Editor’s Note: The following guest post was authored by Sara Collins, contributor to the consumer finance website, NerdWallet. The views expressed in Sara’s article are her own. Although those of us who tend to represent defendants in consumer class actions may not agree with all of Sara’s views on the benefits of class actions, we can certainly learn something from reading a consumer advocate’s views on the subject. The article also provides an easy-to-follow primer on how class actions work. Many thanks to Sara for her contribution.
Class Actions – Do They Actually Help Consumers?
By Sara Collins
Consumers in the United States are sometimes victims of bad business behavior. These behaviors cover a huge range of bad acts, particularly in the field of securities. Class actions allow consumers to band together and fight against bad business. As such, they have a number of benefits for consumers and are quite helpful in evening the corporation versus consumer playing field.
What are Consumer Class Actions?
A consumer class action is simply a lawsuit which takes place in a federal or state court. The case is brought by one or a small handful of individuals, acting as representatives for a larger group of consumers, known as the class. Typically the case is seeking damages on behalf of the named individuals in addition to the entire class.
Why is a Consumer Class Action Necessary?
Traditionally, class actions are used to combine small-dollar claims for a large number of people. One small claim is generally too small for a cost-effective suit. Consumer class actions offer a helpful alternative, justifying the litigation expenses and immensely improving the consumer’s odds of success, particularly when it comes to larger corporations.
How do Consumer Class Actions Work?
When a class action is first brought, the court initially decides whether it is a proper class action. This is a process known as class certification. The parties then work towards a trial, though settlement negotiations can take place at any point. If the parties decide to settle the case, the court must approve the settlement and then order notice given to class action members.
Do Class Actions Work?
They definitely do. Billions of dollars are given back to the public every year which come from consumer class actions. In most cases, the money is given directly to the victims of the suit, rather than going into the hands of the government, lawyers or other non-consumers.
What Long-Term Effects do Consumer Class Actions Cause?
Class actions help to make bad business practices unprofitable. Class actions aggregate the power of isolated consumers, allowing class actions to compete against corporate behemoths. It levels the playing field, forcing businesses to operate in honest and trustworthy ways. Markets in other countries where class actions are not allowed often suffer from corporate abuses like stock manipulation, insider trading and other problems.
Do Lawyers Benefit Excessively From Consumer Class Actions?
One argument used by businesses to protest the prevalence of consumer class actions is to claim that the lawyers benefit excessively from the cases. In fact, attorney fees in class action cases average just between 20 and 30 percent of the amount recovered. In stark comparison, personal injury lawyers typically reap 35 to 50 percent of their case winnings. Clearly businesses are using false arguments in an attempt to eliminate class actions and thus damages sought against them.
What is the Class Action Fairness Act of 2005?
The Class Action Fairness Act of 2005 (CAFA) was enacted by Congress in order to curb abuse of class action suits in state courts. Evidence showed that many class actions were being filed which benefited the counsel, rather than the consumers. Additionally, many cases were filed in courts which showed prejudice against business defendants, a problematic issue.
CAFA was enacted to extend federal jurisdiction to these state courts in order to diminish such abuses. CAFA has had a mild success and while most benefits are for businesses, some benefits are extended to consumers. Primarily, the legislation limits the monetary benefits for the attorneys. This ensures that money won in settlements goes to the members of the class, rather than the plaintiff counsel.
Consumer class actions are needed to ensure the financial safety of consumers, particularly in the realm of securities. Class actions allow consumers to band together, combining resources in order to sue a corporation as a singular entity. In turn, all consumers reap the benefits of the settlement, helping to prevent future bad behavior from the corporation in question. Class actions undoubtedly have a positive effect on the world of consumers and it is vital they stay legal for the foreseeable future.
Sara Collins is a writer for NerdWallet, a personal finance site dedicated to helping consumers learn about new ways to save money.
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Breaking Down the Target Payment Card Breach Settlement – It’s Not as Groundbreaking as You’ve Been Led to Believe
Posted in Articles, Class Action Settlements, Commentary, Data Privacy Class Actions, tagged attorney's fee, class action, class action settlement, consumer class action, credit card, cy pres, data breach, data privacy, fund, heartland, michaels, payment card, reversion, target, target settlement, tj maxx on March 20, 2015| 4 Comments »
HarrisMartin’s Data Breach Litigation Conference: The Coming of Age is scheduled for next Wednesday, March 25, 2015, at the Westin San Diego. I’ll be speaking on a panel titled Creative Approaches to Settling Data Breach Cases with Ben Barnow of Barnow and Associates, P.C., Chicago. So, the news this week was very timely that Target has reached a settlement in the consumer class actions arising out of its massive payment card breach. Because a few clients and colleagues on both sides of the bar have asked for my opinion about the settlement, I thought I’d share a few thoughts here.
