Class actions are at once simple and complex, familiar and disturbing. We read about them almost all the time in newspapers across North America. Large class action cases often galvanize public opinion, and are discussed around water coolers, in classrooms and even at the dinner table.

When it is your company, however, that becomes the target of a class action lawsuit, everything changes dramatically. A new host of questions and concerns comes to the surface. What is a class action exactly? What will it mean for my company and our shareholders? What steps could the Board have taken to avoid this situation? What do we do now that proceedings have been initiated?

In the following paragraphs, we outline a few basic facts and strategies that every Board of Directors should be familiar with. Increasingly, class actions are becoming a tangible reality for Canadian businesses. Preparation, prevention and policy are therefore key.

What is a class action?

Modern class actions were first engineered in the United States and made their way into Canada in the late 1970s. They are a form of "collective" litigation, which means that they group the complaints of two or more people (and often hundreds or thousands of people) together within a single, unified lawsuit. All of these "plaintiffs" will allege in the Statement of Claim that they share certain basic characteristics, and that their claims relate to the same tort or contractual breach. Although the procedural Rules of Court vary somewhat from province to province, no class action in Canada will be allowed to proceed until it is approved by a court. At an early stage, a judge will be asked to determine whether or not the claim is viable, whether there is a sufficient degree of commonality among the proposed class of plaintiffs, and whether attorneys for the plaintiffs have met their legal obligations. If so, the action will be "certified" by the Court, and the plaintiffs will be given the chance to prove the complaint of the class.

It is important to note that class actions are extremely flexible. They can involve issues of product liability, securities regulation, employment law and environmental protection, among many others. Class-wide lawsuits in Canada have targeted everything from asbestos and IUDs to breast implants and pharmaceutical products, attracting national media attention in the process. In other words, no organization, regardless of its activities, is shielded from the potential consequences of a class action.

What does a class action mean for our company?

News that a company will be the object of class action proceedings can be a shocking experience for its management and Board. No lawsuit is a pleasant experience. But because of their sheer size, complexity and importance, class actions are often lived out publicly, in the media spotlight. The prospect of ongoing, complex litigation comes at a substantial price, and casts a pall over the future. Customers, suppliers, investors and employees alike are necessarily presented with a negative image of the business. Doubts are sown as to the ultimate outcome of the case and its impact on the company’s stakeholders. In addition to the bad press, directors have to contend with the practical consequences of a class action, which can result in a decrease in share value and complicate timely financial disclosure. Finally, because the amounts claimed can be enormous, success by the plaintiff class (even if unlikely) could cripple the company or result in its demise. No matter how you look at it, the stakes can be extremely high.

What can be done to prevent a class action?

Plaintiff attorneys are constantly on the look-out for a potential class action. Because large, dispersed groups rarely coalesce on their own, it often takes a proactive lawyer to identify a common problem, set the parameters of the class and find an individual to represent the members of that class. Consequently, it is vital that the Board be equally proactive in defending the interests of the firm. A preliminary risk assessment is always an advisable first step. An individual or task force should be asked to identify the company’s weaknesses and explain why and how a lawsuit could be filed. The Board, in conjunction with management, should also see to it that even minor problems are addressed in order to avoid much larger ones in the future. An efficient customer service department and a complaints resolution process, for example, are often indispensable. The implementation of a document retention policy for paper and e-mail is also crucial, and will prove invaluable in the event of a trial. The inclusion of arbitration clauses in employment contracts can also, in some circumstances, minimize the likelihood of class proceedings.

How should we respond to a class action?

In the hours and days following the announcement of a class action, the Board and the company as a whole will be focused on damage control. Beyond the necessary legal steps, it is essential for the firm to get its message out. While each situation must be dealt with on a case-by-case basis, it may be a good idea to retain public relations professionals in order to develop a comprehensive communications strategy. The company will also have to decide, as expeditiously as possible, whether to recall a product, change an advertisement or remove securities from the public market. Throughout this process, it is critical for the Board to keep its company’s shareholders in mind. Misinformation, uncertainty and panic among investors must be neutralized in order to protect the viability of the company’s stock. If the fundamentals of the business are strong, shareholders must be told so. Press releases, press conferences and an information circular published on the company’s website will enable the Board to explain its position and reassure shareholders. Doing so will require a concerted effort on the part of directors, the management team, public relations personnel, in-house counsel and seasoned external counsel with class action experience.

To reiterate, lawsuits are never pleasant, but they can be pre-empted and contained. The goal is to tailor a set of basic strategies that will serve the Board, the company and the shareholders.