Class Settlements And The Risks Of Viral Media Attention

Risk Settlements

Digital communications and the thirst for relevant news content have completely changed how consumers gain awareness of class actions and how they file claims for settlement benefits...

Unfortunately, class action settlements tend to be another step down the road of financial uncertainty and unpredictability. In the class action context, when resolving a case using a claims-made settlement, the financial payout varies significantly, which can adversely impact liquidity, enterprise value, cash flow and assets. Additionally, when settlements go viral, companies face extreme losses which could exceed reserves and available cash on hand.

So what causes cases to go viral and create unmitigated financial risk for settling companies? The answer is simple and also multifaceted: the internet.

Digital communications and the thirst for relevant news content have completely changed how consumers gain awareness of class actions and how they file claims for settlement benefits. As a result of these changes, the ability to reach potential class members as well as those intent on abusing the system to receive free cash has created a fundamentally different risk paradigm for those looking at settling class actions.

In years past, known class members received direct notice, via mail, of their right to file a claim. Additionally, claim notices and filing instructions might be posted in one or two relevant print publications. For many consumers, filing a claim was more trouble than it was worth.

Today, scores of websites and social media groups exist for two key purposes: (1) notifying the public of available class action settlement payouts; and (2) providing a quick and easy portal for filing claims. The impact of these sites is undeniable. For example, in one recent case against a supplement manufacturer, 90% of the consumers who filed a claim came directly from class action promotion websites.

This article explores (1) the universe of these promotion sites; (2) the risks these sites pose to class action defendants; (3) the impact of free media; and (4) whether, notwithstanding these websites, there is any way to minimize the risk of a class action settlement going viral.

Free Money Equals Heavy Traffic

The reality of class action promotion sites is that they wouldn’t exist if they weren’t a successful revenue stream for their owners. And successful they are. The model is simple: the sites advertise “free money,” which generates huge online traffic, which induces advertisers to pay top dollar for ad placements guaranteed to reach big audiences. While many of them also claim to be promoting the common good by protecting consumers, they are undeniably generating income through advertising.

Indeed, one need look no further than the “Advertise with us” page of one of the top class action promotion sites. It boasts:

Top Class Actions is the #1 source of class action news online. Harness the power of our 5 million+ monthly page views and 705,000+newsletter subscribers to drive up the number of Class Members who submit settlement claims or potential clients who Kevin Skrzysowski are looking to participate in a consumer class action lawsuit or mass tort case. (Emphasis in the original.)

Other sites refer to class action payouts as “rebates” and advertise settlement funds on their homepage so they look like coupons that would be clipped from a newspaper. Still other sites purport to advertise class action settlement funds as part of the site owner’s “passion for finding the best deals, bank promotions, credit card offers, cash back, points and miles, and everything in between.”

Claim Veracity Is Almost an Afterthought

In fact, a Google search for “free money class action” yields dozens of results with site taglines like: “Class Action Lawsuit Settlements – Claim Free Cash,” “No Proof Required Class Action Settlement,” and “Do You Like Free Rebates? File a Claim for a Class Action Settlement.” If there is one commonality among these class action promotion sites, it is that they’re very good at communicating that many class payouts do not require proof of purchase. For example, on the “Frequently Asked Questions” page of one popular site, the following questions and answers are presented:

Do I need to prove I purchased these products?
Many settlements require no proof or purchase whatsoever.

Why don’t you need a receipt? Couldn’t anyone file a claim?
This trust based system does open them up to abuse, by people filing fraudulent claims. The legal philosophy that underpins the system is that as the party that wronged consumers, it is better the company bear the cost of these fraudulent claims than to deny the victims their just compensation.

Given this “free money, low risk” atmosphere, it’s no wonder that so many settlement claims go viral.

Social Media

It’s probably safe to say, of course, that the majority of Americans are not searching for the types of websites discussed above. The purveyors of these websites know this and that’s why instead of waiting for consumers to come to them, they are going directly to consumers. They do this through one principle channel — social media.

According to the Pew Research Center, nearly seven in 10 Americans use Facebook and 73% use YouTube. It’s no wonder, then, that class action settlement announcements are abundant on those sites.

In fact, a review of the Facebook pages for the websites cited in this article alone reveal a collective Facebook following of nearly 170,000 individuals. That means that every time a class action settlement opens for claims, 170,000 people are alerted to the potential for recovery — regardless of whether those people were harmed in a manner similar to class plaintiffs.

For its part, YouTube offers scores of videos on how one can collect cash from submitting class action claims. The videos have titles like “An Easy Way to Collect Cash: Joining Settlements On Class Action Lawsuits” and “Rake in Money with Class Actions.”

Given that Facebook and YouTube both use algorithms to present relevant content to users who have expressed a prior interest in a particular subject, it’s not a stretch to imagine that those seeking to improperly profit from class action settlements will be the first to have these posts appear in their social media feeds.

Internet News

Finally, the impact and immediacy of internet news sources cannot be overstated. On the date of this writing, for example, a Google search for news from the last 24 hours concerning “class action lawsuits” produced 916,000 results, including articles about a class action against the Department of Veterans Affairs, securities-related class action suits, and pharmaceutical class litigation.

Today, many people receive up-to-the-minute news alerts on their cellphones and other mobile devices. This ensures that the potential for class action recovery is never far from the minds of consumers. This may be particularly true when the news involves a class action suit against a popular brand. News of these lawsuits (and resultant claims against settlement funds) can quickly go viral as consumers clamor to take down “giant” corporations perceived as having deep pockets.

