Business, Legal & Accounting Glossary
A class-action lawsuit is a claim brought by one party for a group of individuals who have been injured or suffered loss from the same action or grievance. To have a class action lawsuit there must be a group of people with a “well-defined interest” who have similar injuries as each other. The goal of the class action lawsuit is to increase the power of the suit of individuals to fight against the malfeasance of a larger entity.
Common class actions suits included a 2006 class-action suit against Enron by a group of investors who settled their lawsuit for $7.2 billion. Another common class-action suit was filed against Bridgestone/Firestone when their tires led to numerous accidents and injuries. Makers of silicone breast implants were the subject of another huge product liability class action, which eventually settled for $3.4 billion. Fishermen and canners also successfully filed a lawsuit against Exxon for the Valdez oil spill.
A lawsuit in which a large number of people with similar legal claims join together in a group (the class) to sue someone, usually a company or organization. Common class actions involve cases in which a product has injured many people, or in which a group of people has suffered discrimination at the hands of an organization.
A class-action suit is a lawsuit filed by one or more individuals belonging to a large group on behalf of all members of the group. A class-action suit is generally initiated on behalf of a class of plaintiffs or defendants who share an interest in litigation with their representative. Thus, in a class action suit rights and liabilities can be better decided as a group than in a string of individual suits. Once the court approves the class action suit, all class members must receive a notice of the action. Members are also given an opportunity to opt-out of the class action suit. Members who fail to exclude themselves from the class action suit are bound by the judgment of the class action suit, whether it is in their favour or not. A class-action suit is an instrument often employed by shareholders as an affordable and collective way to counter corporate transgressions.
Class action lawsuits that involve personal injury are usually brought forward in large-scale product liability cases. Other class-action lawsuits have been brought against companies for certain business practices such as “after-hours trading” by mutual funds companies that involve financial loss and fraud.
A large number of individual, yet similar lawsuits brought against the same defendant will most often be grouped into a single class-action lawsuit in an effort to find a singular remedy for multiple parties.
One of the advantages of class action lawsuits over hundreds, thousands or millions of individual lawsuits is that a singular class action lawsuit will unclog the courts that may be overwhelmed by individual cases. Another advantage is that a singular cohesive verdict may be given rather than many dissimilar verdicts that vary because of the dissimilarity of laws between states.
Commonly, class action lawsuits are initiated in one state and then move into the federal court system at the request of the defendant. This is an advantage to the defendant since state courts are seen to favour plaintiffs while federal courts are more often seen to favour the defendants.
Because of the Class Action Fairness Act of 2005, pushed through by the Republican majority as a part of tort reform, large-scale class actions in excess of $5 million are generally moved to the federal courts as long as more than 1/3 of the plaintiffs reside in a state outside the state in which the lawsuit was initiated. The aim of the Class Action Fairness Act of 2005 was to reduce excessive verdicts and reduce attorneys’ fees that were also seen as excessive, in light of the services offered in the class action cases.
According to the Federal Rules of Civil Procedure, a class action must have six components:
When a class action lawsuit is filed, it is submitted on behalf of the named plaintiffs including a putative class. The term “putative” simply means the known or reported group or class. This class must be a large group who has suffered a common wrong from a common source. Once the complaint is filed, the plaintiff needs to have the class certified by the courts.
The defendant may argue that the class is not representative or cohesive, the law firm handling the case is not well suited to represent the class or that the case should not be handled as a class action at all. As part of due process, the court will have notices of the class action sent out to an expanded list of potential class-action members. These notices usually give the potential members of the class an opportunity to opt-out of the class action within a limited time-frame. Those who are thinking of bringing forth their own individual lawsuits may wish to opt-out in favour of an individual court proceeding. Settlement offers may also be sent out to members of the class outlining the terms of the settlement and the plaintiff’s attorneys’ fees.
