How Class Action Lawsuits Work

By: Dave Roos

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.
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.