Privatizing mass settlement.

• Author: Dodge, Jaime
• Position: Corporate compensation to victims without litigation - Introduction through II. In the Shadow of the Law A. Bidirectional Errors in Compensation in Private Funds, p. 335-363

ABSTRACT

From BP's oil spill in the Gulf of Mexico to the National Football League's (NFL) inability to honor Super Bowl tickets, corporate defendants are contravening the established litigation wisdom and offering full compensation to victims--without haggling to pay pennies on the dollar, without stall tactics and frivolous motions; indeed, without any litigation at all. These offers have often been dismissed as rare one-off exceptions to the rule. This Article challenges that claim, suggesting that these private mass settlements are instead relatively common features in our aggregate litigation system.

The Article explores the reasons that, contrary to traditional wisdom, defendants would voluntarily settle claims. It argues that in cases of clear culpability, defendants can mitigate the harm to corporate reputation and reassure shareholders. But, these settlements can also operate at the opposite end of the spectrum, with far more substantial consequences. Correctly structured, these settlement offers allow defendants to preclude the certification of a class action. These settlements thus offer an incredibly powerful tool in deterring or rendering impotent nuisance-value litigation by de facto converting any claim from an opt-out class action into an opt-in settlement. While arbitration provisions have been used as a mechanism for preventing class certification, they inherently can only reach contractual relationships; bilateral mass settlements are not so constricted, allowing them to reach any mass claim.

This transition from opt-out to opt-in mechanisms upends the traditionally assumed relationship between the interests of compensation, deterrence, and legitimacy with respect to mass wrongs. This balance is far more complex than has been posited in the existing analyses and demonstrates that the twin fundamental assumptions of our class action system are not unchanging truths but instead mere default positions. Indeed, in this new world, defendants now have the ability to prevent almost every class from being certified against them--yet, as the analysis demonstrates, they may not choose to do so. In short, this Article seeks to replace our conception of the public aggregate litigation system with a new, more comprehensive model that also incorporates the private ordering that is driving this new emerging generation of aggregate claims mechanism.

INTRODUCTION

Class actions held the promise of remedying previously irremediable harms, from low-value claims (1) to catastrophic mass torts. (2) Yet, despite this promise, the class action mechanism has been broadly criticized from every side. Defendants complain of nuisance suits, (3) blackmail suits, (4) and over-enforcement; (5) each skewing damages--and, in turn, undermining deterrence. At the same time, agency problems, (6) coupon settlements, (7) competing litigation, (8) and, more recently, claims forms (9) have all contributed to an environment in which few absent class members recover meaningful compensation. (10) And, all of this occurs as an exception to our ordinary expectation that an individual should be the master of his own claim, raising fundamental questions about whether the autonomy costs of the class action are too high. (11)

Given these critiques from all sides, it might be unsurprising that parties are experimenting with privatizing the mass settlement process. With the high stakes of class action trials, settlements have become the inevitable end game. (12) Recognizing that the case will ultimately end in a settlement facility administered by a private claims administrator, defendants can short-circuit the litigation process by creating the facility at the outset. The Gulf Coast Claims Facility (GCCF) created by BP to satisfy its statutory obligations in the wake of Deepwater Horizon's explosion has become the most prominent example of a private settlement fund. (13) Perhaps for this reason, many scholars have dismissed the fund as a one-off oddity driven by a unique statutory scheme. (14) But, corporations have not.

