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Consumer Class Actions: 8.3 Compelling Discovery Responses

If the defendant objects to discovery or supplies insufficient, unresponsive, or equivocal responses, or no responses at all, the plaintiff should promptly file a motion to compel.267 Any motions to compel should be filed as soon as possible so that the defendant will perceive that the plaintiff is litigating the case aggressively and so that any delay of the litigation or of the class certification motion will be attributable entirely to the defendant.

Consumer Class Actions: 8.4.1 Discovery to Harass Class Representatives or Members

Defendants in class actions sometimes will serve all-encompassing and inappropriate interrogatories and document requests upon plaintiffs either to avoid the time and effort involved in drafting specific discovery requests or to harass the plaintiff. Rule 26(c) authorizes the court to limit discovery that is unreasonably cumulative or duplicative, unduly burdensome or expensive, or calculated to annoy, embarrass, or oppress.272

Consumer Class Actions: 16.3 Selecting the Claims Administrator

Class counsel should consult with several claims administrators before making a final decision. Ideally, the claims administrator should be presented with the proposed settlement agreement before the completion of negotiations. The claims administrator may be requested to submit a proposed budget and contract for provision of services to be submitted to the court in conjunction with the preliminary motion for approval of notice of settlement.

Consumer Class Actions: 16.5 Recording Class Members’ Responses to the Notice

By the time the notice of settlement or judgment is distributed, a procedure for handling and recording returned notices and, if applicable, claims forms, objections, and/or opt outs should be in place. The administrator should use a computer database to store all information relating to each class member, such as the class member’s name, mailing address, email address, phone number, date of the class member’s response to the notice, and the substance of that response. The administrator should also track undeliverable notices.

Consumer Class Actions: 16.6 Responding to Class Members’ Inquiries

The class notice should encourage class members to first review answers to frequently asked questions (FAQ) posted at a designated website17 or to contact the claims administrator with questions before submitting inquiries in writing. The following provision included in a settlement notice provides an example:

Consumer Class Actions: 16.8.1 Defendant’s Payment of the Settlement Fund

The settlement agreement usually provides that the defendant will deposit the full amount of the settlement fund within a few days of the date the court approves notice of the settlement agreement. This will ensure availability of the funds promised by the defendant for costs of notice and administration, the class fund, and so forth.

Consumer Class Actions: 16.8.2.1 Generally

The Tax Reform Act of 1986 added section 468B to the Internal Revenue Code (Code),28 which requires a settlement fund to file an annual income tax return, pay income tax, and adhere to information reporting requirements. This section gives broad authority to the Internal Revenue Service (IRS) to determine the taxation scheme for settlement funds and makes clear the extensive application of the following rule:

Consumer Class Actions: 16.8.2.2 Definition of a Qualified Settlement Fund (QSF)

Pursuant to the authority of section 468B(g), the Treasury Department promulgated regulations (“the Regulations”), which mandate similar tax treatment for all settlement funds. The Regulations created a taxable entity called a qualified settlement fund (QSF).

Generally, a standard provision is included in the settlement agreement and/or preliminary motion for approval of notice that will direct the claims administrator to establish a QSF. For example:

Consumer Class Actions: 16.8.2.4 Administration of a Qualified Settlement Fund

The settlement administrator will generally handle all aspects of the Qualified Settlement Fund without detailed involvement by counsel, and potentially without extensive court oversight. The administrative details could include, but may not be limited to, providing notices to class members, accounting to beneficiaries, addressing tax matters, investing/managing settlement funds, and making appropriate disbursements of the settlement funds.

Consumer Class Actions: 16.8.2.5 Taxation of Distributions to Claimants

The taxation of a distribution is generally made by reference to the claim for which the distribution is made.47 For example, to the extent a distribution is in satisfaction of damages on account of physical personal injury, the distribution is excludable from the gross income of the claimant.48 This is a partial codification of the “origin of the claim” doctrine set forth by the Supreme Court in United States v.

Consumer Class Actions: 16.8.2.6 Reporting and Withholding Obligations of a Qualified Settlement Fund

The Regulations provide a general rule that “[p]ayments and distributions by a qualified settlement fund are subject to the information reporting requirements of part III of subchapter A of chapter 61 of the Internal Revenue Code (Code), and the withholding requirements of subchapter A of chapter 3 of subtitle A and subtitle C of the Code.”51 “A qualified settlement fund must make a return for, or must withhold tax on, a distribution to a claimant if one or more transferors would have been required to make a return or withhold tax had that

Consumer Class Actions: 16.8.2.7 Using a Qualified Settlement Trust

A Qualified Settlement Trust is a specialized type of QSF, which takes the form of a trust created under state law. A Qualified Settlement Trust can be a powerful, multi-faceted tool to assist with the distribution of settlement funds, especially if there are apportionment issues among the class members, or if a number of class members are minors, have diminished capacity, or receive means-tested public benefits.

Consumer Class Actions: 16.10 Sending Payments to Class Members

Various methods may be used for distributing the settlement payments to class members. If the class members maintain a current account with the defendant for continued goods or services—such as a bank account or a wireless phone account—the payments may be made by the defendant as an account credit, if such a payment method is authorized by the settlement agreement.

Consumer Class Actions: 16.11 Dealing with Undeliverable Checks

Some class members change their residential address between the time they return their claim forms and the time benefits are distributed. Prior to distributing the checks, the settlement administrator should run class members’ addresses against the National Change of Address (NCOA) database to ensure that the addresses are current. If checks are still returned by the postal service as “undeliverable,” the settlement administrator can perform skip-traces to find updated addresses.

Consumer Class Actions: 16.13.2 Initial Determination of the Validity and Amount of Claims

Claims administrators must first determine whether a claim is facially valid—i.e., that the person is a member of the class. Sometimes that task involves comparing the claim to information obtained from the defendant. For example, in Lyngaas v. Curaden AG,61 the court, following a bench trial, entered judgment in favor of a certified class of unwanted fax recipients.

Consumer Class Actions: 16.13.4 The Role of Class Counsel in an Individual Claims Process

One question that class counsel should consider in establishing an individual claims process is whether class members should continue to be—or may be—represented by class counsel. In a case where the claims process is straightforward, class counsel would not be part of the claims process. However, if the settlement or judgment requires individual computation of damages by the presentation of evidence, class counsel should determine whether they may be involved in the actual presentation before the claims administrator or special master.

Consumer Class Actions: 16.13.5 Defendants and Defense Counsel’s Role

The claims process often requires information that is only available from the defendant—a compilation of class members and their contact information, disclosure of records or other information that will provide for assessment of damages, and other information that will aid the claims administrator to effectuate the notice and distribution plan.