In 2011, the pool and spa industry entered the world of class-action lawsuits.

The most visible activity taking place is the suit against mega-distributor PoolCorp and the “Big Three” manufacturers — Hayward Pool Products, Pentair Aquatic Systems and Zodiac Pool Systems.

It may very well be the first anti-trust class action in the industry.

Two groups of plaintiffs are suing the firms: pool professionals, such as distributors and dealers; and consumers. The professionals accuse PoolCorp of anti-competitive behavior, such as pressuring manufacturers to refuse to sell to other distributors and buying competing companies for the sole purpose of shutting them down. By doing this, they say, PoolCorp and the Big Three artificially raised prices and made it virtually impossible for other distributors to operate.

The consumer plaintiffs accused the defendants of artificially raising prices.

The defendants filed motions to dismiss and to date have been partly successful.

The threat of class-action lawsuits hasn’t escaped industry dealers.

In February, mega-retailer Leslie’s Poolmart was named in a California class-action suit accusing the company of failing to properly pay overtime to its staff.

According to a former employee, Leslie’s underpaid hourly wage earners by not including certain types of bonuses in the base wage when calculating overtime, as required by labor laws.

Some experts say class-action lawsuits are becoming more common. Here, find out how they work and how companies should proceed if called as a defendant or witness.

The mechanics

It isn’t surprising that the pool industry has been introduced to the world of class-action lawsuits. Because of their profitability for attorneys, many have noticed a rise in this type of litigation.

“There are a lot of law firms now that specialize in just filing class litigation. It’s become a very profitable area. And where the profit is, the lawyers will follow,” says George Stephan, chairman of the litigation department for Los Angeles-based Buchalter Nemer, who has represented companies in the pool and spa industry since the early 1970s.

When it comes to consumer lawsuits, class actions have practically become the norm. “When I first started practice 30 years ago, it would be rare to have more than one class action on your desk at a time, or maybe even one a year,” says Greg Hurley, a principal shareholder and manager of the litigation department with Greenberg Traurig LLP, which represents businesses. “Now almost my entire practice is class action.”

In the case of PoolCorp and Leslie’s, no doubt their deep pockets and greater number of transactions made them more vulnerable to class-action cases. But even smaller businesses could face the threat. One of the most common allegations in class action lawsuits today are wage and overtime infractions. Warranty issues present another subject of this type of litigation.

A class action is a civil lawsuit filed by one or more plaintiffs seeking to represent not only themselves but all other people who are similarly affected. This type of litigation was devised, in part, as a way for victims of smaller injustices to take parties to court to remedy a wrong. If somebody was duped out of, say, $50, it isn’t worth it to start legal proceedings. But with class actions, many parties can band together, making it more attractive to an attorney.

“By consolidating all the claims of all the class into one large claim, there is then an incentive for an attorney to bring a lawsuit,” says Eric Enson, a partner and member of the anti-trust and competition law division of Jones Day’s Los Angeles office.

It’s true that class actions are seen as a profit machine for attorneys. But while the payouts can be very high, causing extreme financial exposure for the defendants, plaintiffs rarely, if ever, enjoy the same kind of windfall. They may not even receive actual money. For example, a carmaker might have to offer former customers a $100 discount on a vehicle.

If PoolCorp and the manufacturers are found at fault, the payoff could be substantial. “The plaintiffs are claiming that PoolCorp and the manufacturer defendants sort of ganged up against others and made competition in that space much more difficult and caused some of them to go out of business,” Enson says. “So the actual damages associated with that alleged conduct could be — I’m not saying it is, but it could be — higher than a standard ... anti-trust case [where a customer was overcharged for a product or service].”

Primary hurdle

While the threat of such a large payout causes many defendants to settle quickly, the cases are not a slam-dunk when they proceed. In addition to proving the alleged behavior, the plaintiff must show in a separate phase that the group he or she represents qualifies as a class. To succeed in the class-certification phase, plaintiffs must demonstrate several things: that there are enough members in the group to justify this kind of litigation; that they have enough in common to proceed as one party; that they have all been affected by the defendant’s alleged behavior in the same way; and that they can all be identified and notified through some mechanism.

In a price-fixing case, for instance, it’s not sufficient to show that all named customers purchased products from the defendant. Purchases would have had to take place during the stated time period, with each member experiencing the same price increases.

In the case of the Leslie’s suit, plaintiffs will have to show that each of the former employees had similar job descriptions and suffered the same alleged harm.

Plaintiffs also must show how the case can be managed. Hundreds or thousands of plaintiffs can’t testify, so a method must be found for conveying accurate information through a sampling of the injured parties.

The class-certification phase extends the duration of these lawsuits. “You could call the certification battle the midpoint of the case in terms of time,” says attorney Mark Stapke, a partner at Los Angeles-based Gibbs Giden Locher Turner Senet & Wittbrodt LLP.

For the most part, once a class is certified the defendants will settle, but that may be slowly changing. Hurley sees more of his clients going to trial on principle. “They feel like they’re being extorted just by virtue of the fact that one individual has made a claim and uses this class-action procedure,” he says.

