employment Laws
If you employ anyone other than yourself in your business, you need to understand the myriad regulations that apply to employment. Especially as your business grows, you can become embroiled in litigation if you don’t establish solid policies and procedures to comply with employment laws. Employment laws extend to many aspects of employment, including:
- Wages and hours,
- Work conditions,
- Harassment, and
Many of these things are governed by federal laws, but individual states may grant additional protections. Understanding the rules that apply to you can be crucial in protecting your business from costly lawsuits.
Get Appropriate Insurance
While having insurance won’t prevent you from becoming involved in a lawsuit, it can make a huge difference in your business’s ability to survive a lawsuit.
The type of insurance you need may vary depending on the type of business you operate. For example, if you provide professional services, you should have professional liability insurance. If you manufacture or sell a product, you should have product liability insurance.
Consider consulting an insurance agent or business attorney for advice on the specific types and amount of insurance you need for your business.
Josh Brown is a digital marketing manager at Juris Digital, a respected leader in the legal marketing space. He currently resides in Atlanta with his girlfriend and two cats.