The Austrian Code of Civil Procedure (Zivilprozessordnung – ZPO) does not provide for a special proceeding for complex class action litigation. However, Austrian consumer organizations (Verein für Konsumenteninformation/VKI and the Federal Chamber of Labour/Bundesarbeitskammer) have, in recent years, brought claims on behalf of hundreds or even thousands of consumers. This technique, soon labelled as “class action Austrian style”, allows for a significant reduction of overall costs. The Austrian Supreme Court, in a recent judgment, has confirmed the legal admissibility of these lawsuits under the condition that all claims are essentially based on the same grounds.
The Austrian Parliament has unanimously requested the Austrian Federal Minister for Justice to examine the possibility of new legislation providing for a cost-effective and appropriate way to deal with mass claims. Together with the Austrian Ministry for Social Security, Generations and Consumer Protection, the Justice Ministry opened the discussion with a conference held in Vienna in June, 2005. With the aid of a group of experts from many fields, the Justice Ministry began drafting the new law in September, 2005.
Under French law, an association can represent the collective interests of consumers; however, each claimant must be individually named in the lawsuit. On January 4, 2005, President Chirac urged changes that would provide greater consumer protection. A draft bill was proposed in April 2006. Under the proposals, the court will be able to decide whether to allow an action brought by an association on behalf of consumers (which must comprise at least two individuals) for goods purchased under a standard contract. After such an action is brought, the association would be entitled to identify additional consumers for a one-month period. The court would determine the damages that must be awarded to the consumers who have opted-in to the proceedings, with damages limited to 2000 Euros; contingent fees for attorneys would be barred. The president of the French Supreme Court recently declared that “class actions are inescapable.” Nevertheless, the bill was withdrawn in January 2007 at the request of Minister of Health Xavier Bertrand.
On November 1, 2005, Germany enacted the “Act on Model Case Proceedings in Disputes under Capital Markets Law (Capital Markets Model Case Act)” allowing sample proceedings to be brought before the courts in litigation arising from mass capital markets transactions. It does not apply to any other civil law proceeding. It is not like class actions in the United States — it only applies to parties who have already filed suit and does not allow a claim to be brought in the name of an unknown group of claimants. The effects of the new law will be monitored over the next five years. It contains a ‘sunset clause’, and it will automatically cease to have effect on November 1, 2010, unless the legislature decides to prolong the law, or extend it to other mass civil case proceedings.
Italy has class action legislation now. Consumer associations can file claims on behalf of groups of consumers to obtain judicial orders against corporations that cause injury or damage to consumers. These types of claims are increasing and Italian courts have recently allowed them against banks that continue to apply compound interest on retail clients’ current account overdrafts. The introduction of class actions is on the new government’s agenda. On the 19th of November 2007 the Senato della Repubblica passed a class action law in Finanziara 2008, a financial document for the economy management of the government. Now (from 10th December 2007), in order of Italian legislation system, the law is before the House and has to be passed also by the Camera dei Deputati, the second house of Italian Parliament, to become an effective law. More information Class Action Italia. In 2004, the Italian parliament considered the introduction of a type of class action lawsuit, specifically in the area of consumers’ law. To date, no such law has been enacted, however scholars demonstrated that class actions (azioni rappresentative) do not contrast with Italian principles of civil procedure [FAVA P., L’importabilità delle class actions in Italia, in Contratto e Impresa 1/2004 FAVA P., Class actions all’italiana:“Paese che vai, usanza che trovi” (l’esperienza dei principali ordinamenti giuridici stranieri e le proposte A.A.C.C. n. 3838 e n. 3839), in Corr. Giur. 3/2004; FAVA P., Class actions tra efficientismo processuale, aumento di competitività e risparmio di spesa: l’esame di un contenzioso seriale concreto (le S.U. sul rapporto tra indennità di amministrazione e tredicesima), in Corr. Giur. 2006, 535; FAVA P., Indennità di amministrazione e tredicesima: il “no secco” delle Sezioni Unite. Un caso pratico per valutare le potenzialità delle azioni rappresentative (class actions) nel contenzioso seriale italiano, Rass. Avv. Stato 2005] . . See also Class Action Italia, Dalle origini ad oggi
Dutch law allows collective actions brought by associations on behalf of injured parties seeking a judicial declaration that the company is liable for the damage it has caused.
