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General features
  • Class actions are lawsuits in which a representative, often referred to as a “class representative,” litigates, in one proceeding, the common claims of many similarly situated persons (class). Class actions have a long history in the United States and are an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties to an action and the result binds only those parties.

    Various procedural safeguards built into the class action process help ensure that the class representative and the court protect the interests of absent class members. If these procedural safeguards are followed, the compromise or dismissal of a class suit is typically binding on everyone in the class, unless a class member “opts out” of the class, affirmatively electing not to be bound by the final outcome.

    Class actions permit the effective litigation of a suit involving common questions when there are too many plaintiffs to be efficiently joined to a suit and allow class-wide relief. They allow plaintiffs to pool claims which otherwise would be uneconomical to litigate individually. Absent class members do not need to hire counsel or appear in a class action and are almost never subject to counterclaims or liability for fees or costs. In fact, absent class members typically are not required to do anything and may allow the litigation to run its course, knowing there are safeguards in place to protect their interests.

    Class actions, no doubt, provide a plaintiff class with many advantages, and defendants often face potential substantial, class-wide damages. Defendants, however, do have the benefit that the dismissal or compromise of a class action suit typically extinguishes the claims of all class members which were litigated, thus providing defendants with finality to a class-wide dispute that otherwise might have to be litigated in a multitude of individual actions.

Types of collective redress
  • With few exceptions, any type of claim that may be asserted by an individual plaintiff may also be brought as a class action. The most common types of matters litigated as class actions involve securities, labor and employment disputes, consumer-related claims, product liability and civil rights claims. The rules and procedures governing the trial of a class action suit are similar to any other trial, including a plaintiffs’ entitlement to a jury trial.

    Jurisdiction over class actions

    With certain exceptions, at the election of the named plaintiff, class actions may be filed in either federal or state court, although a defendant has the right to have certain putative class suits that are filed in state court transferred to federal court.

    Federal courts have jurisdiction to hear claims of the class that arise under federal law, regardless of the citizenship of the parties. If the claims of the class do not arise under federal law, however, the action traditionally could be maintained in federal court only if all class representatives (not class members) were citizens of different states than all of the defendants, and at least one class member had damages in excess of $75,000.

    Two federal statutes enacted over the last twenty years, however, significantly expanded federal jurisdiction over class actions. The Securities Litigation Uniform Standards Act of 1998 generally preempts state securities fraud lawsuits where there are at least 50 class members and makes such class actions removable to federal court. More recently and more significantly, the Class Action Fairness Act of 2005 provides that, subject to certain exceptions, a class action may be litigated in federal court if (1) there are at least 100 class members, (2) any class member is a citizen of a different state than any defendant and (3) the amount in controversy in the aggregate exceeds $5 million. Moreover, if a class action filed in a state court satisfies these requirements, subject to certain exceptions, a defendant may have the case transferred from state court to federal court.

    Class certification

    The court plays an important role in protecting the interests of absent class members. The first point at which this occurs is at the outset of the case. Shortly after a class action complaint is filed, the named plaintiff typically will ask the court to certify the lawsuit as a class action and approve the named plaintiff as the representative of the class. In certain types of cases, such as securities fraud class actions, there are additional procedural requirements that a named plaintiff must satisfy in prosecuting a class action.

    When seeking class certification, the named plaintiff has the burden of demonstrating to the court that the suit satisfies the requirements to proceed as a class action and that it and its counsel are adequate to represent the interests of absent class members. Through this process, the court conducts an inquiry into, among other things, the common nature of the class representative’s claims and the absent class members’ claims and the adequacy of representation, and attempts to ensure that the interests of the absent class members will be adequately protected. If the court certifies the class, the suit proceeds as a class action. If, on the other hand, the court denies class certification, the action may proceed only as to the named plaintiff’s individual claims.

    Whether a class is certified is the critical point in a class action suit. Most putative classes are not certified by the court, thus the matter cannot proceed as a class action. On the other hand, cases in which a class is certified rarely make it to trial. While some of the actions in which a class is certified are subsequently dismissed on legal grounds, the vast majority are ultimately settled because of the costs and risks associated with litigating a class action. By contrast, only a small number of non-certified putative class actions are settled. Accordingly, the court’s decision whether to certify a class action is significant in terms of determining the ultimate outcome of the action.