Risk of Free Media

In addition to claims promotion sites, settlements can go viral as a result of free media. At times, the news picks up the story organically. Often times, the promoter sites generate the media’s interest in a particular settlement. Once free media picks up a story, then the claims promotion sites and broader consumer awareness drive the submission of both legitimate and fraudulent claims. The following are some examples of cases where free media exploded the claims rate:

Vibram USA Inc. Settlement: This case involved allegations of deceptive advertising related to footwear. The parties’ settlement agreement called for a $3.75 million settlement fund, which the parties estimated would yield a payout of $20 to $50 per pair of shoes to aggrieved claimants. After free media reached a nationwide audience, claims skyrocketed such that the actual refund to each claimant was just $8.44 per pair. It is estimated that there were more claims submitted than products sold during the class period.

Naked Juice Settlement: News outlets including ABC News, Fox and Huffington Post reported that consumers could be eligible for up to $75 as compensation for a product alleged to be improperly labeled as “all natural.” The stories went viral, which caused 1.4 million consumers to visit class action promotion sites and the claim site. Eventually, 634,278 claims were submitted which collectively sought nearly $32 million in benefits.

Red Bull Settlement: News outlets reported that consumers could be eligible for up to $10 cash or $15 voucher for the labeling settlement. The stories went viral, which caused 2.5 million consumers to file claims.

Viral Analysis

It’s possible to examine the likelihood of whether a proposed class action settlement will go viral, thus posing uncorrelated financial risk. For example, in the Naked Juice settlement, claimants filed claims totaling $32 million in class benefits before the cap was applied. (Risk Settlements did not consult or participate in this matter.) Is there any way to know why this
happened and whether it could have been predicted? We think so for the following four reasons.

First, the Naked Juice brand had massive name recognition. By examining the 2013 sales figures of the leading refrigerated juice and juice drink smoothie brands in the United States, we can see as demonstrated in the graphic below, Naked Juice was the top brand with the second highest brand more than $260 million behind. Moreover, Naked Juice’s sales made up 55% of this particular sales category.

Indeed, in the United States, more than 125 million people regularly purchase products in the juice/drink category, and nearly 1.7 million of those people drink Naked Juice daily. With nearly two daily glasses consumed on average, Naked Juice consumption was estimated to represent 2.5% of the juice/drink market as a whole.

Second, Naked Juice had a significant advertising, social media and marketing footprint. According to market research, Naked Juice’s 2013 advertising budget was approximately $15 million, of which 40% was dedicated to television commercials and 40% was allocated to magazine advertisements. In addition, it had over 900,000 Facebook fans and its YouTube channel had over 4 million views.

Third, the class demographics for Naked Juice consumers presaged a large take rate. For this industry, the top marketing strategies target white females, ages 18-34. There is an emphasis on health-oriented consumers who are loyal to the brand and have a household income of more than $75,000. In this case, class demographics increased the risk profile as consumers were more likely to feel aggrieved due to the allegations of the use of GMO products in what was marketed as a healthy, nutritional drink. Class members were both tech savvy and existed within like-minded ecosystems to share stories about the settlement, sense of outrage and mechanisms like filing claims to redress the harm.

Fourth, the company and third-party administrator did not take any actions to deter fraudulent claims from being filed. Given the high level of claims filed, it is likely that a significant portion were filed by claimants that were not part of the class and were seeking “free money” as was advertised on claims promotion sites.

Taking all this information into account, the Naked Juice settlement was ripe to go viral, experience a high number of fraudulent claims from waste, fraud and abuse, and would likely exceed the settlement damage cap.

What Can Class Action Defendants Do About This?

While there is no way to stifle the communications forces of free media, there are ways to lessen the impact.

Engage a Competent Notice Expert

In this media-frenzied environment, hire an experienced notice expert who will develop a media plan which meets all constitutional requirements while making sure that digital advertising is brand safe. Ensure that your notice campaign is actively and not passively managed. This way, the company has safeguards so that the campaign is not jeopardized and the company’s brand and reputation is not tarnished due to ad placement.

Build In Claims Safeguards

Determine whether there are any anti-fraud provisions which can detect waste, fraud and abuse. Ask your administrator if they audit against lists of known fraudulent filers and examine unusual activity or patterns indicative of fraud. The settlement administrator should have protocols outlining their ordinary and customary process for validating claims for completeness and accuracy. Be sure to review all of these anti-fraud safeguards carefully.

Consider Transferring the Risk

When facing a large top line or aggregate risk from a settlement which may go viral, some companies choose to transfer the risk, which is a relatively new class action settlement strategy. Rather than bear the financial risk of high claims rates fueled by media attention, the company can instead transfer the risk of the settlement for a known, fixed cost. The transfer of settlement risk takes place after class action litigation has been filed and a settlement agreement has been executed.

The risk is transferred to a third-party insurer that assesses the class action circumstances and the financial needs and situation of the defending company, determines an appropriate premium, and agrees to pay all valid claims under the settlement agreement. If news of the settlement is picked up by claims promotion websites or the free media, the financial risk arising out of the settlement is not borne by the defending company.

At a time when free media coverage continues to drive ever-larger claims payouts, approaches like these can help class action defendants mitigate the impact and uncertainty of the next viral settlement to hit the internet.


Kevin Skrzysowski is a director at Risk Settlements.

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