This article on claims-made settlements appeared originally in the guest column section of the March 10, 2008 issue of ProductLiabilityLaw360. Under the submission guidelines, I retain copyrights to the article, but I was required to wait at least three months before reprinting the article elsewhere.
Claims-Made Settlements In Consumer Class Actions
Monday, Mar 10, 2008 — In recent years, commentators, consumer advocates, and courts have become increasingly critical of perceived abuses in consumer class action settlements.
Recent changes to Rule 23, Federal Rules of Civil Procedure, and provisions of the 2005 Class Action Fairness Act impose express requirements on courts for assessing the constitutionality and fairness of class action settlements before approving them.
Much of the debate has focused on so-called “coupon” settlements, in which class members are given coupons with little or no value in exchange for a release of claims by the class against the defendant and payment of substantial attorneys’ fees to class counsel.
In light of debate at the federal level, state court judges are also reviewing class action settlements with a more critical eye.
In the context of this additional scrutiny, attorneys in consumer class actions still face the challenge of trying to fashion a settlement acceptable to both sides or face the prospect of years of prolonged and expensive litigation.
One tool still available to counsel in meeting this challenge is the claims-made settlement, in which the defendant agrees to pay a monetary settlement award to qualifying class members who mail in a claim for a payment.
Claims-made settlements can be controversial because like coupon settlements, they do not ensure monetary relief to every member of the class.
However, claims-made settlements can provide a win-win solution for all of the true stakeholders in a consumer class action. They can maximize the relief available to individual class members who take the minimal steps necessary to participate, provide reasonable compensation to the attorneys and class representatives who took the time and effort necessary to pursue the class action, and still keep the cost of the settlement low for the defendant.
If they are done right, claims-made settlements remain a viable tool for resolving consumer class actions despite the atmosphere of additional scrutiny.
Each class action settlement is unique, but there are several common methods for distributing relief to the class. They include: (1) direct payment; (2) fund; (3) claims-made; (4) coupon; and (5) equitable relief.
Two or more methods may be used in combination as part of an overall settlement structure. In a direct payment settlement, class members are sent payments or have accounts credited directly without having to take any affirmative action.
In fund settlements, the defendant pays an agreed sum to a fund that may then be used to pay for settlement costs, attorneys’ fees, and cash awards to class members. Class members may or may not have to file claims for benefits as part of a fund settlement.
In coupon settlements, class members are sent coupons for free or discounted products or services from the defendant, which provide actual monetary benefits only to the extent the coupons are redeemed. Equitable relief, in which the defendant agrees to change its conduct in the future, may be provided on its own or in addition to other relief.
The basic mechanics of a claims-made settlement are typically as follows:
The defendant agrees to pay a monetary award to class members who return a timely claim form after receiving notice of the settlement.
Only qualifying class members who timely mail in claim forms are entitled to payment; no settlement fund is created.
The settlement agreement includes a release of claims by all class members, whether or not they submit a claim, unless they exclude themselves pursuant to Rule 23.
Administrative costs and attorneys fees are paid separately from the amounts to be paid to claimants.
Within this basic structure, there can be many variables. For example, the award amount can be calculated in numerous ways. It can be a set dollar amount, a percentage of an agreed calculation of the plaintiffs’ alleged damages for each class member, a formula that reasonably approximates the harm to each individual, etc.
The notice plan may also differ from case to case. Common means of providing notice include direct mailings to class members, publication in newspapers or other media, or a combination of mailing and publication.
Claim form requirements also can vary. In some cases, each claimant may simply be asked to correct any address information and sign a claim form. In other cases, additional information may be requested to assist in the calculation of award amounts. The amount of verification needed for claims will also vary.
The response rate to a claims-made settlement can vary depending on the makeup of the class, the amount of individual awards, the geographic scope of the settlement, and numerous other factors. Predicting response rates is an art, not a science.
Although it is impossible for a defendant to predict the response rate with certainty, consulting with attorneys and class action administrators with experience in claims-made settlements can help to at least provide a ballpark estimate of what the settlement will ultimately cost.
The claims-made approach differs from other common methods for distributing class relief in several key ways. Unlike direct payment settlements, no payments are made without class members taking the affirmative step of returning a claim form.
Unlike fund settlements, the amount the defendant must pay is not predetermined. Instead, the defendant only pays to the extent claims are made.
This also means that the defendant’s risk is not capped. Also, in a fund settlement, attorneys’ fees and administrative costs are often paid out of the fund, which reduces the amount of money available to class members. These amounts are usually paid separately in a claims-made settlement.
Finally, despite sharing with coupon settlements the characteristic that class members must do something affirmative to enjoy benefits of the settlement, claims-made settlements are not coupon settlements. Real money is paid.
