Law

We recently read an interesting new empirical study that confirms what we've long suspected −  that so-called "no-injury" class actions, those that allege that a product was "worth less" than it should have been due to some inchoate, unmanifested defect, are a litigation boondoggle, benefiting nobody but the lawyers who bring them.

The study is Joanna M. Shepherd, "An Empirical Survey of No-Injury Class Actions," available through the Social Science Research Network, here.  Ms. Shepherd, a professor at the Emory University School of Law, started with all class action settlements between 2005 and 2015 that could be located on Lexis or Westlaw – 2158 cases.  She applied four criteria for identifying "no-injury" classes:

(1) the plaintiffs suffered no actual or imminent concrete harm giving rise to an injury in fact;

(2) the only harm alleged was a technical statutory violation (primarily of the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, the Fair Credit Reporting Act, and the Electronic Funds Transfer Act);

(3) if any out-of-pocket economic  loss was negligible or infinitesimal; or

(4)  the recovery sought was unrelated to compensating plaintiffs for economic or other  harm.

Shepherd Empirical Study at 1.  After applying those criteria, Professor Shepherd included only cases about which information existed on both attorneys' fees and settlement funds.  Id.  This culling produced 432 class actions that could be studied.

The results were appalling to anyone interested in litigation as an efficient means of resolving real disputes.  Only 2.5% of the 432 cases (probably 13) were actually tried.  The rest were settled, for a total of about $4 billion (average $9.37 million).  Id. at 2.  Of this, fully 37.9% went to class action lawyers as fees.  Id.  Of the remaining 63.1% – over $2.4 billion – potentially available to class members – at most 15% of that sum ever went to actual class members.  The result is that only 9% (at most) of the available funds went to those for whom they were intended "with the rest going to lawyers or unrelated groups" and thus failing to "achieve the compensatory goals of class actions.  Id."

Previous studies suggest [the claims rate] is almost always less than 15 percent, and oftentimes less than one percent. . . .  [I]f class members regularly claim less than 15 percent of these available funds, they would receive only 9 percent of the total monetary award paid by the defendant.  That is, although 60 percent of the total award may be available to class members, in reality, they typically receive less than 9 percent of the total.  In comparison, class counsel receives an average of 37.9 percent of available funds, over 4 times the funds distributed to the class.

Id. (emphasis added).  What a collossal waste of time, money, and effort.

We emphasize, that these figures, bad as they are, are a best case scenario.  The 15% claims rate is at the very high end of the scale.  Reality is often far worse:

[A] study of insurance class actions found that in the cases for which they could compute a claims rate, the median claims rate was 15 percent.  [In another] study of consumer and employee class actions . . . the claims rate was less than 12 percent.  Similarly, a federal court has observed that "'claims made' settlements regularly yield response rates of 10 percent or less."  In perhaps the most compelling piece of recent evidence, a declaration submitted in federal court by an executive with a leading administrator of consumer class actions reports that most class actions have a median claims rate of only 0.023 percent.

Shepherd Empirical Study at 17-18 (footnotes omitted).  The 15% is a medium for "insurance class actions."  Using the medium for actual "consumer class actions" of only 0.023% (0.00023 x 0.631) would yield a class member recovery rate of 0.00015 – meaning that the attorney's share of 37.9% is more than 2600 times the amount that ultimately finds its way into the hands of actual class members.  Using the Shepherd Empirical Study's $4 billion figure, it is quite possible that less than $600,000 was ever distributed to class members themselves.  That's the worst case scenario, and probably much closer to what actually goes on than the 9% used by Prof. Shepherd.

These outrageous figures underscore why we have always hated cy pres as a means of distributing supposedly "unclaimed" class action settlement funds.  Without cy pres to disguise what's going on, by giving huge amounts of money nominally belonging to absent class members to third-party charities (which can be plaintiff-side slush funds to finance future litigation), this scam could not work.  Either defendants would get the undistributed funds back, or they would escheat to the state – and in neither case could the bloated fees that class counsel collect be justified, or could a class action with an 0.015% payout to those supposedly injured be considered "superior" to any other form of litigation, or indeed to no litigation at all.

No-injury class actions are a pox on the legal system and exist only to employ and enrich lawyers without contributing anything of value to supposed "victims."  Professor Shepherd is to be commended for developing empirical evidence of this fact, but we wish she hadn't pulled her punches with that 15%.  As bad as her article describes the situation, reality is almost surely far worse.