In case you missed it, the BakerHostetler class action defense team published its second annual Year-End Review of Class Actions last month. The 2013 issue was expertly edited by Dustin Dow of our Cleveland office, and features contributions from other members of the firm’s class action defense team across the country. The 54-page report has a thorough recap of the key class action developments in the U.S. Supreme Court as well as other federal and state courts, summaries of key developments in various substantive areas of law in which class actions are prominent, and a preview of what to look for in 2014. Click the link above to download a copy.
Posts Tagged ‘cy pres’
Posted in Class Action Decisions, Class Action Trends, tagged 2013 class action, amex III, behrend, CAFA, class action, class action settlement, class certification, comcast, cy pres, daubert, genesis healthcare, italian colors, kiobel, oxford health plans, raskas, standard fire, year in review, year-end review on February 17, 2014 | Leave a Comment »
Posted in Articles, Class Action Fairness Act, Commentary, tagged attorney fees, attorneys fees, CAFA, class action settlement, collins, consumer advocate, consumer class action, cy pres, nerdwallet on August 27, 2013 | Leave a Comment »
Editor’s Note: The following guest post was authored by Sara Collins, contributor to the consumer finance website, NerdWallet. The views expressed in Sara’s article are her own. Although those of us who tend to represent defendants in consumer class actions may not agree with all of Sara’s views on the benefits of class actions, we can certainly learn something from reading a consumer advocate’s views on the subject. The article also provides an easy-to-follow primer on how class actions work. Many thanks to Sara for her contribution.
Class Actions – Do They Actually Help Consumers?
By Sara Collins
Consumers in the United States are sometimes victims of bad business behavior. These behaviors cover a huge range of bad acts, particularly in the field of securities. Class actions allow consumers to band together and fight against bad business. As such, they have a number of benefits for consumers and are quite helpful in evening the corporation versus consumer playing field.
What are Consumer Class Actions?
A consumer class action is simply a lawsuit which takes place in a federal or state court. The case is brought by one or a small handful of individuals, acting as representatives for a larger group of consumers, known as the class. Typically the case is seeking damages on behalf of the named individuals in addition to the entire class.
Why is a Consumer Class Action Necessary?
Traditionally, class actions are used to combine small-dollar claims for a large number of people. One small claim is generally too small for a cost-effective suit. Consumer class actions offer a helpful alternative, justifying the litigation expenses and immensely improving the consumer’s odds of success, particularly when it comes to larger corporations.
How do Consumer Class Actions Work?
When a class action is first brought, the court initially decides whether it is a proper class action. This is a process known as class certification. The parties then work towards a trial, though settlement negotiations can take place at any point. If the parties decide to settle the case, the court must approve the settlement and then order notice given to class action members.
Do Class Actions Work?
They definitely do. Billions of dollars are given back to the public every year which come from consumer class actions. In most cases, the money is given directly to the victims of the suit, rather than going into the hands of the government, lawyers or other non-consumers.
What Long-Term Effects do Consumer Class Actions Cause?
Class actions help to make bad business practices unprofitable. Class actions aggregate the power of isolated consumers, allowing class actions to compete against corporate behemoths. It levels the playing field, forcing businesses to operate in honest and trustworthy ways. Markets in other countries where class actions are not allowed often suffer from corporate abuses like stock manipulation, insider trading and other problems.
Do Lawyers Benefit Excessively From Consumer Class Actions?
One argument used by businesses to protest the prevalence of consumer class actions is to claim that the lawyers benefit excessively from the cases. In fact, attorney fees in class action cases average just between 20 and 30 percent of the amount recovered. In stark comparison, personal injury lawyers typically reap 35 to 50 percent of their case winnings. Clearly businesses are using false arguments in an attempt to eliminate class actions and thus damages sought against them.
What is the Class Action Fairness Act of 2005?
The Class Action Fairness Act of 2005 (CAFA) was enacted by Congress in order to curb abuse of class action suits in state courts. Evidence showed that many class actions were being filed which benefited the counsel, rather than the consumers. Additionally, many cases were filed in courts which showed prejudice against business defendants, a problematic issue.
