February 16, 2018 Articles

The Future of Recalls: Increasing Claims Rates and Recall Effectiveness

By Carmen Chambers

Unfortunately, some products cause unforeseen danger to the public. The Consumer Product Safety Commission (CPSC) is thus tasked with protecting the public “against unreasonable risks of injury associated with consumer products.” 15 U.S.C. § 2051(a)(3). The CPSC has the authority to mandate corrective actions, better known as “recalls,” of consumer products that present a substantial hazard to the public. Recalls generally involve notice to the public and some sort of remedial offering, such as repair, replacement, or a refund.

Product recalls are common. In 2016 alone, 900 million items were recalled. Despite this massive number, recalls often have inadequate results. However, new mechanisms will likely improve the outlook of recalls in the future.

Recall Notice Ineffectiveness
Despite the shocking incidence of recalls per year, they are typically ineffective. A few years ago, CPSC Commissioner Elliot Kaye lamented to ABC News that the government estimates that a “good” recall removes only about 20 percent of the potentially defective products from the market. On the lower end, and the more likely occurrence, a recall may remove only 5 percent of the affected products from the public, leaving 95 percent of the recalled items in the hands of consumers.

To remove these products from the public, manufacturers are charged with a daunting task: locating the affected consumers. This process is lined with obstacles rooted in misaligned incentives between manufacturers and third-party sellers, poor consumer data records, and the procedural burdens of dealing with these issues.

Manufacturers rarely know who purchased their products. If a product is recalled, some customers can be identified by the manufacturer through registration cards, direct sales records, catalog orders, or retailer loyalty cards, but these documents often represent a minuscule portion of total sales. This is primarily because most sales are made through retailers and third-party sellers. For example, did you buy your refrigerator from Home Depot (third-party seller) or directly from Maytag (manufacturer)? Did you buy your toothbrush from CVS or directly from Colgate? The typical transactional chain means that the original equipment manufacturers (OEMs) must rely on other entities to (1) keep accurate, historical, and updated consumer records and (2) send the notifications to affected consumers in the event of a recall.

Minimal incentive exists for third parties to assist OEMs with recalls. Although some retailers will assist manufacturers with recall notifications, there is often little incentive for them to exert more than a minimal effort. Thus, many recall notifications consist of little more than a single sheet of paper tacked to a bulletin board near a store entrance or customer service desk. This is particularly true for recalls of products that were not sold recently, where identifying potentially affected consumers would require excessive time and resources from a retailer’s IT group or other departments.

Outdated information is common. In the instances where either the manufacturer or the third party can locate sales information, the associated contact data is often outdated. Thus, notice, when it actually can be sent, is often mailed to the wrong address. In reality, most people have no idea that a product has been recalled unless it is publicly covered in the news. The onus is on the consumers to discover a press release or some other public notification letting them know about the recall and their options.

There is no incentive for the media to cover “small” recalls. Recalls happen all the time, but only a handful of recalls affects hundreds of thousands of people. According to the CPSC’s records, more than half of all consumer product recalls in 2016 involved fewer than 10,000 units. Most media outlets will not report on a recall unless it has already caught the attention of the public. “Basically, it’s caveat emptor, let the buyer beware,” said Tod Marks, former senior editor of Consumer Reports. “If you want to protect yourself, you have to go that extra yard and do your homework.”

Of course, even though a recall may not merit national media attention, the affected products still pose a danger to the individuals who purchased them.

Incomplete data leads to overnotification and a burden on consumers. If a manufacturer is able to overcome all of the aforementioned challenges and a consumer does in fact become informed that they may have purchased a potentially unsafe or defective product, additional burdens are often placed on that individual to confirm that his purchase is actually part of the recall. This is because even when manufacturers or retailers have identified potentially affected consumers, their data is rarely detailed enough to determine if the specific model purchased by an individual is one that is included in the recall.

For example, a certain model of a baby stroller may be recalled if it was manufactured between two specific dates. The potentially affected consumer, after identifying that he has purchased the affected model of stroller, is typically instructed to go to that stroller and locate a complicated code printed on a tag or to go to the manufacturer’s website and enter additional information to determine if his specific stroller was manufactured within the recall date range. All of these additional steps present points of failure in a manufacturer’s ideal goal of 100 percent recall participation.

Low Claims Rates
Not only does ineffective notice jeopardize public safety by leaving recalled products in the hands of consumers, but it also prevents more people from filing class action claims in the event of a lawsuit. The number of people who file valid claims is uncomfortably low, largely because most consumers have no idea that they are eligible to be class members.

Expectations for claims are low. Unfortunately, low claim rates are expected. Potential consumer payouts are often calculated by using claim participation rates below 10 percent. For example, in a current class action lawsuit over Costco’s Kirkland Signature Organic Virgin Coconut Oil, a website outlining the proposed settlement for potentially affected consumers includes a chart that details how much impacted consumers would receive based on potential claim participation rates of only 2 percent, 5 percent, and 10 percent.

Of further interest, given a participation rate of 5 percent or more, over half of the settlement fund in the Costco case was projected to be spent on “notice and administration.” In other words, over half of the settlement fund would be spent on a notice process that, in the best-case scenario, would result in one out of 10 affected consumers filing a claim. Id.

Low claims rates impede settlement approval. A certified class action cannot be settled without the judge’s approval. See Fed. R. Civ. P. 23(e)(1)(A). To be granted approval, the court must find that the settlement is “fair, reasonable, and adequate,” following a hearing on the matter. See Fed. R. Civ. P. 23(e)(1)(C).

