How does a class action work?
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UPDATED: Feb 20, 2013
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In a class action case, one or two named plaintiffs “stand in” for the entire group of similarly aggrieved persons or firms during the course of the litigation. The named Lead Plaintiffs represent in addition to themselves, a large “class” or number of individuals and/or businesses is a similar situation to them. The individual interests of the named Lead Plaintiffs and all those similarly situated are at stake.
The results in the class action case bind BOTH the named plaintiffs (just as they would in ordinary litigation) AND all other persons who were included in the class. Usually, potential class members have the option, after receiving notice, of excluding themselves from a class or class settlement, and pursuing the case on their own.
The class procedure allows individuals and small businesses to bring meritorious cases that would have been too expensive and inefficient to litigate individually. For example, if you bought 100 shares in an Initial Public Offering of Company X at $10 per share, and because Company X had used a fraudulent prospectus the shares went down to $4 per share, would it be worth your while to sue for your own $600 loss ($10 – $4 = $6 x 100 shares = $600)? On the other hand, as there would have been hundreds of other shareholders who also lost $6 per share at the same time, a class action is an effective method to obtain redress.
When a class case settles, the judge presiding over the case must approve the fairness and propriety of the settlement.