Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

Fordham Law professor Howard Erichson (http://law.fordham.edu/faculty/1095.htm) has posted a new working paper that addresses the thorny issue of settlements in mass tort cases.  Titled Uncertainty and the Advantage of Collective Settlement, (forthcoming, DePaul Law Review) it posits six different types of uncertainty in mass torts, each of which he links to well-known cases. According to Erichson, there is uncertainty about

1. General causation (eg, Bendectin litigation)
2. Liability (tobacco/Agent Orange)
3. Exposure (ephedra/Wolburn leukemia clusters)
4. Product ID (asbestos)
5. Individual medical causation (Vioxx)
6. Damages

Erichson argues that, for cases 4, 5, and 6, aggregate settlement is a good idea, while litigation is probably better for cases 1, 2, and 3. What's his definition of "good idea"? He makes a few casual references to "justice," but what he really seems to mean is a settlement where the defendant pays compensation in proportion to the harm it (likely) caused. As Erichson puts it:

When parties face uncertainty about individual causation, a collective settlement may offer an excellent opportunity for an outcome that reflects proportional liability even in the absence of a proportional liability rule of tort law. However, collective settlement offers this advantage only when the uncertainty relates to the likelihood that each plaintiff will prevail on causation. If causation is uncertain but it is clear that each plaintiff can or cannot meet the preponderance standard, then collective settlement would reflect the same overliability or underliability that would result from individual or collective adjudication.

When liability and causation are clear but the amount of damages is uncertain, collective resolution – whether by adjudication or settlement – offers the benefit of reducing variability and possibly providing greater accuracy. Particularly with regard to punitive damages, collective resolution can serve the important function of reducing variable results among similarly situated claimants.

Erichson likes typologies, and views himself as providing starting points for further analysis by other researchers. So the fair question to ask is: is this a useful breakdown of types of uncertainty? And the answer is: somewhat.

One problem is that it seems Erichson stretched a little to get six categories. In particular, "individual medical causation" feels like a fudge. There's little to distinguish it from liability, except that--according to Erichson--in one case, the legal question is uncertain, and in the other, the factual question is. In either case, however, it would require individual trials to determine whether the substance caused the illness, and whether that meant that the manufacturer was liable. (For example, in some mass tobacco cases, it appears one of the larger problems with aggregate treatment was how to address the difficult issue of determining individual medical causation.)

And the second problem is that Erichson really doesn't consider the means by the settlement will be achieved, and the method of settlement can have a tremendous effect on its "justice."  There's no question that the parties would have difficulty pushing through a mass-tort settlement as a classwide settlement.   And while it is possible to settle a mass tort without invoking Rule 23, those settlements bring their own problems. Among other issues, settling many different cases on the same "take it or leave it" terms seems unfair, but engaging in a lengthy plaintiff-by-plaintiff claims may not save much time or money over the original trials. As Judge Eldon Fallon observed about the Vioxx settlement:

The potential harm to the public's perception of the judicial process is especially acute in the instant case because of the large number of claimants participating in the settlement. The approximately 50,000 plaintiffs and the $4.85 billion settlement fund have captured the public's attention, resulting in a heightened degree of public scrutiny on the settlement proceedings and the judicial process in general. Disproportionate results and inconsistent standards threaten to damage the public's faith in the judicial resolution of mass tort litigation by creating an impression of inherent unfairness.

That, right there, is the rub.  To make the settlement seem fair, it has to be fair, treating like cases similarly, and different cases differently.  Judge Fallon's solution was to assert the power to review individual plaintiffs' lawyers contingent-fee contracts (which would check the lawyers' understandable impulse to settle as many cases as possible on whatever terms).  That is an unwieldy solution, but better than nothing. How to resolve mass-tort claims like this--where individual causation is uncertain--remains a very difficult question. Erichson's proposed typology is useful on the easier questions, but unfortunately glosses over one of the most challenging issues in aggregate litigation today.

