FTC Report Underscores the Importance of Crafting Effective Settlement Notices

Seyfarth Shaw LLP

The Federal Trade Commission recently published a preliminary staff report on two studies it conducted to understand the effectiveness of class action settlement notices and develop information to help improve consumer settlement outcomes. While the report highlights its findings relating to low refund claim rates by class members, defense counsel may be more interested in the consumer research conducted to evaluate how email sender names, subject lines, and email formats can influence a consumer to successfully complete steps to file a claim.

The FTC’s Internet-based consumer research study found that recipients’ understanding of both the nature of the email itself and the next steps needed to receive their refund was low overall. About 38 percent of respondents understood the nature of the email when viewing it in their inbox and that number rose to slightly less than half when viewing the actual email. Only around 40 percent actually understood the steps required to receive a refund.

Interestingly, the FTC found that how an email subject line is phrased impacts consumer perceptions to a greater degree than the sender name does. For example, the inclusion of a $100 refund amount in the subject line made respondents 12 percent less likely to understand the nature of the email, with some mistakenly deeming such an email as an untrustworthy scam or spam. Unsurprisingly, respondents were correspondingly 4 percent less likely to even open the email if the refund amount was listed in the subject line.

In the other study covered by this report, the FTC found in analyzing data from 149 consumer class actions that the median refund claims rate in these cases, regardless of the form of notice, was low at 9 percent. For class action members who only received email notices of their refunds rather than traditional mailings, the median claims rate dropped to 2 percent. The FTC report comes on the heels of a 2018 amendment to Fed. R. Civ. P. 23, which now specifically notes that electronic notification is an appropriate means of providing notice to a class. The report’s insights can help parties craft more effective email notices to increase email claims rates.

The 149 class action settlements examined by the FTC contained a wide variety of alleged consumer harm. The most common types of allegations included improper payment charges (30) and misrepresentation (29). Other types of consumer cases with strong showings included debt collection (15), mortgage-related (15) and privacy (14).

In slightly more than half of the cases in the sample, mailed notice packets were used to notify class members. The remainder of the cases were split between postcard and emailed notice campaigns. Less than half of the cases provided direct notice in conjunction with a more expensive publication notice. Claims rates for notice campaigns using mailed notice packets were the highest, with a median claims rate of 16% and a weighted mean rate of 10%. Postcards received a median and weighted mean of about 6 to 7 percent, while email received the lowest median and mean claim rates of 3% and 2%, respectively. The FTC noted that, surprisingly, notice by publication did not have a significant impact on the claims rate. Since publication can be expensive, potentially avoiding publication in the future could allow for a larger percentage of settlement funds returned to class members.

Of particular interest to defense counsel and the businesses they represent, a negligible number of those notified objected to the proposed settlement (0.0003%) and only 0.01% excluded themselves from the settlement.

The FTC’s preliminary finding of low claims rates reinforces previous findings from smaller scale studies, including a 2013 study conducted by Mayer Brown for the U.S. Chamber of Commerce that found few class members ever receive funds. Of the six cases in its data set for which Mayer Brown could locate claims data, five had claims rates ranging from less than 1 to only 12% of the class.

On October 29, 2019, the FTC held a public workshop on improving class action settlement notices, including examining the issues raised in the preliminary report. A video of that workshop is available here. Public comments on these or related topics can be submitted electronically at Regulations.gov through November 22, 2019, or mailed per the instructions provided here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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