In 2015, Nissan reached a $4.27 million settlement with car owners to resolve a class action lawsuit over Nissan brakes. Banks v. Nissan N. Am. Inc., No. 11-cv-2022 (N.D. Cal. 2015). The judge asked the settlement administrator to file a report at the final approval hearing so that she could review the data on the claims filed and the payouts to class members. The judge was understandably unhappy with what she saw. In that case, of the 264,000 vehicles included in the settlement, only 1,540 consumers filed claims. Over 80 percent of the settlement fund was going to attorney fees, with a very low payout to the affected consumers. More than one-fifth of the claimants were to receive $20, and more than one-third of the claimants were to receive just $60 or less.

Brian T. Fitzpatrick, a professor at Vanderbilt Law School, performs empirical research on class settlements. In discussing the Nissan case, he stated that reviewing claims data is not a common practice among judges in class actions. However, Fitzpatrick said, it is “the wave of the future.” Indeed, the Consumer Financial Protection Bureau March 2015 Arbitration Study states that judges have been encouraged by the Federal Judicial Center to maximize class member claims, and that recent judicial decisions suggest increased attention to claims rates. Therefore, forward-looking product manufacturers should craft an effective recall notice process not only for public safety but also to increase claims rates to ensure settlement approval.

Methods of Increasing Claims Rates
Electronic notification and entrepreneurial products are two potential game changers for the future of recalls.

Electronic notification promises benefits to manufacturers and consumers. Tens of millions of Americans are accustomed to using email and various applications to communicate with those around them. However, the legal world has not evolved as quickly.

The class notice requirements of Rule 23 reflect the limited communication opportunities of the pre-Internet world. Currently, the rule states that “the court must direct to class members the best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort.” Most courts construe this language to require certification notice by first-class mail.

The U.S. Judicial Conference’s Committee on Rules of Practice and Procedure published its proposed amendments to Rule 23 in 2016. The proposed amendments revise the rule by adding that notice “may be by United States mail, electronic means, or other appropriate means.” If adopted, courts will likely find that a multichannel approach to notice—one that uses email, text messaging, and social media outreach in addition to “snail mail”—is preferable to notice only by direct mail.

Similarly, the National Highway Traffic Safety Administration (NHTSA) and the Department of Transportation (DOT) have proposed an amendment to the notification required under 49 U.S.C. § 30118, which allows that notification to be “in a manner other than, or in addition to, first class mail.” The NHTSA requires manufacturers of motor vehicles and motor vehicle equipment to inform owners, dealers, and distributors about defects related to motor vehicle safety; it proposed the amendment to improve the efficacy of recalls.

Electronic notice will mean more affected consumers know that they are eligible to be class members, thereby increasing claims rates. Electronic notice, of course, will also save litigants a substantial amount of money by avoiding the postage and printing fees of sending first-class mail.

New data-driven product recall service may increase claims rates. Entrepreneurs have been working to improve the product recall landscape, and a new company is catching the attention of the CPSC for its potential to improve recall effectiveness and increase claims rates. Bonnie, founded by technology entrepreneurs and brothers Chris LoPresti and Matt LoPresti, is a free service that provides personalized, automatic product recall notifications for consumers. The company’s goal is to increase recall effectiveness and to make notifications and procedures as easy as possible for consumers who own a recalled product.

The team at Bonnie worked with email service providers like Gmail, Yahoo!, AOL, and Microsoft to create a streamlined sign-up process. Consumers sign up for Bonnie with their email account and grant Bonnie access to the sales receipts in their email inbox. Bonnie automatically analyzes the receipts to determine if any of them contain products that have been recalled. If Bonnie does find a match, the consumer is alerted via an email that contains information and clear instructions on what to do next. Bonnie operates in the background, continuing to monitor for future purchases and recalls to help keep families safe.

With the increase in Internet sales, as well as the widespread practice of email receipts for purchases, this new tool is a simple and effective way to reach consumers. By monitoring at the most granular level possible, Bonnie reduces the burden on consumers by only notifying them if they are specifically affected by a recall. Furthermore, Bonnie helps resolve the problem of incomplete, out-of-date consumer data and helps manufacturers give notice of their recalls directly to the affected people without having to rely on the help of third-party sellers.

The CPSC recommends using all available options to make recalls effective. The availability of advanced technology provides an opportunity to reach consumers at a low cost. The CPSC hosted a “recall effectiveness workshop” this past summer. In anticipation of the workshop, Commissioner Kaye released a statement outlining six basic principles that he believes will improve recall effectiveness. His sixth principle was “Recall With Full Effort,” in which he stated that a recall should “use all available forms of reaching consumers, including social media, paid advertising and personal outreach, if possible.”

Using Technology to Impact Liability
Using electronic means and new technology to reach consumers not only will likely increase claims rates but also impact liability.

In a product liability lawsuit, a manufacturer cannot use the mere existence of notice process as a shield against liability. The manufacturer must prove that the plaintiff directly received notice of the recall. This is difficult when consumer data is outdated and first-class mail is ineffective. A robust notice process that utilizes social media, email, text messages, and services like Bonnie is much more likely to successfully notify consumers.

Using effective technology to reach consumers can also provide a defendant with defenses. If the court finds that a plaintiff did receive notice of a recall, then the court may find that the plaintiff assumed the risk by continuing to use the product.

The process of giving “notice” is evolving slowly, but it is evolving. The CPSC already strongly recommends the use of technology and social media in the event of a recall, and electronic notice will likely soon be required in this process. Moreover, judges are paying attention to the results of the notice process; so even without electronic notice requirements, creative use of technology might be necessary to avoid getting a settlement tossed at the finish line. By creating the most effective notice process possible—using social media advertisements, emails, texts, and new services like Bonnie—product manufacturers will increase public safety, reduce financial waste, and lessen their own liability.

Carmen Chambers is an associate attorney at Maynard, Cooper & Gale in Birmingham, Alabama.

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