Building Your Business Business Insurance What Is a Class Action Lawsuit? Definition and Examples of Class Action Lawsuits By Marianne Bonner Updated on July 21, 2020 In This Article View All In This Article What Are Class Action Lawsuits? How Class Action Lawsuits Work Types of Class Action Lawsuits Pros and Cons Photo: Ron Chapple / Getty Images A class action lawsuit is a legal action filed by more than one individual against a single defendant. It's designed for situations in which several people have suffered similar injuries as a result of a defendant's actions. Class action lawsuits are appropriate when the damages claimed by each plaintiff—the person who's alleging wrongdoing—are too small for individual claims to be worthwhile. These plaintiffs have the resources to hire an attorney and obtain restitution by filing the legal action as a group. Class action lawsuits also relieve courts of the burden of hearing hundreds or thousands of small claims cases. What Are Class Action Lawsuits? Class action lawsuits are often filed against government entities, financial institutions, manufacturers, retailers, or employers. Many are based on allegations of defective products, false advertising, discrimination, or unlawful employment practices. Some suits have even alleged that the defendant violated the Telephone Consumer Protection Act, which was enacted in 1991. How Class Action Lawsuits Work A group or class of plaintiffs is represented by one or more "lead" plaintiffs. The injuries suffered and the allegations alleged by the lead plaintiffs must be similar to those of the other class members. The class must be certified by a judge before the class action lawsuit can proceed. A lead plaintiff must demonstrate that the plaintiffs have a valid claim against the defendant and that all class members have similar claims. The lead plaintiff must also show that the suit can adequately represent all group members—all with the assistance of legal counsel, of course. The plaintiffs are notified by mail or other means after the class has been certified. All are automatically included in the lawsuit unless they opt out. Note Plaintiffs who wish to opt out from the class action suit must follow a specified procedure. They'll remain part of the class unless and until they do so. Most class action suits are settled out of court. Each plaintiff receives a portion of the settlement, which can consist of cash, a refund, a service such as credit monitoring, or some other benefit. Types of Class Action Lawsuits Class action suits can either state of federal actions. They can be filed and heard in a state court or a federal court, depending on the circumstances of the case. Note Claimants might prefer to file cases in state courts because they're considered friendlier to plaintiffs, rather than in federal courts, which are deemed to be friendlier to defendants. Congress passed the Class Action Fairness Act (CAFA) in 2005, which was intended as tort reform to protect businesses from abusive class action lawsuits. Plaintiffs' lawyers frequently forum-shopped before the law was enacted so they could file their suit in a state that would be most sympathetic to their case. Note The Class Action Fairness Act made it easier for defendants to move their cases to federal courts by amending the requirement for diversity jurisdiction. Before the law was enacted, a defendant was unable to move a class action to a federal court if even one person on the defendant's side of the case and one person on the plaintiff's side were citizens of the same state. The Act allows a case to be moved to federal court if at least one person on the plaintiff's side and one person on the defendant's side are citizens of different states (or countries). Defendants can't move their cases to federal court unless the damages sought by plaintiffs exceed $5 million. The class must consist of at least 100 plaintiffs. Pros and Cons of Class Action Lawsuits Pros Provide restitution to plaintiffs who would otherwise receive nothing because of attorney costs Help reduce the number of suits clogging the courts Reduce the cost of litigation Ensure that defendants with similar injuries are treated consistently Motivate defendants to settle since there are many plaintiffs Cons Plaintiffs may receive a very small award while attorneys earn large fees Cases take a long time to settle because of the complex procedures involved Class members cede control over the suit to the lead plaintiff and their attorney Quality of legal representation affects all class members—if lawyer does a poor job, all members suffer Plaintiffs may receive coupons or rebates instead of cash Plaintiffs give up their right to sue the defendant independently These can be complex lawsuits that can drag on for years due to multiple plaintiffs, and damages don't always amount to much when they're divided among the entire group. By the same token, class action lawsuits allow individuals who might not otherwise be able to afford to sue an opportunity to seek restitution. Key Takeaways Class action lawsuits are legal actions taken against a defendant by several individuals as a group.These lawsuits help eliminate the need for several small claims being filed against a single defendant. Class action lawsuits can be based on allegations of defective products, false advertising, discrimination, unlawful employment practices, or other causes.Many class action lawsuits take place in state courts, but the Class Action Fairness Act of 2005 made it easier for defendants to move their cases to federal courts. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Federal Communications Commission. "FCC Actions on Robocalls, Telemarketing." Accessed July 19, 2020. Cornell Law School Legal Information Institute. "Diversity Jurisdiction." Accessed July 19, 2020. Congress.gov. "Class Action Fairness Act of 2005." Accessed July 19, 2020.