What it is:
Class action is a type of civil lawsuit brought by a group of people who are "similarly situated" -- that is, they have been harmed in a similar way. In the business world, this group is most often shareholders, customers or employees.
How it works/Example:
A class action suit begins as a written complaint that identifies a problem and the class of people involved. The person or entity (usually a law firm) bringing the complaint to the attention of the court on behalf of the class is called the class representative. If the court determines that the complaint and the class meet certain legal requirements, the class is "certified" and anyone meeting the class definition is automatically a member of the class. If the court does not certify the class, plaintiffs are left to pursue their cases individually.
Class members usually have little or no role in the proceedings. If the members don't like the outcome of the suit, they can usually opt out of the class and pursue the defendant on their own (unless the defendant is already bankrupt -- then the court might prohibit this). Not all class action suits seek monetary damages; some seek injunctive relief, whereby a company is instructed to stop an unconstitutional practice.
The class representative is usually paid on a contingency basis, meaning that they are not paid until there is an adequate settlement or judgment. The court approves and awards the compensation to the representative and orders the distribution of the remainder to the members of the class.
Why it matters:
Class action suits are controversial. On one hand, they serve an important legal function by allowing a large group of people to affordably seek justice and share the various legal expenses. This levels the playing field between deep-pocketed defendants and less wealthy claimants. Class actions also save the court system time and money by not having to try each person's case individually.
Critics argue that class action suits foster a litigious society because attorneys often make more from a judgment or settlement than the people they represent. Many times there are tens if not hundreds of millions of dollars at stake, but after the attorney is paid, the remaining amount is distributed among hundreds or thousands of class members. Spreading the proceeds between so many class members may result in token payments.