What Is a Class Action?

A class action is a legal proceeding in which one or several plaintiffs bring a lawsuit on behalf of a larger group, known as the class. The judgment or settlement agreed to arise from the suit covers all members of the group or class, where penalties paid by the defendant are divvied up among class members.

Key Takeaways

  • A class action refers to a legal course where the plaintiff brings forward a lawsuit for the benefit of a larger group of affected people.
  • This group, or class, must attest that they were affected by the defendant's actions, but only the lead plaintiff will try the case in court.
  • Class actions are often the only way for individuals to pursue their claims as it lowers the cost of the legal pursuit.
  • If the plaintiff wins, awards are paid out among members of the class, though not necessarily in equal amounts.
  • In finance, class-action lawsuits are often brought against companies where the class is the company's shareholders.

Understanding a Class Action

The class represented in a class-action lawsuit might consist of groups such as employees, consumers, investors, or patients. Lawsuits are designated, or certified, by the court with jurisdiction as class actions if they meet certain criteria spelled out in a legal rule known as Rule 23.

The criteria include the existence of a sizable group of people with similar claims or common interests and must specify the class, class claims, issues, or defenses, and must appoint the class counsel.

Benefits of Class Actions

Being certified as a class can enable litigation to proceed more expeditiously and cost-effectively, particularly in cases pursued against large corporations. Because they reduce the costs of legal pursuit, class actions may provide the only means for some individual claimants to pursue their case.

Individuals may also have a greater chance of successfully pursuing their claims against a defendant or defendants in a class action. Even when represented in a class, members may choose to opt out of any eventual settlement and pursue their claims individually.

Types of Class Actions

Types of class actions include securities litigation, civil rights proceedings such as school funding, and consumer product liability cases. Congress laid out additional rules for securities class-action lawsuits in the Private Securities Litigation Reform Act (PSLRA) of 1995.

Successful class action cases often result in hefty pre-trial 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 vs. Board of Education case the Supreme Court decided in 1954, which struck down school segregation as unconstitutional. These types of class actions now face greater legal restrictions than previously.

Lawyers typically take class action cases on contingency, collecting a percentage of any judgment or settlement fees made to plaintiffs. This practice has been scrutinized over the years because in some cases, legal teams’ payout can far exceed the amounts plaintiffs receive.

Example: Elon Musk, CEO of Tesla vs. TSLA 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 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.

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

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 that 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 August 7 and August 10 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.

Class Action FAQs

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 that 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 that 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 to individuals or companies by plaintiffs on behalf of a larger group of people. Class actions seek to rectify damages incurred by the individuals in a class-action lawsuit, usually through monetary gain. Most class actions represent hundreds of people and the settlement is divided amongst the entire group, though not necessarily equally.