Administration Challenges, Part 2: Class Action Regulations in this Brave New World

The following is Part 2 of a three-part series on today’s claims administration challenges.

In Part 1, we described the forces shaping the deficiency process in securities class actions: a flood of bot-driven and AI-assisted fraudulent filings, administrators responding with more comprehensive audits and less precise rejection codes, and the collateral damage that legitimate claimants can incur as a result. The natural follow-up query is whether the legal architecture governing securities settlements protects bona fide investors whose valid claim are wrongly rejected.

The answer is “partly, in theory, and rarely tested, in practice.” Two bodies of law regulate the proof-of-claim process: Rule 23(e) of the Federal Rules of Civil Procedure, which requires a court to find any class settlement “fair, reasonable, and adequate” before it binds the class; and the laws regarding settlement agreements themselves, which courts treat as enforceable contracts. Both give leverage to securities claimants – leverage which, heretofore, has rarely (if ever) been used.

Rule 23(e)

Rule 23(e)(2) (of the Federal Rules of Civil Procedure) directs a court to approve a binding class settlement only after finding it “fair, reasonable, and adequate,” weighing among other things whether “the relief provided for the class is adequate, taking into account … the effectiveness of any proposed method of distributing relief to the class, including the method of processing class-member claims,” and whether the proposal “treats class members equitably relative to each other.”

That language directly impacts the deficiency process. A claims process that rejects too many legitimate claims, imposes too much delay, or imposes too much cost onto claimants is vulnerable to the argument that the distribution method is not “effective.” And a process that, in practice, favors well-resourced institutional filers while disadvantaging retail investors who cannot navigate a compressed cure window or a third-party documentation demand is vulnerable to the argument that it does not treat class members “equitably.” That second argument is especially potent in the securities context, where retail investors make up roughly a quarter of the market, yet are the least equipped to contest an arduous deficiency procedure. These are precisely the claimants Rule 23 exists to protect: bound by the settlement but least able to vindicate their own claim.

The case law is thin

Despite strong statutory language, there is little case law applying Rule 23(e) to claims administration. What exists, though, shows courts are both willing and equipped to intervene to keep distributions fair and equitable.

In Briseño v. Henderson, the Ninth Circuit reversed approval of a class settlement under the revised Rule 23(e)(2), emphasizing that the “fair, reasonable, and adequate” standard demands real appellate scrutiny rather than rubber-stamping. In In re Orthopedic Bone Screw Products Liability Litigation, the Third Circuit underscored the court’s fiduciary duty to protect absent class members and its equitable power, under Rule 23, to “balance the disparate interests competing over a finite pool of assets with which to satisfy the class.” That recognition is the crux: a court overseeing a settlement has the authority to weigh expeditious administration against fairness to the claimants who are most likely to be silently bound by terms they will never read.

Two features of Rule 23 review make it a durable path for securities claimants willing to bring test cases. First, because settlement approval is reviewed for fairness — not merely for the absence of unconscionability — a successful challenge can force class counsel to build stronger protections into future agreements. Second, because the fairness finding is a conclusion of law, an appellate court will review it without deference to the trial court. This posture raises the odds of reversal, but critically, can produce binding rather than merely persuasive precedent.

Settlement agreements as contracts

The second source of protection is the settlement agreement itself. Courts have long held that “a settlement agreement is a contract that is interpreted according to general principles of contract law,” and have recognized that class members have standing to enforce it.

In Oetting v. Norton, the Eighth Circuit recognized a class member’s standing to sue a claims administrator over the acceptance-and-rejection process. In Waters v. International Precious Metals Corp., the Eleventh Circuit heard a challenge to a claim rejection and resolved it on the terms of the settlement agreement and notice. The claimant there lost on the merits, and the administrator’s rejection of “timely but incomplete or untimely” claims was upheld. But the court did two things that matter for the road ahead: it acknowledged claimants’ right to appeal such rejections, and it demonstrated that courts will enforce settlement and notice terms as contracts. Notably, it never asked whether those terms complied with Rule 23 — a reminder that the two arguments are distinct (but could be raised together).

Treating these agreements as contracts opens the full contract toolkit. The most promising tool for claimants may be contra proferentem — the rule, familiar from insurance disputes, that ambiguous terms are construed against the party that drafted them. Because class members do not negotiate settlement agreements yet are bound by them, the analogy to an adhesion contract is apt. Applied here, contra proferentem would have courts read ambiguous terms about notice, claim sufficiency, and the proof-of-claim standard in the claimant’s favor. To borrow the example from Waters, a court could read a requirement for “monthly statements” to include the holdings and brokerage records a claimant can readily produce, rather than demanding the more burdensome documentation of every individual trade.

What the standard agreements say

To determine how much protection for class members these agreements really provide, we reviewed the twenty most recent securities class action settlement agreements available on Westlaw. The language was notably uniform: twelve of the twenty contained a deficiency-and-review provision close to identical to the following pair of clauses.

The first clause requires the administrator, “[p]rior to rejecting a Proof of Claim in whole or in part,” to “communicate with the Claimant in writing to give the Claimant the chance to remedy any curable deficiencies,” to notify rejected claimants “in a timely fashion and in writing,” and to inform them of their “right to a review by the Court.” The second gives a contesting claimant a fixed window — typically “within twenty (20) days” after the notice is mailed — to serve a statement of reasons and supporting documentation, on pain of waiving the right to contest the rejection.

On paper, this is meaningful due process — up to and including direct court review. In practice, however, there are gaps which undercut the terms and fall hardest on retail investors.

• The clock runs from mailing, not receipt. The twenty-day window is tied to the date the notice is mailed, not the date it is received. Because curing a deficiency often requires obtaining records from a third party (a broker or custodian bank), a claimant who receives notice late may have little or no real opportunity to respond. Insufficient or slow notice can be fatal to an otherwise valid claim.
• “Curable” is never defined. The obligation to give notice and a chance to fix attaches only to “curable” deficiencies. Not one of the twenty agreements defined this term. A claimant cannot know in advance whether a given defect even entitles them to notice that their claim is in jeopardy.
• The obligations run one way. The only hard deadline in the boilerplate language binds the claimant. There is no corresponding timeline requiring the administrator to respond, to define an acceptable standard of proof, or to specify what documentation will suffice. The terms most consequential to a claimant’s recovery are left to the administrator’s discretion.

The gap, and the opening

Put the two bodies of law together and a clear picture emerges. Rule 23(e) gives courts the authority to refuse or unwind a settlement whose claims process is ineffective or inequitable, but that authority has rarely been invoked against the deficiency process itself. Settlement agreements give claimants enforceable contractual rights, but those rights are written in imprecise terms, run largely in one direction, and vary case by case.

That gap is also the opening. Securities claimants (unlike their consumer peers) frequently have six- or seven-figure recoveries on the line, the resources to litigate, and the standing to do so. They are uniquely positioned to test these arguments: to enforce a favorable agreement against an administrator that ignored its own cure obligations, or to challenge an unfair one under Rule 23(e) and create precedent that reaches future settlements. The legal architecture was built to protect class members from exactly the kind of collateral damage Part 1 described. It is waiting to be used.

In Part 3, we turn from law to practice: the technological tools that can separate fraudulent submissions from legitimate claims without burdening rightful claimants, and the kind of industry coordination — among claimants, third-party filers, class counsel, and administrators — that could align incentives and resolve the underlying problems rather than litigating them one rejection at a time.