Posts Tagged ‘claims made settlement’

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.

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Thanks to Dan Trudeau of Rust Consulting for recommending a useful article authored by his colleague Tiffaney Allen entitled Anticipating Claims Filing Rates in Class Action Settlements.  The article is dated November 2008, but it was new to me.  The article provides only a basic summary of the many factors that can impact settlement claims rates, but it is a good primer for anyone unfamiliar with the claims process in a class action settlement.

Claims filing rates, or “take” rates, in class action settlements will vary on a variety of factors, as Allen’s article points out.  These factors include the amounts available, the clarity of the notice, the ease of making a claim, the structure of the settlement, the make-up of the class itself, the geographic area covered by the settlement class, and many other variables. 

Insiders sometimes throw around the figure 10% as generic rule of thumb for how many claimants are expected to make a claim for benefits in a typical claims-made or common fund settlement, at least in consumer class actions.  But the reality is that the claims rate can vary significantly depending from case to case.  It is possible in some cases and with appropriate expert guidance to predict claims rates with reasonable accuracy.  However, lawyers and their clients who enter into a class-action settlement with the over-simplified assumption that class members will claim only $.10 on the dollar do so at their peril.

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I’m not sure if it is by coincidence or not, but the use of the cy pres doctrine in class actions has been the subject of criticism from several different sources over the past couple of weeks.  Cy pres, loosely translated from its original French “cy-près,” means “as near as possible” or “as near as may be.”  The doctrine arises out of the law of charitable trusts, and gives a Court equitable discretion to modify a trust to allow trust proceeds to be given to alternative beneficiaries when it has become impossible to effectuate the express terms of the trust, and when to do so would be consistent with the settlor’s intent.  In the class action context, some courts have relied on the cy pres doctrine in distributing unclaimed funds to charities as opposed to allowing them to revert back to the defendant or paid to out as additional awards to class members who made a claim.

Last week, George Krueger and Judd Serotta of Blank Rome LLP published an op-ed in the Wall Street Journal entitled “Our Class-Action System Is Unconstitutional.”  The authors argue among other things that the use of the cy pres doctrine in distributing class action damages awards amounts to a “hidden tax” on American companies.  In another article, Jocelyn Kellam and Stuart Clark of Clayton Utz criticize a proposal to allow cy pres awards by courts in the Australian state of Victoria.  (See Previous ClassActionBlawg.com article here).  Overlawyered contributor Ted Frank has an entry today discussing a recent National Law Journal article quoting him that also discusses criticisms of cy pres awards in class actions.

In his often quoted opinion in Mirfasihi v. Fleet Mortgage Corporation, 356 F.3d 781 (7th Cir. 2004) (reprinted version available at http://bulk.resource.org/courts.gov/c/F3/356/356.F3d.781.03-1069.html), Judge Richard Posner provided the following commentary on the use of cy pres in class actions:

The doctrine, or rather something parading under its name, has been applied in class action cases, In re Mexico Money Transfer Litigation, supra, 267 F.3d at 748-49; Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1305 (9th Cir.1990); 4 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 11:20 (4th ed.2002), but for a reason unrelated to the reason for the trust doctrine. That [cy pres] doctrine is based on the idea that the settlor would have preferred a modest alteration in the terms of the trust to having the corpus revert to his residuary legatees. So there is an indirect benefit to the settlor. In the class action context the reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scot-free because of the infeasibility of distributing the proceeds of the settlement (or the judgment, in the rare case in which a class action goes to trial) to the class members. There is no indirect benefit to the class from the defendant’s giving the money to someone else. In such a case the “cy pres” remedy (badly misnamed, but the alternative term — “fluid recovery” — is no less misleading) is purely punitive.

It is important not to view this quotation in isolation from the rest of the opinion.  In reversing the trial court’s approval of a class action settlement, Judge Posner makes that remand is required because of the trial court’s failure to demonstrate that it fulfilled the “duty in a class action settlement situation to estimate the litigation value of the claims of the class and determine whether the settlement is a reasonable approximation of that value,” not because of the inclusion or exclusion of any particular settlement term or structure.

As Judge Posner intimates, the doctrine is much more commonly applied in the class action settlement context than in the context of a contested award of damages to a prevailing class of plaintiffs, which rarely happens under any circumstances.  As a result, some criticisms of the cy pres doctrine in class actions are tempered by the fact that a cy pres award is usually something that a settling defendant has agreed to allow, as opposed to something that has been forced upon it.  The best way for any individual defendant to avoid cy pres awards is to not agree to them.