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 Obviously, securities fraud is bad for firms. But, once a fraud has been discovered (driving down the stock price), does a securities class action add injury to injury? A number of commentators have suggested so, using the following logic: a securities class action takes money from the firm, and pays it to the shareholders, minus costs and attorneys' fees. The hitch is that the firm is owned by the shareholders, which means that the attorneys have just taken money from the shareholders' property and handed it to them directly, while taking a one-third cut for themselves. (This is sometimes known as the "circularity" critique, because the money just moves in a circle--except for the part that moves into the lawyers' pockets.)

If securities class actions really just represent a 33% "lawyer tax," then why haven't firms challenged these lawsuits as being, on their face, evidence of inadequate counsel? One big reason is that doing so is dangerous from a rhetorical point of view. If a firm has been accused of defrauding its shareholders, it may lack the ethos to argue that the real fraud is the lawsuit itself.

And yet the circularity problem remains. However, a new article from the University of Pennsylvania Law Review, Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms, by Lynn Bai, James D. Cox, and Randall S. Thomas (158 U. Pa. L. Rev. 1877), suggests a possible legal argument for countering this kind of lawsuit.

The authors looked at a number of firms in different industries that had been accused of securities-related frauds (usually accounting frauds designed to artificially inflate the price of the stock), in order to determine whether the resulting class actions harmed the firms' performance in the long term. They examined a number of different measurements of performance, including stock price, sales, and liquidity.

The basic conclusion? Filing a securities class action has an immediate negative effect on stock price, but the firm gradually rebounds, even as the litigation progresses. However, both stock price and operational efficiency tend to remain low for a long time afterwards. Why? Because, in settling a class action, the firm winds up using most of its cash to pay the shareholders and lawyers, forcing a liquidity crisis that impairs its short-term performance. Once a firm lacks sufficient cash to operate day-to-day, it can't do what it needs to regain legitimate competitiveness, resulting in a continually depressed stock price.

Now, one possible reason for a continued low stock price is that the firm's performance was never that great to begin with. However, the authors also compared the firm's performance to the amount they paid in settlement, and found a strong relationship. In the authors' own words:

"defendants were more likely to experience lower liquidity levels than their peers in the post-settlement years than in the Pre-class Period. Moreover, this probability increased with the settlement amount ... These numbers are consistent with the theory that insurance provided less than full coverage of the settlement amounts and that the defendants paid the discrepancy out of their current assets. The settlement payment exacerbated liquidity constraints, making the defendants more vulnerable to liquidity crunches and prone to bankruptcy."

So, does this suggest that a securities defendant could accuse a plaintiff of being inadequate simply for filing the lawsuit in the first place? Not really. But it does suggest that in many cases, a securities class action may not be superior to other methods of resolving the lawsuit. If a class-action settlement (or by extension, damages award) harms the firm by reducing liquidity when the firm needs it most, then it is harming many of the same shareholders it is supposed to help. By contrast, SEC fines aimed at the officers who profited from a fraud, or SEC consent orders aimed at reforming the company's bad practices, can reform bad practices without crippling a firm's ability to rebound from actions of bad managers.

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 When a defendant is faced with a class action complaint, sometimes the best strategy appears to be to settle quickly, before having to engage in costly litigation or burdensome discovery. But, as readers of this blog know, that strategy is not always as straightforward as it first seems.  In today's case, we have another example, where what first appeared to be a quick-and-painless settlement wound up taking eight years and visiting the Seventh Circuit Court of Appeals three times.

In 2000, a group of class-action plaintiffs sued Fleet Mortgage claiming that it had sold their personal information to telemarketers, in violation of the Fair Credit Reporting Act (FCRA) and various state consumer-fraud acts. Mirfasihi originally brought suit on behalf of two classes, one of people whose information was shared, and one of people who actually bought something from the telemarketers.

