FTC Study: Class Action Settlement Notices Have Room to Improve
The Federal Trade Commission (FTC) recently released its preliminary report on two studies it conducted to help understand the effectiveness of class action settlement notices and to “develop information to help improve settlement outcomes for consumers.” The report shows that claims rates, regardless of the form of notice, are very low and that some of the more costly forms of notice, like publications in magazines and national newspapers, do not significantly increase the claims rate. The FTC did, however, identify certain characteristics contained in emails (the least expensive form of notice) that improved open rates and consumers’ comprehension of notices. Regardless, consumers’ comprehension of the emails was very low—less than half. The FTC noted that the results suggest that consumers view class action settlement notices with healthy skepticism.
The FTC performed the studies as part of its Class Action Fairness Project. The initiative strives to make sure class settlements provide appropriate benefits to consumers.
Importantly, the FTC, a consumer protection agency, made no effort as part of these studies to determine if the underlying claims had merit, if the settlements were fair under the circumstance of the case, or if the people receiving notices would have been entitled to any compensation had they brought their own lawsuit.
The first study, the Administrator Study, examined the characteristics of 149 class action settlements. To obtain data regarding the settlements, the FTC ordered seven claims administrators to provide information on notification procedures and response rates for different notice methods. The FTC examined 149 settlements, 139 federal court. These included numerous cases involving the consumer finance industry: six TCPA cases, seven overdraft practices cases, 14 consumer privacy cases, 15 mortgage-related cases, 15 debt collection (including FDCPA) cases), and 30 improper payment (charged or credited) cases.
This study found that the median calculated claims rate was 9 percent and the weighted mean (i.e., cases weighted by the number of notice recipients) was only 4 percent. While the claims rates varied by form of notification, the averages remained low. Notice campaigns that used more expensive notice packets with claim forms had claim rates of approximately 10 percent. The claims rates for campaigns that cost less, using primarily postcards and email, was about 6 percent and 3 percent, respectively. Importantly, the added use of publication notice did not have a significant impact on the claims rate. While publication notice is potentially important to convince a court to approve the notice process, it can be very expensive and take up a considerable percentage of the administration fee and overall settlement amount.
The Administrator Study found that, of the consumers who submitted claims, the overwhelming majority had their claims approved. The median claim approval rate was 93 percent, with a weighted mean of 86 percent. Only 15 percent of the claims were incomplete or inconsistent with the definition of the class and denied.
A piece of good news for businesses that settle class lawsuits: the percentage of consumers who excluded themselves from the class settlement or objected were miniscule, with weighted averages at 0.0003 percent and 0.01 percent, respectively.
In the second study, called the Notice Study, the FTC performed internet-based consumer research to explore consumer perceptions of emailed class action notices. While the FTC noted that its study was not an endorsement of email notice, it recognized the reality that class settlements are increasingly using email notifications, especially for large, national classes, and Rule 23 was recently amended to expressly endorse the use of email notice.
The FTC evaluated a number of factors, including the likelihood a class action settlement email would be opened, whether the email would be understood, and impressions about the email. While potentially useful in crafting effective notices, the study has limitations. By using a voluntary internet panel, percentages cannot be projected to the national population. Further, the survey platform did not replicate an authentic email experience. The environment was not the same as the respondents’ personal inboxes.
Interestingly, including a specific refund amount in the email subject line, in a likely attempt to encourage the consumer to open it, actually made it less likely that the email would be opened. For example, 36 percent of the respondents said they would open an email stating they were entitled to a $100 refund in the subject line. But 40 percent of the respondents said they would open an email that did not identify a refund amount in the subject line. The respondents were also less likely, by 12 percent, to understand the class action email if the refund amount appeared in the subject line. Respondents were more likely to think emails that contained a refund amount in the subject line were advertisements or spam.
The study also revealed a likely trade-off in crafting subject lines. Short subject lines, like Notice of Refund, had substantially higher open rates than longer subject lines. But longer subject lines, without a refund amount, like Lavin v. Sonoro Technologies Class Action Settlement and Notice of Class Action Settlement, were more likely to be understood.
Further, the Notice Study examined how comprehension compared between an email with a long format (a text-heavy notice conventionally used in nationwide class action settlements) and an experimental streamlined version. While the streamlined version was more effective in conveying next steps to receive a settlement payout, the long version was more effective in helping respondents understand the nature of the email. Respondents were more suspicious of the streamlined versions, frequently describing them as “spam” or a “scam.”
Overall, the level of comprehension of the emails was low. Only 38.2 percent correctly understood the nature of the email when seeing it in the inbox, 49.3 percent correctly understood the nature of the email when viewing the actual email, and only 40.5 percent understood the next steps required to receive a refund.
The FTC concluded that the results of the Notice Study suggest that consumers may not fully understand the value of participating in class action settlements and that there may be a need to more fully educate consumers about the potential monetary benefits of class action settlements.
We are not the least bit surprised by the FTC’s conclusions because prior studies that were conducted in conjunction with the Consumer Financial Protection Bureau’s (CFPB) 2015 empirical study of consumer arbitration found that class actions fare poorly when compared to other means of dispute resolution, in particular individual consumer arbitration. For example, in class settlements that required the putative class members to submit a claim form, the weighted average claims rate was only 4 percent, meaning that 96 percent of the potentially eligible putative class members failed to obtain any benefits because they did not submit claims. In addition, even those minuscule claims rates fell by 90 percent if documentary proof was required to be submitted along with the claim. Moreover, in 87 percent of the 562 class actions the CFPB studied, the putative class members received no benefits whatsoever because they were settled individually or withdrawn by the plaintiff or had reached no result while the study was ongoing. In the 13 percent of the class actions that settled, the average class member’s recovery was a mere $32.35. The lawyers for the class, by contrast, recovered a whopping $424,495,451 in attorneys’ fees. By contrast, in arbitrations where consumers obtained relief on affirmative claims, the consumer’s average recovery was $5,389 (an average of 57 cents for every dollar claimed and 166 times as much as the average putative class member’s recovery). The CFPB’s statistics further showed that consumer arbitration is up to 12 times faster than consumer class action litigation.
A 2013 empirical study of class actions by the U.S. Chamber of Commerce’s Institute for Legal Reform titled “Do Class Actions Benefit Class Members?” analyzed 148 putative consumer and employee class action lawsuits filed in or removed to federal court in 2009. The Chamber’s report found, inter alia, that:
- Not one of the class actions studied ended in a final judgment on the merits for the plaintiffs. And none of the class actions went to trial, either before a judge or a jury.
- The vast majority of cases produced no benefits to most members of the putative class—even though in a number of those cases the lawyers who sought to represent the class often enriched themselves in the process.
- Over one-third (35 percent) of the class actions that were resolved were dismissed voluntarily by the plaintiff. Many of those cases settled on an individual basis, meaning a payout to the individual named plaintiff and the lawyers who brought the suit, even though the class members received nothing.
- Just under one-third (31 percent) of the class actions that were resolved were dismissed by a court on the merits, meaning that class members received nothing.
- For those cases that settled, there was often little or no benefit for class members. Moreover, few class members ever saw those paltry benefits, particularly in consumer class actions.
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