The unique characteristics of claims-made settlements provide advantages over other possible methods of distributing relief. They can allow the parties to maximize the amount of individual awards available to those class members who take the time and effort to make a claim, while minimizing the overall cost to the defendant of funding the settlement.
This makes it much easier to reach an agreement. Certain administrative costs are avoided because there is no fund. There is no need to set up a structure to deal with unclaimed funds because only those award amounts that are claimed are to be paid.
This eliminates the need for settlement provisions for distributing unclaimed funds, which commonly require that unclaimed funds be paid to a charity or to the state or revert back to the defendant.
Finally, the amount of money available to a class member is not reduced by administrative costs and attorneys’ fees because those amounts do not come out of a common fund.
Despite these advantages, the claims-made settlement is not without criticisms. The criticisms can be grouped into two categories.
The first relates to traits inherent to the claims-made settlement structure that cannot be changed but may be explained and justified. The main criticism in this category is that not all class members are guaranteed relief. This is true, and, in fact, in many cases the number of class members who actually make a claim may be quite low, especially in cases where individual award amounts are low.
As a philosophical matter, a response to perceived unfairness in not guaranteeing relief to the entire class is that the structure maximizes the potential relief afforded to any given individual class member who is interested enough in obtaining relief to participate.
A defendant is much more likely to agree to a higher individual settlement award when faced with the prospect that it will not have to pay 100% of the claims of all class members.
Therefore, while the settlement structure does not guarantee an award to all class members, it does maximize the opportunity available to each class member.
Moreover, oftentimes there is no way to guarantee monetary relief to each class member regardless of the settlement structure, especially in those cases where the defendant lacks contact information for all or part of the settlement class. So, forcing the defendant to pay 100% of all possible claims often does not guarantee that class members will receive those benefits.
Whatever the justification for not guaranteeing relief to all class members in a particular case, courts generally have not rejected claims-made settlements for this reason alone.
Courts typically look to the reach and adequacy of the notice given to class members, not whether all class members ultimately receive monetary relief.
As long as there have not been unreasonable restrictions on access to notice and the opportunity to participate, claims-made settlements are commonly approved.
The second category of criticisms has to do with potential problems that can be avoided in any given settlement. For example, some critics argue that claims-made settlements create an incentive for the defendant to keep the claims rate low.
While this might be a legitimate objection in a settlement where unreasonable hurdles to receiving notice of the settlement and participating in its benefits have been erected, it can be overcome if the parties agree to a notice plan that is reasonably calculated to reach and provide simple, understandable notice and an opportunity to participate to the maximum possible number of class members.
A reputable notice expert will be able to assist in creating a notice plan that meets these objectives. Another common objection is that the attorneys’ fees award may be disproportionate to the payout to class members. This criticism can be tempered if fees are paid separately from the money being made available to class members and if the parties wait to negotiate fees until after reaching agreement on relief to be made available to the class. Including equitable relief can also help to justify a fee award.
A final criticism is that notices tend to be in legalese, causing class members to ignore them or throw them away. This criticism can be avoided in any given case by hiring a qualified notice administrator and by following notice guidelines adopted by the Federal Judicial Center.
Counsel can also maximize the likelihood of court approval, both at the preliminary approval stage and at the final approval stage, by giving full disclosure to the court. Counsel should be up front with the court at or before preliminary approval by explaining all of the material elements of the settlement, including the pivotal factor that only class members who submit claims will be paid.
If the judge is unfamiliar with claims-made settlements, it is a good idea to have at least one hearing in open court where the settlement structure can be explained by the attorneys for both sides, and the judge can ask why the parties agreed to this particular settlement structure.
At the time of preliminary approval, it may even be a good idea to point out some of the criticisms that have been made against claims-made settlements and explain why the settlement before the court is fair. The parties should attempt to quantify the relief available to each individual class member and its relation to the award amounts available to claimants under the settlement plan.
It is a good idea to explain these facts in a memorandum accompanying the preliminary approval motion, along with a discussion of why the litigation risks to plaintiffs and the class justify any discounts used in determining the settlement award.
If it is done right, the claims-made settlement can be a very effective way to resolve consumer class action lawsuits. This settlement structure facilitates the maximum possible benefit to the class representatives, those class members who make the effort to participate, and class counsel.
In addition, it can make the settlement less expensive for the defendant. This makes settlement more likely under terms that are favorable to those class members who care to participate. The parties should be able to adequately respond to any criticisms by providing full disclosure to the court from the beginning and by utilizing a fair and adequate notice plan.
–By Paul G. Karlsgodt, Baker & Hostetler LLP
Paul Karlsgodt is a partner with Baker & Hostetler in the Denver office.