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Posts Tagged ‘settlement fund’

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.

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This is the fourth in a multi-part post summarizing last week’s 5th Annual Conference on the Globalization of Class Actions and Mass Litigation.  Click these links to see the summaries for Session 1, Session 2, and Session 3

Giving Away Money: Calculating Damages & Allocating Damages

Professor Francis McGovern, Duke University Law School chaired this panel of authorities on the management of compensation funds.  A pioneer in the development of mass compensation programs, Professor McGovern has assisted with the administration of similar mass tort settlements in the United States, as well as reparations involving international disputes, such as the United Nations Compensation Commission, through which he is currently assisting in developing a framework for handling approximately 2.6 million reparations claims against Iraq.

Professor Jasminka Kalajdzic, University of Windsor, Canada, presented the case study and offered her insights into practical aspects of the case study.   The case study focused on a $1.9 billion fund for victims of abuse within the notorious Canadian Indian Residential Schools (IRS) program, in which aboriginal children were forced to attend Christian schools in an effort to force assimilation into white culture.  The purposes of the program had been described as “killing the Indian in the child” and turning native populations into English-speaking farmers and Christians.  The children were forced to attend the schools were subjected to harsh corporal punishment, psychological, physical, and sexual abuse.  By the early 2000s more than 50,000 individual claims and a number of class actions had been filed by victims of the IRS programs.  In 2005, following an alternative dispute resolution process, the Canadian government set up a $1.9 billion fund to compensate victims.  Compensation schedules established monetary award amounts based on a variety of factors, such as the amount of time spent in the schools, and the number of specific instances and types of abuse that a claimant had been subjected to.

Each of the panelists had been responsible for administering compensation funds, but the funds themselves had a variety of sources and purposes.

Dr. Norbert Wühler, Director of Reparations Programmes, International Organization for Migration, directs international claims facilities that provide reparations or other compensation arising out of international conflicts.  They include the Iranian Claims Tribunal, which provides compensation to U.S. citizens and companies who were harmed or displaced from Iran following the revolution of the late 1970s, and a program to compensate victims of Iraq’s invasion of Kuwait in the early 1990s.

Mr. Pieter van Regteren Altena, Partner, Van Doorne NV, administered the DES fund in the Netherlands, a fund established as a result of a mass tort settlement of claims against the pharmaceutical companies who manufactured DES, a synthetic hormone given to pregnant women prior to the late 1970s.  A collective settlement of DES claims was approved in 2006, resulting in the establishment of a 38 million Euro fund for the benefit of people who suffered adverse consequences from the use of DES, such as infertility, cancer, and birth defects.

The final panelist, and also the Keynote Speaker at the dinner held later that evening, was Kenneth Feinberg, who has been charged with administering some of the most high-profile compensation funds in history.  They include the September 11 Victim Compensation Fund established by Congress in 2001, the Gulf Coast Claims Facility established by BP following the 2010 Gulf of Mexico oil spill, and a settlement fund arising out of claims by victims of the use of the compound Agent Orange during the Vietnam war.

Professor McGovern opened the discussion with the observation that what all of the panelists had attempted to do in administering monetary funds was “rough justice.”  He then led a discussion on the similarities and differences between different compensation programs and the various issues and themes that can arise in the process of administering compensation funds.

Several of the obvious ways that compensation programs can differ are the source of the assets to be distributed and the sources of authority for the distribution and management of the compensation fund.  In a mass tort case, such as the DES case in the Netherlands or the Agent Orange case in the United States, the source of funding is a corporate defendant, but the source of authority for the settlement is a court.  In many international disputes, the source of authority can be an international tribunal, the United Nations, or a treaty among nations, and the source of funding can differ significantly from case to case.  For example, in the Iranian Claims Tribunal, the source of funding was frozen Iranian assets from outside Iran.  In the case of the fund established for victims of the Iraqi invasion of Kuwait, the funds came out of a percentage of oil sales that were permitted as an exception to a trade embargo.  Other funds have had sources of authority and funding that are unlikely to be repeated again in the future, including the 9/11 fund, which was established and funded by Congress only weeks after the terrorist attacks occurred, and the Gulf Coast Claims Facility, which was established and funded voluntarily by BP following what was essentially a handshake agreement with President Obama.

The structure of a compensation program is dependent on a number of factors.  Feinberg and Wühler both made the point that the volume of claims has a large impact on the structure of the compensation scheme.  In the Iranian Claims Tribunal, there were only 2700 claims, so individual claims could be handled more like a commercial arbitration, whereas with the reparations from the Iraqi invasion of Kuwait, there were many more claims, so the structure had to have a very different composition.  In the case of the 9/11 Victims’ Compensation Fund, the task of determining individual recoveries was handled mainly by accountants, whereas in the case of BP, distribution of benefits also required the work of claims adjusters.

Organizational systems for compensation funds are also influenced by other factors.  The need to prove causation is a factor.  For example, in the DES case, one of the main issues in determining who should receive compensation was the causal link between the drug and adverse health consequences suffered by the individual.  There, van Regteren Altena explained, the fund administrators fell back to the law of evidence, and an individual assessment procedure was implemented.  By contrast, Feinberg explained that in the Gulf Coast Claims fund, the level of evidence needed to prove an adverse impact resulting from the oil spill differed depending on how far removed the claimant was located geographically from the site of the spill.

The issue of causation highlights a common difficulty in administering settlement programs.  That is, the problem of efficiently distributing the funds while maintaining a sense of fairness and proportionality among individual claimants.  As Feinberg pointed out, although the goal of the program may be “rough justice,” there is a big tension between rough justice and individual compensation in any settlement program.  Success in a compensation program requires the administrator to walk a fine line between the efficient and speedy distribution of limited resources and paying enough attention to individual claims so that the claimants as a whole perceive the settlement as fair.  To achieve this goal, allowing claimants an opportunity to be heard makes an enormous difference.  Many of the structures described by the panelists had multiple levels of individual assessment.  For example, in the IRS settlement, claimants were paid according to a schedule but also had the opportunity to request an individual hearing.  Many mass tort settlements, such as the DES settlement, allow individual members to opt out and pursue their own claims individually.  Where individual hearings are impractical due to the number of claims, providing claimants with different options can help resolve the tension.

As a final thought, I would add a personal note that although many of the programs discussed during the presentation involved unique situations that most of us as practitioners are never likely to encounter, the themes and concepts discussed by the panelists are likely to be applicable in fashioning a wide variety of class action and mass tort settlements.  I have been involved with several not-so-high profile class action settlements that involve many of the issues and tensions discussed during the program.  So, as a practitioner, a key question from the Q&A portion of the program that piqued my interested was whether there are any resources or guides available to assist with the development or implementation of compensation funds.  Several of the panelists pointed to a comprehensive guide published by the Center for Public Resources, the Master Guide to Mass Claims Resolution Facilities.

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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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