Class Action Perspectives
Class Action Settlements: What You Should Know About Claim Filing Services
In nearly every major class action today, third parties emerge after a settlement is signed and announced – claim filing services. Claim filing services can provide value in the settlement context, especially where the claims process is complex. In some cases, however, they simply take money for services claimants could easily perform themselves. Class action attorneys need to know when claim filing services can be a useful adjunct to the claims process, and the pitfalls of claim filing services’ participation in settlements. With this knowledge, settlements can be drafted to include guidelines and procedures that best serve class members.
Claim Filing Services: What are They?
A claim filing service is a company – or sometimes an individual – that assists businesses or consumers in the preparation and filing of claims in class action settlements. While the fees for these services vary, typically the claim filing service charges a percentage of the recovery awarded to the claimant. The fee agreement can take the form of a simple contract and is typically accompanied by the grant of a limited power of attorney to the claim filing service. In many instances the power of attorney directs that payment on the claim be made and/or mailed to the claim filing service.
Are Claim Filing Services Needed?
Rust Consulting’s earliest experiences with claim filing services occurred in the Denny’s restaurant racial bias litigation. In May of 1994, the Denny’s restaurant chain agreed to pay $54.4 million to settle two class action lawsuits. A toll-free line with live support was operational the day the settlements were announced, and 1.5 million calls were answered over the course of the claims period. However, in June, some consumers reported that they paid to call the settlement line. An investigation by the D.O.J. revealed that a car repair shop in south central Los Angeles had become “Sims & Associates”, an unofficial Denny’s claims center. Potential claimants had agreed to pay 20% of the recovery for “assistance” filling out a claim form, and $10 to $15 for a Sims employee to dial the toll-free number.
The Denny’s case involved an unnecessary “service” intended to benefit only the operator, but claim filing services can serve a useful function by generating additional claims filings. In the securities arena, for example, while the monetary value of class action settlements continues to grow each year, less than 30% of institutional investors with provable losses perfect their claims. Cox and Thomas, Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements, January 2006, 59 Stan. L. Rev. 411 (http://ssrn.com/abstract=875488). The average mean loss from this failure to file claims is $850,000.00. Id.
Given this evidence, it is not surprising that many class action lawsuits have been filed against mutual fund operators alleging that the funds had violated their fiduciary duties by failing to submit claims in class action settlements. While many of these suits have been dismissed, the S.E.C. is also interested, and has sent letters to a number of fund managers and investment advisors asking for information about their policies for deciding whether to participate in securities class actions and settlements.
These events have helped accelerate the emergence of claim monitoring and claim filing services in securities cases. Services such as Institutional Shareholder Services (www.issproxy.com) and Claims Compensation Bureau, Inc. (www.claimscompensation.com) track securities litigation and file claims on behalf of mutual and pension funds, investment managers, brokers, and custodial banks, either for a fixed annual fee or a percentage of the awards paid for claims filed on behalf of customers. By monitoring litigation and seeking out potential claimants, securities claim filing services can expand the notice and increase consumers or companies that receive settlement benefits.
Claim Filing Service Pitfalls
Even in instances where claim filing services do provide value to claimants, problems can arise. As we learned in the Naef v. Masonite settlement, the widely varying levels of experience, expertise, and reliability of claim filing services means that they should be closely monitored.
The Masonite settlement encompassed a 10-year filing period for claims for defective hardboard siding. Property owners submitting claims were required to provide proof of ownership and verification of the defective siding as Masonite. Claim filing services began submitting claims on behalf of property owners in the summer of 1998. To date, over 300 services have filed claims.
The Masonite Special Master initially ordered that while claims could be filed by claim filing services with a mailing address in care of the service, checks would only be made payable to the claimant. Later, the Special Master approved the use of a standardized power of attorney to accompany all claim submissions from the claim filing services, and a revision to the claim form to include signatures by both the service and the claimant. These changes did not, however, remedy all on-going problems with a handful of the claim filing services. Those problems included the submission of falsified ownership documents and product samples, forged claimant signatures on powers of attorney, and/or failure of notaries to properly witness signing. Even more significant were reports from some claimants that they had not received their payments from one company – Robert Blackford Consultants. Ultimately, Mr. Blackford admitted to pocketing more than $329,000 of his clients’ money, and was sentenced to 24 months in prison.
Oversight of claim filing services in the Masonite settlement was strengthened by the Court’s requirement that any service must agree to several conditions, which included the following:
- The submission of an application to act as a claim filing service, including a background check for employees.
- The provision of an original, signed power of attorney with all claims, the language of which was approved by the Court.
- Maintenance of a separate trust account for all claimant funds.
- Consent to the exclusive jurisdiction of the Court.
In most consumer settlements, assistance is available to help claimants with their filing. Even in these types of settlements, however, some claim filing services may try to take advantage of consumers who do not understand that they can submit claims on their own, or that someone is available to provide assistance at no cost to the claimant.
In these circumstances, the risk that substantial numbers of claimants will pay for unnecessary services can be minimized by the requirement that the claim filing service’s agreement with the claimant include a disclosure form that must be submitted with the claim. This disclosure, like the sample provided on the next page, should be brief and easy to understand.
Building Solutions Into The Settlement Agreement
In 2003, an attorney in a large class action settlement told us he was not concerned with claim filing services because the settlement agreement prohibited assignment of settlement benefits. Two years later, a spokesperson for Settlement Recovery Services announced that it had submitted $50 million in claims in that same settlement, demonstrating that even with the simplest of claims procedures, the parties need to address the prospective role of claim filing services comprehensively as part of the settlement process.
Depending upon the nature of the settlement, additional safeguards can be incorporated into the settlement agreement or be made part of a court order governing the claims process. Those safeguards can include:
- Establishment of qualifications for claim filing services, including the maintenance of insurance.
- A requirement that all services wishing to submit claims complete an application and submit to background checks of employees and owners prior to submitting claims.
- Adoption of a standardized plain language power of attorney that must be signed by the claimant in the presence of a notary. The original of the power of attorney should be submitted with the claim form.
- In a settlement with a very simplified claim process, such as one where the class member dates and signs an individualized claim form for a predetermined award, a requirement that the service’s fee agreement with the class member include cancellation rights.
- Requirements that the claim form be signed by both the service and the claimant and include the disclosure that free help with claims is available.
- A requirement that all claim filing services must execute an agreement or commitment that includes: (1) a consent to the jurisdiction of the court; (2) claim submission and prompt payment requirements and consequences for failure to meet those requirements; and (3) an agreement to maintain separate trust accounts for class member monies, and consent to audits of all accounts.
- A requirement that settlement awards will be made payable only to the class member.
- Provisions detailing under what circumstances, if any, payments on claims will be mailed to the class member in care of the claim filing service. Where payments are mailed to the service, the claims administrator should mail a payment confirmation letter to the class member.
It should be remembered that in many cases claim filing services can and do serve the needs of class members. Strictures that are too onerous can reduce the number of claims filed. Counsel’s challenge in drafting the settlement agreement is to strike the right balance of protection of class members without discouraging claims filing by legitimate services.