How Class Action Lawsuits Work


Corporation Image Gallery A Wal-Mart worker goes about his day on March 29, 2011, the same day the Supreme Court heard arguments in Dukes v. Wal-Mart Stores, the largest civil rights class action suit in U.S. history. See more corporation pictures.
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Contrary to the Bible, when David takes on Goliath in the real world, Goliath almost always wins. Let's say you bought stock in Enron back in the late 1990s, believing it was one of the most successful and innovative energy companies in the world. When the company collapsed in 2001 after evidence surfaced of massive accounting fraud, your stock portfolio plummeted. Could you sue for damages? Sure, but even if you lost tens of thousands of dollars in Enron stock, you'd spend more in legal fees trying to fight Enron's army of attorneys.

By yourself, you're a David fighting a Goliath. But what about all of the other Enron investors who got nailed by its corporate malfeasance? If you all sued Enron together, you'd become an army of Davids -- with your own Goliath-caliber lawyer. This is the essence of a class action lawsuit. In this context, a class is any group of people who are claiming similar injuries or damages from the same company or organization. And in 2006, a class composed of duped Enron investors settled its lawsuit for $7.2 billion [source: CNBC]. Go, David, go.

Class action lawsuits are a civil litigation "device." Civil law, as opposed to criminal law, deals with private disputes where one party accuses the other of injury (physical, psychological, emotional or financial) and sues for damages. A class action is considered a device of civil litigation because it doesn't change the rules of civil law; it simply allows multiple parties to sue over the same legal grounds. In every class action suit, there is a representative plaintiff or lead plaintiff whose name is the only one to appear on the case, as in the current sex discrimination suit before the Supreme Court, Dukes v. Wal-Mart Stores, Inc.

The Enron case is an example of a class action suit involving widespread damages from corporate fraud, but there are lots of good reasons why a group of people would want to sue the same company.

One of the most common is product liability. When faulty Bridgestone/Firestone tires led to numerous accidents and injuries, a federal judge in Indiana certified the scope of the class to include "all current residents of the United States who… owned or leased a 1991 through 2001 model year Ford Explorer as of August 9, 2000" [source: FindLaw]. That's a big class. Makers of silicone breast implants were the subject of another huge product liability class action, which eventually settled for $3.4 billion [source: CNBC]. Environmental disasters can breed class action suits, too, like the fishermen and canners who sued Exxon over the Valdez oil spill.

We'll continue our explanation of how class action lawsuits work with a brief overview of the legal history of class actions.

Legal History of Class Action Lawsuits

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 Procedure

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:

  • Certification -- The judge must certify the plaintiffs as a class. For this, it must be impractical for plaintiffs to sue individually, they must share a common complaint, and the defendants must share a similar defense for all plaintiffs. Only 20 to 40 percent of lawsuits that are filed as class actions receive certification [source: Rothstein].
  • Defining the class -- As part of certification, the judge will define the scope of characteristics of the class. For example: anyone who received silicone breast implants from 1982 to 1993 manufactured by Company X, or anyone who lived within one mile of Alaskan coast during the Valdez oil spill. The judge can also divide the class into subclasses when appropriate.
  • Notification -- The judge will order that all potential plaintiffs be notified of the class action by mail, newspaper advertisements, even TV commercials, depending on how broad the scope of the class.
  • Opting out -- If you fall within the defined scope of the class, then you are automatically included in the case and bound by the final judgment. If you prefer to file your own lawsuit, however, then you can opt out of the class action [source: Lawyers.com]
  • Appointing counsel -- The judge selects representative counsel for the plaintiffs. In most cases, it is the lawyer who filed the case, but it's the judge's responsibility to make sure he or she is experienced in class action proceedings, is highly knowledgeable in the particular subject area, and will fairly represent the class.
  • Distribution of damages - The judge will develop a plan with the plaintiffs' attorney for distributing any monetary damages won in the case. Even if the case is settled, the judge must approve the settlement. The judge also has a say in how and how much the attorneys are paid.

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.

Advantages and Disadvantages of Class Action Lawsuits

A sign advertises the advent of a class action lawsuit in New Orleans shortly after Hurricane Katrina hit the city in 2005.
A sign advertises the advent of a class action lawsuit in New Orleans shortly after Hurricane Katrina hit the city in 2005.
Chris Graythen/Getty Images

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.

How Class Action Lawsuits Work: Author’s Note

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.

Sources

  • Bouvier, John. "A Law Dictionary, Adapted to the Constitution and Laws of the United States of America, and of Several States of the American Union, With References to the Civil and Other Systems of Foreign Law." J.B. Lippincott & Co. 1883 http://books.google.com/books?id=bPkUAAAAYAAJ&pg=PA598& lpg=PA598&dq=rules+of+equity+and+good+conscience&source=bl& ots=Henj9dOLBU&sig=7qZbyg3wWoPSYlODQYbP6rttU7A&hl=en& ei=NnCfTfevMrS80QGF1K2BBQ&sa=X&oi=book_result&ct=result&resnum=7& ved=0CDIQ6AEwBg#v=onepage&q=rules%20of%20equity%20and%20good %20conscience&f=false
  • CNBC. American Greed. "Top 10 Class Action Lawsuits" http://www.cnbc.com/id/35988343/Top_10_Class_Action_Lawsuits?slide=9
  • Findlaw. "Class Action Cases" http://public.findlaw.com/library/legal-system/class-action-cases.html
  • FindLaw. "Class Action Fairness Act of 2005" http://news.findlaw.com/hdocs/docs/clssactns/cafa05.pdf
  • FindLaw. "United States District Court, Southern District of Indiana, Indianapolis Division: Order Certifying Classes." November 2001 http://news.findlaw.com/hdocs/docs/tirelawsuits/brfrclass112801ord.pdf
  • Lawyers.com. "Class Action FAQ" http://class-actions.lawyers.com/Class-Action-FAQ.html
  • Rothstein, Barbara J. and Willging, Thomas E. "Managing Class Action Litigation: A Pocket Guide for Judges." Federal Judicial Center. 2005 http://www.fjc.gov/public/pdf.nsf/lookup/ClassGde.pdf/$file/ClassGde.pdf
  • Rubenstein, William B. UCLA Program on Class Actions. "Understanding the Class Action Fairnes Act of 2005." http://www.classactionprofessor.com/cafa-analysis.pdf
  • Spence, Susan T. American Bar Association. "Looking Back… In a Collective Way." July/August 2002 http://apps.americanbar.org/buslaw/blt/2002-07-08/spence.html

Class Action Lawsuits: Cheat Sheet

Stuff you need to know:

  • A judge decides if a group of plaintiffs qualify as a class. The judge also defines the characteristics of the class. For example, people who bought Ford Explorers with Firestone tires between 1990 and 2000.
  • The key advantage of a class action lawsuit is that it allows a large group of injured parties (financially or physically) to receive individual amounts of compensation without spending a lot of money on legal fees.
  • A major disadvantage of class action lawsuits is that once you join a class action suit, you're prohibited from suing individually. So if you get a lousy settlement in the class action proceedings, you're stuck with it.

Now test your knowledge with these quizzes!

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