What Is a Class Action Lawsuit?

Class Action Lawsuits Explained

Business people in front of New York State Courthouse
•••

Matt Dutile/Getty Images

A class action lawsuit is a legal action filed against a defendant by one or more individuals. It is designed for situations in which many individuals have suffered similar injuries as a result of the defendant's actions It's important to learn the pros and cons of class action lawsuits in case you ever become involved in one.

What Are Class Action Lawsuits?

Class action lawsuits are appropriate when the damages claimed by each plaintiff are too small for individual claims to be worthwhile. By filing this legal action as a group, the plaintiffs have the resources to hire an attorney and obtain restitution. Class actions also relieve courts of the burden of hearing hundreds or thousands of small claims.

Class action lawsuits are often filed against government entities, financial institutions, manufacturers, retailers, and employers. Many are based on allegations of defective products, false advertising, discrimination, or unlawful employment practices. Some suits have even alleged that the defendant violated the Telephone Consumer Protection Act, which was enacted in 1991.

How Class Action Lawsuits Work

In a class action lawsuit, the group (class) of plaintiffs is represented by one or more lead plaintiffs. The injuries suffered and the allegations alleged by the lead plaintiff must be similar to those of the other class members. Otherwise, the lead plaintiff won't be a suitable representative of the class.

Before a class action lawsuit can proceed, the class must be certified by a judge. The lead plaintiff must demonstrate that the plaintiffs have a valid claim against the defendant and that all class members have similar claims. The lead plaintiff must also show that they can adequately represent all group members. 

Once the class has been certified, the plaintiffs are notified of the lawsuit by mail or other means. All are automatically included in the lawsuit unless they opt out. Those that wish to withdraw from the class must follow a specified procedure. If they fail to do so, they will remain part of the class.

Most class actions are settled out of court. Each plaintiff receives a portion of the settlement, which may consist of cash, a refund, a service (such as credit monitoring), or some other benefit.

Pros and Cons of Class Action Lawsuits

Pros

  • Provide restitution to plaintiffs who would otherwise receive nothing because of attorney costs

  • Help reduce the number of suits clogging the courts


  • Reduce the cost of litigation

  • Ensure that defendants with similar injuries are treated consistently

  • Motivate defendants to settle since there are many plaintiffs

Cons

  • Plaintiffs may receive a very small award while attorneys earn large fees

  • Cases take a long time to settle because of the complex procedures involved

  • Class members cede control over the suit to the lead plaintiff and their attorney

  • Quality of legal representation affects all class members—if lawyer does a poor job, all members suffer

  • Plaintiffs may receive coupons or rebates instead of cash

  • Plaintiffs give up their right to sue the defendant independently

Fairness in Class Actions

Depending on the circumstances of the case, a class action suit may be filed in state or federal court. Claimants may prefer to file cases in state courts, which are considered friendlier to plaintiffs, than in federal courts, which are deemed friendlier to defendants.

In 2005, Congress passed the Class Action Fairness Act (CAFA), which was intended as tort reform to protect businesses from abusive suits. Before the law was enacted, plaintiffs' lawyers frequently forum-shopped so they could file their suit in the state most sympathetic to their case.

The Class Action Fairness Act made it easier for defendants to move their cases to federal courts by amending the requirement for diversity jurisdiction. Before the law was enacted, a defendant was unable to move a class action to a federal court if even one person on the defendant's side of the case and one person on the plaintiff's side were citizens of the same state. The Act loosened these requirements. It allows a case to be moved to federal court if at least one person on the plaintiff's side and one person on the defendant's side are citizens of different states (or countries).

Note that defendants cannot move their case from state court to federal court unless the damages sought by plaintiffs exceed $5 million. Also, the class must consist of at least 100 plaintiffs.

Key Takeaways

  • Class action lawsuits are legal actions taken by one or more individuals as a group against a defendant.
  • They help eliminate the need for several small claims.
  • Class action lawsuits may be based on allegations of defective products, false advertising, discrimination, unlawful employment practices, or more.
  • Many class action lawsuits take place in state courts, but the Class Action Fairness Act of 2005 made it easier for defendants to move their cases to federal courts by amending the requirement for diversity jurisdiction.


Article Sources

  1. Federal Communications Commission. "FCC Actions on Robocalls, Telemarketing." Accessed June 18, 2020.

  2. Cornell Law School Legal Information Institute. "Diversity Jurisdiction." Accessed June 18, 2020.

  3. Congress.gov. "Class Action Fairness Act of 2005." Accessed June 18, 2020.