November 15, 2016 / 8:00 PM / 3 years ago

FTC’s class action claims investigation could be “bombshell” for consumer cases

Do you know what the average claims rate is in consumer class actions?

Trust me, you don’t. No one outside of the industry of administering class action settlements does. We’ve seen snippets of data from the Chamber of Commerce and the Consumer Financial Protection Board, but between them, they analyzed claims rates in fewer than 20 class actions. Additional information occasionally surfaces when a federal judge insists on knowing how many class members have responded to notices before deciding whether to grant final approval of a proposed settlement. That recently happened in litigation over an allegedly defective trigger mechanism in certain Remington rifles. After learning the initial claims rate was less than 1 percent of the class, U.S. District Judge Ortrie Smith of Kansas City demanded a beefed-up notice program.

Judge Smith is the exception, however. The vast majority of class action settlements receive final approval without an inquiry into how many class members have responded to notices inviting their participation. As I’ve said before, that data exists. Class action settlements are overseen by a tiny group of companies that specialize in designing notification programs and handling claims by class members. These companies track class action response rates. They’ve just kept the information in a vault of confidentiality.

The Federal Trade Commission is about to blow open the vault. On Monday, the FTC announced that it has ordered eight claims administrators to “provide information on procedures they use to notify class members about settlements and the response rates for various methods of notification.” I’ve been told that the FTC order calls for the eight companies to disclose information about their ten largest cases in each of the last three years, which means the FTC is seeking data on notice procedures and claims rates in 240 big class actions. If the claims administrators comply, the FTC will end up with the biggest-ever repository of information about participation in consumer class actions.

The FTC declined to name the companies that received its order. Two large claims administrators, Epiq and Analytics, told me they received and are reviewing FTC data requests. I reached out to other well-known members of the industry, including Rust Consulting, Garden City Group, KCC and Angeion, but could not confirm whether the FTC has ordered them to turn over information. The agency previously disclosed its plans to conduct a pair of consumer Internet surveys to examine how consumers perceive different sorts of class action notices and what factors influence consumer decisions about participating (or not) in class action settlements.

The FTC’s demand for data from claims administrators comes as the U.S. Judicial Conference’s Committee on Rules of Practice and Procedure has proposed changing the federal rules for class actions to encourage administrations to notify class members by email and other electronic means, which is often much cheaper than notification via regular mail. At the very least, said class action notice expert Todd Hilsee of The Hilsee Group – a vehement and outspoken opponent of the proposed change to the rules for class action notification – the Rules Committee should wait until the FTC has collected data before it decides whether to push forward with the change.

More fundamentally, Hilsee said, the information demanded by the FTC could turn out to be “a bombshell – it’s going to light a fire like you can’t believe.”

I have to agree with Hilsee. Even if claims administrators report an average claims rate in these 240 cases of 10 percent, critics of consumer class actions will argue that settlement fail to deliver a benefit to 90 percent of people who were supposedly harmed. It’s extremely unlikely, moreover, that the average claims rate will be anywhere near that high in class actions in which neither side knows specifically who is in the class and notice is accomplished through traditional or Internet advertising.

In 2014, after all, a claims administrator from KCC said in a declaration in a false advertising class action against the maker of Duracell batteries that the claims rate in cases in which class members receive indirect notice through advertising is “almost always … less than 1 percent.” If the FTC data shows vanishingly small claims rates, will federal judges still approve consumer class action settlements? Will they continue to grant attorneys fees based on the presumption that every class member will file a claim when there’s hard data that the overwhelming majority of consumers don’t bother?

One claims administrator who spoke confidentially to me on Tuesday said he’s concerned about the perception that his industry is working with plaintiffs and defense lawyers to suppress claims rate data. When judges ask for hard numbers, he said, companies like his supply them. “There is not by any stretch of the imagination a concerted effort to keep this information out of the public eye.”

It is, however, in the interests of both defendants and the class action bar to reach settlements. Defendants want broad releases from claims and plaintiffs lawyers want compensation for the work they’ve done. Neither side is going to be very happy if judges suddenly start bouncing settlements based on miniscule claims rates.

On the other hand, that could be a good thing, said Paul Bland of Public Justice. Bland said he doesn’t agree with the FTC’s apparent decision to prioritize consumer class action claims notification and foresees class action opponents like the Chamber of Commerce exaggerating the importance of the claims rate data the agency collects. But if the FTC investigation ends up identifying the best claims notification practices – and judges insists claims administrators follow those practices – consumers will benefit, Bland said.

“The quality of administration matters,” he said.

We may soon find out how much.

Editor’s note: An earlier version of this story identified Paul Bland as working for Public Citizen. He is with Public Justice.

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