Privatizing mass settlement.

AuthorDodge, Jaime
PositionCorporate compensation to victims without litigation - II. In the Shadow of the Law B. Reconceptualizing the "Lesson of BP" through Conclusion, with footnotes, p. 363-396
  1. Reconceptualizing the "Lesson of BP"

    A second level of scholarly commentary suggests that, even assuming arguendo that the private compensation fund pays out a reasonable level of compensation, claimants and defendants should still prefer an MDL settlement to a private claims fund. (121) The argument is that victims are better off because defendants pay more in damages, while defendants are better off because they receive more closure--particularly in high-value cases like the BP oil spill. (122) But, is this always true?

    I do not dispute the fundamentals on which these scholars rely--the decreased litigation costs, mitigation of adverse selection problems, and benefit of resolving the final "handful" of cases. (123) But I question whether these justify the extent of the premium suggested here, or whether something more was at play.

    1. The Traditional Conception of the Deepwater Horizon Funds

      Issacharoff and Rave posit that there were three components of the MDL peace premium that justified the enhanced settlement values relative to the GCCF: decreasing litigation costs by settling in bulk, instead of through individualized negotiations; reducing the risk of adverse selection, whereby the individuals with the best claim opt-out of the settlement; and resolving all claims, thereby avoiding the disproportionate costs the final holdouts can impose upon a corporation. (124) But does this explain the more generous public settlement?

      It is true that the MDL's embedded class actions converted the claims from de facto opt-in structures to opt-out Rule 23(b)(3) classes. But, what did this buy? The GCCF had already processed $6.2 billion in payments to 220,000 claimants. In contrast, only 3,016 cases have been filed in the MDL. (125)

      Against a backdrop of an existing claims fund and a running statute of limitations, how many strong claims was BP buying peace as to? Put another way, how many individuals who had not filed in the GCCF nor already filed lawsuits were likely to come forward before the statute of limitations expired? Given this dynamic, the class settlement required BP to make payments calculated based upon a large number of claims that would never have been pursued but for the class action device.

      The claimants in the class action can be conceived in three basic categories: (1) those who, for whatever reason, did not file a claim before the GCCF and also would not ultimately file in the Rule 23 action either--essentially the "no action" absent class members; (2) those who did not trust the GCCF, often because of its ties to BP or other questions of legitimacy, but would participate in a Rule 23 settlement with similar terms negotiated at arm's length; and (3) the claimants who believed they were systemically undercompensated by formulaic damages, and thus would opt out of both the private and subsequent public suits.

      Having disaggregated the potential claimants in this way, it becomes easier to conceptualize the limited role of adverse selection. So long as the settlement obtains final approval, BP would obtain peace as to the first category of "no action" claimants. Regardless of whether it paid the lower or higher amount, these individuals would be in the class and precluded from subsequent litigation--but the victory would be rather hollow, since they would never have filed claims in either system. So too, the second group of claimants, who merely wanted a legitimate, arms-length process for damages determination, will participate in the settlement at the lower or higher value. For clarification purposes, one might label these the procedural legitimacy/non-opt-out class members--they will accept whatever terms are approved by class counsel and the court.

      It is only the third group of absent class members whose participation is driven by the settlement's terms. But, because the same grid applies to all claimants, in order to capture each additional absent class member in this third, "potential opt-out" group, all claimants must receive these increasingly favorable terms. Put another way, to obtain the marginal participation increase of those potential opt-outs who demand 1% more in payouts, the no-action and procedural legitimacy class members will all also need to receive the additional 1%.

      But, opt-out rates are typically only 1 to 2% of the class. Moreover, opt-outs take all forms. Some opt-outs are opting out of the litigation because they effectively agree with the defendant that it should not be held liable for the alleged harm. Other opt-outs represent the opposite end of the spectrum, believing that the compensation on offer is too little. Within this group, each claimant choosing to opt out rationally must anticipate that the underpayment under the Rule 23 settlement is substantial enough to justify the litigation costs of proceeding, or that there will be enough individuals who opt out to generate cost spreading sufficient to overcome this dynamic. Finally, another set of opt-outs may seek alternative end-goals; for example, wanting to continue discovery to bring to the public's attention additional details of the corporation's wrongdoing. Given this dynamic, only a portion of the potential opt-outs can be captured by a sweeter deal--those that favor the company or who oppose any settlement will opt out under any terms.

