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Understanding Class Action Lawsuits

Here's what those notifications in the mail mean for you and your wallet.

You could call class action lawsuits the nuclear option of consumer advocacy, the ultimate weapon in the battle against unethical corporations.

See also: Flip That House? Think Twice.

However you look at class action suits, you could well be a party to at least one of them at this moment, whether you know it or not. When the lawyers bringing those actions eventually reach out to you, you can make a little money or lose a lot, depending on what you do.

Lawyers file hundreds of class action lawsuits every year. They all start when a group of people with similar complaints — the "named" plaintiffs — join forces to make the same legal argument in court. (They may do this out of a genuine sense of grievance, or at the urging of lawyers who smell big fees. Or both.)

The plaintiffs could be seniors who are victims of discriminatory hiring practices, parents of children injured by dangerous toys, or investors who lost money because of what they claim is corporate malfeasance. To gain legal standing as a "class," the named plaintiffs typically have to convince a judge they have suffered common injury as a result of the purposeful or negligent actions of a corporation. In the recent Wal-Mart case, the Supreme Court significantly raised the bar, so that any suit must now include a common cause for the damage, such as a harmful company policy, and not just a common result.

Next: What to do when a class action notice arrives in your mailbox. >>

Once the judge agrees that the class action suit can move forward, the attorneys filing the case must notify the "unnamed" plaintiffs — maybe hundreds of thousands of them — who suffered the same injury as the named plaintiffs. That's the notice that may have suddenly shown up in your mailbox.

"In most cases, when you get a class action notice, you don't have to do anything," says Ira Rheingold, executive director of the National Association of Consumer Advocates. Courts require that members of the class be offered the chance to opt out if, say, they think they may have suffered greater damages than the typical plaintiff and want to sue separately. Once the case is resolved, you get a second mailing. It may tell you how to file a claim. Or it may just contain a check.

Class action suits can be big bucks — at least for the attorneys. In 1998, U.S. tobacco companies lost the largest class action settlement in history, which came to $205 billion over 25 years. The piece of the pie that goes to unnamed plaintiffs, however, is a tiny fraction of such awards. Many judgments only require the defendant to remedy the problem and don't involve a cash settlement at all for the majority of the class. Even the named plaintiffs may only get compensated for their time, though some could receive additional compensatory damages.

Still, the publicity surrounding awards like the tobacco settlement tend to raise expectations, and there are plenty of con artists standing by to exploit them. One example: Many Californians who lost homes to foreclosure recently received letters telling them they could be part of a class action suit, if they paid thousands of dollars in upfront "filing fees."

Next: Three ways to test the legitimacy of class action suit. >>

Turns out the letters were sent by con artists looking to take advantage of the anguished former homeowners. While outright fraud is rare, unscrupulous lawyers often sent out look-a-like notices aimed at snagging paying clients rather than building a class action case.

How do you tell the good from the grift? Stuart Rossman, director of litigation at the National Consumer Law Center, advises the following:

1. Never Pay Upfront — A legitimate attorney will never ask for upfront money in a class action case. "If they do, they're likely in violation of court practices and legal ethics standards," Rossman said. "Also be careful of any notices that want you to 'submit' or 'confirm' your personal data, such as social security number, bank account information or even your address. None of that information is necessary for you to be represented as part of the class."

2. Walk the Web — Legitimate notices will include a court docket number, usually in the first paragraph. Rossman advises, "Check the Internet for the court’s public records to see if the case information matches what you received in the mail. If it doesn’t, it could be bogus, and you should call your local district attorney.”

3. Take Your Time — The settlement period of a class action suit typically lasts several years, so if you act within a reasonable period, you won't lose out on your share of the settlement. "Read the notice carefully for dates and any action you might have to take," cautions Rossman. "If you think it's legit, it also can't hurt to make a phone call to the issuing law firm. After all, there might be a payday in it for you."

Ron Burley is the author of Unscrewed: The Consumer's Guide to Getting What You Paid for.