After a federal judge rejected a class action settlement with Remington Arms Co. due to an “appalling” claims rate, lawyers in the case scrambled to reach out to more gun owners. They put together a targeted ad campaign on Facebook and radio that was estimated to reach 74 percent of class members.
More than a year later, their efforts paid off: The total number of claims jumped from 2,327 to 22,000. And on Tuesday, U.S. District Judge Ortrie Smith in Kansas City, Missouri, gave his final approval of the deal.
But he still was disappointed in the claims rate. After all, an estimated 7.5 million class members had guns that might inadvertently go off without pulling the trigger, risking death, injuries or property damage.
“While not required by Rule 23, the court is concerned as to why more claims have not been submitted,” he wrote, citing the Federal Rule of Civil Procedure that governs class actions. “To the extent class members do not want to participate, the court cannot force them to do so.”
Dismal claims rates, which are the percentage of potential class members who actually make claims to get compensated under a settlement, have long been an accepted outcome in many class actions. Few judges or lawyers have addressed the issue in the courtroom, and data on claims rates remains sparse.
But that might be changing. In November, the U.S. Federal Trade Commission subpoenaed eight claims administrators for information on notice procedures and response rates of class action settlements. The FTC said the subpoenas are part of its Class Action Fairness Project, which aims to improve class action settlements for consumers while making sure lawyers and defendants aren’t benefiting at their expense. This month, the U.S. House of Representatives passed a class action reform bill that, among many other things, would require lawyers in a class action settlement to turn over claims data to the Administrative Office of the U.S. Courts and the Federal Judicial Center. Even judges, like Smith, are starting to ask more questions about why more class members aren’t participating.
“It’s taken years for it to bubble up,” said Ted Frank, who has been pushing judges to look at claims rates since 2009, when he founded the Center for Class Action Fairness, now part of the Competitive Enterprise Institute. “And as more and more and more of those examples happen, people are going to recognize that this is a standard that class action settlements should be held to.”
Why Claims Rates Hasn’t Been an Issue
Poor claims rates generally aren’t a reason for class action settlements to get rejected. For one thing, claims rates aren’t among the myriad factors judges must consider in approving a settlement. In his order this week, Smith cited nearly a dozen other cases in which judges had approved settlements with similar, if not worse, claims rates than the Remington case.
But some blame inherent conflicts of interest in class actions that keep claims rates low. In many cases, the attorney fees are based on the potential, not actual, amount paid to class members, and defendants don’t want to pay more than they have to. Also, claims administrators bidding for the work have little incentive to pitch expensive notice programs that might reach more class members.
Such conflicts create “a problem which has prompted FTC action to compel claims-rate transparency, and anti-consumer legislation in Congress that would eviscerate class actions,” Todd Hilsee, a notice expert at The Hilsee Group in Philadelphia, wrote in a statement following the ruling in the Remington case. Hilsee had filed an amicus brief opposing the settlement.
The U.S. Court of Appeals for the Seventh Circuit has highlighted many of these conflicts. In a 2014 ruling in Redman v. RadioShack, Judge Richard Posner cited a “built-in conflict of interest in class action suits” that should make judges more hesitant to approve settlements. And in Pearson v. NBTY, Posner criticized a “selfish deal” between class counsel and the defendant that left class members out in the cold.
“I think Judge Posner’s opinion in Pearson is very, very persuasive,” said Frank, who represented an objector in the case. “And I think judges who look at that opinion and think about the incentives they’re creating for parties creating class actions settlements would agree you need to look at the claims rate.”
A few judges are doing just that. In 2015, a federal judge in Oakland, California, noted a claims rate of 0.58 percent when rejecting final approval of a class action settlement involving alleged brake defects in Nissan vehicles. “Where 6.5 percent of the payout goes to the class members and 80.2 percent goes to the attorneys purporting to represent those class members, the tail is clearly wagging the dog,” wrote U.S. District Judge Phyllis Hamilton, who ultimately granted final approval last year.
This year, another federal judge in Oakland rejected final approval of a class action settlement involving PlayStation game consoles after concluding that a claims rate of 11,300 out of about 10 million “appears quite low.”
“Counsel’s failure to provide more than argument about the basis for its estimate of the class size, and thus the claims rate, leaves the court without any basis of confidence” about the settlement, wrote U.S. District Judge Yvonne Gonzalez Rogers in a Jan. 31 order.
In the Remington case, the claims rate issue became particularly acute because the legal dispute involved public safety. The case was featured in a CNBC report and an episode of “60 Minutes.” The revised settlement drew objections from attorneys general of 10 states.
In his order, Smith took pains to outline many of the challenges in reaching out to class members: Remington didn’t have a customer list, and records from the National Rifle Association of America or state hunting licenses provided unhelpful or unavailable information. He also said class members might not be making claims because they aren’t worried about the problem or don’t trust the government or attorneys enough to give up their firearms.
In praising Smith’s order, lead plaintiffs’ attorney W. Mark Lanier of The Lanier Law Firm in Houston acknowledged the shortcomings.
“I wish we had full compliance with the opportunity to fix the triggers,” he said in an email. “But we don’t. And we won’t. Yet every one we get fixed potentially saves a life or limb.”