Class Action Lawsuit: How It Works, Rule 23(b) Types, and Settlements

A class action lawsuit is a civil case in which one person or a small group sues on behalf of a much larger group of people who were harmed in the same way by the same conduct. Instead of thousands of nearly identical lawsuits, a single case resolves the claims together, and the outcome binds every class member who does not opt out.

How a Class Action Works

One or more “named plaintiffs” — also called lead plaintiffs or class representatives — file the lawsuit and ask the court to let it proceed on behalf of everyone who fits a defined class. The larger group is called the “class,” and the individuals in it are often described as “absent class members” because they do not appear in court or take any active role in the case.

The named plaintiffs and their attorneys run the litigation. If the case succeeds through a settlement or a verdict, the recovery is divided among class members. If it fails, that outcome generally binds the class too, and individual members typically cannot refile the same claims on their own.

When a Case Can Proceed as a Class Action

Not every lawsuit qualifies. In federal court, the case must meet the requirements of Rule 23 of the Federal Rules of Civil Procedure, and the plaintiffs carry the burden of proving them.¹ Before certifying a class, the judge conducts what courts call a “rigorous analysis,” and the plaintiffs must back up their arguments with evidence rather than assertion.²

Rule 23(a) sets four threshold tests. The class must be numerous enough that individual lawsuits would be impractical. Members’ claims must share common questions of law or fact — and after Wal-Mart Stores, Inc. v. Dukes (2011), those common questions must be capable of producing “common answers apt to drive the resolution of the litigation.”³ The named plaintiffs’ claims must be typical of the class, based on the same legal theory and the same kind of harm. And the representatives and their lawyers must be able to fairly and adequately protect the interests of the whole class, without conflicts.¹

Meeting those four is necessary but not enough. The case also has to fit one of the categories in Rule 23(b), and that category determines whether members can opt out.

The Three Types Under Rule 23(b)

Rule 23(b)(1) covers situations where separate lawsuits would risk inconsistent rulings that put a defendant in an impossible position, or where individual judgments would effectively exhaust the rights of people who have not yet sued — competing claims to a limited fund is the classic example. Members cannot opt out.⁴

Rule 23(b)(2) applies when the defendant has acted, or refused to act, in a way that affects the class as a whole, and the remedy sought is a court order rather than money. Civil rights and employment discrimination cases often proceed this way. There is no opt-out right.⁴

Rule 23(b)(3) is the most common. It is used when class members are seeking money. To certify, the court must find that common questions “predominate” over individual ones and that a class action is “superior” to other ways of resolving the dispute. Members must be given notice and the right to opt out.²

What Happens If You’re a Class Member

In a Rule 23(b)(3) damages case — the type most people encounter — you are automatically included if you fit the class definition. You do not have to sign up. Once a court certifies the class or approves a settlement, notice goes out by mail, email, or publication describing the case, the proposed terms, deadlines to opt out or object, and how to file a claim.¹ If you want to keep the right to sue on your own, you have to follow the opt-out instructions and meet the deadline. Miss it and you are bound by whatever the class case produces.⁵

Some class actions — including certain federal employment cases — use an “opt-in” model instead, where you have to affirmatively join to participate.⁶ Either way, you do not need your own attorney; class counsel represents the group.

One important limit came from TransUnion LLC v. Ramirez (2021): every class member seeking individual damages in federal court must have suffered a real, concrete injury, not just a technical or procedural violation of a statute.⁷

Settlement and Court Approval

The great majority of class actions end in settlement rather than trial. Because absent class members had no seat at the negotiating table, a judge has to independently approve the deal to protect their interests.

The process runs in two stages. The parties first present the proposed settlement and ask for “preliminary approval,” explaining the terms, the allocation formula, and the notice plan. If preliminary approval is granted, notice goes out and class members typically get at least 35 days to opt out or file written objections.⁸

The second stage is a “fairness hearing.” The judge weighs the objections, looks at how many people opted out, and decides whether the settlement is “fair, reasonable, and adequate.”¹ Even when a class is certified only for settlement, the Supreme Court held in Amchem Products, Inc. v. Windsor (1997) that every Rule 23 requirement still applies; a settlement cannot paper over inadequate representation or a lack of common issues.⁹

How Settlement Money Gets Divided

Settlement funds are paid out in a rough order. Attorney fees come off the top, usually as a percentage of the total recovery — courts commonly approve fees in the 25 to 33 percent range, subject to judicial approval.¹⁰ Named plaintiffs may receive a separate “incentive award,” often a few thousand dollars, to compensate them for the added time and risk of leading the case.¹¹ After fees and administrative costs, the remainder is distributed to class members based on the nature and extent of their individual harm.

Individual payouts vary enormously. In large cases with millions of class members, each person might receive only a modest payment, sometimes a few dollars or a coupon.¹¹ In smaller classes with concentrated harm, recoveries can reach thousands or tens of thousands of dollars per person.¹²

When some of the settlement fund goes unclaimed, courts may order the leftover distributed pro rata to class members who filed claims, or sent to a charitable organization related to the subject of the lawsuit under a doctrine called cy pres.⁸ Cy pres has drawn criticism over conflicts of interest — in Frank v. Gaos (2019), the largest proposed recipient listed the defendant, Google, as a highly paid contractor.¹³

Common Kinds of Class Actions

Class actions run across most areas of civil law. The categories people encounter most often include consumer protection cases involving deceptive marketing, hidden fees, or false advertising; securities fraud claims by investors over misleading disclosures, governed in part by the Private Securities Litigation Reform Act of 1995; product liability suits over defective or dangerous products; employment cases over unpaid wages, overtime, misclassification, or systemic discrimination; and antitrust claims over price-fixing or other anticompetitive conduct.¹⁴¹⁵¹⁶ Civil rights cases seeking to end discriminatory practices often proceed under Rule 23(b)(2); Brown v. Board of Education is a historical example.

