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The First Step to Take When Hit with a New Class Action

HR Column
O ver the past few years, class action lawsuits in the United States have been on the rise, with wage-and-hour suits and other employment-related suits featuring significantly. In the European Union, uneasy observations suggest that the number of collective actions is also trending upward. Regardless of location, in-house counsel can assist their companies in taking a critical first step in defending themselves when hit with a class action suit.

Assess the potential risk

An important first step is to assess the potential risk level of the case. Identifying risks empowers the company to design the optimum response. While defining a solid litigation defense strategy is key (best done in concert with outside counsel and relevant senior stakeholders), having a corporate communications strategy is also crucial.

Communications are not just about putting words on paper, but defining the primary strategic drivers behind the narrative a company wishes to use. An effective communications strategy deployed alongside a strong litigation action plan can alleviate potential customer backlash, reputational damage, and negative impact on shareholder value.

To define the communications strategy, it is important to determine the level of risk the class action suit poses to the organization.

1. Routine risk

Many class-actions are not high profile and do not impact a company's brand or generate negative publicity. In this case, the legal advisor's role is to ensure that the company does not overreact and create negative buzz where there was none to begin with. A suitable strategy may be to not make any public statement unless the press requests a comment.

[Related: How Law Departments Can Help in a PR Crisis]

A few years ago, Apple employees filed a class action suit against the company demanding payment for off-the-clock time spent enduring "embarrassing," "demeaning," and "disturbing" bag searches per employee bag-search policies in Apple stores. Apple did not issue a statement. As bag searches are a common practice in the retail world, the suit posed no unique danger to Apple's reputation, and its sales would likely face no adverse impact. In 2015, Apple prevailed in the litigation, which proceeded to the Ninth Circuit Court and on to the California Supreme Court.

Sometimes silence or a "no comment" response suggests guilt. For situations where a routine class action requires comment, it may be sufficient for the company's spokesperson to issue a caring and thoughtful statement, allowing the CEO to focus on issues that will best benefit the brand.

2. High risk

Some class actions may not risk the entire organization but may pose reputational risk if the company loses the case. At the outset, the case may require the company to address the litigation when filed to advance its legal position. But even then, the company may prefer not to comment, allowing the court pleadings to speak for themselves.

When taxi cab (aka black cab) drivers in London hit Uber with a £500 million class action, Uber declined to comment. While the company's 400,000 London drivers might be impacted by the outcome of this litigation, a recent deal valued Uber at US$120 billion, so it is unlikely that the outcome of this litigation would have a significant negative impact on the company.

3. Bet-the-company risk

In 2002, two top executives of Swiss security systems and electronics giant, Tyco International, Ltd, were found guilty of embezzling approximately US$600 million from the company and imprisoned. Soon thereafter, the company filed bankruptcy. Litigation ensued for years, and in 2007, Tyco settled a class action suit brought by investors by agreeing to pay nearly US$3 billion.

[Related: How to Counsel in an Emergency]

At the time, it was hailed as the largest settlement of its kind. In these situations, both the reputation and the survival of the company are at stake. It is vital for the company to establish a clear narrative from the beginning of the case. Even then, losing customer trust may prove an irreparable blow. Edward D. Breen, Tyco's chief executive officer, issued a quote at the time of the settlement: "With this settlement we are taking an important step to resolve our most significant remaining legacy legal matter … Our balance sheet and cash flow remain strong and will allow us to readily absorb these costs while removing much of the uncertainty around legacy legal matters."

At its zenith, Tyco was one of the world's largest corporations with 240,000 employees, and its collapse sent shockwaves throughout the global economy. In 2016, Tyco merged with Johnson Controls International plc, a global leader in building products and technology. The new organization used the Johnson Controls brand.

Just the beginning

Assessing potential risk is just the beginning of what will likely be a long journey on the class action road for any corporate defendant. It is critical to handle these issues carefully because customers have long memories. Missteps reverberate and may never be forgotten. Just ask BP Chairman Carl-Henric Svanberg about the backlash when he declared, "We care about the small people." You remember blunders like that.

About the Author

Spiwe L. JeffersonSpiwe L. Jefferson is general counsel of ChristLight Productions Ltd., LLC, Patron Fellow of the American Bar Foundation, and board secretary and legal advisor to The BrandLab. She is a member of the ACC employment and labor, law department management, and litigation networks.

The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.