To know the consumer class action is to fear it. Any online marketer or other retailer that has gone through a class action lawsuit – even if it prevails in the end – no doubt has scars and legal bills to show for it. Because the stakes are so high, even winning a class action case at trial may leave retailers limping and still in great peril. Numerous class actions have settled after the appeal from a defendant’s successful summary judgment motion because, even if the odds of winning on appeal were good, the downside risk of losing was large enough to make the gamble unthinkable. And the range of potential consumer class action lawsuits often seems overwhelmingly diverse. Is your “sale price” really a “sale price”? Is there enough fruit in your fruit roll-ups? Did you collect customer zip codes in credit card transactions?
While it is impossible for online and direct marketers to insulate themselves fully from an increasingly litigious world, there are rational steps you can take to help prevent your company from becoming "low hanging fruit" for class action lawyers. This is the first in a series of articles on just that subject, and it focuses on state consumer protection, marketing, and privacy laws that have per violation penalties. The recent Michaels Stores case in Massachusetts involved just such a law.
Honey for Class Action Lawyers. Among the main weapons for class action plaintiffs’ lawyers are statutes that impose monetary penalties on a per violation basis. A real vulnerability to maintenance of a class action is that, absent a penalty, a determination of damages may require an individual analysis of each plaintiff’s claim – which, as a general matter, is anathema to maintenance of a class action. A statutorily prescribed penalty makes the assessment of damages straightforward once a violation is shown. And so, if you are accused of illegally collecting zip codes on credit card transactions, you take the number of times zip codes were collected and multiply it by the per violation penalty.
Astronomical Numbers. As an example, if you collected 1,000,000 zip codes from customers over a six year-period (which is often the length of the statute of limitations) you simply multiply 1,000,000 by the maximum potential per violation penalty to determine your worst-case risk. In California, the penalty can be as high as $1,000 per violation, and so the potential exposure is $1,000,000,000. That’s right. One billion dollars. And if you want to gauge accurately your maximum potential liability, add to the $1 billion a third of that number again for plaintiffs’ attorneys fees. And, resign yourself to the fact that absent extraordinary circumstances which almost never occur, there is no hope for a defendant, even an outrageously successful one, to recover its own attorneys’ fees.
Of course, the “maximum” potential exposure may not be realistic. Penalties are often imposed on a sliding scale – for example, in California, they can range from $250 to $1,000 in certain cases. Many, if not most, of these cases also settle, so we do not have compelling public data on how much money actually changes hands. And most settlements are engineered around providing coupons and checks to class members that may or may not be redeemed by the ultimate consumer, ensuring that the only payout certainty will be for the plaintiffs’ attorneys' fees. Those fees, more likely than not, will be far higher than what you pay hourly-rate outside counsel to defend you.
Focused Compliance. And, so, an essential element of a strategy to reduce your risk of becoming a class action defendant is to focus like a laser beam on complying with consumer protection/privacy laws with per violation penalty provisions.
How does this help? While some states, like California, impose penalties in almost every consumer class action case, elsewhere, and at the federal level, the number of laws to be familiar with is more limited and manageable. One area to be wary about, for example, is telemarketing, with federal laws imposing penalties that can easily exceed $1,000 per violation. In this area, retailers should retain legal counsel to provide them with clear operating principles under which to engage in telemarketing. These principles should address both state and federal telemarketing laws, and they should be adopted in internal policies and employee training. The direct marketer should also make sure that risk is assigned to vendors that provide telemarketing services, with insurance policies to back them up. After all, indemnification from a vendor that goes belly up is obviously worthless. Since vendors often find themselves in hot water for a number of clients simultaneously, even a financially well-heeled vendor could be brought to its knees.
Careful focus and preparation to avoid violation of penalty-laden laws is a good first step in a process of prudently managing consumer class action risk. But, there are other steps to take, as well, which will be addressed in future posts.