Data breach and biometric privacy claims are a fast-growing category. Cases under the Illinois Biometric Information Privacy Act alone generated at least 100 class action filings in 2025, with settlements reaching into the hundreds of millions of dollars.¹⁷

Class Actions vs. Mass Torts and MDL

Class actions are often confused with mass tort litigation, but they work differently. In a class action, everyone in the class is treated as a single entity and bound by one outcome. In a mass tort, each plaintiff remains a separate party with an individual claim, even when cases are consolidated for efficiency. Mass torts are commonly used when injuries vary too much for class treatment — for example, when different people had different reactions to a defective drug — and compensation is assessed case by case, which often produces larger but more varied payouts than the equal-share model of a class action.¹⁸¹⁹

Federal mass tort cases are frequently coordinated through Multidistrict Litigation (MDL) under 28 U.S.C. § 1407, which allows a panel of seven federal judges to transfer related cases from courts around the country to a single judge for pretrial proceedings.²⁰ MDL does not require class certification. The transferee judge handles discovery and motions, and the parties often select “bellwether” cases for trial to gauge value and encourage a global settlement.²¹ Cases that do not settle are returned to their home courts for individual trials.²²

When a Class Action Isn’t Possible: Arbitration Clauses

Many consumer agreements, employment contracts, and terms of service now include mandatory arbitration clauses with class action waivers. The Supreme Court has repeatedly upheld these clauses. In AT&T Mobility LLC v. Concepcion (2011) and again in Epic Systems Corp. v. Lewis (2018), the Court held that the Federal Arbitration Act requires courts to enforce individual arbitration agreements, including in employment disputes. The 5–4 ruling in Epic Systems effectively blocked an estimated 60 million U.S. workers covered by such agreements from pursuing class or collective actions.²³²⁴

If you signed a contract with a class action waiver, you likely cannot join or bring a class action over disputes covered by that contract. Some plaintiffs’ attorneys have responded with “mass arbitration,” filing thousands of individual arbitration demands at once to pressure companies that owe filing fees on each one.¹⁷

Trade-Offs to Weigh

Class actions exist because they solve a problem that would otherwise go unsolved. When a company overcharges millions of customers by $20 each, no individual has enough at stake to hire a lawyer, but the collective harm can run into the tens of millions. By pooling claims, class actions give plaintiffs access to justice they could not afford alone and create financial pressure that can force changes in corporate conduct.²⁵ One ruling also replaces the risk of inconsistent outcomes across thousands of separate cases.¹¹

The trade-offs are real. Individual payouts can be small. Class members give up control over litigation decisions to attorneys they never chose, creating what academics call an “agency problem” — the risk that counsel will prioritize a quick settlement, and a quick fee, over maximizing recovery for the class.²⁵ If the case fails or the settlement is inadequate, members generally lose the right to bring their own lawsuits over the same claims.¹¹

The practical choice for most people who receive a class action notice is simple: read the notice, note the deadlines, and decide whether the potential recovery is worth giving up your independent claim. If your losses are substantial and specific to you, opting out and pursuing your own case may make more sense. If your losses are modest and mirror what the class alleges, staying in generally costs you nothing and may return something. Either way, the deadlines in the notice are the ones that matter.

1
U.S. Court of International Trade. Federal Rule of Civil Procedure 23
2
ClassActionDeclassified.com. A Primer on Class Certification Under Federal Rule 23
3
Justia. Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338
4
Harvard Law School Open Casebook. Notes on FRCP Rules 23(b) and 23(c)
5
LawInfo. The Phases of a Class Action Lawsuit
6
ZLK Law. How Can I Join a Class Action Lawsuit
7
Institute for Legal Reform. Looking to Join a Class Action Lawsuit? Think Again
8
U.S. District Court, Northern District of California. Procedural Guidance for Class Action Settlements
9
Justia. Amchem Products, Inc. v. Windsor, 521 U.S. 591
10
Fordham Law Review. Class Action Attorney Fees
11
LawInfo. The Advantages and Disadvantages of Class Action Lawsuits
12
Workplace Rights Law Group. Who Gets the Most Money in a Class Action Lawsuit
13
Boston University Law Review. Cy Pres in Class Actions
14
LawInfo. Common Types of Class Action Lawsuits
15
Investopedia. Class Action
16
EconOne. Breaking Down the Types of Class Actions
17
Privacy World Blog. 2025 Year in Review: Biometric Privacy Litigation
18
Searcy Law. Mass Tort vs. Class Action
19
Cory Watson Attorneys. Class Action vs. Mass Tort
20
U.S. District Court, District of Kansas. What Is Multidistrict Litigation (MDL)?
21
Advocate Magazine. Multidistrict Litigation Consolidation: Pros and Cons
22
University of Chicago Legal Forum. Multidistrict Litigation and the Choice of Federal Law
23
Supreme Court of the United States. Epic Systems Corp. v. Lewis, 584 U.S. ___
24
Stanford Law School. Epic Backslide: The Supreme Court Endorses Mandatory Individual Arbitration Agreements
25
University of Washington School of Law. Class Action Lawsuits