In recent years, parties entering into class settlements—largely at the urging of courts—have sought to boost the rate at which class members participate in those settlements by reducing gating requirements for submitting claims. In an increasing number of cases, claims are flooding in. But all too often, a meaningful percentage of those claims are fraudulent. And the tools used to submit these improper claims are being used to subvert other parts of the legal system.
Background
Class settlements often require class members to file claims in order to receive settlement payments. Under those settlements, notice of the right to file a claim typically is sent to potential class members or, if their identities are unknown, notice will be published online and social-media and search ads may be targeted to people likely to be class members. Class members then submit claim forms, either by mail or electronically. Third-party claims administrators process and use those claims to make payments.
For decades, many observers have pointed out the low percentage of class members who submit claims in consumer and worker class actions (the so-called “take rate”). An FTC study of consumer class settlements between 2013 and 2015 in which class members received individual notice found a median take rate of 9% and a weighted mean take rate of 4%. A CFPB study of class settlements related to consumer financial products from between 2008 and 2012 found a median take rate of 8% and a weighted mean take rate of 4%. And another law firm’s study of consumer false-advertising class settlements in 2019 and 2020 found that the median take rate was 3.9% and the mean take rate was 4.9%.
Efforts to increase take rates
Proponents of increased take rates have pressed for more expansive notice campaigns and to ease the claiming process. Courts have heeded those calls; claims now can often be submitted online, and courts are increasingly reluctant to require claims to include supporting documentation (such as receipts) or detailed information from individuals claiming to be class members. Historically, claims forms were often required to be signed under penalty of perjury; that requirement is far less prevalent now. In addition, third-party websites, such as topclassactions.com, promote class action settlements and the availability of online claims forms to the general public.
The rise of fraudulent claims
In many cases, however, these efforts to increase take rates have combined with the rise of new software tools to spawn a new danger: a massive influx in fraudulent claims.
Recent indications suggest that the rate of fraudulent claims in class settlements has exploded. A digital payment processor that works with claims administrators recently reported that more than 80 million claims submitted in 2023 showed “significant” signs of fraud—an increase of over 19,000% since 2021.
Submission of fraudulent claims has long been a documented phenomenon. But the problem has been aggravated by the switch to online claiming without the need to present supporting evidence—and the increasing prevalence of tools to automate the claiming process. One prominent example: in December 2023, a settlement of false-advertising claims against the maker of child car booster seats was halted because the claims process resulted in millions more claims for payment being filed than car seats were ever sold.
Moreover, new software tools have enabled the use of clever fakes to circumvent claims administrators’ fraud-detection methods. For instance, fraudsters employ these tools to submit bogus claims using individualized claimant information, from apparently different IP addresses, and even including spoofed proofs of purchase. Some lawyers have even been duped into submitting fraudulent claims. And the problem is likely to get worse as sophisticated machine-learning and AI tools are harnessed for these efforts.
The repercussions
The full effects of this spike in fraudulent class settlement claims are likely to ripple throughout the legal system for years to come. But some immediate implications are clear:
- Parties considering or negotiating class settlements should pay close attention to this issue and design any claiming process to include safeguards against fraud.
- Courts considering objections that claims processes are too onerous should be aware of this sea change, which drastically tips the scale toward the need for requiring greater proof and scrutiny of claims.
- Lawyers and courts should be vigilant to other areas in the law where fraudulent claiming is emerging. For example, as we have explained in detail in a white paper we wrote for the U.S. Chamber of Commerce Institute for Legal Reform, the rate of fake claims in mass arbitrations is shockingly high. And unlike the class-settlement context, where there is an independent claims administrator trying to stamp out fraudulent claims, reports from defendants suggest that some claimants’ counsel are not vetting their claimants before threatening to or actually filing arbitrations.
- The ballooning of fraudulent claiming also has implications for the debate over how to ascertain class members in class actions. We have previously written about the debate over whether a class may be certified even if there is no objective and feasible method of identifying class members. Some courts, most notably the Ninth Circuit in Briseno v. ConAgra Foods, Inc., have championed the use of post-trial affidavits by individuals attesting that they are class members. These courts typically have dismissed concerns about fraudulent claims as a minor issue. But a class-trial-first, ascertain-later approach is deeply flawed when the tools for submitting fraudulent claims in class settlements predictably can be used to submit fraudulent affidavits if a class wins at trial. Unless Defendants are given a right to challenge those affidavits, they would be deprived of their due process right to challenge fraudulent claims, as well as their right under the Seventh Amendment to have the jury decide the issue. That said, those individualized mini-trials are likely to be unworkable—which is why Briseno’s trust in post-trial affidavitsis wrong and why many of these class actions shouldn’t be certified in the first place.