Fleet Mortgage negotiated a settlement of the entire case, which the trial court approved. But, based on the appeal of some objectors, the Seventh Circuit reversed, because the settlement had released the claims of the "information sharing" class without giving them anything in return. After the case was remanded, the parties negotiated a second settlement, with a heavy cy pres component. (The court found cy pres appropriate because the information sharing class's claims were not worth much, if at all.) This settlement drew objections as well, and the Seventh Circuit again reversed and remanded, this time because the lower court had not "made an adequate effort to value the claims of the information-sharing class." On this second remand, the trial court found--after an extensive survey of the various state consumer-protection laws at issue--that the information-sharing claims had no value at all. The objectors appealed again, arguing that the information-sharing claims might be worth as much as a billion dollars, and that their lawyers deserved far more than the $18,750 fee they had received.

This time, the Seventh Circuit pulled no punches. Writing for the panel, Judge Posner first affirmed that the claims of the information-sharing class were worthless. Then, he proceeded to explain the primary dilemma that meritless class actions pose to all parties:

"We are disheartened that the litigation by the information-sharing class has been allowed to drag on for eight years, when it had no merit—and that as a matter of law, without need to take evidence. It is an example of the typical pathology of class action litigation, which is riven with conflicts of interest, as we discussed recently in Thorogood v. Sears, Roebuck & Co., supra, 547 F.3d at 744-46. The lawyers for the class could not concede the utter worthlessness of their claim because they wanted an award of attorneys' fees. The lawyers for Fleet were reluctant to argue the utter worthlessness of the claim because they were able to negotiate a settlement that cost their client virtually nothing—provided they did not take such a strong stand that it jeopardized the class lawyers' shot at a generous award of attorneys' fees, and hence the settlement. And the objectors were motivated to exaggerate the value of the claim of the information-sharing class so that they could get a generous award of attorneys' fees. At the very outset of the case, before certifying the class, the district court should have required the parties to present the belatedly presented survey of the consumer protection laws of the 50 states, plus argument concerning the scope of the Fair Credit Reporting Act, to demonstrate the existence of a colorable claim."

Class-action defense lawyers can learn several lessons from this opinion. First, early challenges to cases may be preferable to settlements, if for no other reason than they can test the merit of questionable claims. Second, certain classwide issues--like the feasibility of a nationwide class based on state law--do not have to wait until class discovery has been completed. And finally, if the plaintiffs don't watch out for the interests of the absent class members, then the defendant may have to; not doing so may cost the defendant years and tens of thousands of dollars in appeals. As I've said before, sometimes, settling on the cheap can be a very expensive strategy.
 

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 Brian Fitzpatrick (of "Objector Blackmail" fame) has published another article in the University of Pennsylvania Law Review asking the provocative question: are class-action lawyers paid too little? His provocative answer: yes they are. According to Fitzpatrick, in small-stakes class actions, lawyers should collect a 100% contingency fee. What's his justification? An argument he refers to as "insurance-deterrence theory." Fitzpatrick assumes that any money that goes to class-action lawyers serves a deterrence function, because not only does it cost the defendant money, it also funds further opposition to corporate wrongdoing. (Fitzpatrick is not the only person to make this kind of argument; many plaintiffs' lawyers and academics argue that class actions primarily serve as a public deterrent to corporate wrongdoing.) He also assumes that, if a harm is too small for a class member to reasonably buy insurance to prevent, then that money is better spent on the "deterrence" of paying the class lawyer than the "insurance" of compensating the class member.

Fitzpatrick dismisses most arguments to cap fees (for example, that class actions exist to compensate class members rather than enrich lawyers, or that giving plaintiffs' lawyers further incentives to file questionable cases might lead to further abuse) as "political." However, even leaving aside these arguments, Fitzpatrick's argument runs afoul of the basic structure of Rule 23.

