The Federal Trade Commission (FTC) has announced that to study the effectiveness of various class action settlement notice programs, it has issued orders to eight claims administrators requiring them to provide information on their procedures for notifying class members about settlements and the response rates for various methods of notification. It is anticipated that such information will demonstrate that only a very small fraction of class members who must file claims to participate in a settlement fund actually do so.

The orders are part of the FTC's "Class Action Fairness Project," through which the agency "strives to ensure that class action settlements in consumer protection and competition matters provide appropriate benefits to consumers." Actions taken by the FTC as part of the program include monitoring class actions and filing amicus briefs or intervening in appropriate cases; coordinating with state, federal, and private groups on important class action issues; and monitoring the progress of legislation and class action rule changes.

In 2015, as part of the program, the FTC sought comments on its plans to conduct two studies. One is an internet-based research study to "examine whether respondents receiving class action notices understand the process and implications for opting out of a settlement, the process for participating in a settlement, and the implications of doing nothing." The other study is intended "to determine what factors influence a consumer's decision to participate in a class action settlement, opt out of a class action settlement, or object to the settlement." To conduct this study, the FTC plans to directly contact recipients of nationwide class action settlement notices.

The response rate data provided to the FTC by the claims administrators is expected to show extremely low response rates (i.e., less than 5 percent) in most cases. Such information might cause judges to give more consideration to response rates before giving final approval to class action settlements. It would also provide support for critics of the Consumer Financial Protection Bureau's (CFPB) proposed rule that would prohibit providers of certain consumer financial products and services from using a pre-dispute arbitration agreement that contains a class action waiver. Underlying the proposed rule is the CFPB's view that consumers obtain more meaningful relief through class actions than in arbitration. Low average response rates would be further evidence that the CFPB's premise is incorrect and arbitration is more beneficial to consumers than class actions.

Indeed, the CFPB's own arbitration study included data showing that even class members entitled to benefits frequently fail to obtain them. The study found that in "claims made" class action settlements, the unweighted average claims rate was 21 percent and median was 8 percent. The weighted average claim rate was only 4 percent. Moreover, claims rates fell nearly 90 percent if documentary proof was required. Presumably, the funds not distributed to the class members either reverted to the company or were used for a cy pres distribution.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

Copyright © 2016 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.