A smoking gun in debate over consumer class actions?

May 9, 2014

The biggest obstacle in evaluating class actions involving inexpensive consumer products is the frustrating lack of empirical data. Sure, we can compile statistics on case filings, dismissals, settlements and attorneys’ fees, but publicly available evidence about whether these cases actually benefit the people who bought the supposedly flawed products is scant indeed.

You may remember the tit-for-tat “studies” on consumer class action outcomes issued last December by Mayer Brown (at the behest of the U.S. Chamber of Commerce) and the Consumer Financial Protection Bureau. Not surprisingly, given that Mayer Brown undertook its research to counter, pre-emptively, the CFPB’s preliminary report on mandatory arbitration clauses, the two studies reached opposite conclusions about whether class actions deliver real value to class members.

Both analyses, however, had to extrapolate aggressively to reach their predictable outcomes. There have been thousands of consumer class action settlements, but Mayer Brown based its conclusions about class members’ claim rates on data from a whopping six cases. The CFPB looked at eight. I’m not blaming either of them. They looked hard for data, but it’s just not available in public records.

The claims information does exist. After cases settle, consultants who specialize in providing notice to potential class members process the claims that result from those notices. Settlement administrators have data on how many consumers actually collect money or other benefits from the class actions they oversee. But their information seldom becomes public. Unless judges or class members kick up a fuss before the deal receives final approval, claims rates in consumer cases aren’t disclosed.

That’s why a declaration submitted last month in a false-labeling class action involving Duracell batteries is so tantalizing. Class counsel from The Lowe Law Firm and Wiggins, Childs, Quinn & Pantazis reached a preliminary deal with the defendants last fall that, in their description, has “a total value of at least $49.87 million.” Seems like a pretty nice result, which is why the lawyers asked U.S. District Judge David Baker of Orlando to grant them about $5.7 million in fees.

Six members of the class of more than 7 million Duracell battery buyers filed objections to the settlement, arguing (among other things) that few consumers would actually bother to file claims for the cash piece of the settlement, which amounted to $3 or $6 per claim. In response, defense lawyers at Jones Day submitted a declaration from Deborah McComb, a senior consultant at Kurtzman Carson Consultants, a settlement administrator. KCC is administering the Duracell settlement, and the point of McComb’s declaration is that the rate of claims in this case is consistent with what KCC typically sees in similar settlements that have received final approval.

McComb provides some hard numbers to support the point — and this is why the declaration is significant. KCC, she said, has administered hundreds of consumer class actions in which class members received notice indirectly rather than directly through the mail. These cases “will almost always have a claims rate of less than 1 percent,” she said.

It gets worse. Six months ago, KCC analyzed claims rates in all of the consumer class action settlements it has overseen in which the only notice to class members came through media advertisements. (Products included toothpaste, heating pads, gift cards, snack food and sunglasses.) The claims rates in those cases, McComb said, ranged between .002 percent and 9.37 percent. That 9.37 percent, though, is clearly an outlier: The median claims rate for cases in the KCC analysis was .023 percent.

By that measure, the Duracell case is a triumph for consumers, since .76 percent of battery buyers filed claims to receive $3 or $6. If all of those claims turn out to be valid, McComb said in the declaration, the settlement fund will disburse $344,850 to class members. But remember: The settlement is supposed to be worth $49 million — the number on which plaintiffs lawyers have based their fee request. Even counting the $6 million in Duracell products that will be distributed to charities if the settlement is approved and the injunction against false labels the defendants agreed to, there’s an awfully big gap between the alleged value of the deal and the actual cash benefit to the class.

I don’t mean to pick on the Duracell case or counsel in the class action, who point out in their response to settlement objectors that it’s standard procedure in the 11th Circuit to base fee awards on the benefit available to class members and not the benefit actually delivered to them. I should also point out that I was alerted to the McComb declaration by Ted Frank of the Center for Class Action Fairness, who is one of the objectors in the case. (I left messages for class counsel and for defense counsel at Jones Day but didn’t hear back.)

But when you consider how little the public knows about consumer class action claim rates, McComb’s data has the effect of an air horn. A median rate of claims of .023! That translates into 1 claim per 4,350 class members. I already know Mayer Brown is excited about the KCC data, which partner Andrew Pincus called “very, very significant.” You can expect the McComb declaration to become a staple reference for the Chamber and other anti-class action groups. And with the CFPB still working to fulfill its Dodd-Frank mandate of reporting to Congress on arbitration clauses, I’m sure business groups will use the information in the declaration to argue that the low rate of consumer arbitrations isn’t a big deal because consumers don’t make claims in class actions either.

Georgetown professor Brian Wolfman told me by email that class actions serve an important deterrent effect even if consumers don’t collect damages. In the late 1990s, Wolfman said, the federal rules committee “rightly rejected the notion that ‘just not worth it’ cases should not be certified [as class actions]. Why? Because the aggregate harm, not just the individual harm, matters, not only to consumers but to commercial competitors.” (To that, I’d answer that the U.S. Supreme Court seems poised in the case of Pom Wonderful v. Coca Cola to make sure commercial competitors can pursue their own false labeling claims.)

A spokeswoman for the American Association for Justice also sent an email statement on the McComb declaration. Most class actions involve notices mailed to class members, she said. And even if McComb’s numbers are right, thousands of consumers have obtained benefits from low-dollar claims in class action settlements. “We can be certain that if consumers were not able to join together as a class, the relief would be zero percent and the company would reap unlawful windfalls for ripping off consumers,” she said.

The real problem, said Todd Hilsee of the Hilsee Group — an expert in class action notices — is that you just can’t get consumers to care very much about filing a claim for a few dollars. No matter how effectively the claim notice penetrates the class, he told me, rates will remain low in cases like these.

Hilsee told me he advocates strict scrutiny by judges who oversee low-dollar class actions and fee awards for plaintiffs lawyers that are based on actual recovery by class members (cash plus the value of any injunctive relief obtained for the class). That’s an intriguing idea. I wonder how many plaintiffs lawyers would file low-dollar consumer class actions if they knew their fees would be based on the claims filed by .023 percent of the class?

I suspect it wouldn’t be very many.

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