Rule 23 and Me: The Problem with Class Action Lawsuits

By: Ava Raine

Edited By: Luke Vredenburg and Emily yang

Americans’ tendency to sue – businesses, employers, each other – is so well established, it has become a punchline. Jokes aside, accountability is important, and lawsuits often provide it by vindicating the aggrieved party and forcing the wrongdoer to make amends. However, a serious flaw in this system arises when ordinary people attempt to sue large corporations. This type of lawsuit is known as a “class action,” and involves a group of multiple plaintiffs (called “class members”) collectively suing a defendant. This is often the only way that individuals with limited finances can take on wealthy corporations in court. However, even when class actions succeed, the damages paid by the company are typically only a small fraction of its profit – hardly enough to deter future wrongdoing. Meanwhile, the class members must divide the settlement between so many people that, in the end, they receive next to nothing. Therefore, class actions, though appealing in theory, ultimately fail to provide justice for either victims or perpetrators in reality. 

The legal basis for class action lawsuits is known as Rule 23, under which a class member may sue as a representative of all members so long as certain requisites regarding the commonalities among class members are met. [1] When a class action is successful, the settlement paid to the class members will include both compensatory damages (a sum intended to compensate for harms inflicted) and punitive damages (an additional sum, intended to punish the wrongdoer and deter future transgressions). [2] Ideally, meting out damages in this manner would both reimburse victims and prevent companies from committing harmful acts in the first place.

Unfortunately, in practice, damages must be divided between all class members. Therefore, even settlements that seem generous result in only meager payments to each victim. For instance, General Motors was recently sued over a flaw in their car engines which led to stalling and breakdowns. In October of 2022, the jury ordered that General Motors pay $102.6 million to the class members. However, once divided amongst the approximately 38,000 class members and their lawyers, it amounted to a mere $2,700 per class member. [3] That amount is, at best, barely sufficient to cover the cost of engine repairs. It is certainly not enough to also compensate for all the additional hardships class members may have experienced due to their cars’ faulty engines: missed work time resulting from unreliable transportation, medical and insurance bills for injuries and vehicle damage sustained in automobile accidents, or the cost of towing cars which broke down on the road, to name a few. 

Similarly, a class action lawsuit was filed against the genetic testing company 23andMe for false advertising. The company made claims that their product could diagnose genetic predispositions to medical conditions – including life-threatening diseases such as cancer – without FDA approval. After the lawsuit was settled in September 2017, class members were given compensation either in the form of a $12.50 cash payment, or a $40 certificate that could be put towards purchasing a new 23andMe genetic testing kit. [4] Neither of these options is sufficient to cover the cost of even one genetic testing kit. For the many class members who purchased the expensive kit because they were misled, this means their expenditures were not reimbursed. It adds further insult to injury that the company also used the settlement itself as an opportunity to promote their product; by giving out certificates which only partially cover the cost of a testing kit, they induced class members to spend more of their own money on 23andMe products in order to be able to make use of the settlement they received. Practices such as this clearly erode the efficacy of class actions to bring justice. 

In each of these cases, the small payments class members received were hardly sufficient to make up for the harms inflicted upon them, financial or otherwise. This pattern holds true for most class actions. Thus, the primary goal of class action lawsuits (to provide justice for victims) is not sufficiently met by class actions in their current form. However, to assume that this failure is an inevitable side effect of having to split settlements between so many class members would be obtuse, and would only serve to foster the continuation of these inequities in court. Large class sizes are, after all, a direct result of the number of people a company has wronged; and class members often do not have the means to pursue individual suits against companies with almost unlimited financial resources. It does not, therefore, make sense to punish class members by forcing them to ration insufficient settlements amongst themselves. It would be much more reasonable to solve this problem by increasing the amount of damages companies have to pay. This solution would place the financial burden in class actions back where it belongs: on the perpetrators. It would also ensure that the compensatory damages they pay do, in fact, “compensate for an injury or loss caused by another party's unlawful conduct… [making] the claimant ‘whole,’” as they are intended to do. [5]

