Class Actions Demystified

Consumer and Shareholder Class Actions

What is a Class Action?

A class action is a legal proceeding that permits one or more plaintiffs to prosecute a lawsuit on behalf of a group of similarly situated individuals, known as the class. Taking action as a group reduces costs and allows for a more efficient process. A class action allows courts to manage lawsuits that would otherwise be unmanageable if each class member were required to be joined in the lawsuit as a named plaintiff. See Hansberry v. Lee, 311 U.S. 32, 41, 61 S.Ct. 115, 118 (1940). The result of the lawsuit will apply to all class members. If there is a monetary judgment or settlement, the class members will share the money awarded or benefit received.

How is the Class Determined?

A class action can be brought in a variety of circumstances.  Employees can bring a class action against an employer who violates wage and hour laws or who discriminates against a specific group of employees. Consumers can bring a class action when they are injured by a product, purchase a product based on certain misrepresentations by the company, or when the product fails to perform to specific standards. Shareholders can bring a class action when they incur a loss in the value of their investment due to the wrongful conduct of the company’s executives and board members.

Under the Federal Rules of Civil Procedure Rule 23, the court can certify a class if:

  • it is so numerous that joinder of all the members is impracticable;
  • there are questions of law or fact that are common to the class;
  • the claims or defenses of the plaintiffs leading the litigation are typical of the claims or defense of the class; and
  • the plaintiffs leading the litigation will fairly and adequately protect the interests of the class

Digging Deeper

Consumer Class Actions: Consumer class actions can compensate you for money lost due to misleading representations, the failure of a product to perform as intended, or harm caused by a bad product or data privacy breaches. If you are the victim of one of these wrongs, it is likely that someone else is as well. A product does not typically fail for one person but not for all others. A company does not suffer a data breach that only affects one customer.  While it might not make sense for one person to bring a case for harm or loss incurred, it likely makes sense to bring a class action on behalf of a group to ensure the company is held accountable through legal consequences. It only takes one individual to initiate a class action to help all consumers who encountered the same set of circumstances.

Shareholder Class Actions: A shareholder (or securities fraud) class action can compensate you for investment losses incurred as the result of a board member or executive of a company making false and misleading statements regarding the company’s profits, financial statements, business prospects, etc. In shareholder class actions, the court will identify the individual or group of individuals who incurred the greatest loss due to the misconduct and name that person or group the representative plaintiff to lead the litigation.

The losses incurred by most shareholders do not make sense to litigate on their own. However, if you suffered a significant loss less than the representative plaintiff suffered, but still considered substantial, you can opt-out of the class action and pursue your own case. Few individual shareholders will take this path, but institutional investors are more often pursuing individual cases.  

The Litigation Process

In any class action, plaintiffs must overcome many hurdles. First, they must get past the pleading stage. The defendants will argue the complaint does not sufficiently allege a claim and the court will decide whether the case can proceed. If the complaint is not sufficient, the court may give plaintiffs an opportunity to correct the deficiencies. This can go on for several rounds. If the plaintiffs are unable to plead their case, the case will be dismissed. Sometimes an appeal will follow.

If the court finds the allegations sufficient, the case will proceed to discovery, which includes written statements and oral depositions. The parties may choose to obtain class certification (often, the class is certified as part of the settlement). Mediation will follow discovery. If the parties are amenable to settling, settlement discussions can occur. If the parties cannot reach a settlement, they will attempt to resolve the dispute through pre-trial motions. If that fails, the parties have to resolve the dispute in court.

This process can take between two and three years, or longer if a court ruling is appealed.  The class action filed after the 1998 Exxon Valdez oil spill lasted nearly 20 years before the class members received $2.5 billion in settlement payments in December 2008. Multiple appeals were filed in the case, which went all the way up to the U.S. Supreme Court.

Financing the Litigation

Lawyers typically take class actions on a contingency fee basis, which means that the plaintiffs do not pay the costs of litigation. If the case results favorably for plaintiffs, the attorneys will get their fees reimbursed and a portion of the judgment or settlement to cover the time spent to litigate the case. The court must approve this payment, ensuring fairness for both the plaintiffs and the attorneys who represented them. 

The Settlement

Some cases win, some lose. Because of the length of litigation, you may lose track as these cases progress.  Perhaps you noticed that your stock dropped as the result of corporate misstatements and saw a corresponding article on yahoo!finance.  Maybe you saw an MSN article about a product recall or data breach.  You may have heard about the possibility of a class action, but did not follow it over the years. To ensure consumers and shareholders receive compensation for their losses, the offending company is required to give notice of the settlement or judgment.

You have likely received a card in the mail or an email (check your spam box) about a settlement informing you of cash, vouchers, coupons, warranty extensions, and other benefits of the settlement. Consumer class action settlement claims are extremely easy to submit and often require no proof of purchase. Several websites (Top Class Actions and ClassAction.org) provide up-to-date lists of consumer class action settlements.  

Shareholder class actions are a bit more challenging in that they do require you to provide proof of your purchases and sales of the relevant stock. While this may seem like a daunting task, keep in mind that the settlement proceeds are distributed on a pro rata basis. This means that the unclaimed proceeds are divided among the shareholders who do submit a claim, thereby increasing the share received by the claimants. Shareholders often argue the claims process is time consuming and yield little result.  However, for the avid investor, the number of possible claims over a lifetime will add up.  In 2021 alone, 116 settlements yielded $3.53 billion for shareholders.

Advances in technology are making the claims process easier. Most claims can be submitted online. One way to ensure you are prepared in the event of a shareholder class action settlement is to download and retain your end-of-year brokerage statements. Those statements usually contain all the information you will need to submit your claim form. One way to get assistance submitting your claim forms is to sign up for Stock Watch. One benefit of the service is having someone available to assist you with submitting your claims.

The Bottom Line

The law gives injured consumers and shareholders the right to initiate class actions when harmed. Use the tools available to you to hold the offending companies accountable. One such tool is engaging competent counsel to represent your and the classes’ interests. Even if you do not take the lead, be sure to claim the settlement you are owed to ensure the companies receive the message they cannot do damage without consequences.

Having information at your fingertips is easier than ever. Enroll in Robbins LLP’s free investment monitoring service, Stock Watch, for notifications of corporate misconduct impacting the value of your investments, advice on how to hold corporate officers and directors accountable for their misconduct, and to receive information about class action settlements. 

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