The Federal Trade Commission (FTC) recently conducted two studies to help understand how effective class action settlement notices are and to develop information that would aid in their effectiveness. Ultimately, the FTC found that many of these notices were not effective and any consumers did not understand them.
About the Studies
The studies were part of the FTC’s Class Action Fairness Project, which strives to ensure class settlements provide appropriate consumer benefits. The first study was called the Administrator Study. It reviewed 149 class action settlements to examine their specific characteristics. Seven claims administrators were required to provide information on notification procedures and response rates for different types of notice methods. 139 of these cases were filed in federal court, including consumer finance industry cases, overdraft practices cases, consumer privacy cases, mortgage-related cases, debt collection cases, TCPA cases and improper payment cases.
The second study was called the Notice Study. In this study, the FTC conducted internet-based consumer research to assess consumer perceptions of emailed class action notices that they received since class settlements are using this form of notification more commonly and it has gained wider acceptance in the legal arena. In this study, the FTC evaluated several factors, including:
- The likelihood that the recipient of a class action settlement email would open it
- Whether the recipient would understand the email
- The recipient’s impressions about the email
The study sought to determine how to make notices more effective. However, because the FTC used a voluntary internet panel, national statistics could not be derived from the study. Additionally, the panel was given a series of hypotheticals and asked how they would respond to the information, which is not the same as them actually receiving notifications and responding to them.
The FTC did not attempt to determine if the underlying claims were meritorious, if the settlements were fair based on the case facts or if the people who received the notice would have been entitled to compensation if they would have brought a separate lawsuit.
A major objective of the studies was to improve settlement outcomes for consumers.
The FTC released its preliminary report on the two studies.
Study Findings
Across all methods, the FTC found that claims rates were very low. Additionally, some of the most expensive forms of notice such as publications in national newspapers and magazines did not significantly increase claims rates. The Administrator Study revealed that the median calculated claims rate was 9% while the weighted mean was 4%. Claim rates were approximately 10% for more expensive forms of notice, postcard campaigns had 6% and email had 3% claims rates. Using publication notice did not have a significant impact on the claims rate.
The Administrator Study found that the vast majority of consumers who submitted their claims had their claims approved. The median claim approval was 93% while the weighted mean was 86%. 15% of claims were incomplete or inconsistent and denied. Those who objected or excluded from the class settlement were very low, less than 0.01%.
The Notice Study revealed some effective and ineffective methods to improve the open rate of email notifications. For example, including a specific refund amount in the subject line of the email actually caused a lower open rate than when there was not a number in the email subject line. Additionally, the respondents of this study were 12% less likely to understand the email if the refund amount was in the subject line. Respondents in the study said they were more likely to think emails that had a refund amount were ads or spams.
In contrast, short subject lines had significantly higher open rates than longer subject lines. However, longer subject lines without a refund amount were more likely to be understood. The Notice Study also examined how an email with a lot of text, which is common in class action cases, would compared to a experimental streamlined version. Researchers found that respondents were more likely to understand what steps to take to receive a settlement with the streamlined version but had a better understanding of the nature of the email with the longer version. They were also more likely to view the streamlined version as a scam.
The level of comprehension related to the email notices was low with less than half of people understanding them. Specifically, comprehension levels included the following:
- 2% understood the nature of the email when seeing it in an email inbox
- 4% understood the nature of the email when viewing the email itself
- 5% understood what steps they needed to take to receive a settlement.
Ultimately, the FTC concluded that consumers might not fully understand the potential value of their participation in class action settlements and may need more education in this area.
Previous Findings
Previous studies echo the findings of the most recent ones. A 2015 study with the Consumer Financial Protection Bureau revealed that only 4% of people responded by submitting a required claim form, meaning that 96% of the potential class members who were entitled to settlement funds failed to respond. If documentary proof was required, claims rates declined by 90%. However, even those who did respond often walked away with nothing. Of the 562 class actions the CFPD studied, 87% of the class members received no benefits because they settled individually, withdrew their claim or had no result while the study was pending. Of the 13% of class actions that settled, the average recovery for a class member was $32.35.
A similar empirical study in 2013 analyzed 148 consumer and employee class action lawsuits and found that none of the class actions ended in a final judgment on the merits for the plaintiffs or went to trial. In the vast majority of cases, most class members received no benefits. 35% of the class actions were dismissed voluntarily by the plaintiff and many of these cases settled on an individual basis with the original claimant receiving a settlement even though the class members did not. 31% of the class actions that were resolved were dismissed on the merits.
Future Action
The FTC will hold a public workshop on October 29, 2019 to discuss how to improve class action settlement notices for consumers. Panelists will discuss current practices and the latest research related to notices.