Furthermore, there is an additional rationale for increasing the size of class action settlements; the current standards for settlements mean that the companies at fault are often not sufficiently penalized. Millions of dollars in damages are barely a drop in the bucket for companies worth billions. Even one of the largest class action lawsuit settlements in US history – the $14.7 billion settlement against Volkswagen in the so-called “dieselgate” scandal of 2017, in which the car company misled regulators regarding the polluting nature of their vehicle – failed to have a meaningful impact on the company's wealth, as Volkswagen brought in roughly $256.6 billion worth of sales revenue in that year alone. [6][7] Similarly, in 2015, Takeda Pharmaceutical settled a class action for $2.4 billion, when one of their drugs was found to put users at risk of cancer. [8] Yet, Takeda Pharmaceutical brought in roughly seven times that amount in revenue, with their assets worth over sixteen times the sum of the settlement. [9] The disparity between the 2022 General Motors settlement and their income is even greater; the class action was settled for $102.6 million, while their total revenue for that year was $127 billion, with assets worth $244.7 billion. [10][11] In a statement to The Washington Post, the executive director of the Center for Auto Safety, Clarence Ditlow, observed that when it comes to General Motors, “‘There’s no problem too big that money can’t solve’... GM “‘[buys] its way out of a criminal prosecution.’” [12] Yet, this is not only true of General Motors. It holds true for many, many corporations. In most class actions, the corporation at fault is made to pay only a tiny fraction of its overall worth. 

As a result, companies settle class action with ease, avoiding any real consequences for the harms they perpetrate. This is a fundamental problem, and not only because it runs counter to one's sense of justice. In order for punitive damages to have their intended effect – “to deter the wrongdoer and others from engaging in unlawful conduct in the future” – they must impose a financial incentive for corporations to steer clear of harmful practices. [13] Only settlements which take a significant fraction of a business’s profit can achieve this. Otherwise, it may well be more profitable for companies to continue illicit activities, notwithstanding the occasional small lawsuit settlement, than to alter their behavior. This phenomenon is apparent in practice. Many companies are sued repeatedly; their legal histories are dotted with lawsuit after lawsuit and settlement after settlement. General Motors, for one, was fined $900 million after the discovery of another dangerous engine flaw back in 2015. [14] This lawsuit came seven years before the later $102.6 million settlement that took place in 2022. [15] The company was also sued in 2019 yet again, for a vehicle flaw and, according to Reuters reporter Brendan Pierson, “GM has faced litigation accusing it of covering up problems with its vehicles over the years, including alleged deadly flaws in steering wheel sensors and ignition switches.” [16][17] If those lawsuits had the desired effect, a single class action should have been enough to prevent future transgressions. The fact that General Motors has dealt with so many similar lawsuits over time, indicates that the damages they are being made to pay are not a sufficient deterrent, and that lawsuits are ineffective at preventing the company from taking dangerous shortcuts with their products. 

These problems are compounded and reinforced by existing legal infrastructure. In particular, laws which cap the damages a company can be made to pay. Individual states have differing laws regarding such caps; for instance, Alabama limits the ratio of punitive to compensatory damages to 3:1. Meanwhile Louisiana places no cap on compensatory damages, but “disfavors” levying punitive damages altogether. Wisconsin caps punitive damages at two times compensatory damages. [18] These are only a few examples; however, they indicate a general trend of limiting punitive damages. In light of this, it is unsurprising that settlements in class actions are often too small to effectively deter corporations from repeatedly cheating, scamming, and endangering consumers. If the potential profit of illicitly cutting corners is larger than the sum of the resultant damages, and if those damages will not significantly impact a business’ wealth, then there is no incentive against continuing negligent or dangerous practices. As a result, customers’ health, safety, and pocketbooks suffer, as illustrated in the examples above. 

All of this is not to say class actions are pointless or obsolete; on the contrary, they can be a powerful tool for change and for holding corporations accountable. The problem is that current legal precedents and limitations decrease this potential. To be effective, damages paid must be a large enough sum to fully compensate the victims and to deter corporations from cutting corners. Currently, settlements are generally not large enough to satisfactorily achieve either of these aims. 