Spanish law allows nominated consumer associations to take action to protect the interests of consumers. A number of groups already have the power to bring collective or class actions: certain consumer associations, bodies legally constituted to defend the ‘collective interest’ and groups of injured parties.
Recent changes to Spanish civil procedure rules include the introduction of a quasi-class action right for certain consumer associations to claim damages on behalf of unidentified classes of consumers. The rules require consumer associations to represent an adequate number of affected parties who have suffered the same harm. Also, any judgment made by the Spanish court will list the individual beneficiaries or, if that is not possible, conditions that need to be fulfilled for a party to benefit from a judgment.
Swiss law does not provide for any form of class action. When the government proposed a new federal code of civil procedure in 2006, replacing the cantonal codes of civil procedure, it rejected the introduction of class actions, arguing that:
[It] is alien to European legal thought to allow somebody to exercise rights on the behalf of a large number of people if these do not participate as parties in the action. … Moreover, the class action is controversial even in its country of origin, the U.S., because it can result in significant procedural problems. … Finally, the class action can be abused. The sums sued for are usually enormous, so that the respondent can be forced to concede, if they do not want to face sudden overindebtedness and insolvency (so-called legal blackmail).
In the United States federal courts, class actions are governed by Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332 (d).
Class action lawsuits may be brought in federal court if the claim arises under federal law, or if the claim falls under 28 USCA § 1332 (d). Under § 1332 (d) (2) the federal district courts have original jurisdiction over any civil action where the amount in controversy exceeds $5,000,000 and either 1. any member of a class of plaintiffs is a citizen of a State different from any defendant; 2. any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or 3. any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state. Nationwide plaintiff classes are possible, but such suits must have a commonality of issues across state lines. This may be difficult if the civil law in the various states have significant differences. Large class actions brought in federal court frequently are consolidated for pre-trial purposes through the device of multidistrict litigation (MDL). It is also possible to bring class action lawsuits under state law, and in some cases, the court may extend its jurisdiction to all the members of the class, including out of state (or even internationally) as the key element is the jurisdiction that the court has over the defendant.
Typically, federal courts are thought to be more favourable for defendants, and state courts more favourable for plaintiffs. Many class action cases are filed initially in state court. The defendant will frequently try to remove the case to federal court. The Class Action Fairness Act of 2005 increases defendants’ ability to remove state cases to federal court by giving federal courts original jurisdiction for all class actions with damages exceeding $5,000,000, exclusive of interest and costs. It should be noted, however, that the Class Action Fairness Act contains carve-outs for, ‘inter alia’, shareholder class action lawsuits covered by the PSLRA and those concerning internal corporate governance issues (the latter typically being brought as shareholder derivative actions in the state courts of Delaware, the state of incorporation of most large corporations).
The procedure for filing a class action is to file suit with one or several named plaintiffs on behalf of a proposed class. The proposed class must consist of a group of individuals or business entities that have suffered a common injury or injuries. Typically these cases result from an action on the part of a business or a particular product defect or policy that applied to all proposed class members in a uniform manner. After the complaint is filed, the plaintiff must file a motion to have the class certified. In some cases class certification may require additional discovery in order to determine if the proposed class meets the standard for class certification.
Upon the motion to certify the class, the defendants may object to whether the issues are appropriately handled as a class action, to whether the named plaintiffs are sufficiently representative of the class, and to their relationship with the law firm or firms handling the case. The court will also examine the ability of the firm to prosecute the claim for the plaintiffs, and their resources for dealing with class actions.
Due process requires in most cases that notice describing the class action be sent, published, or broadcast to class members. As part of this notice procedure, there may have to be several notices, first a notice giving class members the opportunity to opt-out of the class, i.e. if individuals wish to proceed with their own litigation they are entitled to do so, only to the extent that they give timely notice to the class counsel or the court that they are opting out. Second, if there is a settlement proposal, the court will usually direct the class counsel to send a settlement notice to all the members of the certified class, informing them of the details of the proposed settlement.
