Class Action

A type of litigation where a group of plaintiffs who, in principle, have been injured in similar ways by a defendant(s) action (i.e., they are “similarly situated”) bring suit for damages collectively in a single case. Different jurisdictions require that class actions be either “opt-in” or “opt-out.” In an opt-in jurisdiction, all plaintiffs must be affirmatively agree to be parties to the case. In an opt-out jurisdiction, name plaintiffs or class representatives bring suit on behalf of themselves and “all other similarly situated” and other potential plaintiffs must then “opt-out,” i.e., state that they do not want to be parties, usually before any final disposition of the case. Much of the world, except for the United States, operates an opt-in system; the US is notably opt-out.

Once such a suit is brought in the United States, there is a second step called class certification, where a judge must be persuaded that the members of the proposed plaintiff class have sufficient in common to justify such a suit. At the conclusion of a class action, either by settlement or final judgment, those plaintiffs who do not “opt-out” may no longer bring a suit, but share in the outcome. Class actions are prevalent in securities, antitrust, environmental, and products liability litigation and derivative suits.

Considerable controversy surrounds the United States class action system, which is largely supported by the legal community and consumer advocates, but opposed by the U.S. Chamber of Commerce and “big” business (as opposed to small (small companies can be class litigants.)) There are advantages and disadvantages to the class action system. One major advantage is that where individual plaintiffs’ damages are too small to justify the legal cost to pursue when attorneys’ fees are unavailable (which could mean less than $50-100,000, i.e., a lot of money to an individual or small company), a class action can aggregate the claims to make them worth pursuing.

In the area of antitrust, individual consumers’ damages from a cartel may be small, perhaps a few dollars or cents, but the gain to the cartel could still easily be billions of dollars, and the overall cost of such cartels to an economy huge. In such a situation, a class action makes a case viable, while without class actions scofflaws can persist. For defendant companies there is also the advantage of an opportunity to resolve in a single case a matter which otherwise could drag on for years.

The disadvantages of class actions are: the pressure to settle what may be dubious cases, because of the aggregate risk; the alleged frequency with which settlements are of little value to victims (e.g., discount vouchers only redeemable on goods or services from the defendant, perhaps only applicable to the full-list price), but the legal fees paid are substantial. It is also argued by large U.S. companies that class actions are damaging to business. Against this argument it should be noted that when efforts were made in the 1990s to rein in class actions in securities suits, at least anecdotally there was a subsequent epidemic of companies engaging in securities fraud, e.g., WorldCom, Enron, etc. In addition, many commentators attribute high prices in Europe (especially the U.K.) to the difficulty in bringing class actions for price fixing.

Firms which specialize in securities class actions in the United States sometimes maintain what are known as “professional plaintiffs,” i.e., individuals who own tiny blocks of stock in many companies, so as to be situated to be a lead plaintiff if an actionable claim arises (whose lawyer may thus have a better chance of becoming lead counsel and thus get the lion’s share of the legal fees); recent legal changes have restricted this practice by limiting the number of actions such a person can be a party to over a period of time.