A Bigger Threat Than the FTC?
Running a successful business isn’t just about making money, it’s also about keeping the money you make.
Once you start making money, it’s easy to blow it on unnecessary expenses, bad investments, exotic vacations and expensive toys. But, you can also lose your money by making bad legal decisions.
Most people in the internet marketing world are probably aware of the Federal Trade Commission (FTC). For those who aren’t, the FTC is a government agency given the power to regulate unfair competition and advertising. Not just advertising online, but advertising in any medium.
If you have a business online and you’re not familiar with the FTC, you need to get familiar with them. Especially, these two principles:
1. You must disclose all material connections when promoting, reviewing or endorsing products or services.
2. Endorsements and testimonials must be truthful and honest, and testimonials are presumed to be the results that one can typically expect if they buy your product or service. Putting the standard “Results Not Typical” doesn’t cut it anymore.
That’s a very brief summary of the two most common guidelines applicable to internet marketers. If you want to know more about the regulations, you can download the free 2011 Internet Marketing Legal Guide here – internet marketing law.
If you get in trouble with the FTC, it can cost you a lot of money. Read this article by Shoemoney on Phony Product Reviews to see just how much it could cost you.
But, this article isn’t about the FTC. This article is about something potentially worse than the FTC – Class Action Lawsuits.
Class Action Lawsuits
A class action lawsuit is a lawsuit on behalf of a “class” or specific group of people. For example, if Evil Corporation dumps toxic chemicals into the river near your house and everyone in your city drinks that water and gets sick, the sick people in that city could be a “class” for a class action lawsuit against Evil Corporation.
In the example above, a class action lawsuit against Evil Corporation would probably be a good idea. Instead of clogging up the court system with thousands of different lawsuits against the same company, litigating the same issues, you combine them into one lawsuit and litigate the liability issue once. The damages may vary for every person that’s a member of the class, but the main issue is whether Evil Corporation was the cause of the problem.
But, here’s the truth about class action lawsuits. In some cases, attorneys look for technical violations to litigate as class actions. In other words, they look for opportunities to make money. There doesn’t have to be a tremendous injustice. All they need is one small violation of some obscure law that no one pays attention to.
If you’re a small fish, you probably don’t have much to worry about. Class action attorneys go after “Deep Pockets.” That means companies with a lot of money or a lot of insurance coverage. They look for a big payout because the real winner in these types of class actions are the attorneys and law firms that bring the lawsuits.
Let me give you an example. But, before I do, let me throw out a disclaimer. I’m not saying that this example is not a legitimate class action lawsuit for a good cause. I don’t know all of the facts and surrounding circumstances, so you’ll have to do your own research to make that call. But, it’s an example of why some attorneys and law firms might like class action lawsuits.
I received a class action notice in the mail about a month ago because I was a potential member of a “class.” You may have received the same thing if you had Farmers Insurance at any time between 1999 and 2010.
Here are the relevant details.
- It was a lawsuit against Farmers Group, Inc, et al and Zurich Financial Services Ltd for allegedly violating California law and charging “management fees” that were too high and the plaintiffs also alleged that Farmers Group made too much in profit.
- The proposed settlement, which must be approved by the court, is for $455 million.
- The attorneys involved in the matter would receive $90 million.
- My portion of the settlement, as a class member, would be $3.07.
So, you can see who the real winners are in class action lawsuits. Many times they don’t even give cash to the class members, they give coupons instead. Of course, the law firms involved will still receive cash.
So, what does this have to do with internet marketing? Well, ever hear of Kissmetrics, SEOmoz, Raven Tools, Gigaom or Etsy? They, along with others, are currently being sued in a class action lawsuit.
The reason? Alleged violations of the Electronic Communications Privacy Act, California Privacy Act, Trespass to Chattel, and California Unfair Competition Law.
In plain English, the lawsuit alleges that Kissmetrics and others used tracking methods in violation of the laws. I won’t bore you with the details, you can read the complaint for that. But, the allegations suggest that the defendants were tracking visitor activity beyond their own websites.
If you’re a defendant in a class action lawsuit, you have a lot to lose. We’re talking millions, and in some cases billions (asbestos, tobacco). But, regardless of whether you’re guilty or not, once the lawsuit is filed, you have to defend yourself.
Defending yourself against a lawsuit isn’t cheap and I would multiply that x100 for class action lawsuits. There will be a lot more costs involved with research, investigation, discovery, experts, time involved and so on and so forth.
If you have a vault full of money, or you have “deep pockets,” you could be a target for class action attorneys. As an attorney myself, I follow these 3 guidelines to protect myself:
1. Don’t ignore the law. A legal decision is a business decision and choosing to ignore the law is a bad business decision.
2. Follow the law. Don’t just be aware of the laws, actually comply with the laws. If you don’t know what laws apply to your situation, either hire an attorney or do the research yourself. There are a ton of free legal resources online.
3. Get the proper insurance. If your business has liability insurance, your insurance company will be the one defending you against any alleged violations as well as paying any settlements or judgments, up to your coverage limit. Just be sure that you have the right coverage. There’s nothing worse than paying for coverage for years only to find out after being sued that the thing you’re being sued for is excluded.
There are good and bad people in every profession. Not all lawyers are bad. Not even all class action lawyers are bad. You can’t always avoid legal trouble, but if you stick to the 3 simple rules above, you will definitely keep your level of risk low.