In federal civil procedure law, which has generally been accepted by most states (through adoption of state civil procedure rules paralleling the federal rules), the class action must have certain definite characteristics: (1) the class must be so large as to make individual suits impractical, (2) there must be legal or factual claims in common (3) the claims or defenses must be typical of the plaintiffs or defendants, and (4) the representative parties must adequately protect the interests of the class. In many cases, the party seeking certification must also show (5) that common issues between the class and the defendants will predominate the proceedings, as opposed to individual fact-specific conflicts between class members and the defendants and (6) that the class action, instead of individual litigation, is a superior vehicle for resolution of the disputes at hand.
Since 1938, many states have adopted rules similar to the Fed. R. Civ. P. However, some states like California have homegrown civil procedure codes which less closely mirror the federal rules. As a result, there are entire treatises dedicated to the topic. Some states, such as Virginia, do not provide for any class actions, while others, such as New York, limit the types of claims that may be brought as class actions.
Class action lawsuits may offer a number of advantages because they aggregate a large number of individualized claims into one representational lawsuit.
First, aggregation can increase the efficiency of the legal process, and lower the costs of litigation. In cases with common questions of law and fact, aggregation of claims into a class action may avoid the necessity of repeating “days of the same witnesses, exhibits and issues from trial to trial.” Jenkins v. Raymark Indus. Inc., 782 F.2d 468, 473 (5th Cir. 1986) (granting certification of a class action involving asbestos).
Second, a class action may overcome “the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 388, 344 (7th Cir. 1997)). “A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone’s (usually an attorney’s) labour.” Amchem Prods., Inc., 521 U.S. at 617 (quoting Mace, 109 F.3d at 344). In other words, a class action ensures that a defendant who engages in widespread harm — but does so minimally against each individual plaintiff — must compensate those individuals for their injuries. For example, thousands of shareholders of a public company may have losses too small to justify separate lawsuits, but a class action can be brought efficiently on behalf of all shareholders. Perhaps even more important than compensation is that class treatment of claims may be the only way to impose the costs of wrongdoing on the wrongdoer, thus deterring future wrongdoing.
Third, in “limited fund” cases, a class action ensures that all plaintiffs receive relief and that early-filing plaintiffs do not raid the fund (i.e., the defendant) of all its assets before other plaintiffs may be compensated. See Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999). A class action in such a situation centralizes all claims into one venue where a court can equitably divide the assets amongst all the plaintiffs if they win the case.
Finally, a class action avoids the situation where different court rulings could create “incompatible standards” of conduct for the defendant to follow. See Fed. R. Civ. P. 23(b)(1)(A). For example, a court might certify a case for class treatment where a number of individual bond-holders sue to determine whether they may convert their bonds to common stock. Refusing to litigate the case in one trial could result in different outcomes and inconsistent standards of conduct for the defendant corporation. Thus, courts will generally allow a class action in such a situation. See, e.g., Van Gemert v. Boeing Co., 259 F. Supp. 125 (S.D.N.Y. 1966).
Whether a class action is superior to individual litigation depends on the case, and is determined by the judge’s ruling on a motion for class certification. The Advisory Committee Note to Rule 23, for example, states that mass torts are ordinarily “not appropriate” for class treatment. Class treatment may not improve the efficiency of a mass tort because the claims frequently involve individualized issues of law and fact that will have to be re-tried on an individual basis. See Castano v. Am. Tobacco Co., 84 F.3d 734 (5th Cir. 1996) (rejecting nationwide class action against tobacco companies). Mass torts also involve high individual damage awards; thus, the absence of class treatment will not impede the ability of individual claimants to seek justice. See id. Other cases, however, may be more conducive to class treatment.
The preamble to the Class Action Fairness Act of 2005, passed by the United States Congress, found:
Class-action lawsuits are an important and valuable part of the legal system when they permit the fair and efficient resolution of legitimate claims of numerous parties by allowing the claims to be aggregated into a single action against a defendant that has allegedly caused harm.
