In Focus: Class Action Lawsuits

• Posted on: Feb 19 2018

Through the years, numerous class action lawsuits have been brought involving securities fraud, corporate misconduct, unfair business practices and other claims. This article provides a brief overview of class action lawsuits.

What is a class action lawsuit?

A class action is a procedural device in which one or more persons sue on behalf of a larger group of persons, referred to as the “class.”

The class action lawsuit started in the courts of equity in seventeenth-century England as a Bill of Peace. A Bill of Peace allowed the Court of Chancery to hear the dispute of a group of persons – known as the “multitude” – in one lawsuit. The Bill of Peace provided the means by which a court could resolve legal disputes affecting numerous people with similar claims in one lawsuit rather than in separate actions.

To bring a Bill of Peace, the number of persons affected had to be so numerous that joining their claims in one lawsuit would be impractical; the members of the group had to possess a common interest in the issues to be adjudicated; and the persons named in the lawsuit had to adequately represent the interests of persons who were absent from the action but whose rights would be affected by the outcome. If a court allowed a Bill of Peace to proceed, the judgment that resulted would bind all members of the group.

In the early nineteenth century, the Bill of Peace came to the United States. Justice Joseph Story, then serving on the United States Court of Appeals for the First Circuit, advocated the use of the Bill of Peace in courts of equity. In that regard, Justice Story wrote that “all persons materially interested, either as plaintiffs or defendants in the subject matter of a bill ought to be made parties to the suit, however numerous they may be,” so that the court could “make a complete decree between the parties [and] prevent future litigation by taking away the necessity of a multiplicity of suits.” West v. Randall, 29 F. Cas. 718, 2 [C.C.R.I. Mason] 181 [1820] [No. 17, 424].

Initially, a class action could be brought only in actions in which the plaintiffs sought equitable, as opposed to monetary, relief.  In 1938, with the adoption of Rule 23 of the Federal Rules of Civil Procedure, plaintiffs were permitted to seek monetary damages using the class action device. In 1966, Rule 23 was amended to provide that absent class members would be bound by a final judgment so long as their interests were adequately represented by the class representative.

There are three categories of actions that fall within the scope of Rule 23. The first category involves the commencement of separate actions that may adversely affect members of the class or the defendant in one of two ways: it may impose inconsistent rulings on the defendant, or it may “impair or impede” class members from protecting their interests. The second category involves non-monetary relief, where the party against whom the class seeks relief “has acted or refused to act on grounds generally applicable to the class” so that injunctive or declaratory relief as to class would be appropriate. The third category involves cases seeking monetary relief in which there are questions of law or fact common to the class that predominate over questions specific to each class member, and the class action device is a more efficient means to resolve the controversy – that is, it is “superior to other available methods” for resolving the dispute.

Regardless of the category of class action, a plaintiff, known as the class representative, who seeks class certification, must demonstrate that: (1) the number of class members is too numerous making it impracticable to join them in the action; (2) there are common questions of law and fact shared by members of the class; (3) the claims or defenses of the proposed class representative are typical of the class; and (4) the proposed class representative will adequately protect the interests of the class.

Defendants can object to class certification. For instance, defendants can argue that the proposed class representative does not satisfy the adequacy and typicality requirements of Rule 23(a)(3) and (4). Defendants can also argue that the proposed class representatives have injuries that are different or more severe than those suffered by the class.

If a class is certified, then members of the class must receive notice of the action. The notice includes information about the lawsuit and informs class members that their rights may be affected by the outcome of the litigation. The notice also provides information about how class members may opt out of, or exclude themselves from, the class if they do not want to be bound by the outcome of the litigation. If class members remain in the class, they give up their right to sue the defendants individually on the same claim after the class action concludes. If the named plaintiff and defendants reach a resolution, all members of the class must receive notice of the settlement. The court must approve the settlement to ensure that it is fair, reasonable and in the best interests of the class.

Many, but not all, states permit class action lawsuits. The states that permit class actions have rules that mirror the Federal Rules of Civil Procedure. One notable exception is California, which has materially different rules for class actions in its state courts. Virginia does not allow class actions – there are no procedural rules or statutes permitting the commencement of a class action lawsuit in Virginia state courts.

[This Blog recently wrote about the difference between New York’s Civil Practice Law and Rules and the Federal Rules of Civil Procedure with regard to providing notice to class members affected by the pre-certification settlement of the lawsuit. Here.]

The Benefits and Criticisms of Class Actions

The Benefits

Class action lawsuits advance important public policy goals. Such lawsuits often provide an oversight function for misconduct the government may be unable or unwilling to police, whether because of deregulation or resource conservation.

A class action is often the only way average Americans with limited means can remedy wrongs committed by powerful, multi-million-dollar corporations and institutions. As noted by Justice William O. Douglas, “The class action is one of the few legal remedies the small claimant has against those who command the status quo.”

Class action lawsuits have a deterrent effect on bad actors.  It forces those within the defendants’ industry or sector to change their behavior, product or procedures.

In short, because a class action lawsuit combines and disposes of numerous claims that may not be practical to litigate individually, the process is more efficient. Additionally, aggregating small claims into a collective action can reduce the cost of litigation. A class action lawsuit can also ensure that all the plaintiffs obtain some compensation, even though the award may not cover all of the damages.

The Criticisms

Many critics consider the plaintiffs’ lawyers, not the class, to be the only “winners” in a class action lawsuit – if successful, the plaintiffs’ lawyers receive a percentage of any recovery achieved for the class. Proponents of the class action device, in particular, those from the plaintiffs’ bar, contend that this perception ignores the risk that class action attorneys take in starting such lawsuits. Indeed, not every class action results in a successful outcome. Without a financial incentive, attorneys will not handle class action lawsuits, thereby depriving average Americans the ability to recover damages for their injuries and losses. Proponents of the device also note that contingent fee attorneys receive large percentages of the awarded damages through their fee agreements. Class action lawyers should not be treated differently.

Critics maintain that there is no salutary purpose to class actions, especially in small claims actions, in which individual class members have very small stakes. These critics argue that such actions are lawyer-driven – because the class representatives have so little at stake, they do not exercise any control over the litigation. With the class action lawyer in complete control, the economics of the lawsuit change. The lawyer has the largest financial interest in the outcome of the litigation, leading to settlements that produce high attorneys’ fees and minimal payouts to class members.

Some critics argue that class action attorneys are more interested in securing a lucrative fee than advancing social justice. These critics claim that if social justice was the driving force behind the lawsuit, then class action lawyers would let the government perform its regulatory and oversight functions. Instead, by filing a class action lawsuit, private lawyers are substituting their judgment for that of a government agency charged with overseeing the conduct at issue. This usurpation of the government function is significant when the agency concludes that the conduct at issue and the injuries sustained by the plaintiff are immaterial and do not warrant prosecution of the defendant.

Finally, as to the deterrence factor, critics maintain that state and federal law enforcement organizations have the ability to investigate and punish cases involving fraud and other wrongdoing regardless of its size and scope and offer an alternative means of addressing wrongful conduct. Private enforcement through a class action, they say, reduces the accountability of the law enforcement effort and delegates to the plaintiffs’ attorney control over enforcement priorities.  Since payouts to class members are often insignificant, class actions wind up being the cost of doing business rather than a deterrent to future conduct.