What is a Class Action Lawsuit?

Published

August 11, 2022

Class Actions

In theory, class actions allow groups of individuals who have been wronged by a company or organization to band together and pursue justice in a single, consolidated case. However, in practice, class actions often fail to deliver on their promise of efficiency and fairness. Unfortunately, class actions most often benefit plaintiffs’ lawyers with lucrative paydays, while frequently providing only minimal or token compensation to class members.

Reforming the class action system is a complex endeavor that requires a balance between protecting the rights of class members, ensuring access to justice, and preventing abuse of the system by plaintiffs’ lawyers.

Arbitration

For years, efforts backed by the plaintiffs’ bar have sought to undermine arbitration across the U.S. court system. Those attacks are motivated by the fact that, while on average arbitration produces better results for claimants than litigation, it can often cut off plaintiffs’ lawyers’ ability to generate astronomical fees.

Across three empirical studies, the results indicated that arbitration remains a fairer, faster, and better alternative to litigation, producing better outcomes on average for all parties.

Fairer: Because arbitration tends to be less complicated than the court system, claimants can more easily navigate arbitration without having to hire and pay legal counsel. Removing the need to hire personal legal counsel means that individual claimants get to keep a greater percentage of their awards.

Faster: With many complex civil procedures required by courtroom environments, litigation processes are notorious for the time they require, giving meaning to the common phrase “the wheels of justice turn slowly.” Arbitration acts as a grease to those gears.

Better: ILR’s study also showed that, between 2014 and 2021, across arbitrations which ended with awards, consumers won 41.7% of cases they initiated, while employees won 37.7%. By contrast, across litigations which ended with awards, consumers won only 29.3% of their cases, and employees won a mere 10.8%. That gap is clear evidence that arbitration is better for claimants.

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Summer 2022 | ILR Research Review | Volume 9, Issue 2

The class action lawsuit system in the U.S. was created more than half a century ago to provide compensation for injured individuals and to deter unlawful conduct. Unfortunately, our system has drifted far from its intended purpose.

In a class action lawsuit, a person sues a defendant on behalf of a group of people who have been injured in the same way. Instead of each similarly harmed person bringing their case to court individually, class action lawsuits are resolved in a single proceeding. Class action lawsuits are often brought forward without the knowledge of its class members, and its members may only learn about it through some form of advertising like commercials, social media, or receiving a postcard in the mail. Plaintiffs’ lawyers walk away pocketing millions in legal fees, while class members often receive pennies, or in some cases, coupons!

What Are the Different Types of Class Action Lawsuits?

Common categories of class action lawsuits include securities, defective products, consumer protection, employment, and some environmental claims.

Securities class actions are filed on behalf of investors who bought or sold shares of a publicly traded company and suffered some type of economic injury because of a securities law violation.

Before Congress intervened in 1995, exploitative securities fraud class actions were rampant. Congress attempted to solve this problem with the 1995 Private Securities Litigation Reform Act (PSLRA), instituting a new set of rules to more fairly deal with the then-prevailing patterns of abusive securities fraud lawsuits. Unfortunately, frequent filers have found ways to evade the safeguards put in place by the PSLRA and its 1998 follow-on statute, the Securities Litigation Uniform Standards Act. ILR released research, Frequent Filers Revisited: Professional Plaintiffs in Securities Class Actions, that reveals how individual frequent filers are exploiting a loopholes in the law to file dozens of merger and acquisition challenges each year, with little to no benefit to class members.

Consumer protection class action lawsuits include those relating to laws around telemarketing, credit records, collection of debt and truth in lending. Defective product claims are another type of consumer class action. Some consumer class action lawsuits you might recognize include:

a Chicago woman filed a $5 million class action lawsuit against Starbucks, claiming the company puts too much ice in its cold drinks;
a group of Subway customers filed a class action lawsuit claiming its footlong subs didn’t always measure 12 inches;
a group of Chicago plaintiffs filed a class action lawsuit against Home Depot because their 4x4 lumber measured 3.5 inches by 3.5 inches.

Employment class action lawsuits are filed by a group of workers who have experienced a harm in areas such as discrimination, overtime, benefits, and more. Environmental class action lawsuits allow groups of individuals dealing with environmental contamination to sue the potentially responsible party.

Class Members Rarely See a Dime

A 2015 Consumer Financial Protection Bureau (CFPB) study found that, out of a sample of 562 cases, only 13% of resolved class action lawsuits resulted in some type of benefit to class members. Even when relief is made available to class members, its impact is often negligible. In fact, the same study found that the average award to consumers is just $32 through class action lawsuits, while plaintiffs’ lawyers take home nearly $1 million on average.

The class action lawsuit system has made it so easy for plaintiffs’ lawyers to file claims, that the best interests of the class members are often overlooked, and there is little to no focus on whether they have actually experienced real harm.

For example, lawsuits targeting food and beverage manufacturers are through the roof. According to ILR’s research, The Food Court, Developments in Litigation Targeting Food and Beverage Marketing, the number of consumer class actions targeting food and beverage marketing continues to set new records, increasing 52% between 2017-2021.

Every jurisdiction where these lawsuits have sored has a handful of local attorneys behind most of the food class action lawsuits. New York has Spencer Sheehan, who filed half of New York’s consumer class actions in 2019 and nearly two thirds of these lawsuits in 2020, according to federal court filing data highlighted in ILR’s Food Court research. ILR’s research also found that Mr. Sheehan filed over 100 class action lawsuits solely targeting vanilla-flavored products.

Can the Class Action Lawsuit System Be Reformed?

In 2005, Congress passed the Class Action Fairness Act (CAFA) expanding federal subject-matter jurisdiction over many large class action lawsuits. The act permits federal courts to preside over certain class actions where the aggregate amount exceeds $5 million, where the class has at least 100 plaintiffs, and where there is "minimal diversity" between the parties (i.e., at least one plaintiff class member is diverse from at least one defendant). This act was a step in the right direction in preventing class action abuse.

One year ago, the U.S. Supreme Court ruled in TransUnion LLC v. Ramirez that a plaintiff must have suffered a “concrete” injury to establish standing to bring a federal lawsuit. According to ILR’s research, TransUnion and Concrete Harm: One Year Later, “TransUnion’s clarification of the concrete harm standard will also have consequences for plaintiffs’ lawyers seeking to obtain class certification of statutory damages claims, even if the named plaintiffs are able to satisfy the concrete harm requirement.”

In just one year, TransUnion has been cited in over 575 court decisions, including the recent dismissal of GoDaddy.com LLC’s $35 million settlement. The 11th Circuit Court of Appeals stated that the class cannot be certified if it contains members who did not suffer a concrete harm and therefore have no constitutional right to sue.

In matters of securities class action lawsuits, ILR’s research suggests a number of reforms. Congress should close loopholes in the PSLRA that have enabled an extortionate business model in merger objection cases. Congress should also rethink securities litigation rules in light of the current model of shareholder suits alleging misleading proxy statements in order to bring these suits under court supervision and ensure that plaintiffs have a substantial interest in the suit.

At its best, our class action lawsuit system can protect consumers and provide relief for truly injured parties. However, as it currently stands, plaintiffs’ lawyers are the only real winners. By enacting common-sense reforms, we can continue to make our class action lawsuit system more effective for consumers and businesses alike.