CAFA was enacted to extend federal jurisdiction to these state courts in order to diminish such abuses. CAFA has had a mild success and while most benefits are for businesses, some benefits are extended to consumers. Primarily, the legislation limits the monetary benefits for the attorneys. This ensures that money won in settlements goes to the members of the class, rather than the plaintiff counsel.
Consumer class actions are needed to ensure the financial safety of consumers, particularly in the realm of securities. Class actions allow consumers to band together, combining resources in order to sue a corporation as a singular entity. In turn, all consumers reap the benefits of the settlement, helping to prevent future bad behavior from the corporation in question. Class actions undoubtedly have a positive effect on the world of consumers and it is vital they stay legal for the foreseeable future.
Sara Collins is a writer for NerdWallet, a personal finance site dedicated to helping consumers learn about new ways to save money.
Posted in Class Action Settlements, Data Privacy Class Actions, tagged Class Action Settlements, cy pres, data privacy, facebook, preliminary approval, privacy, seeborg, settlements, sponsored stories on December 5, 2012 | Leave a Comment »
Those of you who enjoyed the recent CAB summary of the presentation on privacy class actions at the ABA’s 16th Annual Class Actions Institute will be interested to know that the re-submitted settlement agreement in Fraley v. Facebook, No. No. C 11-1726 RS (N.D. Cal) was preliminarily approved Monday by Judge Richard Seeborg. Here is a link to a Reuters article by Jessica Dye summarizing the settlement and the court’s decision.
Posted in class action reform, Class Action Settlements, Data Privacy Class Actions, tagged class action, class action settlement, cy pres, data privacy, data privacy class action, dire straits, fee award, final approval, frankel, money for nothing, privacy class action, reuters, wolfman on September 17, 2012 | Leave a Comment »
Reuters contributor Alison Frankel authored an insightful column published August 20, 2012 entitled Foretelling the End of Money-for-Nothing Class Actions, that touches on issues similar to those raised by Brian Wolfman in two recent articles summarized in this August 15 CAB post. In her column, Frankel comments on a recent trend, particularly in data privacy class actions, where large fee awards are requested in settlements for which no meaningful relief is provided to class members. Oftentimes, the fee awards are justified by the value of prospective injunctive relief or by the fact of a large cash payment to charity in the form of a cy pres award, but not by any direct benefits to the class members themselves.
Frankel predicts that we have seen the “high point” in what she terms ”money-for-nothing” class action settlements, pointing to a growing skepticism among judges who are asked to approve them. While it remains to be seen if this prediction will come true, Frankel’s article, like Wolfman’s articles, should at least give pause to class action attorneys who are willing to sell out a class for personal gain: you may be getting away with this now, but at some point the courts will begin to look beyond the desire to clear their dockets and begin to question the societal value of these settlements.
Posted in Class Action Settlements, tagged atochem, class action, class action settlement, class members, cy pres, elf, escheat, fifth circuit, first circuit, klier, lupron, pro-rata, reversion, settlement fund, unclaimed funds on May 2, 2012 | Leave a Comment »
Editor’s Note: The following is a post that I contributed to the Baker Hostetler Class Action Lawsuit Defense Blog. Please be sure to visit the firm’s blog for more great class-action related content!
What to do with unclaimed settlement funds is a common problem facing class action litigants. There are at least four methods of distributing unclaimed settlement funds: (1) reversion of unclaimed funds back to the defendant; (2) payment to those claimants who did make claims on a pro rata basis; (3) letting the funds escheat to the state; and (4) a cy pres award to a charitable organization. All of these methods have been the subject of criticism, but the practical reality is that something has to be done with funds from a class action settlement that are not claimed by class members.
Recently, the First Circuit Court of Appeals issued a decision that outlines the circumstances under which a court may approve a cy pres distribution of unclaimed settlement funds. In In re: Lupron Marketing and Sales Practices Litigation, Case Nos. 10-2494, 11-1329 (1st Cir., Apr. 24, 2012), the parties had agreed to a provision that gave the trial court discretion on the distribution of any unclaimed funds from a settlement of claims alleging overcharging for the medication Lupron. The Court had ordered that $11.4 million in unclaimed funds be distributed to a non-profit cancer center for the purpose of treating diseases for which Lupron was commonly prescribed. Although the First Circuit expressed “unease with federal judges being put in the role of distributing cy pres funds at their discretion,” it found that the trial court had not abused its discretion.
