High Cost, Little Compensation, No Harm to Deter: New Evidence On Class Actions Under Federal Consumer Protection Statutes

Jason Scott Johnston, High Cost, Little Compensation, No Harm to Deter: New Evidence On Class Actions Under Federal Consumer Protection Statutes, 2017 Colum. Bus. L. Rev. 1 (2017).

Working from a sample of all consumer class actions filed in the Northern District of Illinois during 2010–2012 (totaling 510), this Article reports and analyzes data on class actions under four federal consumer protection statutes, the Electronic Funds Transfer Act (“EFTA”), the Fair Credit Reporting Act (“FCRA”), the Fair Debt Collection Practices Act (“FDCPA”), and the Telephone Consumer Protection Act (“TCPA”). Even assuming that the TCPA cases alleged actual harm to the named plaintiff, over half the cases in the sample sought statutory damages without an allegation of harm to the plaintiff. Especially in large class actions, only 10% to 15% of the class received compensation, and the aggregate compensation paid to the class is far less than the stated or nominal class settlement fund amount. Because courts award attorneys’ fees based on the nominal settlement amount, attorneys’ fees are a very large fraction of the amount paid to the class, and for some case types attorneys’ fees average 300% to 400% of the amount paid to the class. With low class compensation rates and attorneys’ fees to class counsel that often dwarf total class compensation, such class actions are highly inefficient means of awarding compensation to consumers. As the actual harm in such cases is, at best, small, consumers would likely have little ex-ante demand for insurance against such harm. Because statutory damages are far greater than the actual harm and relatively uniform and independent of actual harm, the system likely leads to a misallocation of efforts of class counsel toward such high statutory damage cases and away from cases with bigger harm but smaller statutory damages. In Spokeo, Inc. v. Robins, 578 U.S. __ (2016), the Supreme Court recently articulated a test for standing in actions brought under precisely the sort of no-harm, statutory damage provisions studied here. This Article concludes by evaluating possible solutions to socially wasteful no-harm causes of action under federal consumer protection statutes. One possibility is that under Spokeo, courts could screen true no-harm cases from the costly class-action process. Another is that through better monitoring of class settlement terms, district courts could lower the costs of class actions and restore balance between costs and benefits. The final reform possibility analyzed in this Article is Congressional amendment of no-harm statutory damage provisions.

Read Full Article

© Jason Scott Johnston

Author Information

Henry L. and Grace Doherty Charitable Foundation Professor, University of Virginia Law School