If the class is not certified, then it can move forward as an individual lawsuit involving the named plaintiff. Generally, these cases fizzle, since the potential payoff is so small.

Because of this imbalance of payout to pay-off, there is a shift in advantage between plaintiffs and defendants as the case proceeds. Before certification, the plaintiff faces the bigger risk. “If they lose the certification motion, they end up functionally [losing] the case,” Stapke says. “Because, instead of a $100 million claim based on credit-card violations, for instance, they have a $50 claim [involving] one class plaintiff.”

Because of this, plaintiffs are more motivated to settle at this time. However, once the class is certified, the dynamic changes.“There’s great motivation for the defendants to settle, simply because the financial exposure of losing is very large,” Stapke says.

Many in the legal profession believe the class-action mechanism is being abused. For this reason, the courts — especially those on the federal side — have been making it harder to certify a class.

“There have been a number of U.S. Supreme Court decisions recently … that have tightened the requirements of getting cases certified,” says Michael Cereseto, another attorney with Buchalter Nemer. “And the courts are looking at these a lot more closely.”

And in at least one well-publicized case, attorneys were prosecuted for initiating these lawsuits through illegal means, such as soliciting and paying someone to file the litigation.

What to do?

Companies named in class actions should find attorneys who specialize in these cases.

“There’s a whole different layer of issues with class litigation,” Cereseto says. “It’s very important to hire counsel who know class litigation and the kind of procedural defenses there are in the class-certification process.”

Because these cases are so expensive to litigate, he adds, these attorneys should make it one of their first jobs to perform an analysis. Together, counsel and defendant should determine the issues involved, total exposure and chances of certification. “So the client [can] make the informed decision of whether or not it’s something that’s going to be litigated or maybe ... to settle,” he says.

Defendants should ask plenty of questions — something not enough clients do, Hurley says. Cover everything: When can the case be settled? How much will it cost to litigate? Why are you doing this? Why aren’t you doing that?

Because class-action lawsuits generally require a group of at least 40 similarly situated plaintiffs, they usually will target larger companies, such as manufacturers.

But for builders, service firms and retailers, two types of these suits can prove problematic — warranties and employment law. While completely avoiding litigation may be impossible, attorneys suggest a step or two to reduce the chances.

If enough customers believe that a warranty isn’t being properly observed, they can file a class action. To protect against this, companies should have an attorney periodically review warranty policies and practices to make sure they are valid.

Employment law presents an area where attorneys are seeing an increasing number of class actions spring up. If it is determined that a large enough group of employees with very similar positions experienced the same loss, a class action can be filed. These often involve breaks and overtime, such as the Leslie’s case, and sometimes start when a former employee consults an attorney about filing a wrongful termination suit.

“The lawyer [may] say, ‘The termination was okay, but maybe they haven’t been paying you enough,’” Stephan says. “Then maybe it ends up being a class action for not getting a meal break or rest break …”

Companies should put in place a mechanism for receiving updates about changes in employment laws. Also consult with an attorney from time to time to make sure your practices still comply. For instance, make sure employees are being properly classified, especially exempt ones.

“It’s good to get compliance counseling,” Cereseto says. “It can save you a lot of money if you have wrongly classified employees.”

Class-action lawsuits generally will apply to larger companies with deeper pockets. But even smaller pool and spa dealers can become involved in these cases by being subpoenaed to provide information.

This could happen if a service firm’s client — say, a hotel — is named in a class-action suit for failing to comply with the Americans with Disabilities Act. If that occurs, the service company wouldn’t be able to claim that interactions between it and the hotel were confidential.

If this happens, try to find an attorney who specializes in this type of litigation. And act right away, because failing to meet deadlines can invite severe penalties. “When you get served a subpoena, the clock starts running, and you need to do something by a set period of time,” says Eric Enson, a partner and member of the anti-trust and competition law division of Jones Day’s Los Angeles office.

The first thing the attorney will probably do is work with the court and other attorneys to narrow the scope of information being sought. “They’re going to be asking you for information that most companies consider trade secret — their customers, their list, what they sell their products for, what products they sell,” says George Stephan, chairman of the litigation department for Los Angeles-based Buchalter Nemer. “This kind of information is not information that is publicly available.”

So the attorney needs to make absolutely sure that all information being sought is relevant to the case. They also will seek a protective order stating that this information is only to be used for the case.

“Most subpoenas, when they are first drafted, are quite broad,” Enson says. “That is by design, because the lawyers drafting the subpoena know that when the non-party receives the subpoena and hires a lawyer, that lawyer will then start negotiating the subpoena to narrow it and to limit the burden on the nonparty. The parties usually meet somewhere in the middle.”

Some attorneys recommend that companies seek counsel anytime a client is named in a class action, even if no subpoena has yet been issued. This holds especially true if your company was involved in the project or service that has fueled the complaint. “If ... [the dealer] helped them in this project, everything [the dealer] says to their client, none of that’s protected,” says Greg Hurley, a principal shareholder and manager of the litigation department with Greenberg Traurig LLP’s Orange County office. —R.R.