There are several criticisms of class action lawsuits. The preamble to the Class Action Fairness Act stated that some abusive class actions harmed class members with legitimate claims and defendants that have acted responsibly; adversely affected interstate commerce; and undermined public respect for the country’s judicial system.
Class members often receive little or no benefit from class actions. Examples cited for this include large fees for the attorneys, while leaving class members with coupons or other awards of little or no value; unjustified awards are made to certain plaintiffs at the expense of other class members; and confusing notices are published that prevent class members from being able to fully understand and effectively exercise their rights.
For example, in the United States, class lawsuits sometimes bind all class members with a low settlement. These “coupon settlements” (which usually allow the plaintiffs to receive minimal benefit such as a small check or a coupon for future services or products with the defendant company) are a way for a defendant to forestall major liability by precluding a large number of people from litigating their claims separately, to recover reasonable compensation for the damages. However, existing law requires judicial approval of all class action settlements, and in most cases, class members are given a chance to opt-out of class settlement, though class members, despite opt-out notices, may be unaware of their right to opt-out because they did not receive the notice, did not read it, or did not understand it.
The Class Action Fairness Act of 2005 addresses these concerns. Coupon Settlements may be scrutinized by an independent expert before judicial approval in order to ensure that the settlement will be of value to the class members. 28 U.S.C.A. 1712(d). Further, if the action provides for settlement in coupons, the attorney must take a corresponding part of his fee in coupons. 28 U.S.C.A. 1712(a).
Although normally plaintiffs are the class, defendant class actions are also possible. For example, in 2005, the Archidiocese of Portland was sued as part of the Catholic priest sex-abuse scandal. All parishioners of the Archdiocese’s churches were cited as a defendant class. This was done to include their assets (local churches) in any settlement. Where both the plaintiffs and the defendants have been organized into court-approved classes, the action is called a bilateral class action.
In a class action, the plaintiff seeks court approval to litigate on behalf of a group of similarly-situated persons. Not every plaintiff looks for, or could obtain, such approval. As a procedural alternative, plaintiff’s counsel may attempt to sign up every similarly-situated person that counsel can find as a client. Plaintiff’s counsel can then join the claims of all of these persons in one complaint, a so-called “mass action,” hoping to have the same efficiencies and economic leverage as if a class had been certified.
Because mass actions operate outside the detailed procedures laid out for class actions, they can pose special difficulties for both plaintiffs, defendants, and the court. For example, settlement of class actions follows a predictable path of negotiation with class counsel and representatives, court scrutiny, and notice. There may not be a way to uniformly settle all of the many claims brought via a mass action. Some states permit plaintiff’s counsel to settle for all the mass action plaintiffs according to a majority vote, for example. Other states, such as New Jersey, require each plaintiff to approve the settlement of that plaintiff’s own individual claims.
The Exxon Valdez disaster of 1989, in which 11 million gallons of crude oil was spilt into Prince William Sound in Alaska resulted in 1,300 miles of beaches being fouled and tens of thousands of coastal animals being killed. In 1994, a class action jury awarded the plaintiff class $5 billion in punitive damages. The class was made up of 32,000 fishermen, landowners and Alaska natives who livelihoods were adversely affected by the disaster.
In August 2000, Firestone / Bridgestone recalled 6.5 million tires that were related to rollover crashes of Ford Explorer SUVs and other vehicles. In March 2004 a Texas judge approved a class action settlement of $149 million covering the estimated 10 – 15 million in the class. The verdict did not, however, cover those who were bringing individual lawsuits for damages in rollover cases.
In May 1994, the Engle v. Philip Morris tobacco lawsuit was filed on behalf of a class of smokers in Florida who had been adversely affected by cigarettes with tobacco-related diseases (approximately 500,000 class members). In July 2000, the jury award $145 billion in punitive damages. In July 2006, the verdict was struck down by the Florida Supreme Court.
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This glossary post was last updated: 22nd April, 2020 | 2 Views.