Settlements in data breach cases have been fairly rare up to this point, as many data breach cases have met their doom at the pleadings stage due to the inability of plaintiffs to show injury-in-fact sufficient to give them standing. Payment Card cases have been an exception because there are real financial losses to consumers that can flow naturally from a hacking incident. Importantly, these losses generally do not include the amount of any fraudulent card transactions because federal law limits consumer liability to $50 and the major card brands go further and impose $0 liability requirements on issuing banks. However, other incidental losses, such as replacement card fees, interest, finance charges by other companies due to missed payments, to name a few, can result from a payment card breach. For this reason, claims in several payment card class actions, including Target (Target Order on Motion to Dismiss) have survived motions to dismiss, leading many defendants to settle these cases. Payment card class actions against Heartland Payment Systems, TJ Maxx, Michaels Stores, and others were all resolved by class-wide settlements.
The Target Settlement has been praised and derided by the mainstream and legal trade media with a host of characterizations ranging from “huge” to “affordable” to “tiny.” In fact, Target’s settlement is not particularly groundbreaking beyond the media attention that it has garnered. Instead, it shares many of the features of the payment card settlements that came before it, and it is not significantly different in terms of its cost or in terms of the benefits it would provide to consumers, if finally approved.
Here is a summary of some of the key features of the settlement:
Overall Costs to Target
Claims Fund. Target is to pay $10M to create a fund to pay consumers who claim certain out-of-pocket losses and time spent in connection with those losses (discussed in more detail below). The fund is non-reversionary, meaning unclaimed funds don’t go back to the defendant. Instead, the agreement contemplates that the court will decide who unclaimed funds are to be distributed. (For a discussion of how courts can deal with unclaimed funds, see this February 2010 CAB post.)
Attorneys’ Fees. The plaintiffs will request court approval of up to $6.75M in fees. Target may object to the initial request, but it may not appeal any decision by the trial court to award $6.75M or less. Target must pay the fees awarded in addition to the $10M fund.
Settlement Expenses. Target must pay for all settlement administrative expenses in addition to claims fund and fees. This includes the expenses to provide both published and direct notice of the settlement to affected customers and the costs to administer claims and make payments to claimants if the settlement is finally approved. For a class size as large as Target’s these costs can easily measure in the millions of dollars.
Total Payment by Target. So, my guess it that the total payout by Target is likely to be closer to $19M, assuming the full amount of fees are approved.
Settlement Benefits to Consumers
One of the attachments to the Settlement Agreement is a Distribution Plan that generally outlines the benefits available to claimants. The Distribution Plan doesn’t itemize every conceivable loss that might qualify for compensation, but it attaches sample claim forms that give more insight into the specific benefits that are contemplated. Most of the categories of reimbursable losses are similar to those provided for in other payment card settlements. Here’s a summary, with some comments on each category:
As a practical matter, given the size of the fund, it is likely that there will be plenty of money to pay all documented claims and all plausible undocumented claims. In fact, in view of past settlements, it is extraordinarily unlikely that the amount of all legitimate claims will get even close to the $10 million available in the fund. In the Heartland Payment Systems settlement, for example, arising out of an incident that impacted 130 million card holder accounts, the number of claims for reimbursement amounted to a grand total of $1925. (See Judge Rosenthal’s Order in Heartland Payment Systems). This miniscule claims amount was due undoubtedly to a lack of public familiarity with Heartland (a payment processor) as a brand and with the incident itself, two things that are certainly not true of Target, and claims rates in other settlements have certainly been higher despite having much smaller numbers of potential class members. However, various media outlets have quoted a RAND Corporation researcher as estimating that less than $1 million of the $10 million fund will be claimed (see, for example, this article by Jason Abbruzzese at Mashable).
If he’s right, expect a fight ahead on what should happen with the $9M in unclaimed funds which, according to the agreement, “shall be distributed by the Settlement Administrator as directed by the Court.” Cy pres anyone?
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