Q: What is a class action?
- A class action is a lawsuit filed on behalf of a class of people with similar claims against a defendant. The action is filed by one or a few class representatives or named plaintiffs. When the action is filed the court will determine whether it is appropriate to proceed as a class action. Four factors go into this determination. These are called:
- Numerosity - whether there are enough claims to use the class action form
- Commonality - whether the claims are sufficiently alike to use the class action form
- Typicity - whether the class representatives' claims are typical of all claims
- Adequacy - whether the representatives are up to the task of representing the class fairly and well
A typical class action involves hundreds or thousands of people who have been injured by a defective product. Class actions may be filed against a drug maker if the drug turns out to have bad side effects that injure a number of people. Banks can be sued in a class action if they improperly charged overdraft fees to hundreds or thousands of clients. Many class actions have in common claims that are relatively small on average. The small claim size makes the claim not cost-effective to file a lawsuit on an individual basis. If hundreds or thousands of these claims are put together in one lawsuit though, all of the claimants can get some relief, and it can be done very efficiently.
Class actions follow most of the same rules as individual lawsuits. In addition they have their own rules, mostly related to the special procedures adopted for the class action form. Perhaps the most important rules relate to certifying the class and deciding whether the class action is the appropriate means for resolving the claims. Federal Rule of Civil Procedure 23 governs this in federal courts. Information about this rule and class actions can be found at the Federal Judiciary Homepage.
Q: How do I become part of a class action?
- A: In most cases, if you are described by the class, you become part of it automatically. You do not have to do anything to join the class. You will be bound by the result of the lawsuit and participate in any common fund of money the lawsuit produces for its members.
- If you are described by the class, you can opt out of the lawsuit if you want to sue the defendant individually. If you opt out you will not be bound by the result of the lawsuit. Of course you also will not share in the judgment. Rarely will a class action be started on an opt in basis. If so you will have to file a claim form or request to join in the lawsuit.
- Usually the notice of the lawsuit will inform class members what action, if any, they must take to participate. Class members may ask to intervene in the case as class representative or named party. This would be the case where the person wants to have some say in how the case is litigated
Q: How do I know if a settlement is unfair, or the representation improper?
- A: Class actions sometimes are criticized as an abuse of the legal system. In some cases this may be true. On balance though class actions are an effcient way of resolving large numbers of claims. Often a class action is the only way to hold a large corporation responsible for illegal behavior that affects many people in real but relatively slight ways. Cases in which courts have found an abuse of the system or improper or inadeqaute legal representation share one or more common traits. Here are some red flags to look for:
- Coupon Settlements. Providers of consumer products and services like to settle class actions by offering coupons to plaintiffs. The plaintiffs attorneys' get real money for their fees though, not coupons. Since 2005 federal law has limited the basis of attorneys' fees to the value of the coupons actually redeemed. Coupon settlements must be carefully examined. If the complaint was that the defendant's products were defective, how good is it to receive a coupon for more of the same?
- Intangible Benefits. If plaintiffs claimed to have suffered money damages because of the defendant's product or actions, settlements for something other than money should be scrutinized. If a manufacturer's car accelerates unintentionally, but all the settlement provides for is an inspection of the vehicles, is that worthwhile? The owners still have an unsafe car whose resale value is badly affected. It's questionable the lawyers should be paid a percentage of the value of this intangible benefit. At least the benefit should be valued appropriately. On the other hand if the lawyers are successful in getting the defendants to discontinue some harmful activity, that benefit could be quite valuable. A fee based on this might not be objectionable.
- Broad Releases of Unrelated Conduct. If a class action claims the defendant engaged in a specific illegal behavior, and the settlement contains a release for every conceivable other behavior, this should ring a bell. It's possible that the defendant has committed some other illegal act in its dealings with the plaintiffs, but the plaintiffs' lawyers did not consider this or failed to recognize it.
- Insufficient Investigation of the Case. The failure to identify other harm caused by the defendant, as in the preceding example, could be due to the failure to fully explore the case through discovery. Some class actions may settle very quickly if the defendant has good reason to do so, or simply wants to put the litigation and reputation risk behind it. The belief this might happen could cause plaintiffs' attorneys to fail to explore the case fully. It pays to see the actual work put into the case when evaluating the fee, even if it's based on the percentage-of-funds method.
- Gentlemen's Agreements. If the settlement appears large on its face, and the defendant has agreed not to object to it (called a "clear sailing" agreement), plaintiffs or some class members should inquire into the reasonableness of the fee.
- Fees in class actions must be approved by the court. When red flags like these are present, plaintiffs or class members should consider filing an objection to the fee application. Although these red flags don't always signal trouble, raising the issue and clearing the air should reconcile everyone to the appropriateness of the fee.
