Afterpay fiasco: What is a class action lawsuit and what is its significance?

On Tuesday, it was reported that Australian fintech giant Afterpay Ltd (ASX:APT) is facing a proposed class action complaint filed in the US Northern District Court of California by two US law firms. The claim alleges that the company’s marketing team is misleading consumers over the fees that they can incur with their banks and seeks restitution of all fees paid, punitive damages, actual damages, the reports said. The suit also seeks an “an injunction on behalf of the general public to prevent Afterpay from continuing to engage in its illegal practices as described herein”.

Immediately after the news broke, the company’s shares erased most of the gains it had made in the morning trade. The shares of the company tumbled 1.65% from the intraday high – erasing 1.78% of the early morning gains. However, the shares partially recovered by the time of filing this copy.

The issue brings into spotlight the class-action suits – a common thing for the companies in the US. Till now, there have been 46,492 class action suits in the US, of which 2,611 have been settled till now – leading to settlements worth US$105.14 billion. The South District of New York is the most active court on this front, according to Stanford University.

We at Kalkine Media bring to you all that you need to know about class action suits.

So, what are class action suits?

A class action, which can be called as a representative action as well, is a legal option that permits one or more parties to file or prosecute a lawsuit on behalf of a larger group of parties, or what is referred to as "class".  Let us try to decipher it in simpler terms. Imagine a company X Ltd, that has not paid severance pay to 1,000 employees, who have quit the firm over the last five years. All these employees, who feel cheated over different points of time, get together and file a case against the company – either through one of them or through a law firm. This reduces the work of the courts as well. Had they all filed the case individually, it would have created an unimaginable burden on the courts. In case of countries like India, where class action suits are not that prevalent, the courts have to club together different litigations by themselves at times.

Why are they important?

Class-action lawsuits are usually considered as an important part of the legal system, as they permit the fair and efficient resolution of claims of multiple parties by allowing the claims to be bundled into a single action against a defending party that has allegedly caused harm. It reduces the logistics associated with the case for all the parties involved.

What are the pros of a class action suit?

The class action suits provide restitution to aggrieved parties, who would have otherwise received nothing because of attorney costs. The move also helps reduce the cases clogging the court along with reducing the cost associated with it, and hence, enables a speedy delivery of justice. The move also bring equality in delivery of justice as it ensures that people with similar injuries are treated similarly, which may not have been possible with individual suits. It also motivates defendants to settle the case with plaintiffs, since there are many plaintiffs involved – and hence a social cost.

Are there any cons associated with the class action suit?

Yes, many of them. Primarily, the aggrieved parties may end up receiving a very small award while attorneys earn large fees. The case may also take longer time to settle than usual because of the complex processes involved. The quality of the legal representation, or simply put, the lawyers, impacts many plaintiffs at one go – which would not have happened had they filed the case individually. Also, as has happened many times, the law firms may end up exploiting the plaintiffs for their own fame and money. Plaintiffs also give up the right to sue the defendant individually.

So, are they worth going for?

Yes – class action lawsuits are worth going for, if your claim is worth it. For Class Members, or the parties involved in the case – in which a single action has been decided against the defendant – it only takes the filing of a claim form and potentially providing documentation in order to be able to recover benefits from a class action settlement. The move can allow plaintiff, or the aggrieved parties, to recover up to thousands of dollars’ worth of compensation, without having to run from pillar to post.