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How To Handle A Class-Action Lawsuit

It’s the court of public opinion that has the final say over what your brand is worth.

How To Handle A Class-Action Lawsuit
[Photo: U.S. Air Force photo/Airman 1st Class Grace Lee via Wikimedia Commons]

It’s no excuse for wrongdoing, but class-action lawsuits are a fact of life for big businesses. Get to a certain size, and you’ll almost certainly become a target.

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Class-action expenditures actually declined between 2011 and 2014, but that probably masks a reverse trend as data security and insurance become bigger priorities for corporations–and bigger legal fields as a result.

A Delicate Balance

Faced with a class-action lawsuit, companies typically put their legal concerns first, then end up weathering considerable PR and business fallout soon after. But the obvious legal response many CEOs opt for can itself harm their brands’ reputations.

One reason missteps are so common is that companies’ lawyers usually aren’t willing to offer both perspectives. Fearing malpractice suits, lawyers are understandably reluctant to suggest options that aren’t strictly about reducing legal risk. But CEOs need it desperately and should seek out counsel (whether in-house or out) who can offer a balanced, broad-ranging point of view.

There are three risk levels for companies facing class-action lawsuits, and each one requires a different response. Making the right move depends on understanding early on which one you’re facing.

Level 1: Routine Risk

Most class-actions don’t particularly threaten a company’s brand or business. The only task for CEOs is to to avoid creating a negative buzz in the media by making routine class-action suits into bigger deals than they need to be.

Apple recently defeated one such suit regarding employee bag-search policies in its stores. Because this is a standard policy in the retail world, the suit posed no danger to Apple’s reputation. CEO Tim Cook never released a statement. In fact, nobody at Apple even bothered to acknowledge it.

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That effectively sidestepped any PR flak, but had the suit posed a higher-level risk, that would have had the opposite effect. In this case, though, it was the right move. The behemoth that Apple is, iPhone and iPad sales weren’t likely to be affected even if it lost the suit.

Smaller companies facing routine class-actions may not have the luxury of “no comment.” For customers of some businesses, silence is equivalent to guilt. Sometimes all it takes is the head of PR or the manager over the division concerned releasing a thoughtful statement. This allows the CEO to keep driving attention to the things that benefit the brand.

Level 2: Complex High-Risk

Some situations don’t necessarily put the entire company at risk, but the brand’s reputation can suffer if the class-action is lost. In these instances, it may be best to admit fault, even if corporate counsel recommends otherwise.

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LinkedIn CEO Jeff Weiner recently admitted fault in a recent class-action lawsuit, settling allegations that the company harvested users’ contact information without their permission. By waiting until after he knew that the company would likely settle the case, Weiner avoided the embarrassment and consequences of backtracking and looking disingenuous.

From a user’s perspective, Weiner is more likely as a result to seem like an honorable guy who can admit to mistakes and make amends. This was a great move for LinkedIn. Weiner’s actions protected the brand when it needed it most.

Level 3: Bet-The-Company Risk

When the pressure is turned up, leaders are more liable to do the reverse, though. For proof, look no further than Volkswagen, which recently found itself faced with a higher-risk lawsuit than LinkedIn did.

These types of situation are so dire that the reputation–and even survival–of the entire company is on the line. It’s critical to take a hard-line stance from the get-go. Keep in mind, though, that customers and clients come first. Losing their trust may equal losing the company anyway.

When the Environmental Protection Agency issued Volkswagen a notice of violation of the Clean Air Act for installing software devices in more than 11 million diesel vehicles designed to cheat U.S. emissions tests, CEO Martin Winterkorn initially denied knowledge of the situation. He resigned soon afterward.

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From a brand perspective, this was the only option because its CEO either knew about the situation or should have known. Where the company dropped the ball, though, was in allowing Winterkorn to release that statement prior to preparing a proper response strategy. His comments before resigning are still connected to the brand and could still negatively impact it. Despite his departure, Winterkorn’s response could have devastated the automaker by leading to huge fines by the Justice Department, on top of the multiple, global class-actions it’s already facing (though probably big enough to weather).

Regardless of the allegations and risks involved, CEOs should always show restraint in the face of class-action lawsuits. Before discussing anything with the press, be sure everyone is on the same page. The last thing your company needs is to give the appearance it has knowingly lied to customers. That impression–even if untrue–can do more damage than any class-action lawsuit, whatever its outcome. Of course, winning is the desired end result. But it’s the court of public opinion that has the final say over what your brand is worth.

Anthony Johnson is the founder and CEO of American Injury Attorney Group.

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