In reaching this decision, the First Circuit adopted the “reasonable approximation” test for evaluating whether a district court’s cy pres award constitutes an abuse of discretion. Under the “reasonable approximation” test, which had previously been applied by the Seventh, Eighth, and Ninth Circuits, the Court looks to whether the cy pres distribution is to a recipient that reasonably approximates the interests being pursued by the members of the class. The Court listed a number of non-exclusive factors to be considered in making this determination:
(1) the purposes underlying statutes claimed to have been violated;
(2) the nature of the injury to the class members;
(3) the characteristics and interests of the class members;
(4) the geographic scope of the class;
(5) the reasons why the settlement funds have gone unclaimed; and
(6) the closeness of the fit between the class and the cy pres recipient.
The opinion more generally has an interesting discussion of some of the policy arguments for and against each potential alternative method of disposing of unclaimed funds. Relying on the American Law Institute’s Principles of the Law of Aggregate Litigation, the First Circuit rejected the presumption suggested by the concurrence in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), that any residual funds in a class action settlement should be returned to the defendant. The Court also cited the ALI Principles in rejecting escheat to the state as the preferred option of disposing of unclaimed settlement funds. The opinion lists a variety of policy reasons why unclaimed funds should not be given pro-rata to the claimants who do participate, including that this method creates a windfall and leads to perverse incentives to prevent participation in a settlement by absent class members.
Like the Fifth Circuit’s decision in Klier last year, the First Circuit’s decision in In re: Lupron Marketing and Sales Practices Litigation illustrates the need for parties to be specific in the settlement agreement about the means of distributing unclaimed settlement funds. Failure to take care in specifying how unclaimed funds are to be distributed can lead to additional unwanted and expensive litigation with objectors, and can force the court to make a public policy-driven decision that may be inconsistent with the desires of both parties to the settlement.
Close Counts In Horse Shoes, Hand Grenades, and Chronic Halitosis, but Not Class Action Distributions, Says Fifth Circuit
Posted in Class Action Decisions, Class Action Trends, Federal Court Decisions, tagged Baker Hostetler, class action settlement, cy pres, elf, fifth circuit, klier, settlement agreement, unclaimed settlement on November 8, 2011 | Leave a Comment »
The Baker Hostetler class action practice team issued a new Executive Alert today authored by Columbus Partner Mark Johnson entitled Fifth Circuit Restricts Cy Pres Doctrine in Class Action Settlements. The alert discusses the Fifth Circuit’s recent decision in Klier v. Elf Atochem North America, Inc., restricting the use of the cy pres doctrine to distribute unclaimed class action settlement funds in the absence of express terms in the settlement agreement.
Posted in Class Action Decisions, Class Action Fairness Act, Federal Court Decisions, tagged amount in controversy, CAFA, chimei, circuit court of appeals, cy pres, easterbrook, federal court of appeals, fifth circuit, fourth circuit, keeling, klier, ninth circuit, parens patriae, punitive damages, remand, removal, seventh circuit on October 4, 2011 | Leave a Comment »
Having been focused on several other speaking and writing projects recently (in addition to my day job), it’s taken longer than I had hoped to comment on several recent class-action-related decisions by the federal circuit courts of appeals. Here’s a brief summary of three recent decisions of note:
Washington State v. Chimei Innolux Corp., No. 11-16862 (9th Cir. Oct. 3, 2011) – joining the Fourth Circuit in holding that a parens patriae action brought by state attorneys general or other state officials for the benefit of the state’s citizens is not a “class action” for the purposes of removal under the Class Action Fairness Act (CAFA).
Klier v. Elf Atochem N. Am., Inc., No. 10-20305 (5th Cir., Sept 27, 2011) – holding in the absence of an express provision in the settlement agreement to the contrary that unclaimed funds should be distributed pro rata to class members who participated in the settlement as opposed to being given to charity as a cy pres distribution. Take note of the concurrence by Judge Edith H. Jones, which makes a strong argument that in the absence of any agreement to the contrary or express waiver of the right to recover unclaimed funds, the equities favor returning those funds to the defendant rather than paying them to the class or distributing them to charity.
