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.