Very few civil cases ever reach a jury. Nearly every lawsuit is at some point resolved by the court on motion or through settlement. Class action cases are no different, including those filed after data breach incidents. Accordingly, developing a strategy early in a lawsuit timeline is critical – whether to seek an early dismissal or an early out of court resolution. This article discusses a number of developments in the past year impacting class action settlements. And whether a case settles for tens of millions of dollars or substantially less, these recent events should be a part of any settlement consideration.
First, as we reported last year in this publication, two federal courts recently certified classes in data breach cases. Both cases were appealed and, in each instance, the appeals courts reversed or vacated the district court decisions (albeit for different reasons). While the lower courts’ certification orders demonstrate data breach cases can be appropriate for class treatment, the fact that appeals courts have closely scrutinized the district courts’ conclusions also shows there is uncertainty. In turn, a well-known axiom for any settle environment is where uncertainty exists on either or both sides.
Claims Rates and Notices
Second, courts, particularly in the federal system, are increasingly scrutinizing settlements in terms of fairness, reasonableness, and result. Courts are evaluating the claim rates and adequacy of notices being used. A California federal judge recently complained that predicted rates of 1%-9% were too low. He also found that the settlement notice provided to class members was too long and complicated. In denying the plaintiffs’ motion for preliminary approval, the judge told the lawyers to find a way to boost up the expected number of claims. In another recent instance, a Michigan federal judge became irked when the settlement presented to him describing potential payouts failed to consider that settlement costs and attorney fees were being deducted from the settlement fund. He found the notice was misleading and rejected preliminary approval. The First Circuit Court of Appeals also recently vacated a class settlement where it found significant differences in the claims created conflicts within the class requiring separate class representatives and would not allow for equal treatment of class awards. Finally, the Second Circuit Court of Appeals vacated a settlement finding there is no “presumption of fairness” as to a settlement agreement that was negotiated at arm’s length during a lengthy mediation before a neutral party. Rather, district courts must fully analyze all aspects of a settlement under the factors in Rule 23.
Aggregators and Artificial Intelligence
Relatedly, another somewhat recent development is the introduction of thirdparty aggregators using artificial intelligence (“AI”) to boost objection, opt-out, and claims rates. In essence, aggregators are using AI to locate class members and then communicate with them to file objections, opt-outs (with the possibility of filing other suits), or submit claims on behalf of the class members. At least one court has sounded an alarm and rejected the use of an AI aggregator for these purposes. See In re Juul Labs, Inc. Marketing, Sales Practices, and Products Liability Litigation, 2023 WL 6205473 (N.D. Cal. Sept. 19, 2023). The court overruled objections and set aside aggregated claims reasoning there was a lack of control over class communications and notice. On the other hand, some commentators have expressed that the use of AI could lead to more class member participation, better class notice, improvements in class administration, and higher claim rates. That said, AI is not a panacea for all problems and safeguards to prevent abuses and fraud would have to be implemented.
Counsel fees continue to be a source of judicial consternation and a number of courts have continued to question attorney’s fee awards in settlements. In a June 2023 Ninth Circuit Court of Appeals opinion, the court reversed (and revoked) a district court order where the plaintiffs initially sought $6 million and the court reduced it to $1.7 million. Still, the appeals court rejected the amount because – in the claims-made settlement – only $53,000 in compensation was claimed. This resulted in attorney’s fees of more than 30 times the amount. This case and others like it are now being used to change class action settlement structures. Plaintiffs are aggressively pushing for settlement terms that include non-monetary class-wide relief such as credit monitoring or certain forms of injunctive relief to demonstrate the value of the class settlement. There are also a significant number of cases where plaintiffs are demanding a common fund structure (as opposed to claims-made) to reduce the risk that settlements are not approved because they do not sufficiently compensate class members. Historically, claims-made settlements have been a better approach in data breach settlements because the structure permits compensation to be awarded to those class members that have interest in the settlement and have been harmed by the incident. A common fund structure, on the other hand, merely distributes a settlement fund without regard to anyone’s possible damage – potentially resulting in overpayments and underpayments to particular class members.
Residual Settlement Funds
Finally, residual settlement funds have received attention in the past year. Frequently, in a common fund settlement, these are funds remaining due to an inability to locate every class member. Several alternatives exist to distribute the remainder: (1) reversion to the defendant, (2) re-distribute to the class members who are known, (3) distribute to a cy pres recipient, (4) or escheat to a government. Ordinarily, courts reject returning money to the defendant that paid to settle and, in some instances, it is infeasible or uneconomical to re-distribute to the class members. This leaves alternatives (3) or (4) most likely. In the past year, courts have continued to struggle with the tension of distributing money to a cy pres recipient that has no connection to the lawsuit and judges determining how much should be awarded to any particular organization. In addition, critics have commented that cy pres awards divert funds from the real beneficiaries of the settlement. This said, courts have recently approved both cy pres distributions and awarded residual funds to the U.S. Treasury. The validity and application of cy pres and other alternatives will continue to be addressed by the courts.
Each of these developments will continue to impact the future of data breach class actions and settlements. There are opportunities to be creative and seek novel ways to resolve these claims and parties and counsel alike should be open to building settlements that can reach the proposed classes yet also consider the necessary safeguards to protect against abuses.