Esurance Ins. Co. v. Keeling, No. 11-8018 (7th Cir., Sept. 26, 2011) – holding that when punitive damages are at issue, the correct standard is whether it would be “legally impossible” for the plaintiff to recover an amount of punitive damages that, when combined with the amount of compensatory damages sought, would exceed the $5 million amount in controversy threshold under CAFA, but concluding that it was not legally impossible under Illinois law, even though it was unlikely, that $4.4 million in punitive damages could be awarded in a case where the compensatory damages were slightly more than $600,000.
A great resource for more timely commentary and analysis on recent class action decision in the federal courts of appeals is Alison Frankel’s blog On the Case.
Posted in Articles, Class Action Settlements, Practice Tips, tagged appropriate government official, class action notice, class action settlement, coupon settlement, cy pres, nonprofit objector, organized objector, professional objector, public interest objector, reversion on April 21, 2011 | 1 Comment »
Recently, I have commented on two types of objectors in class action settlements. This March 31 entry discusses the problem of so-called “professional” objectors. And this April 12 entry addresses objections raised by government officials. There is at least one other type of organized objectors to class action settlements: public interest organizations. (I use the term “organized objectors” to distinguish these types of objections from objections that may be sent in by individual class members who are not represented by separate counsel). Mechanically, objections by public interest organizations may be accomplished in a manner similar to that used by professional objectors: through the representation of one or more settlement class members by lawyers employed by or cooperating with the organization. However, unlike with professional objectors lawyers, the representation is usually pro bono. Alternatively. as with objections by government officials, public interest objections to a settlement may be accomplished through amicus briefs to the court.
There are a variety of public interest organizations that file objections to proposed class action settlements. These organizations have widely differing purposes and political agendas. For example, the Center for Class Action Fairness (CCAF) was founded by attorney and leading tort and class action reform advocate (and contributor to the popular law blog, Overlawyered), Ted Frank. CCAF is a nonprofit organization formed for the stated purpose of providing “pro bono representation to consumers and shareholders aggrieved by class action attorneys who negotiate settlements that benefit themselves at the expense of their putative clients.” In this April 18, 2011 press release, Frank summarizes various cases in which his organization successfully objected to class action settlements that “will result in class members receiving over $5 million more than what their class attorneys were willing to negotiate.”
At the other end of the political spectrum (at least from the perspective of tort reform) from CCAF, is Public Justice, an organization founded by leading trial lawyers that describes itself as “America’s public interest law firm.” A stated objective of Public Justice is to fight interests aimed at ”closing the courthouse doors so victims can’t hold the powerful accountable,” including fighting “class action bans and abuses.” Like CCAF, Public Justice has successfully objected to or intervened in a variety of class action settlements. Some of its work in this area is summarized in the article “Fighting Class Action Abuse,” which is available on its website.
A third organization, Public Citizen, is a consumer advocacy group that has the stated goal of preserving the right of consumers to seek relief through class actions. However, according to its website, ”[a]t the same time, we recognize that on occasion class action settlements may not be in the interest of all class members, and in such cases we have often represented class members in objecting to and seeking to improve the terms of such settlements.”
Although the political motivations of these organizations might be different, there are several key similarities between these groups. First, their interest in objecting to a settlement is based on a sincerely held belief that their involvement is necessary to protect the public interest. This means that they are not motivated by profit, but rather by a conviction that the settlement (or the system itself) is unfair. Like government objectors, their goal is to gain disapproval of or modification to the settlement, not to extort a portion of the fee.
Second, regardless of the ultimate motivating philosophy, even public interest groups with drastically different political agendas can find the same kinds of settlements or settlement terms objectionable. Not surprisingly, many of their objections are the same as those that a government official might make. Coupon settlements are a natural target. A conservative group formed to combat class action abuse might object to a coupon settlement because the fact that a coupon settlement was the best the plaintiffs’ could do for the putative class reflects that he case was a frivolous, lawyer-driven case that had no societal value in the first place. A consumer advocacy group might object to the same settlement because of a perception that it is unfair for a defendant to profit from its own wrongdoing. Where both groups might agree is that the court should not approve a settlement that includes little or no benefit to class members and a large payout to the plaintiffs’ lawyers.
