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

A group of workers listen as the results of a class-action lawsuit are given.
From left, Maria Coronado, Juan Arellano and Angel Esparza listen during the announcement that more than 150 workers who helped install drywall in SkyHouse Denver, a luxury high-rise, will be able to share in a settlement of over $800,000 in a class action lawsuit over unpaid wages during a news conference in downtown Denver Wednesday, Dec. 20, 2017. (AP Photo/David Zalubowski)

If you qualify for a class-action lawsuit, 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, as well as 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 number 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.

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 potential class members 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 -— aka, the cases must share common “questions of law or fact.”

  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 — aka lead plaintiff — for a class-action suit, you’d have a lawyer to consult for legal advice and to make sure these requirements are met. For most of us, though, we’d be part of the class of 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. 

Class actions are commonly filed over defective products, misleading claims, and unfair business or employment practices, including discrimination.

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 from the class action settlement 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. 

FROM THE MAKE MONEY FORUM

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.

The deadline to file a claim is usually stated in the settlement agreement. But in some class-action cases, that can be extended. 

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 former senior writer at The Penny Hoarder.