Low numbers of class members coming forward with claims has always been an issue in class action settlements. Take-up rates, as they are known, are especially low in cases involving hundreds of thousands or millions of class members, each with a low-value claim.[1] Lawyers, courts, and claims administrators have tried to increase take-up by making claiming easier, in an attempt to increase access to justice and (if it is a claims-made process) behaviour modification. Such efforts have included online claims submissions, direct deposit into bank accounts, and allowing claims without proof of purchase.2]
However, attempts to make the claims process easier and more automated are backfiring. In the past 18 months, claims administrators in both Canada and the US have seen an unprecedented upswing in take-up rates in many cases, but these claims have not been submitted by humans: they are the work of bots.[3]
Allowing claims without proof of purchase has become a generally accepted way of processing low-value claims, because the likelihood of fraud on such claims used to be minimal – why bother committing fraud for $5? However, with advances in technology and minimal to non-existent evidentiary requirements, that $5 can be multiplied by tens or even hundreds of thousands of claims, creating potential for substantial profit[4] and the perfect environment for bots to thrive.
Recent stories from the US indicate that, in some class action settlements, the number of fraudulent claims may be up to half of all claims made.[5] A report released in April 2024 by Western Alliance Settlement Services, which provides banking services to the claims administration sector, stated that the number of claims in US class actions with significant indicia of fraud had increased by more than 19,000% in just two years, from just over 400,000 in 2021 to just over 80 million in 2023.[6] The problem is the most severe in consumer and competition cases, which are more likely to require minimal or no proof of eligibility.
This trend is also appearing in Canada. In an interview with the author, a senior vice president (SVP) at a leading Canadian class actions administrator said that the advent of digital payments has worked “like gasoline on a bonfire.” The SVP said that, in one recent case involving low-value claims with no proof requirement, more than 10 million users tried to access the administrator’s website in one day.
This increase in claims fraud has implications for access to justice and behaviour modification. If the settlement fund is limited to a certain amount, then fraudulent claims will deplete the funds available for genuine class members. They will also make claims administration more costly and protracted, which will also undermine the goal of timely and fulsome compensation to class members. If it is a claims-made settlement, then defendants will have to pay more than they would otherwise have had to, or even more than their total liability for the whole class.[7] A significant number of fraudulent claims may even threaten the entire settlement.
Fraud can delegitimize the class actions process. “Those who work in class actions have done a tremendous job of building and preserving public trust in the efficacy of class proceedings as a social benefit tool”, said the SVP. “It is important that all parties work together to preserve the integrity of class proceedings – otherwise everybody stands to lose.”
Fraudulent claims could artificially inflate the fees awarded to class counsel, particularly in Ontario, where fees are increasingly being tied to class member recovery.[8] Defendants may also undervalue a settlement due to the prospect of such claims. When American Medical Systems settled its pelvic mesh MDL, it assumed that a certain number of claims would be duplicates, and therefore underestimated the true settlement value of its claims by $401 million.[9]
Canadian claims administrators are acutely aware of this issue and, like their US counterparts, they continue to take steps to combat fraud. This includes spotting indicia of fraud, such as massive spikes in the rate of claims; emails from the same domain that was created just after the settlement website was launched; residential addresses that are duplicated across claims or that don’t exist at all; spikes in claims from international IP addresses; and multiple claims from the same IP address.[10]
Claims administrators’ websites use front-end measures such as firewalls and other tools to stop the site from becoming overloaded. Once users access the site, a digital fingerprint can be created for them that includes their IP address, their location, and how much time they spend on the website. Other countermeasures can include requiring class members to enter a unique identifier code that is on the personalized notice they received before they can make a claim (this would only be possible with direct notice, however); requiring class members to register with the claims website, which tracks IP addresses; and allowing claims administrators to contact claimants to verify their submission. Canadian class action administrators also have the advantage of seeing any issues that arise in parallel claims processes south of the border.
Class counsel can do their part to combat fraud by working with claims administrators during settlement negotiation, in order to design notice and claims distribution protocols as well as fraud countermeasures into the settlement agreement.
“This is an emerging and evolving issue”, said the SVP. “We’re going to see efforts to prevent or mitigate the effects of administration fraud in settlement agreements and settlement approval decisions. All class proceeding participants need to preserve the integrity of the system, and to persuade judges that they are working to discourage fraud. Fraud erodes confidence across the spectrum in the efficacy of the class actions tool, and that cannot be allowed to happen.”
[1] A report of the US Federal Trade Commission found that in a sample of 149 consumer class actions, the median claims rate was 9%: Consumers and Class Actions: A Retrospective and Analysis of Settlement Campaigns (Washington, DC: FTC, 2019) at 22. The take-up rate in Canadian consumer class actions is often much lower.
[3] Bots focus on the automation of simple and repetitive tasks (such as sending notifications or scheduling), while AI focuses on tasks that normally require human intelligence (such as conversation). The largescale fraud discussed in this article has been perpetuated, for the most part, by bots.
[6] Francesca Castagnola and Jeff Richardson, 2024 Annual Report: Digital Payments in Class Actions and Mass Torts (Phoenix, AZ: Western Alliance Bank and Digital Disbursements, 2024) at 5.
[7] Artsana, a manufacturer of child booster seats, settled a consumer class action in 2023 and offered $50 to each class member. Records showed that the company had sold approximately 875,000 booster seats, but it received more than 3.3 million claims for payment. Settlement administration had to be put on hold and is still pending. In another class action about an ingredient in eyelash serum that required regulatory approval, one million customers were estimated to have been affected, but more than 6.5 million claims were filed. Only 110,000 of these were ultimately deemed valid. See Diana Novak Jones, “Scammers flood US class action settlements with fraudulent claims” Reuters (May 7, 2024), online: <https://shorturl.at/HKUZ8>.
[8] Class Proceedings Act, 1992, SO 1992, c 6, sections 27.1(16) and 32(6) (fee holdback pending filing of settlement distribution report); Lavier v MyTravel Canada Holidays Inc, 2013 ONCA 92.
[9] Jeff Lingwall, Isaac Ison & Chris Wray, “The Imitation Game: Structural Asymmetry in Multidistrict Litigation” (2018) 87:2 Miss LJ 131 at 141. These authors point out that valuating class action or mass tort liability is also material to GAAP and SEC regulations, and an under- or over-valuation of a settlement could lead to statutory or common-law securities claims (at 140).
[10] Kevin Skrzysowski, “The New Fraud Phenomena in Class Action Settlement Administration” Certum Group (August 22, 2023), online: <https://certumgroup.com/podcast/the-new-fraud-phenomena-in-class-action-settlement-administration/>. In a class action settlement in which several major app developers agreed to pay $5.3 million to resolve claims related to invasion of privacy, more than 5,400 claims were submitted by the same IP address, with about 1,000 of them submitted by someone living in a single-family residence in Toledo, Ohio: Opperman v Kong Techs, Inc et al, 13-CV-00453-JST (ND Cal, Jul 6, 2017), ECF 911 (Motion for Direction Regarding Potentially Fraudulent Claims).
Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.