Viral Class Actions Offer Good (and Bad) News for Plaintiffs’ Firms

From the start, consumer class action lawsuits have been designed to right wrongs committed against a group of similarly situated consumers. And from the start, lawyers and courts have wrestled with the problem of how to make class members aware of relief available to them.

Until now, courts have lived with imperfect yet workable solutions. For many years, where possible, direct mailings were used to alert individual consumers to their right to relief. Newspaper advertisements directed to the class were also considered an acceptable, if not ideal, method of making consumers aware of their rights.

In the age of 24/7 media and an ever-evolving digital world however, things have changed. Most significantly, the internet has made us much more efficient in spreading information to targeted communities. This has created complications for stakeholders in class actions—particularly small firms representing plaintiffs.

Settlement Distribution

To understand those complications, we must understand how settlements are paid out in consumer class actions. Several methods can be used by the parties and memorialized in their settlement agreements. Among most common:

• Coupon settlements: In these settlements, class members receive a voucher, coupon or discount of some kind from the defendant(s).

• Common Fund: This method, often used in securities and antitrust cases, creates a pool of money from which to compensate class members. That pool can be distributed in various ways; in one scenario, it can be divided proportionally among class members who make valid claims (with some percentage going to pay class counsel).

• Claims-Made: This type of settlement is most common in consumer class actions. In claims-made settlements, the defendant pays the value of all valid claims submitted. The settlement amount increases, that is, with each new claim. Some claims-made settlements place a cap on the amount the defendant must pay; if valid claims reach above that amount, they are adjusted downward.

Courts, which must approve any settlement, are most skeptical of “coupon” settlements. It is also worth noting that in common fund settlements and claims made settlements that are capped, defendants do not face limitless liability when a very large number of claims are filed.

The Risks of “Free Money”

At first glance, it would seem that the power of social networks and the internet to spread information about class action settlements would be an unalloyed positive. And yes, it is a good thing that potential claimants are being reached more efficiently. But the ease with which class settlements attract attention also carry a downside, which can fall disproportionately on legitimate class members and the law firms representing them.

Two in particular merit discussion.

First, the digital age has given rise to a cottage industry of websites that help individuals claim relief from class actions. These websites generate revenue by attracting the largest audience possible and do not have great concern for restricting their reach to valid claimants. Instead, they lure visitors with tempting offers of “free money” and emphasize the lax verification standards applied to class action claims.

This of course, encourages fraudulent claims. For common fund or claims-made settlements that are capped, each fraudulent claim reduces the amount of money going to each legitimate claimant.

Second, the ability for news of a settlement to “go viral” on legitimate sites can also greatly increase the number of claimants and, in turn, reduce individual recoveries. The prototypical case here is the massive settlement in which Equifax® agreed to pay a total of $575 to $700 million to resolve state and federal investigations of the data breach exposing the information of nearly 150 million Americans. A smaller portion was reserved to pay individual claimants, but because of the high-profile nature of the breach, the entire country was following the settlement closely. Here’s how USA Today® described what happened:

“Originally, consumers were told they could receive free credit monitoring for 10 years or up to $125. But on July 31, the FTC warned that the payouts would be ‘nowhere near the $125 they could have gotten if there hadn’t been such an enormous number of claims filed.’”

The free credit monitoring is, of course, the better deal here – it has a retail value that far exceeds $125. However, free cash being free cash, a “run on the bank” ensued.

“’The public response to the settlement has been overwhelming. . . . [E]ach person who takes the money option is likely to get a very small amount,’ the FTC explains in frequently asked questions.”

Similar situations have played out with other defendants. Footwear maker Vibram® USA created a fund that its estimated would pay claimants $20 to $50 for each pair of shoes bought. After news of the settlement went viral, and more claims were made than shoes purchased, claimants received less than $9 each. Red Bull® and Naked Juice® have also faced avalanches of class claims.

Any scenario in which claims are reduced to unsatisfying levels creates obvious problems for class members, but also for the law firms representing the class. They can face the wrath of dissatisfied class members as well as courts, and take reputational hits that impact them when seeking court appointments to represent future consumer classes.  

That’s not to say small class action firms should shy away from consumer class actions. Simply being aware of the above issues (especially in cases involving attention-getting brands) can go a long way in reducing the risk of a viral settlement. Careful planning should include hiring qualified outside firms to audit and administer claims. Class counsel should also consider hiring a communications firm to manage the public relations aspects of the settlement process—and keep the firm in the best light.

With the right planning, viral settlements can be a financial and PR boon for smaller firms, rather than a nightmare.

Equifax is a registered trademark of Equifax Inc. USA Today is a registered trademark of Gannett Satellite Information Network, Inc. Vibram is a registered trademark of Vibram S.P.A. Red Bull is a registered trademark of Red Bull GmbH. Naked Juice is a registered trademark of Naked Juice Co. of Glendora, Inc.