The Rise of Smaller Class Actions

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On July 22, 2014, NERA Economic Consulting (NERA) published a study of consumer class action settlements between 2010 and 2013. The report states that NERA’s data “show a steady increase in consumer class action settlements from 2010–2013.” NERA found that 66 class actions were settled in 2010, 111 were settled in 2011, 141 were settled in 2012 and 161 were settled in 2013. In other words, nearly 100 more class actions were settled in 2013 than were settled just three years prior.

At the same time, however, NERA also concluded that the aggregate amounts paid by settling defendants in each year only exhibited a “gradually increasing trend” when two large, outlier settlements are excluded. (These two outlier settlements are a $7.25 billion settlement of antitrust claims alleging that merchants paid excessive interchange fees for accepting Visa/MasterCard and a $1.6 billion settlement of claims alleging that Toyota vehicles experienced sudden, unintended acceleration.) In fact, when these two outlier settlements are excluded, the average amount of each settlement “showed a slightly decreasing trend” during this period. Thus, although the number of class action settlements increased substantially since 2010, the average per-case settlement amount actually declined while the aggregate annual settlement amount increased only gradually.

NERA’s data are consistent with the authors’ experience in consumer class actions during the last five years, who have also observed the trend of more class action settlements for smaller settlement amounts. What is causing this trend, and what can businesses expect in the future? Three basic conclusions are drawn, as follow.

Conclusion No. 1: Class Action Lawyers Are Focusing on Volume

A primary cause of this trend is a shift in the nature of the class actions being filed. Plaintiffs’ lawyers are filing a higher volume of class actions that have comparatively smaller values. Indeed, class actions are increasingly becoming a volume, “commoditized” enterprise for many plaintiffs’ lawyers. The following factors from the NERA data and the authors’ own experience support this observation.

Plaintiffs Are Filing More Class Actions Involving Smaller Damages

For example, there has been a recent boom in the filing of smaller value class actions, including claims involving food labeling (e.g., claims alleging that products are mislabeled as “All Natural,” claims alleging misleading calorie content, etc.), consumer privacy (e.g., data breaches) and violations of the Telephone Consumer Protection Act (TCPA) (e.g., unsolicited faxes and texts). These types of cases typically involve smaller potential damages than consumer class actions filed in the past. Because plaintiffs’ lawyers do not anticipate the historical returns on these types of cases, they will not invest as much on the front end and will be inclined to try to settle as early as possible in the litigation to maximize the return on their investment. Defense counsel are inclined to settle early, too, because these cases can often be settled for much less than the costs of defense in a typical class action. Also, given the commoditized nature of the complaints, plaintiffs’ counsel often file large volumes of these cases against different defendants to offset the smaller average amount of the settlements.

Data Show Most Settlements During this Time Period Were Relatively Modest for Class Actions

According to the NERA data, “roughly half of the cases with a reported settlement value settled for less than $10 million.” Although not broken down in the NERA data, based on experience, the authors believe it is likely that a significant number of those settlements were valued at $1 million to $2 million. Plaintiffs’ counsel receive a smaller fee per case, but they seek to make up for it through the volume of actions they bring and settle early.

Plaintiffs Are Targeting Venues with Perceived Lower Pleading Standards

According to the NERA data, approximately 50 percent of the consumer class actions that were settled were filed in California. California courts provide a favorable forum for the filing of these small-dollar, high-volume class actions. The vast majority of those California cases, especially the food labeling cases, involve claims brought under the California Unfair Competition Law, Business and Professions Code §§ 17200 et seq. (UCL). California courts have not required reliance by absent class members and, even for the named plaintiffs, have been willing to infer reliance if the plaintiff was exposed to a long-term advertising campaign. These comparatively low pleading standards increase the likelihood that the plaintiff will survive a motions to dismiss (which is the one opportunity that defendants have to win the case before they need to begin the costly discovery process) and bring the defendant to the negotiating table. (Mandatory early mediation rules in the California courts also foster early settlements of class actions on either an individual or classwide basis.)

Conclusion No. 2: Product Liability Actions Are Increasing Due to Recent Decisions

The NERA report identified two areas in which the average settlement value was the highest between 2010 and 2013: antitrust and product liability. Antitrust class actions have always been high-stakes litigation, and the fact that many of the largest class actions settlements involved antitrust claims is nothing new.

However, in accordance with the NERA data, the authors have noticed a clear increase in the number and size of settlements of product liability class actions. The increased filing and settlement of product liability class actions are likely the direct result of several recent decisions from federal appellate courts granting class certification in product liability class actions. See, e.g., Butler v. Sears, Roebuck & Co., 727 F.3d 796 (7th Cir. 2013); In re Whirlpool Corp. Front-Loading Washer Prod. Liab. Litig., 722 F.3d 838 (6th Cir. 2013); In re Zurn Pex Plumbing Prod. Liab. Litig., 644 F.3d 604 (8th Cir. 2011); Pella Corp. v. Saltzman, 606 F.3d 391 (7th Cir. 2010). Prior to these rulings, plaintiffs typically faced a very high burden to obtain certification of product liability claims because individual issues of causation would typically predominate under Federal Rule of Civil Procedure 23(b)(3). See, e.g., McLaughlin v. Am. Tobacco Co., 522 F.3d 215 (2d Cir. 2008); In re St. Jude Medical, Inc. Silzone Heart Valve Prod. Liab. Litig., 522 F.3d 836 (8th Cir. 2008); In re Bridgestone/Firestone, 288 F.3d 1012 (7th Cir. 2002); Castano v. Am. Tobacco Co., 84 F.3d 734 (5th Cir. 1996). The recent appellate court decisions have circumvented the predominance of individualized issues of causation by recognizing “issue certification” under Federal Rule of Civil Procedure 23(c)(4) and/or bifurcating issues of causation or damages for separate individual trials. As a consequence, plaintiffs’ lawyers are using those recent decisions as blueprints for asserting and certifying product liability class actions, while defendants are facing increased pressure to settle due to the increased risk of classwide relief.

Conclusion No. 3: These Trends Will Likely Continue

The NERA data tell a clear story. More class actions are being settled in recent years (particularly in areas such as food labeling, consumer privacy and TCPA cases), but the per-case settlement value slightly declined, and the aggregate annual settlement dollars increased only gradually even though substantially more cases were settled. Taken together, this data reveal that many class action lawyers are filing more smaller-value class actions (and then seeking to settle them quickly). These lawyers will likely also continue to file high-stakes class actions that they perceive to be easier to get certified, such as antitrust and product liability class actions. This is consistent with the authors’ own experience in class actions in recent years, who expect that businesses will see these trends continue.