Class Action Settlements: A Neglected Revenue Stream
Now, more than ever, businesses are under pressure to control costs and maximize revenue. Unfortunately, many organizations are neglecting an often misjudged but worthwhile revenue stream: recoveries from class action settlements. Businesses routinely receive notice of these settlements, but they are often ignored or even thrown away based on the misguided belief that any potential recovery is not worth the time and effort to file a claim. As COO of a third-party filer who has recovered over $255 million in class action settlement claims on behalf of thousands of businesses, here's what I've learned.
Understanding the Class Action Settlement Process
Each year, thousands of class actions lead to the awarding of billions of dollars in settlements. To fully understand how your business can benefit, it's best to know how these class actions work.
In most cases, class action settlements begin when a large group of people or businesses who experienced the same or similar damages from a product, service, or action, come together to file a class action lawsuit against a defendant. In a class action, a single suit is filed on behalf of everyone in the group (or "the class"), and all claims are tried in a single court. When successful, all class members receive compensation.
There are various types of grounds for a class action lawsuit. They often involve defective products, but they can also cover security fraud, anti-trust or price-fixing, incorrectly paid insurance claims or corporate misconduct.
How Are these Suits Settled?
Typically, most of these suits take a while to settle. It's not uncommon for them to produce several years of discovery, complaints, motions to dismiss, amended complaints, deadline extensions, objections, and counterclaims. Nevertheless, in due course, the parties often begin to talk about a settlement. Settlements happen for many reasons, but most often, they come about so the parties involved can avoid a trial, and the defendant can avoid any admission of guilt. When a class action lawsuit settles, a fund is typically established by the defendant to compensate the victims. These funds can be worth tens of millions, hundreds of millions, or even billions of dollars for a single settlement. Defendants are willing to set aside these pools of cash in exchange for a release from class members from future claims or legal action.
As part of the settlement, the parties will also work out how to notify class members, how the amount of each claim is determined, which settlement administrator will oversee the process, and whether any special masters or committees will be appointed to help manage the claims.
Defining the Class
An essential step in any class action is defining the class. The plaintiffs and defendant must identify whom the settlement is going to cover. Since a settlement can occur either before or after a case is officially designated a class action by a judge, there are two ways a class is defined. If the settlement occurs before a class is officially certified, the parties involved establish the settlement class. If the settlement happens after certification, the class is defined and approved formally by the court.
Defining the Compensation
Another area that gets resolved during settlement talks is the type and amount of compensation the settlement will provide to the class members. The total amount involved in a settlement depends on many factors. In the cases we have been involved with on behalf of our clients, settlement funds have ranged from tens of millions of dollars to billions. An excellent example of the latter is the current Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, also known as the Visa / MasterCard Interchange Fee Class Action Settlement. It has a fund set aside to cover as much as $5.5 billion.
During settlement negotiations, the involved parties also resolve whether the settlement will include what's known as injunctive relief, requiring the defendant to do or stop doing a specific act. In the case of the Visa / MasterCard litigation, a separate class of merchants is seeking injunctive relief to verify whether Visa and MasterCard will reform their rules.
Once the parties involved in the class action reach a mutually agreed-upon arrangement, they submit their proposed settlement to the judge overseeing the case. The court reviews the proposal and decides whether the settlement is "fair, reasonable, and adequate" to the class members. The judge considers many factors, including any signs of collusion, to ensure the agreement benefits the entire class and not just the lead plaintiff and counsel.
Once the court grants preliminary approval (and sometimes earlier), a notice of the settlement is advertised or sent out via postcard or letter. A settlement website is also launched where class members can learn about the litigation and eventually file a claim. Since a settlement may be rejected if the court determines that not enough class members were made aware of the opportunity to participate, the goal is to reach as many class members as possible.
Now You Know the Basics—What Can You Do?
When your business is presented with an opportunity to participate in a settlement, in most cases, there are at least five options to consider:
Do Nothing. Many businesses eligible to participate in a settlement do not file a claim because they never learn about the opportunity. While settlement administrators go to great lengths to communicate the settlement to potential class members, even with 21st-century communication channels, sometimes the notices never make it to the right person. At MCAG, our clients depend on our research team to monitor class action settlements worldwide and keep them informed of opportunities.
Remarkably, even after receiving notice of eligibility, roughly 80% or more of eligible entities do not pursue settlement opportunities. There are several reasons for this high abstention level. Our research shows that many of those who do nothing are uncertain about the potential return of the settlement or fear that they don't have access to the data or records needed to achieve their recovery potential. This is where we often play our most important role. As a result of our access to relevant industry data for over 6 million businesses via our strategic partnerships, we can build and/or extrapolate required claim information when a client's data is limited or not readily available, as part of our Settlement Recovery Services.
File a Claim. To participate in a settlement, class members are often asked to complete a claim form, and they may also be asked to provide some proof of the damages they suffered (usually in the form of bills or receipts). However, in some settlements, class members are not required to file a claim. They receive a check automatically after final approval—although automatic payment has become the exception rather than the rule these days. For our clients, MCAG completes the proof of claim on their behalf and files all the required documentation with the settlement administrator.
Sell Your Claim. Some class members may want to consider monetizing their settlement before the settlement fund is distributed through a sale and assignment of their claims, particularly if increasing cash flow in the short term is important. In the Visa / MasterCard Interchange Fee Class Action Settlement, a market for these claims has been growing, and some third-party funders, including MCAG, are now making offers. Any business interested in selling their claims should be sure to understand the projected value of their claim and solicit multiple bids from different funders before accepting a final offer.
Exclude Yourself from the Settlement. After preliminary approval, class members can exclude themselves from the settlement, which means they won't benefit from it. This allows them to preserve their right to individually sue the defendant(s) at their own expense—an option that settlement participants forfeit when they choose to participate.
Object to the Settlement. Class members may choose to object to the proposed settlement if they believe it is unfair, inadequate, or unreasonable. Objections help the court identify settlements that are unfair, inadequate, or unreasonable. They also delay the settlement process.
If a settlement survives all the stages I've outlined, it is granted a final approval hearing. At the hearing, the court considers, among other factors, any objections to the settlement, the number of class members who opted out or submitted claims, and the total relief to be granted to class members. If the judge decides the settlement is fair, reasonable, and adequate, he or she grants the final approval of the settlement. Only after this point will settlement funds be distributed to class members.
So how long does it take for a settlement to pay out? The Visa / MasterCard Interchange Fee Class Action Settlement goes back to 2004. Claim forms are not yet available and the filing deadline for claim submission has not been announced. While this is a rather extreme example, it does reinforce just how complex and challenging it can be to reach a final settlement and distribute funds.
When you hear about settlement talks, don't ignore the opportunity— don't start counting on any money either. Instead, stay informed. Keep an eye out for settlement notices, visit our settlements news page and sign up for our Settlement Recovery Services so we can help you maximize your recoveries while minimizing the burden and expense associated with submitting a claim.