In analyzing potential reforms, it still may be a legitimate criticism that allowing cy pres awards even in class action settlements has societal disadvantages because it allows class counsel to justify higher fee awards that might otherwise appear inflated in relation to the benefits provided to the true class members.  Thus, theoretically, abolishing cy pres awards could remove one possible incentive to pursuing class action litigation that, even if successful, has low likelihood of ever resulting in meaningful benefits to the actual members of the class.  But there are plenty of other creative settlement devices that commonly are used to justify large fee awards even in the face of a low payout to individual class members.  Consequently, it is unlikely that by itself, prohibiting cy pres awards in class actions would have any measurable impact on the number of class action lawsuits being filed or pursued in the U.S.

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It is well-established that a properly tailored class action settlement release can preclude future actions by absent class members, even those who don’t respond to or otherwise participate in the settlement.  (As an example, see this recent Eleventh Circuit Court of Appeals opinion).  So, in agreeing to a class action settlement, the defendant assumes that it is buying peace from civil liability from all future actions arising out of the same alleged conduct.  There are a few notable exceptions, including the threat of opt out litigation (see this earlier ClassActionBlawg.com entry) and the possibility of collateral attack if the settlement does not meet due process standards (see this article by Gerson H. Smoger summarizing possible arguments supporting collateral attack).  For the most part, defendants’ counsel can minimize the risk of these residual exposures in crafting the terms of the settlement in the first place.  (See this article on claims-made settlements).

Possible residual exposures due to the threat of governmental action, however, are more difficult to avoid.  A settlement in a class action will generally buy the defendant protection from private civil exposure, but it may not prevent potential regulatory penalties or possible criminal liability.  It may also not protect the defendant from actions by state Attorneys General, the Federal Trade Commission, or other regulators for injunctive relief.  While it may not be possible to completely shield a client from these exposures, a lawyer can at least advise a client of their possibility and advise about other possible steps to mitigate them, such as voluntary changes in policy.  For an excellent discussion of the interplay between private class actions and the concurrent powers to enforce consumer’s rights by state attorneys general and the FTC in antitrust matters see this presentation by Patricia A. Conners of the Florida Attorney General’s office, from the FTC’s website. 

Even beyond these more obvious state and federal law enforcement and regulatory powers, there has been a growing trend in recent years for attorneys general and other governmental agencies to use the doctrine of parens patriae to also pursue the monetary claims of private individuals.  For a general discussion of the origins and recent trends in the use of this doctrine in aggregating private tort claims, see this uncredited Columbia Law Article entitled Constituting Parens Patriae.  Under the parens patriae doctrine, a governmental entity pursues claims for monetary relief for the benefit of its citizens by essentially standing in their shoes and pursuing the citizens’ claims in a representative capacity. 

Because of the representative nature of parens patriae actions, a propertly tailored release on behalf of class members in a civil case–at least theoretically–should foreclose the possibility of a governmental entity bringing an action for the same monetary relief.  But try telling that to the government.  A defendant that reached a settlement for 50% of the potential compensatory damages might find itself facing a suit by the government for the other 50%.  Similarly, a defendant that reached a claims-made settlement where not all potential claimants responded might face a parens patriae action filed on behalf of those who didn’t participate.  Or maybe the state or federal agency takes the position that it isn’t bound by the fact that amounts were paid at all.  The client can end up facing the possibility of defending against exactly the same monetary exposure for civil damages that it faced in the civil lawsuit.

Thankfully, most state officials have better things to do than file copycat lawsuits to try to squeeze more money out of a corporation that entered into a reasonable settlement of civil claims.  As a state official that I spoke to recently noted, AG’s consumer protection efforts are more commonly focused on exercising their law enforcement powers to prevent ongoing or future harm than on trying to ensure civil compensation for alleged victims of past civil wrongs.  On the other hand, the same official commented that one area of focus in reviewing the notices now required to be sent under the Class Action Fairness Act (see previous entry here and here), is to look for settlement agreements that are attempting to release potential parens patriae claims by the state or otherwise seek to interfere with the state’s sovereign power.

As a practical matter, because government officals typically do leave civil damages enforcement up to private civil enforcement in the courts, post-settlement government action is not likely to become an issue except in those cases where a governmental agency was already investigating or pursuing action relating to the subject matter of the civil dispute even before the settlement.  In those situations, it is a good idea to try ensure some resolution with the government before finalizing the settlement in the civil case.  Patricia A. Conners’ commentary cited above provides some examples of cases in which this type of global resolution has occurred in the antitrust context.

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This article on claims-made settlements appeared originally in the guest column section of the March 10, 2008 issue of ProductLiabilityLaw360.  Under the submission guidelines, I retain copyrights to the article, but I was required to wait at least three months before reprinting the article elsewhere.

