What is a Class Action Lawsuit?

A class action lawsuit is a lawsuit brought by a group of people who have suffered similar harm from similar actions of a particular defendant. A class action is brought by one or more “class representatives” who represent the interests of the entire class. The claims of the class representatives must arise from facts or law common to all class members. If the class action settles, a judge must approve the amount of the settlement and the compensation paid to the lawyers. Individual class members are given the opportunity to accept the benefits of the settlement or to “opt out” of the settlement and pursue their legal claims on their own. If a class action lawsuit results in a favorable verdict, the class members will split the damages awarded by the jury among themselves, typically pursuant to some type of formula.

How does a Class Action Lawsuit Work?

A class action lawsuit begins when an attorney files a lawsuit against a defendant on behalf of a defined class of persons. The lawsuit is brought by one or more individual class representatives for the benefit of the entire class.

Often times, a defendant will respond by immediately seeking to have the lawsuit dismissed. In securities fraud class actions, for example, defendants typically file motions to dismiss, alleging that the plaintiffs have failed to properly allege their claims. If the case survives the defendant’s motion to dismiss, then it may continue.

The next step in a class action lawsuit is when the court is called on to determine whether the case is appropriate to be brought as a class action. This is known as “class certification.” In class certification proceedings, the plaintiffs will ask the court to approve the use of a class action and to define the scope of the class, that is, describe exactly who is included as a class member. For example, in a securities fraud case, the class might be defined as all persons who bought stock in ABC Company during a certain time period. In response to a motion for class certification, the defendant will argue that the case is not properly brought as a class action. The grant or denial of class action certification is often the first pivotal point in a class action lawsuit, and can often be dispositive of the lawsuit’s outcome.

When deciding whether to certify a class, a court is required to evaluate four specific factors. They are:

1. Numerosity: the plaintiffs must show that “the class is so numerous that joinder of all members is impracticable.” While there is no set minimum number of class members, typically courts will require at least 100 members in order to satisfy the numerosity requirement. The plaintiffs must also show that class members must be identifiable through the use of specific criteria or information.
2. Commonality: the plaintiffs must show that there are questions of law and fact that are common to the claims of each class member. The commonality requirement is satisfied where the party opposing the class has engaged in some course of conduct that affects a group of persons and gives rise to a cause of action.
3. Typicality: the class representatives must show that their individual claims are “typical” of the claims of the various class members. Typicality exists where the representatives’ claims arise from the same event or course of conduct that gives rise to the claims of other class members and the claims are based on the same legal theory.
4. Adequacy: the plaintiffs must show that they will fairly and adequately protect the interests of the class. To make such a showing, they must typically demonstrate that they have the willingness and ability to take an active role in and control the litigation in order to protect the interest of the absentee class members and that their attorneys will act with the necessary zeal and competence.

Typically, Plaintiffs are given only minimal discovery prior to class certification. Written questions to the defendant, requests for documents from the defendant and deposition of employees of the defendant are usually limited to facts bearing on the four factors mentioned above. Because the actual merits of the Plaintiffs’ claims are not at issue prior to class certification, discovery about the actual substance of such claims is usually not allowed at this stage. In addition to conducting limited discovery, class action plaintiffs and their attorneys will often hire a host of experts to assist them in this phase of the trial. For example, they might hire experts to show how damages for the class can be calculated. This can often be an expensive proposition.

If the class is not certified, it cannot proceed as a class action. If it is certified, the defendants often have a right to immediately appeal the certification decision to a higher court. Assuming such a challenge is not successful, the case will continue to the next phase of litigation, merits-based discovery.

Merits-based discovery means that the class is allowed to obtain information from the defendants or third parties relating to their claims. This is accomplished through written discovery (interrogatories, requests for production, requests for admissions) and depositions, sworn testimony under oath. Discovery can last for many months and is often one of the most expensive and time-consuming phases of class action litigation.

At some point after adequate discovery has occurred, class action defendants will usually move for summary judgment. In filing such a motion, the defendants allege that the plaintiffs lack the necessary factual basis to proceed or that there is some legal impediment to their claims. Summary judgment motions are determined based on written materials provided to the court by the parties and their attorneys. The decision as to whether to grant or deny the motion is made by a judge, not a jury. Assuming the judge denies such a motion, the case may continue.

Eventually the class action lawsuit will either be settled or tried. If the case is tried to a plaintiffs’ verdict, the defendant will frequently appeal to a higher court, causing delays that can last several years. If the case is settled, the court will be tasked with approving the settlement as well as the fees and expenses of the class’ attorneys. All members of the class will be notified of the proposed settlement and its terms. Class members can either accept their portion of the settlement or “opt out” of the settlement, declining to accept the settlement funds and instead pursuing their individual claims in a separate lawsuit.

A class action will typically last from three to five years unless it settles at some earlier stage. To persevere through such a lengthy process, it takes a law firm willing to make a substantial commitment of time, energy and money.

What are the Advantages of Class Action Litigation?