One area in which right-leaning and left-leaning public interest groups may diverge is in their view of cy pres provisions in class action settlements, that is, distribution of any unclaimed funds to a charity. Class action reform advocates object to cy pres distributions because they don’t benefit the members of the class, and are sometimes simply a tool used by trial lawyers to raise funds for their own pet causes. Trial lawyers in turn, argue that cy pres is the best way to deal with unclaimed funds, because the alternative would be to let the money revert back to the defendant, which would allow the defendant to profit from its wrongdoing. (Although I want to stay neutral, as a defense lawyer, I am compelled to point out that the fallacy in this reasoning is the class action settlement context, the defendant hasn’t been found to have done anything wrong. Rather it has voluntarily agreed to provide some compensation in exchange for peace from further litigation).
As with objections by government actors, objections to class action settlements by public interest groups are rare, but they present a significant risk to approval of a settlement if they do occur. There are a variety of steps that counsel can make to avoid these types of objections, including:
- Ensure that the settlement notice is in plain English, understandable, and contains all information required by Rule 23(c)(2)(B). The Federal Judicial Center guidelines for plain English notice provide an excellent template, but the template obviously must be tailored to each case in order to provide effective notice. Hiring a qualified notice expert (not simply a settlement administrator) to help draft the notice and testify about the fairness of the notice plan can protect against possible objections to the fairness of the notice.
- Make sure that the notice is delivered in a way that makes it truly the best notice practicable. Intentionally using a method of notice that is unlikely to be read and appreciated by class members, in the hopes of reducing the response rate, is folly. If you don’t do everything reasonable possible to give class members adequate notice of a settlement, you risk having the entire settlement disapproved after you have incurred the significant notice costs. In many cases, direct mail is still considered the best way of distributing notice. Technology has made direct mail possible even in cases where the last known addresses of class members are a few years old. Old addresses can be updated through the post office change of address system, as well as through various private databases. Again, having a qualified notice expert can help. If it is truly impossible to reach a sufficient number of class members through direct mail, then a published notice can be used as a supplement, but it is better to think of published notice as a last resort.
- Avoid settlement terms or arguments that exaggerate the true value of a benefit to be given to the class. A settlement does not have to give class members 100% of the claimed damages in order to be fair. It is, after all, the result of a compromise. However, exaggerating the value of benefits, especially non-monetary benefits, is one of the surest ways to draw objections and skepticism from the Court.
- Avoid unnecessary publicity. Unnecessary publicity (by either the plaintiffs or the defendant) raises the risk that public interest groups will scrutinize it. This is another reason to use direct mail when possible.
- If the settlement does include a cy pres component, try to find an organization that is likely to benefit some or all of the class members directly. Distribution to any organization in which one of the lawyers has a personal affiliation or stake will raise a red flag. Donations to a victim’s assistance fund, for example, are less likely to receive scrutiny than a donation to a lawyer’s law school.
- In any settlement that may include unclaimed funds (whether those funds revert to the defendant, are distributed pro rata to other class members, or are distributed to a charity), above all else, do whatever you can to ensure that class members have a fair opportunity to participate in the settlement. You often can’t force class members to claim benefits, but you do have the power to make sure that there are no artificial barriers to participation.
Posted in Class Action Settlements, Commentary, tagged claims made settlement, class action reform, class action settlement, cy pres, reversion, reversionary settlement on February 23, 2010 | Leave a Comment »
The other day, a colleague tipped me off to a December 2009 blog posting by Oakland, California employment and civil rights attorney Bryan Schwartz entitled Death to the Reversionary, “Claims-Made” Settlement, a thoughtful, well-written article with which I completely disagree and to which I felt compelled to respond. Schwartz is critical of what he alternatively calls “reversionary” or “claims-made” settlements and proposes that plaintiffs’ firms adopt strict policy of refusing to enter into them. His critique may be best summarized in the following excerpt, although I would encourage reading the entire article:
The idea of a reversionary, claims-made settlement is that the defendants will actually be paying “up to” the amount indicated, depending on the number and value of the claims that are submitted. So, if only 50% of eligible claims are submitted, then defendants may wind up paying only half of the agreed-upon amount, with the rest reverting to defendants, though the plaintiffs’ attorneys still collect fees on the full settlement amount. Though many courts no longer permit this practice, defendants still frequently try to offer claims-made (aka reversionary) settlements (which can be easy to sell to the corporate client – “I know X sounds bad, but you’re really only paying Y, so don’t worry!”). Some plaintiffs’ counsel may still agree to claims-made/reversionary settlements, too – but I urge you not to do so!
