Issue #241: 'Everybody should get free money'

Hi y’all —

“I’m not gatekeeping because everybody should get free money.”

That line stopped me in my tracks while I was scrolling through TikTok recently. I watched the video with rapt attention: Speaking in front of a screenshot of a Venmo payment, the creator urged viewers to sign up for any and all class-action lawsuits they qualify for.

Why? To get a settlement, of course — “your share of the pie,” she promised.

Class-action lawsuits and settlements are particularly hot topics right now. Some 17 million people are due to get checks from Facebook once its user privacy settlement clears a few final legal hurdles, and a handful of lawsuits have been brewing over a massive AT&T data breach. Monday was the deadline for iPhone 7 users to get their piece of a $35 million settlement arising from audio problems.

The list goes on and on, but I’m skeptical that profiting from this is truly as simple as that TikToker claims. Is joining class-action lawsuits an easy way to make money?

I called Paul M. Vaaler, a business and law professor at the University of Minnesota, to learn more. At its core, he says, a class-action lawsuit is a lawsuit brought on behalf of a group of people or businesses who suffer common injuries. Typically, one main plaintiff and their attorney(s) take the lead on suing an entity in connection with a bigger issue that’s affected a large swath of folks.

Class-action lawsuits are popular because plaintiffs tend to have more leverage when they band together as opposed to suing separately. It’s also an efficient way for the courts to deal with millions of people affected by the same issue who would otherwise file individual cases.

Vaaler says most class actions involve securities (like when investors sue because a firm does something to make them suffer a financial loss), employment (like when when certain employees suffer discrimination), consumers (like when when a bad business practice harms customers) or personal injury (like when a defective medical device physically harms patients).

The vast majority of class-action lawsuits get settled, meaning the defendant agrees to forgo a trial and pay a sizable sum in damages. But it’s not necessarily a quick process.

Class-action lawsuits involve several stages. After one is filed, it has to be certified by the court, and potential members of the "class" have to be notified. Next, those members need to have the opportunity to opt in (or out). Only then are there settlement negotiations or a trial. This can take months or years — not an immediate payday by any means.

It’s also not necessarily a big payday. With a settlement, Vaaler says, the law firm is paid out of the pool of money first, followed by the lead plaintiff. What’s left over is divided among the claimants, either equally or according to certain criteria. (If person A used a faulty product for longer than person B, person A would get paid more, etc.)

“I wouldn’t expect to get rich on this,” he adds.

Case in point: The average payment in a $15 million settlement from Post Foods cereal a few years ago was just $14.28. A 2015 Red Bull settlement gave class members the choice between $10 cash or $15 worth of Red Bull products.

On one hand, all of these small deposits can add up. On the other, depending on what type of relief I receive, I may owe taxes on it, which makes the financial victory a liiiittle less exciting.

“Unless otherwise excluded under the law, all income is taxable including settlement money from lawsuits — both individual and class-action,” Mark Steber, chief tax information officer for Jackson Hewitt Tax Services, tells me in an email. “But there are a few exceptions to the taxable rule, including certain discrimination claims, amounts paid for physical injury, amounts paid for personal injuries and physical sickness, and certain punitive damages such as a wrongful death claim.”

(FYI, Steber says settlements for wages will likely be reported on a W-2, and others will probably be on a 1099-MISC.)

Don’t get me wrong: Class-action lawsuits and their settlements can still be legit opportunities for people who were injured or wronged. So if I get a notice and I have to decide whether to sign onto a class-action lawsuit, Vaaler suggests I do a bit of research. I should make sure the complaint accurately represents my specific situation, and if I choose to join the class, he says I should stay diligent on any developments.

“If [someone says], ‘Gosh, join a class-action, make some easy money,’ you’ve gotta do your homework,” he adds.