How Does a Class Action Lawsuit Affect a Business? Find Out

• Author: Kelly Cooke
• Posted: 2024-10-30

A class action lawsuit is a legal proceeding in which a group of people experiencing the same problem from a product or service band together to sue the manufacturer or provider. Class action lawsuits fight large corporations, as the individual damages awarded to each plaintiff would be too small to make it worth their while to file a lawsuit on their own. They help victims get justice and ensure companies improve the products or services they offer. There are a few different ways that a class action lawsuit can affect a business, including the following:

1. It Can Damage the Business's Reputation

A class action lawsuit can seriously damage your business's reputation. Not only will it dominate all over the news, but potential customers and clients will also be able to see it. It can make it challenging to attract new business and keep existing customers loyal.

In most cases, the negative publicity will eventually die down, but it can take a long time for your business to recover. The modern competition in various business industries is high, and companies need to offer the best services to their customers to safeguard their brands. So, if a class action damages your business's reputation, it can be hard to get back on track.

2. It Can Cost the Business a Lot of Money

A class action lawsuit can be very costly for a business. If the business loses, it may have to pay the plaintiffs a large sum. It can be a substantial financial burden for the business and may even force them to close down. Besides, the cost of the litigation itself can also be very high. The company may have to spend much on lawyers and other legal fees. It may be unable to recoup all its costs even if it wins the case.

On the other hand, a business battling a class action doesn't have time for anything else, including production, marketing, and employee remuneration, because it channels all its resources towards the case. The tragedy can hurt the business because it puts all its resources there.

3. A Class Action Can Force the Business To Change Its Operations

Plaintiffs file class actions when they believe a company is violating the law or harming consumers. If the lawsuit is successful, the court may order the company to change its operations. It can significantly impact the business, especially if the court directs it to change its product, pricing, or marketing strategy.

Some businesses change names and brand descriptions to rekindle their image. In such cases, they struggle like startups because they must build from scratch to convince the public to trust them again. For example, Toyota dealt with a class action lawsuit in 2010 for faulty acceleration pedals. The court ordered the automobile firm to change the pedals' design and recall millions of cars. The company also had to pay a $1.2 billion fine, damaging its sales tremendously.

4. A Class Action Can Lead to a Decrease in Stock Value

Businesses facing class action lawsuits often see their stock prices drop because investors worry about the financial impact a lawsuit can have on their investment. A class action lawsuit can cost a company millions of dollars, leading to a decrease in profitability and share value. Investors fear the company will be unable to withstand the legal costs and awarded damages, affecting share price and dividend payments.

5. It Can Inspire Other Lawsuits Against the Business

If a business faces a class action lawsuit, it may just be the start of its legal problems. Other plaintiffs may see that the business is vulnerable and choose to file additional lawsuits. It can quickly become a costly litigation cycle for the business. On the other hand, if the business prevails in the class action lawsuit, it may deter other would-be plaintiffs from filing suit. Continuous court cases will push the company into a negative light, which will damage its reputation.

Overcoming the challenges associated with class action lawsuits is not easy, but it is possible with the help of experienced legal counsel. Contact an experienced business litigation attorney to discuss your case if your business faces a class action lawsuit. However, try solving emerging conflicts early on to avoid litigation's cost and time commitment.