Mitigating Fraud in Class Action Settlements

Innovations like online claim filing and the digitization of settlement payments, while a net positive, have provided new incentives for bad actors to target consumer class action settlements, where low dollar individual awards were previously a less attractive target. Indeed, the period between 2021 and 2023 saw a reported 19,000% increase in fraud in class action settlements. What was once an exercise of identifying and addressing simpler, more common fraud (such as one person submitting multiple claims under different variations of personal information) has given way to much more evolved and sophisticated fraud (such as a large volume of false claims filed with a mix of verifiable and fake personal information).

Key Takeaways

• The industry faces a critical challenge in balancing the goal of high claim rates with the necessity of robust fraud prevention and detection.
• Leading firms like EisnerAmper are at the forefront, leveraging advanced technology, including AI and machine learning, alongside traditional methods, to combat evolving fraudulent schemes.
• Collaborative efforts among administrators, legal counsel, and specialized fraud detection services are proving essential to preserving settlement funds for valid claimants.

Overcoming the Initial Industry Lag

Grappling with and developing approaches for more sophisticated fraud has taken our industry time. Some of the early lag in response can be attributed to a reluctance among well-meaning practitioners, jurists, and administrators—admirably focused on efforts to make sure high claim rate outcomes—to accept a new reality that impacts those efforts (or at least is perceived to impact them).

Industry leaders, like EisnerAmper, who were skilled enough and willing to recognize and address the emergence of newer sophisticated fraud during this time, served as proverbial “canaries in the coalmine” when administering settlements like the Google BIPA matter.

Thankfully, over the last couple of years, practitioners, jurists, and administrators have become more attuned to a new reality and are working to evolve solutions to address and stay ahead of sophisticated bad actors. To wit, the number of claims with significant indicia of fraud in 2024 was reported to have dropped by more than 40%.

Balancing Claim Rates and Comprehensive Fraud Control

The tension between claims rates and identifying fraudulent claims in consumer class actions arises from the need to balance two competing priorities:

• Maximizing the number of legitimate claimants who receive compensation.
• Minimizing the impact of fraudulent claims on settlement funds.

Achieving a high claims rate means more class members receive their share of compensation and has been one of the standards for measuring a settlement’s success. However, fraudulent claims are a drain on administrative resources and diminish compensation available to legitimate claimants. When the cost and effort to identify and address a limited number of fraudulent claims, it may not make sense to “spend a dollar to chase fifty cents.” But, as we have seen in the last few years, skyrocketing volumes of fraudulent claims means chasing a lot more than “fifty cents” and undermines the integrity of the settlement process, eroding trust, and jeopardizing the viability of future settlements. Chris Chorba, a leading class action litigator, went as far as to say, “It’s an existential crisis to the whole process.”

Fraud in consumer class action settlements has become extreme in some cases.

• In Jimenez v. Artsana USA, Inc., a settlement involving Chicco “KidFit” Booster Seats, approximately 875,000 of the class products were sold. Still, almost four times that amount of claims were reportedly filed.
• At the Final Approval hearing for In re: Juul Labs Inc., Marketing, Sales Practices and Products Liability Litigation, Judge Orrick, surprised by the fact that only an expected two million claims out of 14 million filed may be deemed valid, called for law enforcement authorities and prosecutors to get involved and investigate such fraud on the Court.

To navigate the tension between claims rates and fraud effectively, claims administrators must employ a multi-faceted approach that combines technology-driven fraud detection tools with human oversight and discretion. By leveraging advanced analytics, artificial intelligence, and data validation techniques, claims administrators can enhance their ability to identify suspicious claims while minimizing disruptions to the claims process. Additionally, ongoing monitoring and evaluation of claims data can help identify patterns of fraudulent activity and inform targeted interventions to mitigate risks.

Solutions – Prevention, Detection, and Comprehensive Technology

The very publicized fraud-related issues from settlements like Artsana and JUUL have been good for our industry to bring the problem to light and create a more hospitable atmosphere for administrators to feel comfortable pushing back against the countervailing pressure to deliver high claims rates. The conversation has now evolved to consider what best practices can be implemented to prevent, detect, and combat fraud.

As a top 20 accounting and business advisory firm that includes an assurance practice and employs many experts in this area (e.g., Certified Fraud Examiners “CFEs”). This DNA has always kept our Settlement Services team focused in this area and unafraid to stake out and defend our position when we raised the red flag in settlements like the Google BIPA matter.

EisnerAmper has continued to employ very robust fraud mitigation practices in the administration of class action settlements.  Our first line of defense is a (WAF). This WAF is continuously updated in real-time based on insights from the global network, providing proactive protection against emerging threats.

The second tier of our defense utilizes sophisticated AI algorithms to detect and mitigate bot and scripted browser traffic, effectively distinguishing between legitimate and malicious activities to prevent attacks like credential stuffing in real-time. Our third and most comprehensive line of defense involves a team of dedicated fraud prevention specialists who employ a proprietary, multi-faceted approach. This includes AI-powered fuzzy matching to identify abnormal patterns indicative of fraud, digital fingerprint verification, and comprehensive monitoring of suspicious IPs and domains across all cases. By leveraging technology, we make sure that our fraud mitigation practices not only meet but exceed industry standards.

Yet, some of the most effective fraud techniques still involve old school methods. Attorneys negotiating settlements can work with their administrator to design settlement provisions to make sure that fraud can be detected and addressed. Parties should make sure the settlement agreement allows the administrator the time and authority to validate claims through methods like requesting additional information, such as proof of identification. Claims form design is also important. Including information on the claim form that is not required to validate all claims but could be used to validate a questionable claim, can also help combat fraud.

Collaborating with Industry Partners

When a settlement is one that may be of the type that is most susceptible to fraud, and the settlement value and structure allow, it may be prudent to involve additional resources. One example is a company like ClaimScore, who has developed a proprietary claim validation and fraud detection software. The software solution reviews and scores each claim individually using a 65+ point expert system artificial intelligence algorithm, backed by a machine learning scoring system.

Close coordination and planning among partners like administrators, ClaimScore, and digital payment providers, can be very powerful in combatting fraud. The Kandel, et al v. Dr. Dennis Gross Skincare, LLC, No. 1:23-cv-01967-ER (S.D.N.Y.) settlement is a great example where close partnership and early involvement with the settling parties ultimately saved the class millions of dollars and preserved a much higher individual recovery for each valid claimant than would’ve otherwise been realized.

• The Dr. Dennis Gross Skincare net settlement fund was $5.3 million.
• Out of 8.8 million claims filed, the partnership model weeded out all but 127K as valid.
• This preserved an average individual claimant payout of $41.

A Light at the End of the Tunnel  

The class action industry is ever evolving with technology. While increasing use of AI and bots led to an explosion of fraudulent claims over the past few years, the industry is responding accordingly. Administrators with robust fraud protection procedures and technology can make sure that the claims that are approved and paid are valid.