Claims-Made Settlements In Consumer Class Actions

Monday, Mar 10, 2008 — In recent years, commentators, consumer advocates, and courts have become increasingly critical of perceived abuses in consumer class action settlements.

Recent changes to Rule 23, Federal Rules of Civil Procedure, and provisions of the 2005 Class Action Fairness Act impose express requirements on courts for assessing the constitutionality and fairness of class action settlements before approving them.

Much of the debate has focused on so-called “coupon” settlements, in which class members are given coupons with little or no value in exchange for a release of claims by the class against the defendant and payment of substantial attorneys’ fees to class counsel.

In light of debate at the federal level, state court judges are also reviewing class action settlements with a more critical eye.

In the context of this additional scrutiny, attorneys in consumer class actions still face the challenge of trying to fashion a settlement acceptable to both sides or face the prospect of years of prolonged and expensive litigation.

One tool still available to counsel in meeting this challenge is the claims-made settlement, in which the defendant agrees to pay a monetary settlement award to qualifying class members who mail in a claim for a payment.

Claims-made settlements can be controversial because like coupon settlements, they do not ensure monetary relief to every member of the class.

However, claims-made settlements can provide a win-win solution for all of the true stakeholders in a consumer class action. They can maximize the relief available to individual class members who take the minimal steps necessary to participate, provide reasonable compensation to the attorneys and class representatives who took the time and effort necessary to pursue the class action, and still keep the cost of the settlement low for the defendant.

If they are done right, claims-made settlements remain a viable tool for resolving consumer class actions despite the atmosphere of additional scrutiny.

Each class action settlement is unique, but there are several common methods for distributing relief to the class. They include: (1) direct payment; (2) fund; (3) claims-made; (4) coupon; and (5) equitable relief.

Two or more methods may be used in combination as part of an overall settlement structure. In a direct payment settlement, class members are sent payments or have accounts credited directly without having to take any affirmative action.

In fund settlements, the defendant pays an agreed sum to a fund that may then be used to pay for settlement costs, attorneys’ fees, and cash awards to class members. Class members may or may not have to file claims for benefits as part of a fund settlement.

In coupon settlements, class members are sent coupons for free or discounted products or services from the defendant, which provide actual monetary benefits only to the extent the coupons are redeemed. Equitable relief, in which the defendant agrees to change its conduct in the future, may be provided on its own or in addition to other relief.

The basic mechanics of a claims-made settlement are typically as follows:

The defendant agrees to pay a monetary award to class members who return a timely claim form after receiving notice of the settlement.

Only qualifying class members who timely mail in claim forms are entitled to payment; no settlement fund is created.

The settlement agreement includes a release of claims by all class members, whether or not they submit a claim, unless they exclude themselves pursuant to Rule 23.

Administrative costs and attorneys fees are paid separately from the amounts to be paid to claimants.

Within this basic structure, there can be many variables.  For example, the award amount can be calculated in numerous ways. It can be a set dollar amount, a percentage of an agreed calculation of the plaintiffs’ alleged damages for each class member, a formula that reasonably approximates the harm to each individual, etc.

The notice plan may also differ from case to case. Common means of providing notice include direct mailings to class members, publication in newspapers or other media, or a combination of mailing and publication.

Claim form requirements also can vary. In some cases, each claimant may simply be asked to correct any address information and sign a claim form. In other cases, additional information may be requested to assist in the calculation of award amounts. The amount of verification needed for claims will also vary.

The response rate to a claims-made settlement can vary depending on the makeup of the class, the amount of individual awards, the geographic scope of the settlement, and numerous other factors. Predicting response rates is an art, not a science.

Although it is impossible for a defendant to predict the response rate with certainty, consulting with attorneys and class action administrators with experience in claims-made settlements can help to at least provide a ballpark estimate of what the settlement will ultimately cost.

The claims-made approach differs from other common methods for distributing class relief in several key ways. Unlike direct payment settlements, no payments are made without class members taking the affirmative step of returning a claim form.

Unlike fund settlements, the amount the defendant must pay is not predetermined.  Instead, the defendant only pays to the extent claims are made.

This also means that the defendant’s risk is not capped. Also, in a fund settlement, attorneys’ fees and administrative costs are often paid out of the fund, which reduces the amount of money available to class members. These amounts are usually paid separately in a claims-made settlement.

Finally, despite sharing with coupon settlements the characteristic that class members must do something affirmative to enjoy benefits of the settlement, claims-made settlements are not coupon settlements. Real money is paid.