One solution to this problem would be to increase maximum permitted ratios of punitive to compensatory damages at the state level. This would increase the total sum of the damages paid in settlements. Additionally, a sliding scale based on the defendant’s income could be used to calculate the appropriate punitive damages. This would prevent large corporations from getting off lightly, simply because their superabundant profits allow them to easily absorb the blow of a settlement, while also ensuring that smaller companies pay a fair amount within their means. State legislation could incorporate practices such as this in order to reform the laws which currently place caps on the amount of damages a company can be made to pay. If changes such as these were implemented, class action lawsuits would be transformed into real opportunities for justice.

NOTES:

1. “Rule 23. Class Actions.” Legal Information Institute. Legal Information Institute. Accessed November 29, 2022. https://www.law.cornell.edu/rules/frcp/rule_23. 

2. “Compensatory Damages | Practical Law - Westlaw.” Thomson Reuters. Accessed November 29, 2022. https://content.next.westlaw.com/practical-law/document/I0fa00d5def0811e28578f7ccc38dcbee/Compensatory-Damages?viewType=FullText&contextData=(sc.Default); “Punitive Damages | Practical Law.” Thomson Reuters. Accessed November 30, 2022. https://uk.practicallaw.thomsonreuters.com/6-501-5593?contextData=(sc.Default). 

3. Person, and Brendan Pierson. “GM Hit with $102.6 MLN Jury Verdict in Engine Flaw Class Action.” Reuters. Thomson Reuters, October 6, 2022. https://www.reuters.com/legal/litigation/gm-hit-with-1026-mln-jury-verdict-engine-flaw-class-action-2022-10-05/. 

4. Tassin, Paul. “23andMe DNA Testing Kit Class Action Settlement.” Top Class Actions, May 18, 2019. https://topclassactions.com/lawsuit-settlements/closed-settlements/23andme-dna-testing-kit-class-action-settlement/. 

5. Reuters, “Compensatory Damages.”

6. Shepardson, David. “U.S. Judge Approves $14.7 Billion Deal in VW Diesel Scandal.” Reuters. Thomson Reuters, October 25, 2016. https://www.reuters.com/article/us-volkswagen-emissions/u-s-judge-approves-14-7-billion-deal-in-vw-diesel-scandal-idUSKCN12P22F. 

7. Carlier, Mathilde. “Revenue of Volkswagen 2006-2021.” Statista, June 10, 2022. https://www.statista.com/statistics/264349/sales-revenue-of-volkswagen-ag-since-2006/. 

8. Pollack, Andrew. “Takeda Agrees to Pay $2.4 Billion to Settle Suits over Cancer Risk of Actos.” The New York Times. The New York Times, April 28, 2015. https://www.nytimes.com/2015/04/29/business/takeda-agrees-to-pay-2-4-billion-to-settle-suits-over-cancer-risk-of-actos.html. 

9. “Takeda Pharmaceutical | Company Overview & News.” Forbes. Forbes Magazine. Accessed November 29, 2022. https://www.forbes.com/companies/takeda-pharmaceutical/?sh=6a79b7ec6f4c. 

10.  Person and Pierson, “GM Hit with $102.6 MLN Jury Verdict.”

11.  “General Motors | GM Stock Price, Company Overview & News.” Forbes. Forbes Magazine. Accessed November 29, 2022. https://www.forbes.com/companies/general-motors/?sh=7f653aab4e09. 

12.  Harwell, Drew. “Why General Motors' $900 Million Fine for a Deadly Defect Is Just a Slap on the Wrist.” The Washington Post. WP Company, October 23, 2021. https://www.washingtonpost.com/news/business/wp/2015/09/17/why-general-motors-900-million-fine-for-a-deadly-defect-is-just-a-slap-on-the-wrist/. 

13.  Reuters, “Punitive Damages.”

14.  Harwell, “General Motors' $900 Million Fine.”

15.  Person and Pierson, “GM Hit with $102.6 MLN Jury Verdict.”

16.  18-14371 - Berman et al v. General Motors LLC (United States District Court Southern District of Florida November 15, 2019). 

