Class Action Lawsuits 101: How Big Business Games The System & Why You Should Always Opt-Out (Case… (2023)

The other day I found this website where plaintiffs attorneys are offering easy, no out-of-pocket cost representation to Capital One data breach class members. I wondered why anyone would bother hiring a lawyer if they’re already part of a class action because, like anyone, class action notifications come across my desk for a variety of past purchases, data breaches, and the like.

After a bunch of research, it turns out we’ve been asleep at the switch, or the class action lawyers have been in their marketing efforts. Either way, the American Bar Association has the data to show we should be paying more attention and probably opting out of class actions wherever we can get competent contingency lawyers to take our cases. And, technology is making it more likely that lawyers will do that even on small claims (at least when there are a lot of us).

It’s no secret that most people in a class action lawsuit are underwhelmed when they get their settlement checks. Usually, it has been years since the initial injury, with only the occasional update from the class action’s legal team. Often thousands of people have been harmed by the defendant’s actions and all have waited patiently as the case made its way through the legal system, finally resulting in some kind of negotiated settlement. The result? Often the individual payout is trivial or at best ranges from a few hundred to a few thousand dollars— which may be a small fraction of the actual loss suffered.

According to the American Bar Association (ABA), class actions commonly settle for a fraction of actual damages, with “settlements of under 10 percent of losses” being “typical,” before adding “Opt-out plaintiffs typically recover multiples of this amount.”

The lesson here is simple: Most of the participants in a typical class action case will only see a fraction — often pennies on the dollar — of the damages they would have received if they instead had hired a lawyer and pursued their own case individually (or, perhaps better, together with others ).

Not surprisingly, the number of plaintiffs opting out of class action cases to pursue their own cases has been steadily increasing. A 2019 study of opt-out rates in securities class action settlements found that the opt-out rate has climbed significantly for the last decade, rising from 3.4% in 2014 to 8.9% in 2018. Clearly, people are becoming increasingly aware of the benefits of having their own lawyers, and wary of accepting highly discounted class action settlements. When it’s possible to engage a competent lawyer, it seems that the better option is often to opt-out of the class action entirely.

Why do plaintiffs who opt out of class action cases tend to see higher settlement amounts? Here’s how class action lawsuits actually work.

Consider a typical lawsuit where a defendant is being sued for crashing into the plaintiff’s car, causing around $10,000 in damages. The plaintiff’s lawyer isn’t interested in actually going to trial over such a small amount, he or she just wants compensation for the client. Suppose the plaintiff’s lawyer believes that there’s a 70% chance of winning the $10,000 at trial. The defendant’s lawyer is more optimistic about the defendant’s chances, of course, and believes it’s more of a 50% chance. The two lawyers negotiate and compromise, splitting the difference at 60%, which then becomes the basis for a settlement of $6,000 (60% of $10,000). This reduction in the settlement amount reflects a reasonable assessment of the uncertainty of whether and what the plaintiff would win at trial. Let’s call this discount the “liability risk” component.

Class action cases have not one but two discount components. There’s the standard one — the odds that the plaintiff will win. But there’s also another factor that further discounts the payout. In a class action, no class member (other than the named plaintiff) recovers a dime unless the court grants class certification. So any in pre-class-certification settlement there’s a second discount for class certification risk, and that number can greatly reduce the average class settlement.

Class Action Lawsuits 101: How Big Business Games The System & Why You Should Always Opt-Out (Case… (1)

Take the recent class action cases where a large institution like a bank, or a tech company that handles private data — was hacked. It’s the company’s job to securely store this private information, and they failed to. As a result, thousands of people had their private details stolen, resulting in a wide variety of actual and potential damages including fraudulent credit card charges and actual identity theft. One or more class action lawsuits are filed quickly, since lawyers are motivated: tens of thousands of claims are usually involved, with potentially a lot of money at stake.

For the case to proceed on a class basis, potentially benefiting everyone, the court has to agree that a class certification is appropriate (that’s Federal Rule of Civil Procedure 23 and the various state law equivalents). It’s not an easy standard to meet. There are often facts of the case that complicate class certification. If the judge decides that a class action isn’t appropriate, the case is dead, except for the one Plaintiff who filed it. However, if class certification is granted, the defendant is in really serious trouble — a loss at trial means a loss to tens of thousands of customers, and could cost hundreds of millions of dollars.

To avoid these risks, both sides usually prefer to avoid the risk of the court’s decision on that issue. So, the parties negotiate. The class members get a settlement, but subject to the double discount described above.

Often the discounts are extreme, like where the lawyers decide that there’s a 90% chance that the court will rule against granting a class certification. It’s not that the damages aren’t real, or that the defendant isn’t liable for those damages, it’s just that the case for the class action format is relatively weak. The plaintiff’s lawyer, who specializes in class action cases, may decide that it’s better to settle the case at a steep discount in order to get some relief for his clients.

Using our previous example, a class certification discount of 90% in a case with a 50% chance of success would result in plaintiffs seeing 5.4% of the damages they believe they are seeking. That’s just $540. If you’ve ever wondered why class action settlement payouts are so small, now you know.

In response to the need for an alternative, some lawyers are starting to offer their services, on a contingent fee basis, directly to class members who’d like to opt-out of the class. if they can get a lawyer (at nost cost to them) and thus a better deal. (After all, if it’s easy and cheap, why not sign up and get a bigger check.)

For example, if you were part of the recent Capital One data breach (like most of these, you got a letter if you were), there’s a website at that lets you engage a lawyer online in just a couple of minutes.

These lawyers are using modern client intake and legal CRM technology to make it economically viable for firms to file individual lawsuits or arbitrations swarms for clients seeking relief from companies that made big mistakes. Instead of being forced to file these cases as a class action, and weigh the risks of class certification and liability in settlement negotiations, these cases can be handled individually, but collectively, by a single firm. Finally someone is helping consumers by using the same technology that big companies use to reap their massive profits. The same type of technology has already supported arbitration swarms that have caused giant companies like Amazon and Uber to back down from forced arbitration clauses in their user agreements. The companies have figured out that if you do hire a lawyer, and especially if lots of people do, class actions are a better deal for them.

As mass arbitration technology becomes more common in law firms across the globe, expect to see the percentage of class action opt-outs continue to rise. And the next time you get a notice that you’re part of a data breach, or a class action, look around and see if a lawyer will take your case instead, as your lawyer, not just a lawyer for the class.

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