The unique characteristics of claims-made settlements provide advantages over other possible methods of distributing relief. They can allow the parties to maximize the amount of individual awards available to those class members who take the time and effort to make a claim, while minimizing the overall cost to the defendant of funding the settlement.

This makes it much easier to reach an agreement. Certain administrative costs are avoided because there is no fund. There is no need to set up a structure to deal with unclaimed funds because only those award amounts that are claimed are to be paid.

This eliminates the need for settlement provisions for distributing unclaimed funds, which commonly require that unclaimed funds be paid to a charity or to the state or revert back to the defendant.

Finally, the amount of money available to a class member is not reduced by administrative costs and attorneys’ fees because those amounts do not come out of a common fund.

Despite these advantages, the claims-made settlement is not without criticisms. The criticisms can be grouped into two categories.

The first relates to traits inherent to the claims-made settlement structure that cannot be changed but may be explained and justified. The main criticism in this category is that not all class members are guaranteed relief. This is true, and, in fact, in many cases the number of class members who actually make a claim may be quite low, especially in cases where individual award amounts are low.

As a philosophical matter, a response to perceived unfairness in not guaranteeing relief to the entire class is that the structure maximizes the potential relief afforded to any given individual class member who is interested enough in obtaining relief to participate.

A defendant is much more likely to agree to a higher individual settlement award when faced with the prospect that it will not have to pay 100% of the claims of all class members.

Therefore, while the settlement structure does not guarantee an award to all class members, it does maximize the opportunity available to each class member.

Moreover, oftentimes there is no way to guarantee monetary relief to each class member regardless of the settlement structure, especially in those cases where the defendant lacks contact information for all or part of the settlement class. So, forcing the defendant to pay 100% of all possible claims often does not guarantee that class members will receive those benefits.

Whatever the justification for not guaranteeing relief to all class members in a particular case, courts generally have not rejected claims-made settlements for this reason alone.

Courts typically look to the reach and adequacy of the notice given to class members, not whether all class members ultimately receive monetary relief.

As long as there have not been unreasonable restrictions on access to notice and the opportunity to participate, claims-made settlements are commonly approved.

The second category of criticisms has to do with potential problems that can be avoided in any given settlement. For example, some critics argue that claims-made settlements create an incentive for the defendant to keep the claims rate low.

While this might be a legitimate objection in a settlement where unreasonable hurdles to receiving notice of the settlement and participating in its benefits have been erected, it can be overcome if the parties agree to a notice plan that is reasonably calculated to reach and provide simple, understandable notice and an opportunity to participate to the maximum possible number of class members.

A reputable notice expert will be able to assist in creating a notice plan that meets these objectives. Another common objection is that the attorneys’ fees award may be disproportionate to the payout to class members. This criticism can be tempered if fees are paid separately from the money being made available to class members and if the parties wait to negotiate fees until after reaching agreement on relief to be made available to the class. Including equitable relief can also help to justify a fee award.

A final criticism is that notices tend to be in legalese, causing class members to ignore them or throw them away. This criticism can be avoided in any given case by hiring a qualified notice administrator and by following notice guidelines adopted by the Federal Judicial Center.

Counsel can also maximize the likelihood of court approval, both at the preliminary approval stage and at the final approval stage, by giving full disclosure to the court. Counsel should be up front with the court at or before preliminary approval by explaining all of the material elements of the settlement, including the pivotal factor that only class members who submit claims will be paid.

If the judge is unfamiliar with claims-made settlements, it is a good idea to have at least one hearing in open court where the settlement structure can be explained by the attorneys for both sides, and the judge can ask why the parties agreed to this particular settlement structure.

At the time of preliminary approval, it may even be a good idea to point out some of the criticisms that have been made against claims-made settlements and explain why the settlement before the court is fair. The parties should attempt to quantify the relief available to each individual class member and its relation to the award amounts available to claimants under the settlement plan.

It is a good idea to explain these facts in a memorandum accompanying the preliminary approval motion, along with a discussion of why the litigation risks to plaintiffs and the class justify any discounts used in determining the settlement award.

If it is done right, the claims-made settlement can be a very effective way to resolve consumer class action lawsuits. This settlement structure facilitates the maximum possible benefit to the class representatives, those class members who make the effort to participate, and class counsel.

In addition, it can make the settlement less expensive for the defendant. This makes settlement more likely under terms that are favorable to those class members who care to participate. The parties should be able to adequately respond to any criticisms by providing full disclosure to the court from the beginning and by utilizing a fair and adequate notice plan.

–By Paul G. Karlsgodt, Baker & Hostetler LLP


Paul Karlsgodt is a partner with Baker & Hostetler in the Denver office.




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