How Class Action Lawsuits Work

Civil law in the United States is based on common law. Common law -- as opposed to criminal law or constitutional law -- is grounded in precedent, the decisions made by judges in similar cases. Modern class action lawsuits were born out of the common law tradition of England stretching back to medieval times.

Written records dating back as early as 1125 show a well-established English legal custom that allowed a large group of villagers to choose three or four representatives to file a single complaint in court [source: Spence]. These so-called representative actions persisted throughout English history and into Colonial America.

Another legal hand-me-down from England was the separation between law courts and equity courts (also called chancery courts). Law courts resolved disputes based on codified laws (regulations and statues) and common law (judicial precedent) while equity courts relied on a judge's "good faith and good conscience" to find remedies when the law couldn't [source: Bouvier]. This division between law courts and equity courts persisted in early America, with most representative action suits being tried in equity court.

The problem with equity court is that it established no standard procedure for trying and judging such large cases. The biggest controversy was whether all parties in a representative case, even "absent" parties who didn't sign their name to the lawsuit, were bound by the decision. Gradually, equity courts began to codify their procedures for representative actions. In 1842, the Supreme Court issued the Federal Equity Rules, which included a rule that absent parties weren't bound by representative decisions and could mount their own suits [source: Spence].

In 1937, the Supreme Court adopted the Rules of Civil Procedure, a far more detailed set of courtroom instructions that essentially erased the separation between law courts and equity courts. Rule 23 directly addressed the issue of class actions, but didn't settle the argument over absent parties. It wasn't until 1966 that Rule 23 was amended to explicitly state that all absent parties are indeed bound. The amendment established a procedure for notifying all parties and giving them the opportunity to opt out of the class. The latest change to class action law came in 2005, with the Class Action Fairness Act (CAFA), which moved jurisdiction of any case involving more than $5 million in damages from state courts to Federal district courts.

In the next section we'll take a closer look at class action legal procedure as outlined in Rule 23 and CAFA.

Class action lawsuits, like other civil lawsuits, can be filed in both state courts and federal courts. The Class Action Fairness Act of 2005 lays out the criteria for cases that fall under federal jurisdiction: Any class action lawsuit in which claims exceed $5 million, as well as any case involving plaintiffs or defendants from many different states (called diversity jurisdiction). In addition, federal courts can decline to hear cases involving primary defendants that are state governments or state officials, can also decide not to hear cases that include plaintiff classes totaling fewer than 100 people [source: FindLaw].

Rule 23 of the Federal Rules of Civil Procedure gives detailed instructions to judges, attorneys, plaintiffs and defendants for conducting a class action lawsuit. Every state has its own rules of procedure for class actions, but they all closely resemble Rule 23. Here are some of the main requirements under Rule 23:

Class actions are wonderfully efficient in some ways and controversial in others. In the next section, we'll outline and advantages and disadvantages of class actions.

Lawsuits are expensive. The only reason for going through the long and costly process of suing someone is if the damages are substantial, as in cases of serious physical injury or financial loss. But what if the damages were $100 or even $1,000? Is it worth it to sue? For most people, the answer is no.

That's one of the huge advantages of class action lawsuits. They allow a large group of injured parties to receive just compensation, even if their individual claims are relatively small. Besides being financially prohibitive to the plaintiffs, it would also be a huge waste of time for the court and the defendant to both try and defend all of those claims individually.

Another advantage of class actions over individual lawsuits is that individual suits operate on a first-come, first-served basis. If your neighbor sues a corporation for $50 million and wins, then the company might be in bankruptcy before you can even stake your claim. Class actions ensure that payments are spread equally across all injured parties.

Class actions also ensure that plaintiffs are represented by an experienced, highly competent attorney, someone they might not have been able to afford on their own.

One significant disadvantage of a class action is that if the plaintiffs lose the lawsuit, they're prohibited from filing individual suits later [source: FindLaw]. This is why it's important to opt out of a class action if you feel that your damages are substantially higher than the rest of the class.

Critics of class actions say that attorneys sometimes file frivolous lawsuits just to earn a quick settlement. In such cases, the damages paid to the individual plaintiffs might be very small, but the lawyer walks away with a large percentage of the total award.

The Class Action Fairness Act of 2005 (CAFA) was written to address some of these concerns, particularly over so-called coupon settlements. Instead of paying out damages in cash, some companies offer coupons for a certain dollar value of new products. Attorneys were still taking their cash cut of the total value of the coupons, even though relatively few plaintiffs would ever use them. CAFA requires that judges fully investigate and approve all settlements to fair compensation of both plaintiffs and lawyers [source: Rubenstein].

For lots more information on lawsuits and legislation, see the helpful links on the next page.

I consider myself very lucky to have never seen the inside of a courtroom. I have never sued nor been sued, and frankly find the whole legal system more than a little confusing. I welcomed this assignment because it gave me the opportunity to explain some of the basics of the U.S. legal system in terms that even people as uninformed as me could understand. The "Legal History of Class Action Lawsuits" page proved the most difficult research-wise, but also the most rewarding. I was most surprised to learn that the U.S. didn't have an established rule of civil procedure until the 1930s. I was also impressed to see all of the safeguards built into modern class action law to protect both individuals and the institutions they're suing. That said, I'm still not eager to see the inside of a courtroom.

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