Class action suit comes to stakeholders' aid

What is class action suit and who can file it?
A class action lawsuit is filed on behalf of a group of people who have been affected by the actions of a company. It is common to see members of a company filing class action lawsuits if hiring or salary practices have been illegal.

Another type is filed against a drug company for making illegal claims about its product, or for causing physical damage to those taking the drug. Another example would be that of a plane crash when relatives of deceased would form a group to file a suit against the airline.

In Satyam case, Aekta Ben Patel of the US who bought Satyam’s American Depository Receipts (ADRs) has filed a class action complaint in a district court in New York against Satyam, B Ramalinga Raju and B Rama Raju.

Origin of class action lawsuit
The legal system in the United States encourages class action litigation. Under this arrangement, the aggrieved individuals have a common legal interest and pursue a common goal. This ensures that courts are greatly facilitated in meting out justice and providing compensation. Besides, the offender would not be advantageously placed to subvert justice. The objective of saving time and money, and ensuring uniformity of decisions is met.

Does India have anything like this?
The Indian government is planning to codify class action as law. A clause for filing class action suit has been included in the new Company Law Bill in India. Once enacted, the provision will empower shareholders to hold companies and their managements responsible for wrong-doing. Though the principles of class or representative action by shareholders against managements have been upheld by various courts in India, these are yet to be reflected in law.

Is the class action suit only for ADRs?
Yes.

How does it work?
The action usually starts after the case or the incident is discussed with friends, neighbours or people who matter. If similar incidents had occurred previously and many of them have been victims of such a fraud, a class action lawsuit is filed. A feeling of oneness develops and “class” — comprising persons who are injured in the same manner, although not to the same extent, and who are determined to take the bull by its horns — is constituted.

An attorney files a suit in the name of one of the members of the class after a couple of preliminary investigations. Such a person is called the lead representative based on criteria like he or she should have incurred sustained loss or damage in the case in question. The court first serves notices to the members of the “class” by the defendant’s attorney. Depositions are taken. The suit is then certified as a class action lawsuit by the court. The members are treated equally in the sense that the compensation would be shared equally. In the Satyam fraud case, ADR holders in the US could form one class which would be open for others to join.

Is there a jury trial?
Class action lawsuits may become jury trials or may be settled prior to a trial. Settlements and mediation mean that damages are agreed to by the defendants. Jury trial class action lawsuits can create problems because a company levelled with heavy punitive and compensatory damages can appeal the decision. The appeal process may last for years, so plaintiffs may have to wait a very long time before seeing any money. Companies can also declare bankruptcy, which means the plaintiffs may never be awarded any money. There is a two-three year trial window here.

Will the insurance taken by companies cover class action suit?
It depends on the type of cover. Professional indemnity insurance specifically covers things like advise given by audit and law firms and covers the wrongdoings of some officers in the company. However, it excludes deliberate and malicious fraudulent action by the company.

Under class action suit, who all can be prosecuted?
Everybody, including board members, can be prosecuted.

How is the monetary damage determined?
Damages are covered by the law of damages, which are same in both the US and India. Damages are awarded in terms of actual damages.

Compiled by Sapna Dogra with inputs from Rishi Bhatnagar, corporate lawyer and consultant with law firm Olswang, and Akil Hirani, partner, Majmudar & Co, International Lawyers