Class action lawsuits have many advantages. In fact, in passing federal legislation relating to class action lawsuits, the U.S. Congress has stated:

“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.”

Class Action Fairness Act of 2005, Section 2(a)(1).

The most well recognized advantage of class action litigation is that it allows a person who has suffered minimal damages to seek compensation by combining their claims with the claims of other similarly situated persons so that litigation against a large corporation becomes economically feasible. Suppose, for example, that a fisherman whose livelihood was ruined by the BP Gulf oil spill suffered $10,000 in damages. While $10,000 is a great deal of money to most people, it would be difficult for an attorney to take on the time and expense of litigating a claim against a company like British Petroleum if their recovery was limited to a contingent fee of $4000 (40% of $10,000). To handle such a complex case, an attorney would likely expend hundreds (or even thousands) of hours of time and literally tens of thousands (if not hundreds of thousands) of dollars in case expenses. There would be no way a rational attorney would agree to take on such a monumental task for such a limited recovery. Nor would it serve the best interests of his client, since the out-of-pocket expenses of the attorney would exceed the client’s actual damages, meaning the client would receive no compensation in the end.

Suppose, however, the fisherman hires an attorney to file a class action lawsuit against BP on behalf of all Gulf Coast fishermen who lost their jobs as a result of the oil spill. Given the number of fishermen affected by the spill, the damages could easily be in the millions of dollars. Such damage claims would easily support a decision to sue BP and expend the time and money necessary to take on such a large corporation in such a complex case. By pooling his claims with the similar claims of others, the fisherman now has a realistic legal remedy where he previously had none.

Aggregating similar claims also leads to a more efficient use of precious judicial resources. Using the example above, if 1000 fishermen filed separate claims in separate lawsuits, the courts would be flooded with duplicative lawsuits. It would take literally years to try all of he cases and reach a resolution of all of the disputes. There would also be a risk of inconsistent results, with some plaintiffs prevailing and others not, depending on the judge, jury and lawyers involved. By aggregating the claims into a single lawsuit, the risk of inconsistency is eliminated and the litigation is handled much more efficiently by a single judge presiding over a single trial. Even defendants benefit; by aggregating the cases into one lawsuit, their defense costs are substantially reduced, they are better able to evaluate their risks and they are able to resolve all claims against them at one time, either through trial or a settlement.

In “limited fund” cases, class action suits keep the earliest-filing plaintiffs from draining the defendant of all assets, ensuring that all plaintiffs who have been injured are compensated. In lawsuits involving a failed company like Enron, for example, where the plaintiffs’ aggregate damages are greater tan the assets of the company, a class action lawsuit can ensure that all victims are fairly compensated in proportion to the amount of their loss.

A final advantage of class action lawsuits is that they often alter the conduct of businesses and corporation in ways that benefit society. The threat of being exposed to hundreds of millions of dollars in damages can cause a corporation to think twice about illegal, unethical, discriminatory or unsafe conduct. In 2010, the average securities fraud class action settlement was more than $36 million. These large settlements, and the prospect of even larger jury verdicts, are a powerful incentive for corporations to deal honestly and ethically with the public. Studies have also shown that class action lawsuits are an effective way to end discriminatory employment practices, encourage companies to develop safer products and ensure compliance with environmental regulations.

Types and Examples of Class Action Cases

Class action cases have arisen in a wide variety of circumstances and have alleged a wide variety of claims. The most common areas of law in which class action lawsuits have been brought include:

• Securities fraud litigation
• Employment discrimination
• Product liability claims
• Unfair wage claims
• Claims of price-fixing
• Claims of environmental contamination

Class action lawsuits have a long history of being successfully used to obtain compensation for serious injuries and damages suffered by millions of Americans. Such lawsuits have been brought to address damages caused by defective products, environmental disasters and massive securities fraud. Some of the more famous class action cases include the following:

• Class action lawsuits relating to the Exxon Valdez oil spill in Alaska
• Class action lawsuits relating to the collapse of Enron
• Class action lawsuits relating to the diet drug Fen-Phen
• Class action lawsuit against W.R. Grace & Co. for environmental contamination in Woburn, Massachusetts (made famous by the movie A Civil Action)
• Class action lawsuits against tobacco companies for concealing the dangers of smoking
• Class action lawsuits relating to leaking breast implants
• Class action lawsuits relating to the BP Gulf oil spill
• Class action lawsuit against Pacific Gas & Electric for environmental contamination in Hinkley, California (made famous by the movie Erin Brockovich)
• Class action lawsuits relating to Hurricane Katrina
• Class action lawsuits relating to the drug Vioxx
• Class action lawsuits relating to alleged securities fraud by Tyco International, MCI Worldcom, Adelphia Communications and AOL-Time Warner

Many class action lawsuits have resulted in the recovery of millions of dollars for the plaintiffs, whether through a settlement or jury verdict. Examples include the following:

• $7.2 billion total settlement in lawsuits alleging fraud leading to the collapse of Enron
• $2.4 billion settlement in securities fraud class action against Nortel Networks
• $671 million jury verdict in class action alleging inadequate staffing at nursing homes
• $624 million settlement in class action lawsuit against Countrywide Financial relating to alleged securities fraud
• $500 million judgment against Exxon relating to the Exxon Valdez oil spill
• $323 million settlement of class action against DeBeers alleging antitrust violations relating to the price of polished diamonds
• $175 million settlement in class action against Novartis alleging sex discrimination claims
• $140 million settlement in case alleging price-fixing in sale of compact discs

Legal Hurdles in Class Action Cases

Despite their inherent advantages, class action cases present formidable legal hurdles for clients seeking compensation for their injuries and damages. In the last several years, numerous laws have been passed that have made class action practice more difficult and expensive for plaintiffs.

