Judge rejects $425M settlement in Capital One class action

• Key insight: A federal judge found that a $425 million settlement agreement wouldn't provide enough money for Capital One customers who still earn relatively low yields on their accounts.
  
• What's at stake: The ruling is the latest twist in a saga that's also involved efforts by federal and state authorities to hold Capital One accountable for allegedly deceptive conduct.
  
• Forward look: The class action case could go to trial in July 2026 if it's not resolved before that time.
  

A federal judge has rejected a proposed $425 million class action settlement between Capital One Financial and lawyers representing consumers, saying that the deal wouldn't adequately compensate savings account holders who received low rates as a result of the bank's alleged deception.
U.S. District Judge David Novak on Thursday directed the two parties to reengage in settlement talks in order to fix what he described as flaws in the plan.

Novak identified multiple problems with the deal, saying that the amount of money that has gone to certain Capital One customers was insufficient, and arguing that the notice the McLean, Virginia-based bank sent to the same customers about their ability to switch to an account with a higher annual percentage yield read like a marketing pitch to open a new account.

"The fact that less than half of that email's recipients opened it, and that only about 1% of those readers actually acted on it — despite the fact that doing so would have netted these customers nearly eight times more interest income — vividly demonstrates how inadequately this notice informed account holders of their options," the judge wrote.

In the suit, the plaintiffs alleged that Capital One deceived its existing 360 Savings account holders by creating a new, higher-yielding account called 360 Performance Savings, rather than raising the rates it was paying on the older accounts.

The proposed settlement would have required Capital One to pay $300 million into a settlement fund, plus an additional $125 million to some 4 million to 5 million customers who still maintain the lower-yielding accounts.

Novak wrote that under the settlement agreement, the 360 Savings account holders would have recovered only about 10% of what they would have earned if Capital One had provided them the "high interest" that it promised upfront. They would have also gotten an uptick on their current interest rate, but the judge found that the increase would be too small.

"Under the proposed settlement, and based on current interest rates and the pace at which the proposed $125 million additional interest pool has been spent so far, these class members will receive roughly 0.8% interest on their deposits for less than 16 months, at which time Capital One will revert them back to whatever interest rate it likes," Novak wrote. "That interest rate previously sat as low as 0.3% for much of the relevant period."

A Capital One spokesperson did not immediately respond to a request for comment on the judge's ruling. Attorneys at Wolf Popper, the law firm that represents the plaintiffs, declined to comment.

The case sheds light on how banks often benefit from customer inertia, but it also highlights how Capital One's approach differed from those of many other banks that offer low rates on savings accounts.

As of Sept. 16, 2019, Capital One was paying 1.00% on the 360 Savings account, according to the class action lawsuit. The same month, the bank dropped references to 360 Savings from its website and started advertising the 360 Performance Savings account, which at the time paid an annual percentage yield of 1.90%, the suit states.

After the Federal Reserve started hiking interest rates, the difference between the rate Capital One paid to 360 Savings customers and the rate it paid to 360 Performance Savings customers grew substantially. At one point, Capital One customers with 360 Performance Savings accounts were receiving 4.30%, while those with 360 Savings accounts were getting 0.30%, according to the lawsuit.

The judge's rejection of the settlement agreement is the latest twist in a saga that has also included lawsuits by federal and state authorities against Capital One.

Less than a week before the end of the Biden administration, the Consumer Financial Protection Bureau sued Capital One in connection with the savings accounts. But after President Trump took office, the CFPB voluntarily dismissed its suit.

In May, the New York Attorney General's Office filed its own lawsuit against Capital One. The office, led by Attorney General Letitia James, said at the time that its suit was an effort to ensure that Capital One did not escape accountability after the CFPB stepped aside.

Prior to the judge's ruling Thursday in the class action case, the attorneys general from New York and 17 other states filed a legal brief in opposition to the proposed settlement. A spokesman for the New York AG's office declined to comment Friday on the judge's ruling.

The judge, who sits in the Eastern District of Virginia, said the class action suit could go to trial in July 2026 if it's not resolved before that time.