At both sides of the class action spectrum, would-be defendants are exploring the use of private settlement funds as a superior alternative to the litigation process. Companies responsible for mass torts are now announcing the creation of private claims funds in the immediate aftermath of the tort as a component of their public relations rehabilitation or crisis management efforts. (15) At the opposite end of the spectrum, savvy defendants are creating programs to address small-value and outlier claims in an effort to provide superior compensation to those affected while simultaneously avoiding the vast expenditure of resources on frivolous claims that have become the hallmark of class litigation for so many defendants. (16)

Yet, our scholarship continues to conceive of mass claims resolution through the lens of public aggregate litigation--class actions and, in recent years, multi-district litigation (MDL). (17) If we speak of private ordering, the conversation typically focuses only upon pre-dispute arbitration as a mechanism for preventing aggregation. (18) As a consequence, many of these innovations are dismissed as ad hoc responses to extraordinary situations. (19)

I argue that we are witnessing the birth of a new privatized mechanism for mass claims resolutions, competing with the traditional public aggregation mechanisms. Most commonly, these private mass settlements consist of a unilateral settlement offer by the defendant, which each victim may then accept, forming a bilateral settlement agreement--thereby avoiding the procedural hurdles associated with judicial aggregation and its associated agency costs and due process checks.

These settlements contravene the traditional conception of defendants resisting settlement and attempting to delay resolution and impose costs upon plaintiffs as they pursue low-probability defenses. (20) These emerging structures are based upon a wholly different dispute resolution methodology than those described in the existing literature--one that bypasses the determination of common questions at the core of aggregate mechanisms entirely. (21) Instead, these mechanisms use individualized claims determination as the vehicle for mass claims resolution--whether culminating in a claims settlement fund (22) or simply direct payments from the defendant.

Private mass settlements give defendants no less than the option to avoid class actions altogether--substantially limiting the experiment with aggregation that has occurred over the last half century. (23) This completely upends our understanding of the nature of aggregation, creating a completely new generation of mass claims strategies--with a completely new effectuation of compensation, deterrence, efficiency, and legitimacy--unlike any of its predecessors. (24)

This Article proceeds in three parts. Part I of this Article demonstrates that the emergence of private mass settlements reveals the error of the fundamental premises upon which the class action system is built. This Part then analyzes the market for these offers and demonstrates that these offers have the capacity to generate simultaneous win-win outcomes for both the defendant and the claimants--a remarkable assertion, suggesting the superiority of these offers from the perspective of the parties.

Part II takes on the emerging consensus in the developing literature. It first seeks to demonstrate that these offers have the capacity to drift in both directions from the optimal compensation value, rather than reliably disfavoring claimants. It then turns to the "lesson" of BP--that MDLs offer better results for both claimants and defendants than private claims funds. This Part argues that the conventional explanations for the superiority of MDL cannot rationally account for the compensation differential, and instead identifies extrinsic causes. This insight raises not only difficult normative questions about the entanglement of public and private litigation, but also suggests limitations on the predictive value of BP in future mass claims settlements.

Part III of this Article then explores the strategic use--and limits--of private mass settlement funds. This Part argues that privatization can be an incredibly effective mechanism for deterring frivolous nuisance suits, which have typically represented a large component of many companies' complex litigation budgets. This Part then posits that private funds can also be a useful component at the opposite end of the litigation spectrum as part of a disaster mitigation strategy. Apart from these potentially effective uses, the discussion also focuses on identifying the factors that make privatization less likely to offer a superior resolution for the corporation, and the situations in which we should expect to see fewer unilateral settlement offers by defendants.

Part IV of this Article situates bilateral settlements within the broader transitions occurring in aggregation mechanisms. This Part argues that unlike the practical limitations upon arbitration and MDL, bilateral mass settlement is able to reach any type of claim--and convert it from the opt-out regime of class actions. This is a remarkable step in the evolution of aggregation, giving rise to a new generation of mass claims enforcement in which opt-in rather than opt-out mechanisms are poised to obtain dominance given their grassroots popularity and remarkable potential for superior outcomes for both the defendant and claimants. But, this analysis also reveals that the emerging doctrine creates gaps in the closure afforded by bilateral settlements. The result is an overall picture of enforcement that is increasingly discordant--a result that impedes compensation, deterrence, efficiency, and legitimacy. Finally, the Article concludes by offering some observations about the consequences of bilateral mass settlement for the doctrine and theory of mass claims and...