(The opinions expressed here are those of the author, a columnist for Reuters.)
By Alison Frankel
NEW YORK, Oct 25 (Reuters) - One of the critical junctures in the U.S. Senate’s late-night dismantling of a Consumer Financial Protection Bureau rule shielding consumers’ right to band together to sue financial institutions was, according to The New York Times, an Oct. 23 Treasury Department report that used the CFPB’s own data to criticize the bureau’s rule.
In 2015, after a three-year study, the CFPB issued an epic report contrasting consumers’ recovery in class actions with their results in individual arbitration against banks and credit card companies.
The bureau considered its study unequivocal proof that class actions against financial institutions deliver vastly more money to vastly more people than arbitration. With the study as its justification, the CFPB issued a rule in July 2017 that prohibited the institutions it regulates from imposing mandatory arbitration on their customers.
The Treasury Department pulled different numbers from the CFPB study to conclude that class actions deliver a lot of money to plaintiffs' lawyers but little benefit to aggrieved consumers.
Only 13 percent of the cases result in classwide recovery, Treasury said, and few affected consumers – on average, just 4 percent – bother to claim their share. That’s not surprising, Treasury said, since the CFPB data show the average claim from class settlements to be about $32.
Plaintiffs’ lawyers, meanwhile, collect an average of more than $1 million per case.
“Based on the bureau’s own data, it is far more likely that the rule will generate massive economic costs — borne by businesses and consumers alike — that dwarf the speculative benefits of the bureau’s theorized increase in compliance,” Treasury said.
Nothing in the Treasury report is news to class action lawyers, whether they sue corporations or defend them. Low claims rates and high transaction costs are always the first resort for class action critics. But the outcome of the Senate vote shows the power of those data points.
Class action proponents, meanwhile, don’t have equally provocative numbers to counter critics’ data.
There’s plenty of data to prove arbitration does not compensate consumers victimized by systemic corporate misconduct. For the most part, as the CFPB study proved, consumers don’t bother to bring individual arbitration claims against financial institutions. Millions of consumers were members in class actions against financial institutions during the time period covered in the CFPB study. By contrast, the CFPB found, fewer than 500 a year filed individual claims – and most of them lost their cases. (In a forthcoming law review article on the impact of mandatory arbitration provisions in employment litigation, New York University law professor Cynthia Estlund crunched the available data to conclude that 98 percent of employees covered by mandatory arbitration do not bother to assert claims.) Business groups continue to tout arbitration as a fast, low-cost vehicle for redress. Maybe, but consumers aren’t using it.
But there are two big reasons why class action proponents don’t have data to show the benefits of group litigation outweigh the costs. One is a matter of procedure. The other involves the very purpose of class actions.
First, there’s no way to prove how many consumers, by percentage or in the aggregate, receive compensation from class actions because no one has collected that information. Once federal judges grant final approval of class actions and legal fees, the cases usually fall out of sight. Settlement administrators typically send out notices and process claims without anyone asking for a final accounting of how much money has been sent to class members. Occasionally a judge will demand information about claims rates and disbursements, but those are exceptions. The CFPB made a determined effort to analyze the numbers and could only come up with data in 105 cases. (It found an average claims rate of 21 percent and a median rate of 8 percent.)
The U.S. House of Representatives passed a bill earlier this year that called for class action lawyers to submit an accounting of payouts in every case to the Federal Judicial Center and the Administrative Office of the U.S. Courts. The Judicial Center would then be required to annually compile data on claims rates, total payments to class members, average and median recoveries, and (of course) payments to class counsel. The bill, which also contains a defendants’ wish-list of fetters on class actions, is stalled in the Senate and considered unlikely to become law, but even class action proponents otherwise skeptical of the House’s ideas have said they’re intrigued by the data collection proposal.
New York University’s Center on Civil Justice is hoping to fill the class action data vacuum, according to law professor Samuel Issacharoff. He told me Wednesday that the center wants to amass “close out” reports to judges who have overseen class actions. Issacharoff, who frequently works with class action lawyers on high-stakes appeals, said he’s convinced the data will show the cases deliver measurable benefits to class members, especially as technology provides new tools to identify and notify class members. Issacharoff pointed out that in some cases, like the e-books antitrust class action against Apple, tech has already eliminated the whole cumbersome claims process. “The claims rate stuff is dramatically different than it used to be,” Issacharoff said.
Better accounting of class action payouts, in other words, could prove (or disprove!) the efficacy of class actions as a vehicle for delivering compensation to supposedly harmed consumers. There are, however, no numbers to measure the other big benefit class action advocates believe they provide: deterring corporate wrongdoing.
Class actions were created merely as a procedural way to aggregate individual claims that might otherwise not be feasible. But as Vanderbilt law professor Brian Fitzpatrick has written, the cases have taken on the additional public interest mantle of holding corporations accountable to their victims. Fitzpatrick argues, in fact, that policing corporate conduct has become the primary purpose of class actions.
Punishing and deterring corporate wrongdoing was the rallying cry for class action proponents trying to convince the Senate to keep the CFPB rule in place.
Public interest groups such as Public Justice and Public Citizen said mandatory arbitration allows companies such as Wells Fargo and Equifax to evade responsibility for allegedly taking advantage of their customers.(As Reuters reported Wednesday, both Equifax and Wells Fargo have said they will allow customers to pursue class actions.) And other corporations, by this theory, will be emboldened to rip off consumers if they know they won’t face class actions.
The CFPB built that assumption into its rule barring mandatory arbitration clauses. But as the Oct. 23 Treasury Department report said, “The bureau has identified no evidence indicating that firms that do not use arbitration clauses treat their customers better or have higher levels of compliance with the law.”
The CFPB, in other words, couldn’t measure the deterrent effect of class actions. Vanderbilt prof Fitzpatrick surveyed the class action literature and came up with a few studies that support the deterrence theory, but even he hasn’t attempted to quantify it.
If you can’t put a number on a primary justification for class actions – and your opponents, meanwhile, can shout about fat lawyers’ fees and low claims rates – you’re inevitably going to be at a disadvantage in policy fights.
I’ve spent nearly my whole career thinking about class actions. I’ve always started from the assumption that little guys deserve a right to work together to fight big guys. The data on mandatory arbitration certainly proves little guys are reluctant to bring their own cases. But at the moment, the data on class actions makes it all too easy for critics to argue their benefits for little guys are outweighed by the costs to big guys.
Someday, I hope, we’ll have deeper stats and can make more informed judgments about class actions – assuming actions like the Senate’s dismantling of the CFPB rule don’t wipe them out before we get there.
Reporting by Alison Frankel. Editing by Alessandra Rafferty.