Understanding Class Action: Definition, Types, Benefits & Key Examples

Definition

A class action is a legal proceeding where one or more plaintiffs file a lawsuit on behalf of a group of individuals who collectively seek damages or remedies from a defendant.

What Is a Class Action?

A class action is a legal case in which one or more plaintiffs bring a lawsuit on behalf of a larger group of people, known as the class, who have similar claims against a defendant.

Class actions must meet criteria set by Rule 23 for court certification. They offer advantages such as lower legal costs, a better chance of winning, and the potential for significant settlements.

Claims typically covered in class actions include securities litigation, civil rights, and consumer product liability.

Courts in the United States standardized class-action claims and expanded their scope in 1966 to help enforce court rulings declaring racial segregation in schools and public accommodations unconstitutional.

A class-action lawsuit against Tesla CEO Elon Musk highlights the importance of class actions in contemporary legal context.

Key Takeaways

A class action allows one or more plaintiffs to file a lawsuit on behalf of a group affected by similar issues.
Class actions are an efficient way to deal with legal claims against large corporations, helping lower the cost of litigation.
Lawsuits must meet specific criteria set by Rule 23 to be certified as class actions, including a large-enough group of claimants.
Lawyers often handle class-action cases on a contingency basis, taking a percentage of any resulting judgment or settlement.
Notable examples include cases against Enron and Toyota, which resulted in substantial settlements for shareholders and consumers.

How Class Actions Work

Class-action lawsuits involve groups like customers, employees, investors, or patients with similar legal claims against one or more defendants. Courts certify these lawsuits as class actions if they meet criteria under Rule 23.

Criteria for class actions require a group of claimants large enough that handling their claims individually is impractical. A court's certification order must specify the class, claims, issues, and defenses and appoint class counsel.

The Evolution of Class Actions

In 1966, U.S. courts standardized class-action claims and expanded them to help enforce rulings against racial segregation in schools and public spaces.

Advantages of Class Actions

Class certification allows litigation to move faster and at a lower cost, especially in cases against large corporations. Lower legal costs make class actions sometimes the only option for plaintiffs.

Individuals in a class action often have a better chance of winning against defendants. Class members can choose to opt out of settlements and pursue their claims separately.

Exploring Different Types of Class Action

Class actions can cover securities issues, civil rights cases, such as school funding, or product liability cases. In 1995, Congress added rules for securities lawsuits through the Private Securities Litigation Reform Act (PSLRA).

Successful class-action cases often result in hefty pretrial settlements. The lawsuit Enron shareholders filed after the company’s collapse resulted in a $7.2 billion settlement. Another famous class action was the product liability case filed against Toyota for faulty brakes. It resulted in a costly recall and over a $1 billion settlement.

Civil rights class-action cases typically involve requests for injunctive relief, meaning legal remedies instead of claims for payment. One of the most famous civil rights class actions is the Brown v. Board of Education case that the U.S. Supreme Court decided in 1954, striking down school segregation as unconstitutional. These types of class action may now face greater legal restrictions than previously.

Lawyers often work on contingency, taking a percentage of any settlement or judgment. This method is criticized because sometimes legal fees are higher than what plaintiffs receive.

Case Study: Tesla and Elon Musk's Legal Battle with Shareholders

Tesla Inc. (TSLA) and its outspoken Chief Executive Officer Elon Musk were slapped with two class-action lawsuits over Musk’s series of tweets in the summer of 2018, where Musk tweeted out a plan to take the company private. His tweets said he was considering taking the electric car maker private for a share price of $420, which shocked Wall Street and sent Tesla stock surging.

After the series of tweets and a letter to employees in which Musk laid out his thought process, there was silence on the topic from both Musk and the company. That led to inquiries by the U.S. Securities and Exchange Commission (SEC) into the situation and two class-action lawsuits by investors who USA Today reported contend the company violated federal securities laws via the tweets.

Fast Fact

The largest class-action settlement was that of the Tobacco Master Settlement Agreement in 1998, which resulted in a $206 billion payout and a perpetuity of $9 billion per year.

In one of the two lawsuits, which was filed in federal court in San Francisco by Kalman Issacs, the plaintiff contended Tesla and Musk "embarked on a scheme and course of conduct to artificially manipulate the price of Tesla stock to completely decimate the company’s short-sellers.”

The lawsuit alleged the tweets sent the stock up $45.47 above the stock’s closing price the day earlier, which cost short sellers, or those who bet a stock will go lower with borrowed shares, billions of dollars in mark-to-market losses.

The lawsuits also claimed Musk hadn’t lined up the financing necessary to take Tesla private and therefore made false statements. In a separate class-action lawsuit also filed in federal court in San Francisco, William Chamberlain contends Musk “materially” misled investors between Aug. 7 and Aug. 10, 2018, claiming investor support for the deal was secured and that the funding was in place.

There are, in fact, nine lawsuits against Musk regarding the tweet that have now been consolidated into one lawsuit. It is still ongoing without any resolution, and U.S. District Judge Edward Chen denied Tesla and Musk's request to dismiss the lawsuit in 2020. Musk did have to pay a $20 million fine with the SEC, but the class-action lawsuits are still pending.

How Do You File a Class-Action Lawsuit?

To file a class-action lawsuit, first, have a lawyer look at your case to determine whether it is credible and if you have a chance at winning. This will help in determining if other cases on the issue exist, looking at past similar cases to gauge the outcome, whether or not a statute of limitations applies, if others have also been impacted, and if it is the overall right course of action.

The next step would be to file the complaint. The complaint will include all of the details regarding the class action, such as the individuals affected, the demands, the specific problem, and so on. The final step would then be a judge having to certify the class action based on all of the information provided.

How Much Money Can You Get from a Class-Action Lawsuit?

The amount of money you can get from a class-action lawsuit varies widely. It depends on the number of individuals who make up the lawsuit and the amount that the courts deem an appropriate sum. The proceeds of the settlement are not proportioned out equally. Lawyers get a large percentage, and then those who were impacted the most. The money you receive can range from a few hundred dollars to millions of dollars, depending on many factors.

How Many People Do You Need for a Class-Action Lawsuit?

There is no official number on how many people are needed for a class-action lawsuit; however, a judge is unlikely to move ahead with certification unless there are at least a few dozen. The more people, the better, but even a group of 20 could be enough for a class-action lawsuit, depending on the case.

What Is a Class-Action Waiver?

A class-action waiver is a document that seeks to prevent an individual from the right of filing a class-action lawsuit. Class-action waivers can be stipulated in various contracts, such as employee and customer contracts, that large corporations would use to prevent any possible class-action litigation.

What Is a Class-Action Lawsuit Settlement?

A class-action lawsuit settlement is the proceeds that are received from winning a class-action lawsuit. It is the monetary benefit paid out to the individuals that make up the class-action lawsuit.

The Bottom Line

Class actions are lawsuits brought against individuals or companies by plaintiffs on behalf of a larger group of people, known as the class. The class representative or representatives act on behalf of the group in a legal setting.

A class-action lawsuit requires court certification and must meet certain criteria under Rule 23.

Class actions are often the only way for individuals to pursue their claims against large entities, as they lower the cost of the legal pursuit and increase accessibility. The cases often involve significant legal undertakings against big corporations, as seen by notable class-action lawsuits involving Enron and Toyota.

Settlements from class actions are not distributed equally, and legal fees affect the final payout. The cases can have an impact not only on corporate accountability but also on civil rights.

Individuals who want to pursue their claims separately might opt out of a class action and its settlement.

The 1988 Tobacco Master Settlement Agreement is the largest class-action settlement and the most significant example of a monetary outcome.