17.  Person and Pierson, “GM Hit with $102.6 MLN Jury Verdict.”

18.  Plosser, W. McDonald. “Sky's the Limit? A 50-State Survey of Damages Caps and the Collateral Source Rule - Insurance Laws and Products - United States.” Sky's The Limit? A 50-State Survey Of Damages Caps And The Collateral Source Rule - Insurance Laws and Products - United States. Butler Snow LLP, December 11, 2018. https://www.mondaq.com/unitedstates/insurance-laws-and-products/762574/sky39s-the-limit-a-50-state-survey-of-damages-caps-and-the-collateral-source-rule.

BIBLIOGRAPHY:

18-14371 - Berman et al v. General Motors LLC (United States District Court Southern District of Florida November 15, 2019).

Carlier, Mathilde. “Revenue of Volkswagen 2006-2021.” Statista, June 10, 2022. https://www.statista.com/statistics/264349/sales-revenue-of-volkswagen-ag-since-2006/.

“Compensatory Damages | Practical Law - Westlaw.” Thomson Reuters. Accessed November 29, 2022. https://content.next.westlaw.com/practical-law/document/I0fa00d5def0811e28578f7ccc38dcbee/Compensatory-Damages?viewType=FullText&contextData=(sc.Default).

“General Motors | GM Stock Price, Company Overview & News.” Forbes. Forbes Magazine. Accessed November 29, 2022. https://www.forbes.com/companies/general-motors/?sh=7f653aab4e09.

Harwell, Drew. “Why General Motors' $900 Million Fine for a Deadly Defect Is Just a Slap on the Wrist.” The Washington Post. WP Company, October 23, 2021. https://www.washingtonpost.com/news/business/wp/2015/09/17/why-general-motors-900-million-fine-for-a-deadly-defect-is-just-a-slap-on-the-wrist/.

Person, and Brendan Pierson. “GM Hit with $102.6 MLN Jury Verdict in Engine Flaw Class Action.” Reuters. Thomson Reuters, October 6, 2022. https://www.reuters.com/legal/litigation/gm-hit-with-1026-mln-jury-verdict-engine-flaw-class-action-2022-10-05/.

Plosser, W. McDonald. “Sky's the Limit? A 50-State Survey of Damages Caps and the Collateral Source Rule - Insurance Laws and Products - United States.” Sky's The Limit? A 50-State Survey Of Damages Caps And The Collateral Source Rule - Insurance Laws and Products - United States. Butler Snow LLP, December 11, 2018. https://www.mondaq.com/unitedstates/insurance-laws-and-products/762574/sky39s-the-limit-a-50-state-survey-of-damages-caps-and-the-collateral-source-rule.

Pollack, Andrew. “Takeda Agrees to Pay $2.4 Billion to Settle Suits over Cancer Risk of Actos.” The New York Times. The New York Times, April 28, 2015. https://www.nytimes.com/2015/04/29/business/takeda-agrees-to-pay-2-4-billion-to-settle-suits-over-cancer-risk-of-actos.html.

“Punitive Damages | Practical Law.” Thomson Reuters. Accessed November 30, 2022. https://uk.practicallaw.thomsonreuters.com/6-501-5593?contextData=(sc.Default).

“Rule 23. Class Actions.” Legal Information Institute. Legal Information Institute. Accessed November 29, 2022. https://www.law.cornell.edu/rules/frcp/rule_23.

Shepardson, David. “U.S. Judge Approves $14.7 Billion Deal in VW Diesel Scandal.” Reuters. Thomson Reuters, October 25, 2016. https://www.reuters.com/article/us-volkswagen-emissions/u-s-judge-approves-14-7-billion-deal-in-vw-diesel-scandal-idUSKCN12P22F.

“Takeda Pharmaceutical | Company Overview & News.” Forbes. Forbes Magazine. Accessed November 29, 2022. https://www.forbes.com/companies/takeda-pharmaceutical/?sh=6a79b7ec6f4c.

Tassin, Paul. “23andMe DNA Testing Kit Class Action Settlement.” Top Class Actions, May 18, 2019. https://topclassactions.com/lawsuit-settlements/closed-settlements/23andme-dna-testing-kit-class-action-settlement/.