We’ve often argued that when the principal rationale for approving a low-value class settlement is that the claims are weak, that is a signal that the case should not have been filed as a class action in the first place. The Second Circuit recently reached that exact conclusion when considering a proposed class settlement in a Fair Debt Collection Practices Act (FDCPA) case, holding that the putative class couldn’t be certified and that the FDCPA claims should be dismissed.

The decision

In Gallego v. Northland Group Inc. (pdf), a debt collector faced a class action under the FDCPA for allegedly sending borrowers a debt collection letter that gave a call-back number but didn’t specify the name of the person at that number. As a matter of law, the claim seems dubious at best. But rather than incur the expense of filing a motion to dismiss, the defendant agreed to a class settlement. Under the deal, the defendant would pay plaintiff’s counsel attorney’s fees of up to $35,000 and establish a class fund of $17,500—an amount equal to one percent of its net worth, which was its maximum exposure in the class action. (The FDCPA limits liability in a class action to “the lesser of $500,000 or 1 per centum of the net worth of the debt collector.” 15 U.S.C. § 1692k(a)(2)(B).) Of the class fund, the named plaintiff was to receive $1,000 with the remainder to be distributed pro rata to the class members who submit claims—meaning that if all of the 100,000 class members were to submit claims, each would receive 16.5 cents.

The district court denied preliminary approval of the class settlement, holding that the class couldn’t even be certified because a class action wasn’t superior to individual lawsuits. And the court then dismissed the case for lack of subject matter jurisdiction, concluding that the FDCPA claim was so weak that it couldn’t support an exercise of federal question jurisdiction.

The Second Circuit largely agreed with the district court’s ruling. Although the Second Circuit held that the FDCPA claims should be dismissed on the merits rather than for lack of subject matter jurisdiction, the court affirmed the denial of class certification. The Second Circuit explained that the “‘meaningless’ amount’ of relief “that each putative class member would receive from the settlement” confirmed that “Rule 23(b)(3)’s superiority requirement was not met[.]” Nor was the court impressed by the plaintiff’s rejoinder that likely only “5%” of class members would file claims, and thus each would recover “a more substantial amount”; as the court put it, “[a]n expected low participation rate is hardly a selling point for a proposed classwide settlement—and the relief provided would still be trivial even if only 5% of class members filed a claim.”

Implications

The Second Circuit’s ruling in Gallego is noteworthy. To begin with, it underscores the unfortunate economics of class-action litigation: The costs of getting even borderline frivolous class actions dismissed or thrown out on summary judgment are high enough that defendants often feel compelled to agree to a class settlement—at least under the circumstances of the FDCPA’s cap on class-wide damages. In addition, it is more than a little ironic that plaintiff’s counsel sought to salvage the settlement by arguing that it was his expectation that 95 percent of his clients (the class members) wouldn’t get a cent.

Gallego is also important because it confirms that few large FDCPA classes merit certification. As the court pointed out, the maximum class recovery in these cases is capped at $500,000 or one percent of the defendant’s net worth, whichever is less. By contrast, in an individual case, a plaintiff can recover actual damages plus up to $1,000 in statutory damages. Thus, once the number of class members exceeds 500, the maximum recovery for each class member falls below the $1,000 in statutory damages that could be recovered in individual actions. And if class members also incurred actual damages, then the break-even point is even lower.

Plaintiffs typically respond by insisting that the prospect of individual lawsuits over these amounts is unrealistic. But the whole point of statutory damages and statutory attorneys’ fees is to make individual litigation worthwhile. And the sheer number of individual FDCPA actions filed every year confirms that many do indeed find these suits worthwhile. Moreover, if the consumer’s claim were covered by an arbitration agreement requiring individual arbitration—in which all or all but a token amount of the costs of the forum are paid by the defendant—that process would surely result in a better outcome for the consumer than would a class action in court