Class Action Fairness Act

The Class Action Fairness Act is a federal law passed in 2005 after much lobbying by big business and “tort reform” groups. The Act gives federal courts the ability to hear class action lawsuits that previously would have been heard by state courts. Specifically, the Act provides jurisdiction to federal courts in class action cases involving at least $5 million and in which at least one of the members of the class of plaintiffs is from a different state than any defendant. The Act allows a defendant sued in a state court class action to “remove” the case to federal court under certain circumstances. Most large corporations believe they are better off in federal court than state court because federal judges are often perceived to be more conservative than state court judges, federal juries are drawn from a larger, often more conservative, area than state court juries, and the procedures in federal court make it more likely a defendant can avoid liability without a trial.

Another change ushered in by the Class Action Fairness Act was greater court scrutiny of class action settlements. Under the Act, class action settlements involving coupons are given special scrutiny.

PSLRA

The PSLRA, or the Private Securities Litigation Reform Act, was passed in 1995 and governs federal court lawsuits alleging securities fraud, many of which are brought as class actions. Under the PSLRA, plaintiffs are required to allege with great particularity in their initial pleading the way in which a defendant committed an act of securities fraud. For example, they are required to identify “each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.” This is often difficult to accomplish at the outset of a lawsuit when the plaintiffs do not yet have access to the defendants’ internal documents.

The PSLRA also requires plaintiffs to allege that the defendant made the alleged misrepresentations with knowledge they were false or with recklessness as to whether they were true or false. Proving a defendant’s state of mind is always difficult. But it is particularly difficult in an initial pleading when documents have not yet been turned over by the Defendants and none of the Defendants or their employees has been deposed.

To make matters worse, the PSLRA imposes a “stay” on all discoveries once a defendant has filed an initial motion to dismiss the lawsuit on the basis that the claims against it were not adequately pled. Thus, the plaintiffs are forced to articulate all of the facts supporting their case in their very first pleading and are denied access to critical information they might obtain through the discovery process once the defendants have challenged that pleading.

The PSLRA has made it difficult for class action plaintiffs to successfully bring securities fraud lawsuits. Only plaintiffs with aggressive, well-educated and experienced attorneys like those at Heygood, Orr & Pearson have a fighting chance to receive the compensation they deserve.

Class Action Reforms

Class action reforms have been picking up steam during the last few years. One of the most significant reforms involves the appeal of class certification orders. As explained above, class action certification is the most important stage of class action litigation. Once a trial court has certified a class, allowing a class action lawsuit to proceed, large corporate defendants face significant defense costs and the risk of a substantial damage award should they litigate the case to a jury verdict. As a result, in the past, most cases settled favorably for the plaintiffs following class certification.

Recently, however, laws have been passed allowing Defendants to immediately appeal a class certification order rather than being forced to litigate the class action case to its conclusion before taking an appeal. For example, Rule 23(f) of the Federal Rules of Civil Procedure allows discretionary, immediate appeals of class action certification orders entered by federal district courts. Moreover, at least ten states also have laws permitting immediate appeals of such orders, and several other states are considering such laws.

By allowing these immediate, or “interlocutory,” appeals, these laws have made class action litigation much more difficult and expensive for plaintiffs. Such appeals allow a Defendant to avoid the costs and risks of class action litigation by immediately appealing any unfavorable class action certification order to a higher court. These higher courts, unfortunately, have proven to be sympathetic to the interests of big business, frequently overruling class action certification orders entered by lower courts and effectively stopping class action suits in their tracks. For example, since 2003, the Texas Supreme Court has sided with defendants appealing class certification orders approximately 90% of the time.

Heygood, Orr & Pearson Guides its Clients through the Complex World of Class Action Lawsuits

To be successful in a political and legal climate that has become increasingly hostile toward class action lawsuits, class action clients need educated, experienced attorneys like those at Heygood, Orr & Pearson. We have the experience and knowledge to guide our clients through class action litigation from beginning to end. And we have the financial resources to help them stand toe-to-toe with some of the biggest corporations in the world through what is often be a lengthy, complicated and expensive process.

Heygood, Orr & Pearson has represented individuals in class actions involving securities fraud, consumer protection law violations and unfair wage claims. We are currently representing investors in a class-action lawsuit against Life Partners Inc. If you have invested with Life Partners Inc. and think you may be owed money, please contact us to learn more about your legal rights and options.