How a class action settlement number actually gets negotiated

A class action settlement number is not a guess, and it is not a prediction of a verdict. It is built from four things. The realistic exposure if the class is certified and the case is tried, the odds that certification happens at all, the share of the class that will actually file a claim, and the value to the defendant of the release it buys. Almost everything said across a mediation table is an argument about one of those four.

I am writing about the mechanics rather than any particular matter, because settlement negotiations are confidential and the terms that matter are specific to the parties. What follows is how the number gets built, why claims rates change what it means, how class counsel fees are set, and what a court tests before it approves anything. If you run a company that has just been sued on behalf of a class, this is the shape of the next year and a half.

What actually sets the size of a class action settlement?

Start with the arithmetic both sides run on day one. Class size multiplied by a per person recovery, whether that is actual damages, a statutory amount or a restitution measure, produces a top number. That number is almost always large enough to be alarming and almost never the settlement. It gets discounted for everything standing between the plaintiffs and a judgment.

The largest discount is class certification. If the class cannot be certified, the case is a handful of individual claims, and both sides know it. So the real negotiation is usually about commonality, predominance and whether damages can be calculated across the class without individual trials. The second discount is the merits, including defenses that apply to the whole class and the ones that only apply to parts of it. The third is time and cost, because a contested certification fight, an appeal of that ruling and then a trial can run for years.

Most of this gets negotiated through a mediator rather than across a table. The usual pattern is confidential positions, then brackets, then a mediator’s proposal that each side accepts or rejects without learning what the other said. Numbers converge when both sides have priced the same risks and reached different conclusions about them. They stall when one side has not yet done the certification analysis honestly.

Why do claims rates change what the number means?

There are three common structures. A common fund, where the defendant pays a set amount and the class divides it. A claims made deal, where the defendant pays only for claims actually submitted. And direct payment, where checks or credits go out without anyone filing anything. The same headline number means very different things depending on which structure it sits in.

That is because claims rates are often low. In consumer cases where notice goes out by email or publication, a single digit percentage of the class filing a claim is common. The quality of the notice plan drives that number more than anything else, which is why notice is negotiated as hard as the fund. A defendant is usually focused on total outlay. Class counsel is focused on the size of the fund, since fees are often measured against it. The court is focused on what actually reaches class members, and that interest is not the same as either party’s.

So the structural terms carry real weight. Whether unclaimed money reverts to the defendant or stays in the fund. Whether claimants’ payments increase pro rata when claims come in low. Whether there is a floor on total distribution. Whether leftover money goes to a charitable recipient, which courts examine closely and some have restricted. A class action settlement that looks generous and distributes very little is the kind of deal that draws objectors and gets sent back.

What is the release worth, and why does it matter as much as the money?

The release is the thing the defendant is actually buying. Its scope decides whether the payment ends the exposure or just reduces it. The terms that control that are the class definition, the class period, the specific claims released, whether affiliates and individuals are covered, and whether the release reaches conduct that continued after the suit was filed.

There are limits. In most courts a class release has to stay tethered to the claims in the case, so a defendant cannot buy peace on everything it has ever done by settling one theory. Opt outs matter here too. Class members who opt out keep their claims, and deals commonly include a walkaway right if opt outs pass an agreed threshold, which keeps the defendant from paying for a release that has holes in it.

Business practice terms are part of the price. A commitment to change disclosures, billing, a renewal process or a collection practice has a real cost, and sometimes a larger one than the fund. It also becomes a document that regulators and later plaintiffs can read. Worth knowing as well: a class action settlement generally does not bind a state attorney general or a licensing body. Private peace is not regulatory peace.

How do class counsel fees get decided?

Two methods, often used together. A percentage of the fund, with the percentage varying by jurisdiction and by the size of the recovery, and typically scaling down as the fund grows very large. Or a lodestar calculation, which is hours multiplied by reasonable rates, adjusted by a multiplier for risk and result. Many courts pick one and use the other as a cross-check.

Fees can come out of the fund or be paid separately by the defendant. Either way the court decides the amount, not the parties, and a request can be cut. Courts pay particular attention to terms that suggest the fee was traded against the class recovery. A clause where the defendant agrees not to oppose a stated fee gets scrutiny. So does a term where fee money the court declines to award reverts to the defendant rather than to the class.

Administration costs, notice costs and payments to the named plaintiffs for their service are negotiated alongside the fee. Service awards have become contested. One federal appeals court has held them impermissible, other courts still approve them, and the law is not uniform, so this is a term worth checking against the jurisdiction rather than assuming.

What does the court test at preliminary and final approval?

A class action settlement gets approved in two steps. At preliminary approval the court looks at whether the deal is good enough to send to the class and whether the notice plan will actually reach people. Notice then goes out, and class members get a window to object or opt out. At the final fairness hearing the court decides whether to approve. The reason for all of it is that absent class members are giving up claims without ever appearing, so the court acts as their check.

What gets tested is fairly consistent. Whether the named plaintiffs and class counsel adequately represented the class. Whether the negotiation was genuinely at arm’s length. Whether the relief is adequate given the risks and costs of continuing. Whether class members are treated equitably relative to each other. In federal court those categories come from the civil rules, and most states apply something close to them. By final approval many courts also want to know the actual claims rate, not the projected one.

Objectors can appear, and a single objector who appeals can delay finality for a year or more. That is why settlements often include terms addressing when fees get paid and what happens if an appeal drags. The practical lesson for a defendant is that signing a term sheet is not the end of the matter. It is the beginning of an approval process that has its own schedule, its own audience and its own ways of going sideways.

Frequently asked questions

Can a company settle a class action without admitting anything?

Yes. Class settlements routinely state that the defendant denies liability and that the agreement is not an admission, and courts approve deals on that basis. What the court needs is a record that the deal is fair, not a confession. Keep in mind that the settlement itself is a public document and others will read it.

What happens if a lot of class members opt out?

Most agreements include a threshold. If opt outs exceed an agreed number or percentage, the defendant can walk away from the deal. The point is that the defendant is paying for finality, and too many opt outs mean it is not getting finality. Those thresholds are usually confidential terms.

How long does approval take?

Typically several months at a minimum, and often most of a year from term sheet to final approval, because notice periods, objection windows and court calendars all take time. An appeal by an objector can add a year or more before the settlement becomes final and money moves.

Talk with Michael

My practice is regulatory and administrative defense, professional licensing defense and fiduciary litigation, so I spend a lot of my time on matters where exposure has to be priced before anyone can talk sensibly about resolving it. If your company is facing a class claim or a regulatory demand and you want a clear-eyed read on what it is really worth, I am happy to have that conversation. Reach me through our contact page.

By Michael Cherba, Senior Attorney, Complex Litigation, AEGIS Law