Schwartz’s critique has surface appeal, and is no doubt shared by many plaintiffs’ lawyers and even judges. However, I would respectfully urge lawyers and judges alike not be too quick to dismiss the possible benefits of these settlement structures for all parties and the courts. If done properly, claims-made settlements provide a unique mechanism for resolving disputes that is both fair to all parties and reduces unnecessary burdens on the court system.
I wrote an article for ProductLiabilityLaw360 in 2008 in which I summarized different possible class action settlement structures and discussed the benefits of claims-made settlements over various alternatives (See full article here). In that article, I drew a distinction between a true “claims-made” settlement and a settlement that involves a pre-determined capped fund with a reversion to the defendant. The quoted section from Schwartz’s article above appears to refer to the latter structure. By contrast, what I would consider a true “claims-made” settlement would be a settlement in which each class member is given the right to make a claim in a predetermined amount or based on a predetermined formula, but the total amount of the potential payments are not capped, and attorney’s fees and costs are paid separately and not taken out of any fund used to pay claims. Unlike the structure described by Schwartz, the Defendant in this type of claims-made settlement takes on the risk, at least theoretically, that it will have to pay 100% of all claims submitted, plus fees and costs. Typically, if the settlement involves a set fund with a reversion, fees and costs are taken out of the fund first, and benefits to class members are reduced pro-rata if there is not enough money left in the fund to pay 100% to all claimants. Any unclaimed amounts revert to the defendant if, after paying all fees and costs and 100% of money claimed by class members, there is still money left over. Despite these technical differences, however, both structures are subject to many of the same criticisms as outlined in Schwartz’s article, and I will not dwell on the differences in the discussion that follows but will rather refer to them both as “claims-made” settlements.
One of the main ideas in my 2008 article was that claims-made settlements can be beneficial to all of the true stakeholders. By true stakeholders, I mean the named plaintiffs, their counsel, the defendant, the courts, and all class members who can be reached and who care to participate. The main factor in making a claims-made settlement fair is in doing everything possible to ensure the best notice practicable, so that all class members have a fair opportunity to participate in the settlement. In my view, this should be the primary goal, not forcing class members to benefit from a settlement or forcing a defendant to pay whether or not class members benefit. Class members who receive notice may choose not to participate in claiming settlement benefits for any number of completely legitimate reasons, including that they don’t want to be bothered, they disagree with class actions generally, or they don’t feel strongly that the defendant did anything wrong. In some cases, it is impossible to reach a portion of the class, so there is no way to benefit class members directly even assuming that they would have wanted to participate.
With these principles in mind, I have outlined below a few of the key criticisms leveled at claims-made settlements, with a brief response to each. Whether my responses carry the day will obviously be left to the individual reader, but I would hope that anyone predisposed to think that claims-made settlements are generally a sham to benefit corporate America at the expense of the public will at least read them with an open mind.
Criticism 1: Claims-made settlements allow the defendant to get away with its misconduct. The defense attorney’s easy retort to this argument is that class actions generally allow greedy plaintiffs’ lawyers to extort money out of innocent companies by filing frivolous lawsuits. In most class actions, however, the defendant’s conduct was not clearly improper, nor was the lawsuit clearly frivolous. That is one reason why most class actions are resolved by settlement in the first place. The point is that a settlement is a compromise resolution of a dispute, not punishment for a corporate wrongdoer. It is no more fair to call a defendant in a class action settlement a wrongdoer than it is to call the case frivolous.