    Procedural Requirements for Class Actions

    Federal law - copied in many states - has two procedural requirements for a lawsuit to proceed as a class action. First, there are four prerequisites for maintaining a class action relating to the class and the representative:

    • Numerosity. The putative class must be so numerous that individually naming and joining all members of the class to the lawsuit is impractical. There is no minimum number of class members necessary to proceed as a class action. Courts have discretion in that regard based on the facts of a case, and have certified classes with less than 20 members and denied certification to putative classes with more than 100 members. Typically, however, 20 to 40 class members is the minimum number of members necessary to proceed as a class action.
    • Commonality. There must be questions of law or fact common to all class members. Although it is not necessary that all questions of law or fact be common, at a minimum, the central question or questions must be common to the class.
    • Typicality. The claims or defenses of the class representative must be typical of the claims or defenses of the absent class members. In other words, there must be a close relationship between the representative’s claims and the claims alleged on behalf of the class.
    • Adequacy. The class representative, as well as counsel for the class representative, must adequately represent the class members. This typically requires that the class representative be a member of the proposed class, free from conflicts and engaged and attentive, and that its counsel is proficient and competent to represent the interests of the class.

    In addition, under the relevant federal rules, to be certified as a class action, a case must fall within one of four categories:

    • Damages actions. Far and away the most common type of class action, these law suits typically involve many class members with claims for damages (often for relatively small amounts) where common questions of fact or law “predominate” over questions affecting only individual members, and where proceeding as a class action is “superior” to class members proceeding individually.
    • Injunctive cases. This type of class action arises where injunctive or declaratory relief is appropriate to the class as a whole because the defendant has acted the same with respect to all class members.
    • Risk of inconsistent results. These class actions are intended to avoid a situation where the prosecution of separate actions by individual class members creates the risk of inconsistent decisions and establishing incompatible standards of conduct for the defendant.
    • Limited funds. This category of suits involves situations where a defendant has limited funds incapable of satisfying all potential claimants, so a class action assures fairness by providing that any judgment or settlement may be distributed fairly among the members of the class.

    Pre-trial discovery in class actions

    Parties in class actions are subject to the same broad discovery obligations to which parties in individual lawsuits are subject in the United States. The discovery process is governed by rules of procedure that vary depending on the court in which the class action is litigated, but generally include producing all documents, including electronically stored information, that are relevant to a party’s claims or defenses and making witnesses with relevant knowledge available for pre-trial depositions.

    Oftentimes, initial discovery in putative class actions prior to the certification of a class will be limited by agreement among the parties or order of the court to issues related to class certification, with merits discovery postponed until and unless the court certifies the suit as a class action. This typically results in the initial burden of responding to discovery falling on the named plaintiff because the named plaintiff has the burden of establishing that the action satisfies the requirements of proceeding as a class action.

    Relief available in class actions

    A wide variety of relief is available in class action proceedings, including money damages, in-kind relief and declaratory or injunctive relief. Punitive damages in class actions are generally available to the same extent they would be available if the claim was litigated on an individual basis. In both cases, in order to recover punitive damages, evidence that the defendant acted in a particularly egregious or outrageous manner is typically required. As is the case in individual actions in the United States, there typically is no cost-shifting and each party bears their own litigation costs, regardless of the outcome of the case, unless otherwise provided by statute or contract.

    Settlement of class actions

    Like all litigation in the United States, class action lawsuits are likely to settle. Unlike most American litigation, however, most jurisdictions require that a class action, once certified, may not be dismissed or compromised without the approval of the court, thus providing additional safeguards for absent class members. A court must approve the settlement because the parties to the class action - the class representative, class counsel and defendants - are proposing to compromise the rights of absent class members. The court has a duty to ensure that the interests of the absent class members are safeguarded in any settlement and that the settlement is fair to them.

    In that regard, notice of any proposed compromise, in a form and manner approved by the court, is typically sent to the class and class members are then given the opportunity to object to the terms of the proposed settlement. This is the one point in a class suit when class members are invited to participate in the proceeding.

    After notice to absent class members, the court holds a fairness hearing, during which it may hear from both proponents and objectors to the proposed settlement. The Court also may have a special master or court-appointed expert gather information to assist it in understanding the proposed settlement and determining whether it is fair to the class. Ultimately, the court has the obligation, even in the absence of objections, to satisfy itself that the proposed compromise is fair to all class members.

    Binding nature of class actions

    One of the purposes of a class action is to allow litigation by a representative of the class, with any settlement or judgment having a binding effect on absent class members, thus precluding class members from individually re-litigating the resolved claims. Subject to later challenges by absent class members that the procedural safeguards designed to protect their interests were not followed (for instance, that absent class members were not adequately represented or that adequate notice of a proposed settlement was not provided), a final judgment in a class action typically will preclude individual class members from separately pursuing the claims resolved.

    It is well-established, however, that absent class members be given an opportunity to opt out of a class action seeking predominately money damages, thereby preserving their right to pursue their claims separately, apart from the class. Other types of class suits, by their nature (for instance, limited fund or injunctive cases, as well as cases where there is a risk of inconsistent judgments) are intended to bind all class members with no ability for a class member to opt out. In those situations, if a class member disagrees with the proposed resolution of the action, their only option typically is to file an objection to the proposed settlement and attempt to persuade the court not to approve the compromise.

