Ever Wonder How a Class Action Works? We Talked to an Expert to Find Out

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The numbers are always striking.

Honest Co. agreed to pay out more than $7 million after a dispute over ingredients.

Another $11.2 million is coming from adultery website Ashley Madison after a massively embarrassing security breach revealed customer data.

And a judge ordered that Dish Network pay a whopping $61 million for telemarketing calls a contractor made on behalf of the company to people on the National Do Not Call Registry.

If you qualify for even one of these class-action lawsuits, seeing settlement agreements in the millions can make you feel like you’ve won the lottery, at least in the beginning. But if you’ve ever received a payout, you know that in most cases, by the time your check arrives in the mail, your cut of the pie can feel pretty insignificant.

To understand why, you need to understand a bit more about the life cycle of a class-action lawsuit, and the difference between how we use some terms colloquially and what they really mean to legal professionals.

First, let’s start with the phrase “class-action lawsuit.”

A lawsuit is classified as a class action when a group of people sue the same company, accusing it of the same wrongdoing. In a traditional lawsuit, a single person or company sues another person or company.

The phrase “class-action lawsuit” is often used in newspapers, on TV and even by us at The Penny Hoarder from the moment a lawsuit is filed against a company. But the lawsuit isn’t technically a class action that early in the process, according to corporate attorney Jeff Lieser.

“You’re basically just putting the defendants on notice that you will be seeking to have a class certified,” he said. “Just because I decide I want to file a class-action lawsuit and I entitle the complaint a class-action complaint against John Doe for ripping off consumers, that does not make it a class action. It’s up to the judge.”

(Disclosure: Lieser works for the Lieser Skaff Alexander law firm, which handles legal issues for The Penny Hoarder.)

When Is a Class Action Really a Class Action?

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In some cases, class certification comes in the early months of a lawsuit. In other cases, that can take years, if it comes at all.

In the Ashley Madison case, class certification happened during the settlement process.

According to Lieser, pretty much every one of those scenarios can be considered normal. When it happens is less important, but the class certification is necessary if anyone other than the person or group handling the legal battle is going to get paid.

And getting a judge to certify a class can be tough.

The prerequisites for a class action in federal court are laid out in Rule 23 of the Federal Rules of Civil Procedure. Most states have rules modeled after Rule 23 to govern class-action lawsuits filed in state courts.

Here’s what Rule 23(a) says must be in place before a lawsuit can be certified as class action:

  1. There have to be enough members in the class for it to be impractical for each to file individual lawsuits.
  2. The law has to apply in the same way to each member of the class.
  3. The claims of individuals in the class must be similar, and the company’s defense against each class member must be similar as well.
  4. The class representative — this is the person whose name is usually on the lawsuit as the plaintiff — and their attorney have to be willing to protect the interests of the class.

If all four prerequisites are met, the court moves on to Rule 23(b).

Here, only one of three items must exist for the lawsuit to move forward as a class action. The most common is the final item, Lieser said: The class members’ similarities should be greater than their difference to show that what happened to each person is a common practice of the company being sued.

Of course, if you are considering being the class representative for a class-action lawsuit, you’d have a lawyer to make sure these requirements are met. For most of us, though, we’d be among the unnamed participants waiting to see if it ends in a win at trial or an out-of-court settlement followed by a check.

Why Do Companies Settle and Say They Did Nothing Wrong?

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If you’ve ever read even one article about a lawsuit that’s been settled, you have probably read that despite a multimillion-dollar settlement and the promise to change business practices, the company still “denies all wrongdoing.”

If you think this seems contradictory, you’re not alone. But Lieser said the laws governing class-action lawsuits make it so companies can right wrongs without admitting guilt.

“If you’re changing your business practices, people are going to assume that they need to be changed because they were screwed up before or you did something wrong,” Lieser said.

But legally, agreeing to settle and change practices without conceding guilt is allowed.

“That is because courts want to be an agent of change, and they don’t want there to be a disincentive to remedying those things that are out there that can cause harm,” Lieser said. “They don’t want something used against you… The courts want companies to do the right thing.”

That’s why the apparent inconsistency is allowed: The courts don’t want a change in practice or a large settlement to eventually lead to more lawsuits against a company that has just admitted guilt.

OK, There Was a Settlement. When Do You Get Paid?

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Like just about every other question we had about class-action lawsuits, the answer is: “It depends.”

“It’s always going to be years,” Lieser said. “It’s just a matter of how many years. It’s a safe bet that it’s going to be anywhere from two years to 10 years or more in some cases.”

Then, when a case is finally over, the large cash settlements cover much more than consumer payouts.

The money must also cover attorney’s fees, which Lieser said normally hovers around one-third of the settlement, and the cost of informing members of the class that they’re owed money.

That means the bare-bones websites that go up so people can file electronic claims; any ad space purchased in newspapers, online or on TV; the pay for people on hand to answer questions from those trying to see if they qualify for a payout. All of that could come out of the settlement.

“Class actions often get a bad rap for this,” Lieser added.

And depending on the size of the class and the settlement, it could mean just a few dollars, like the Red Bull settlement a few years back, or more than $1,000, like the Dish Network case.

The deadline to file a claim is usually stated in the settlement agreement, but in some cases, that can be extended. In the Wells Fargo fake account settlement, for example, the deadline to file was extended to July 7 after the bank failed to properly notify consumers about the settlement.

No matter how long it takes, if you’ve been promised a settlement and you can prove that you qualify, you’ll likely get paid eventually — even if it’s just a few bucks.

Desiree Stennett (@desi_stennett) is a senior writer at The Penny Hoarder. She writes about how government and court actions impact your wallet.