      Taken together, one must then ask whether increasing the payout structure was the best available approach to minimizing adverse selection. It may well be that in some cases, damages are clustered so closely that even paying all claimants at the highest possible damage level is still less expensive than litigating. Indeed, this is the basic principle behind many of the private mass settlement funds identified in this Article. But, where the premium was paid for claims in an area of uncertainty--as here--there is less cause to expect that only a small increase in payout will markedly change the opt-out rate. As the payout demanded by holdouts increases in size, it becomes more costly to extend this largesse throughout the entire absent class.

      Moreover, because the GCCF had already paid a substantial number of claims, the universe of potential filers was somewhat distorted. Removing those claims from the MDL pool inherently left a greater percentage of no-action claims than would otherwise have existed. Yet, these no-action claimants were still included in the calculation of the fund, at the now-magnified rate of the settlement premium.

      At the extreme, the premium demanded by the final holdouts--even if irrationally high--may be enough to incentivize the corporation to simply accept the opt-outs. But, if this is done, then the adverse selection and disproportionate, final-holdout costs have not been eliminated by the more generous terms; they have merely been mitigated.

      Recognizing the high costs and functional limits to the peace purchased by BP, might there have been other factors that combined with these to incentivize its more generous MDL settlement terms?

    2. A Supplemental Public/Private Interaction Narrative

      BP settled its economic loss and medical claims cases in March 2010, in the shadow of the pending criminal charges, which were the largest in U.S. history. (126) Viewed in this context, BP's settlement on the courthouse steps may have been not simply about the victims' claims, but about their collateral effect on other public proceedings. By settling with the victims, BP could decrease any likelihood that the government would seek compensation on behalf of private victims--as it has frequently done in recent years. But, more importantly given the procedural posture of the settlement, it removed the uncompensated victim from the table as a symbol of BP's wrongdoing. And, it affirmatively allowed BP to argue that neither retributive nor corrective justice required government regulators to seek the harshest possible penalty against BP. Instead, it could argue that while it had made mistakes, it had already learned its lesson, had compensated victims--and even remote potential victims--with extreme largesse, and was, in short, attempting to make right its wrongs. In this tale, generous compensation became the lynchpin of proving remorse--and, in turn, demonstrating that draconian regulatory terms were simply punitive rather than deterrent.

      This alternative narrative explains the paradox of the BP settlement for many. As BP--and before it, Haliburton--have argued (if not demonstrated) in their filings, there are persons being generously compensated who may not have suffered any legally cognizable injury, while for others the payments outstrip the actual harm suffered. Why did BP agree to--and some would say actually pushed for--this over-compensation in terms of both the scope of the class and damages paid? And, more perplexing, what drove BP's sudden change of heart, in which it suddenly began appealing the settlement to which it had just consented, with the ink barely dry? (127)

      One might argue that BP simply had bad lawyers, who did not realize that this was the consequence of the settlement agreement until months after the negotiations concluded and the claims processing was underway. Given restrictions on settlement talks for British corporations, there might be some merit to the argument that talks were too hurried for robust reality testing and thus there was a lack of a true consensus on what certain terms would mean. But, BP had hired many of the best lawyers in the nation and was working with many of the leading settlement advisors, making it difficult to believe that BP's lawyers did not see the gaping holes in the settlement. Indeed, many of the terms now complained of were expressly discussed in the settlement talks and, after having the consequences pointed out, BP's attorneys expressly agreed to the terms. (128) This suggests that the tale is not purely one of incompetent lawyering as some have assumed. (129)

      Removing this explanation, the story...

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