Criticism 2: Leftover money should be given to charity, not returned to greedy corporate executives. Aside from the previous observation that a defendant hasn’t been found to have done anything wrong in a class action settlement, this criticism also often rests on another flawed premise; that is, that any money saved by a corporation in settling a lawsuit goes to a select few corporate executives who use the money to buy a new private jet or vacation home. This is a misconception of how large companies operate. Every dollar paid out by a corporate defendant impacts a variety of groups of people who had nothing to do with whatever the alleged misconduct was. When a company pays a settlement or a judgment in a class action, it is not required to specify where the money is going to come from. So, every dollar paid in settlement negatively impacts the company’s shareholders, most of whom (at least in the case of a public company) clearly had nothing to do with whatever malfeasance the company is accused of. Paying a settlement may require the company to increase the cost of its goods or services, which negatively impacts consumers. In the case of an insurance company, the cost of settling a lawsuit is also borne by the company’s policyholders in the form of higher premiums. The cost of settling a lawsuit may also impact the job security of the company’s employees. When these other stakeholders are taken into account, it becomes far less clear that it is more just to have any unclaimed funds be paid to a charity, which had nothing at all to do with the subject of the dispute, rather than returned to the company, where the funds might benefit certain executives but will also benefit innocent shareholders, consumers, policyholders, and employees. There are a variety of other criticisms of cy pres awards in class action settlements. (See CAB entries dated October 11, 2009, October 28, 2009, and December 17, 2009 discussing cy pres awards).
Criticism 3: Claims-made settlements create perverse incentives for defendants. In many cases, claims-made structures provide the only possible way to bridge the gap between what the Defendant is willing to pay, short of going to trial, and what the plaintiffs’ attorneys are willing to accept in fees, short of going to trial (In my experience, the named plaintiff does not play much of a role in this process, but then again, I’ve never been in the room when settlement was discussed with a named plaintiff). The defendant doesn’t think it did anything wrong, and certainly doesn’t think that whatever it might have done wrong impacted everyone in the class (or would-be class), and it isn’t willing to pay 100% of what the plaintiff is claiming on behalf of the class. In order to settle the suit, it will only agree to pay far less than what would take to make the entire class whole. On the other side, the plaintiffs’ attorneys fee expectation, which is based on an assumed 1/3 share of a recovery on behalf of the class as a whole, becomes a key obstacle for resolution of the dispute, whether or not the actual class members would ever hope to benefit from the relief that the attorney is seeking. So, it can be argued that claims-made settlements create perverse incentives for both defendants and plaintiffs’ class action lawyers.
But incentives don’t necessarily have to translate into abuses. There are checks in place to prevent abuses on both sides. The perverse incentive for a defendant is to create artificial roadblocks to participation, such as making the claim form confusing or burdensome to complete. This can be avoided by following strict plain notice guidelines and hiring a competent settlement administrator and notice expert. The perverse incentive for a plaintiff is to trade class benefits for higher fees. However, the potential for this abuse is limited by the requirement that the court approve any fee award.
Perhaps abolishing claims-made settlements would cause more consumers, shareholders, or employees to reap higher returns in class action lawsuits, but it would just as likely reduce the fee expectations created within the plaintiffs’ bar for settling suits for what they are actually worth both in terms of litigation risk and public benefit. These are public policy matters that in my view are best left to the state legislatures and Congress to correct if they need to be corrected. Removing claims-made settlement as an option, stated simply, means less class action settlements. From the perspective of critics of the class action device generally, this may sound like a positive reform, but I can’t imagine that it would ultimately be a positive development for the plaintiffs’ bar. Fewer class action settlements means a greater burden on the court system and lower fee expectations for plaintiffs’ lawyers generally, resulting in less people willing to pursue class actions, and less opportunity for the victims of alleged wrongdoing to recover any benefits.
Cy pres awards continue to be a hot topic both in the news and in academia. The latest contribution comes from Columbia law student Sam Yospe, whose article entitled Cy Pres Distributions in Class Action Settlements (Columbia Business Law Review, forthcoming) examines judicial discretion in choosing cy pres awards and makes practical suggestions for reform. Yospe’s article is an excellent secondary research source for anyone looking at issues relating to cy pres awards in class action settlements.