Funding and costs
  • Class actions are typically litigated by plaintiffs’ lawyers on a contingency basis. If plaintiffs prevail (or the case is settled), the court will award legal fees to class counsel that are usually proportionate to the size of recovery; if the class action fails, counsel for the class usually does not recoup its expenses. Fees to class counsel in a successful matter may be awarded either on an hours-and-expense basis or on a percentage-of-fund basis, with the court considering the size of the recovery in awarding fees. Because litigating a class action is expensive and time consuming, law firms are unlikely to agree to represent a class unless there is a potential for a large recovery; however, there has been a recent influx of smaller class action law firms that are suing when less money is at stake.

    Outside litigation funding, where a capital provider advances funds to a law firm to cover the cost of litigation, is not as common in the United States as it is in some countries. It is, however, beginning to get some traction in the United States, particularly in large, complex and traditional contingency fee cases, like class actions.

Recent developments, trends and predictions
  • Securities Class Action Filings Reach Record Levels. A report issued in July 2017 indicates that the number of class action securities fraud cases filed in federal court surged to a record high in the first six months of 2017. The number of filings is up almost 50 percent over the same period in 2016 and up 135% over the historical average for the first half year period for the years 1997 through 2016.

    The reason for the uptick is likely due to several factors. First, as noted below, a large number of mergers and acquisitions class actions that traditionally would have been filed in Delaware (state) Chancery Court were instead filed in federal court in 2017. Second, stock prices for pharmaceutical companies, a traditional target for class action securities fraud suits, have had a rocky performance over the last year, resulting in a more than a three-fold increase in filings against health care firms in the first half of 2017 over the historical average for the same period. And third, there has been an influx of smaller class action law firms that appear to have a lower threshold for bringing a class action and are suing for smaller amounts.

    Plaintiffs appear to be increasingly targeting non-U.S. companies in their securities class action filings. Filings against non-U.S. companies are occurring at a record pace and, on a percentage basis, non-U.S. companies are more likely to be sued than U.S. exchange listed companies.

    State v. Federal Jurisdiction. There has long been a perception that state courts are a more plaintiff-friendly forum for class actions than federal courts, both in terms of the likelihood of certification and liability issues, as well as for the approval of class settlements.

    In the mid-1980s, the United States Supreme Court issued a series of decisions that greatly expanded the jurisdiction of state courts to adjudicate certain claims of non-resident class members and allow settlements reached in state courts to have preclusive effect even over federal claims that were not litigated in the state court forum. Consequently, there was a significant increase in the number of class suits filed and litigated in state courts compared to federal courts. The enactment of the Class Action Fairness Act of 2005, however, reversed that trend by greatly expanding federal jurisdiction over class actions, providing plaintiffs a broad right to file class action claims in federal courts and, more importantly, granting defendants the right to remove many class action complaints from state court to federal court where, generally speaking, courts are typically less likely to certify a class action.

    The shift away from state to federal courts, at least in respect of challenges to mergers and acquisitions (a popular type of class action), has continued recently, in part due to a 2016 decision by the Delaware (state) Court of Chancery where the court rejected a “disclosure-only settlement” of a merger and acquisition class action (ie a settlement that contains broad releases in exchange for mere supplemental disclosures) and expressed skepticism towards that popular form of settlement.

    As a consequence, today most large class actions involving multistate classes are filed in, or are able to be transferred by the defendant to, federal court, which is generally viewed as more pro-business and a more favorable venue for defendants.

    Class Action Waivers. The inclusion of mandatory arbitration clauses in form or standardized contracts has become increasingly popular in recent years, and increasingly is impacting class action practice. These provisions typically not only mandate that parties individually arbitrate any disputes that arise under the contract, but increasingly purport to preclude a party from bringing class action litigation (or class-wide arbitration). These class action waivers have been the subject of numerous challenges by putative class action plaintiffs in both state and federal courts.

    The United States Supreme Court has been highly protective of the efforts of companies to enforce class action waivers with regard to their customers, vendors and employees. In a series of rulings dating back to 2010, the Supreme Court has consistently upheld these “agreed-to” arbitration clauses, even while acknowledging that such clauses might make it impractical to prosecute individual claims. Together, the message of these decisions is that class action waivers in form contracts will be upheld in nearly any context, both in state and federal courts.

    That being said, there is currently a split among the federal appellate courts with respect to the validity of class action waiver provisions in employment contracts. Many employers have long required their employees to agree to mandatory arbitration to address legal claims arising from the workplace. Taking the lead from the success of class action waivers in form contracts, employers increasingly require their employees not only to agree to mandatory arbitration, but also to waive their rights to file a class action. This creates a potential conflict with an employee’s substantive federal rights, specifically his or her right to take concerted action. The federal appellate courts are split on whether a class action waiver in this context falls foul of federal law and is enforceable and, although the matter is not yet before the Supreme Court, the issue appears to be ripe for resolution by the Court.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.