Class Action Defense Lawyers Do Talk About Claim Rates

The percentage of eligible people who file claims in class action settlements should never be a taboo subject. Lawyers on both sides should talk about claim rates, and, where fewer people than expected have stepped forward to claim settlement benefits, judges should look further to understand why.

Settlements vary significantly in design and intent, however, and judges shouldn’t deal in absolutes. Specifically, judges shouldn’t insist on universal minimum claim rates, as some commentators recently have suggested.

In an outlier case featuring a massive settlement fund, large payments to each claimant, and a social media defendant with the ready means to provide inexpensive direct notice to class members, of course courts might expect those unusual inputs to drive unusually high claim rates, and judges would be justified in asking tough questions if the claim rate did not meet their expectations.

Much closer to the norm, however, is a recent case from the Southern District of New York, Hesse v. Godiva Chocolatier, Inc., where 500,000 people completed a straightforward online process to claim up to $25.00 in benefits. Although only about three percent of eligible class members filed claims, the court called the claims process “commendable” and approved the deal over objections from several state attorneys general.

Cases like Hesse highlight why no court should find a settlement to be unfair based on the claim rate without having asked why the rate turned out as it did. In every case, multiple factors, including the compensation the settlement makes available to each class member, what a class member must do to demonstrate eligibility to recover, and the feasibility of direct notice, may impact the claim rate without rendering the settlement unfair.

A universal minimum claim rate does not make sense even for common fund settlements.

In a common fund settlement, the defendant agrees to pay a fixed sum meant to represent fair consideration for the whole class. The defendant’s payment does not change, regardless of the number of claims. The common fund is distributed among the class either pro rata or pursuant to an agreed formula.

Just because the defendant’s financial obligation is fixed rather than variable, however, doesn’t mean the parties should prioritize a high claim rate over all other considerations.

Both sides want to agree on methods of notice that satisfy or exceed due process considerations. But, because every dollar spent on notice is a dollar that won’t be distributed to the class, the parties must consider the cost of a notice step relative to the overall settlement amount. Spending $500,000 to notify class members of a $1 million common fund makes little sense, but less expensive notice may yield a lower claim rate. The court should consider whether the parties struck the right balance between preserving the common fund for distribution and providing effective notice.

Both sides also want to agree on a claims process that blocks fraudulent claims while not putting unnecessary hurdles between eligible claimants and the compensation intended for them. For every step the parties include in a claims process, it is fair for the judge to ask whether that step fills a real need of the settlement, such as to confirm the class member’s eligibility to recover, or seems instead like mere make-work for the class member.

The primary question should be whether each class member was afforded a fair opportunity to partake in the settlement. If the answer is yes, but the number of claims nevertheless falls below the judge’s preapproval expectations, asking why fewer people came forward would be a better option than rejecting a settlement for failure to meet some bright-line minimum percentage.

A universal minimum claim rate doesn’t make sense for pure claims-made settlements either.

In a claims-made settlement, the defendant’s settlement cost rises with the number of claims. This obviously introduces different financial incentives than exist in common fund cases, but those incentives do not change the responsibilities of plaintiffs’ counsel, defense counsel, or the court, to ensure effective notice and a fair claims process.

Although the defendant in a claims-made settlement benefits financially from a lower claim rate, the defendant also wants to ensure that the business practices in dispute are resolved, its customers are satisfied, and the settlement receives final approval. No defendant should want a shoddy notice process or a cumbersome claims process that does not help it accomplish these goals or cannot be easily explained.

Critically, however, the raw number of claims in a settlement is not usually, and certainly not always, a good gauge of the settlement’s fairness. Many claims-made settlements involve conduct that the defendant believes was lawful and unobjectionable to most of its customers.  In a consumer fraud case, for example, the plaintiffs may have challenged a practice that the defendant believes all or most of its customers find reasonable, an alleged “defect” that few customers experienced, etc.

If that defendant agrees to a claims-made settlement, it puts its money where its belief is. It offers to pay all class members who say they had a problem, but requires each claimant to complete a reasonable claims process. This can be as simple as a check-box attestation or may call for more, depending on the case. If the defendant is right about the general satisfaction of its customer base, there will be few claims, and that would be a feature of the settlement, not a bug.  If the defendant is wrong, the claim rate and overall cost of the settlement will be higher than the defendant expected.

Rule 23 requires the “best notice that is practicable under the circumstances” (with an explicit reasonability requirement). The parties therefore must design a fair notice program tailored to the circumstances of the case, and judges absolutely should scrutinize the notice proposal carefully at the preliminary approval stage.

The parties also must design the claims process with the particulars of each case in mind. In many cases, it will be perfectly reasonable for the defendant to require class members to produce receipts or other documentary proof of purchase. In other cases, hard-copy proof should not be necessary and requiring it may depress the claim rate artificially. Motions for preliminary approval of settlements should describe the claims process in detail and include depictions of what class members will see and must do and why. If the defendant doesn’t think it can explain a burden to the court’s satisfaction, it shouldn’t seek to impose that burden.

The reviewing judge should ensure that class members are not being held to an unduly burdensome standard, given the size of the contemplated payments and the ease of access to and need for the information required to verify the claim. Ideally, this scrutiny should happen during the preliminary approval stage, before class members receive notice and begin the claims process. Deferring it to the final approval stage risks generating objections and slowing the process in ways that could have been avoided.

So, yes, let’s talk about claim rates. But let’s do it honestly and with a focus on what is reasonable—not arbitrary thresholds.

Claim rates can be one element of a settlement’s fairness. Rarely, however, does the raw number of claims tell anyone, and certainly not the court, whether the settlement treated class members appropriately.

Defense counsel always must keep in mind that plaintiffs’ counsel are not the only stakeholders in the settlement process. Judges have the most important vote. State attorneys general exercise a critical watchdog role in settlements, too, and there are plenty of lawyers out there who will be quick to identify flaws in class action settlements and who will not hesitate to file objections, particularly if doing so may yield a payment. Defense counsel thus should not always press to impose unnecessary roadblocks to claims even if plaintiffs’ counsel may agree to some of them.

Atypically large settlements can produce atypically high claim rates. When a lawyer on the plaintiffs’ side has a case so large that the parties can entertain any kind of notice they want, and a defendant has the ready means to communicate with millions of customers at the push of a button, it is easy for that lawyer to throw stones at settlements that do not have those features and which may, as a result, yield lower claim rates. For more typical class action settlements, however, good reason exists to push back against the idea that the failure to achieve such an unusually high claim rate automatically says something negative about the kinds of settlements that should and do receive judicial approval every day of the week.

This is why good class action defense lawyers can, and do, talk about claim rates.

Reprinted with permission from the June 10, 2022 online edition of The National Law Journal © 2022 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.