• 100% fees make inadequate settlements. Rule 23(e) requires a settlement to be "fair, reasonable, and adequate."  One way the court measures these criteria is by determining whether a proposed settlement represents good value to the proposed class.  A class settlement that provided the members with nothing, and the lawyers with everything would be unlikely to pass this test. (It also would not pass the settlement-approval requirements of the Class Action Fairness Act. If courts are legally required to scrutinize settlements that give class members only coupons, then they certainly can't rubber-stamp settlements that give the lawyers everything and the class nothing.)
• 100% fees require inadequate class representatives. Fitzpatrick's proposal is also flawed because there is no reasonable class member that would willingly agree to forgo any possibility of recovery so that her counsel could be paid more. In essence, Fitzpatricks proposal relies on a class representative that would be willing to say "I understand I was defrauded for $100, but instead of getting that money back, I'd rather you just gave it all to my lawyer. And I'm confident everyone else like me will feel the same way." For many courts, that kind of statement would serve as evidence that the class representative was not sufficiently independent of her counsel. 
• 100% fees indicate inadequate class counsel. Under Rule 23(g), "Class counsel must fairly and adequately represent the interests of the class." That means that they must watch out for the class's best interest, not their own. From that standpoint, a 100% fee clearly does not look out for the best interests of the proposed class instead of the lawyers.

One has to admire Fitzpatrick's chutzpah; agree or not, he's made a bold proposal. But he's completely ignored the existing Rule 23 requirements to get there. As it turns out, Fitzpatrick's proposal is inadequate, in every sense of the word.

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Geoffrey Miller is one of the few law professors out there who consistently investigates real empirical questions about class actions. He's published on the role of objectors in class-action settlements, the use of non-pecuniary relief, and even the effect of judicial review on settlement rates. So when Miller comes out with a policy proposal--as he does in a recent article in the University of Illinois Law Review, it's worth paying attention to what he says.

Miller starts from the premise that "something is wrong with settlements." (If one were glib, one could say that his critique proves that something is right with settlements. Nobody's pleased with them.) His proposed solution? The preliminary judgment. As Miller proposes it, at any point, a party could move the court to declare whether it believed the plaintiff could establish her case by a preponderance of the evidence currently available.

A preliminary judgment is simply a tentative assessment of the merits of a case or any part of a case, based on the same sorts of information that the courts already consider on motions for summary judgment. The difference between a preliminary judgment and a summary judgment is that the court, in a preliminary judgment, would not be limited to deciding issues with which no reasonable jury could disagree. Instead, the court would provide its own provisional judgment on the merits of the case based on the information provided by the parties. A preliminary judgment, once given, would convert into a final judgment after the expiration of a reasonable period of time - say, thirty days. Any party against whom a preliminary judgment is issued, however, would have the right to object prior to the expiration of the period (with or without explanation), in which case the judgment would be vacated and the case would proceed according to ordinary rules of procedure. Like other threshold rulings, the preliminary judgment would then have no preclusive effect in the continuing litigation.

(Internal footnote omitted.)  According to Miller, this "preliminary judgment" would offer more information to the parties than a ruling on other preliminary motions--presumably because it would apply the same decision rule that applies at trial. He also believes it would reduce litigation costs.

In reality, while the motion for preliminary judgment would likely prove another useful tool, there is no reason to believe that it would be immune from the strategic behavior prompted by other versions of preliminary motions. Preparing a motion for preliminary judgment would not be costless. Defendants would have strong incentives to file early preliminary judgment motions, much as they already do with other preliminary motions. (This analysis would hold true whether one believes that defense counsel file early motions to rid themselves of frivolous cases, to frame the remainder of the litigation, or simply to run up their hourly bills.)

The lesson Miller's analysis suggests is a simple one, and one that this blog has advocated for some time now: Challenge both certification and merits as early as possible. While this isn't quite the same as getting a "preliminary judgment," the same advantages Miller touts operate. Each side gets an early look at the merits of the case. If the case lacks merit, the court should recognize the strength of the defendant's arguments and dismiss it (or at least strike the class allegations). If the case has some merit, better the defendant learn that as early as possible.

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When we talk about complex litigation, we usually refer to the legal issues involved in joining a large number of varied claims. But the legal debates are not the only issue that makes complex litigation so complicated; sometimes it’s just the lawyers. Because class actions involve such high stakes, they often require more than just one attorney or one law firm. On the defense side, lawyers may find themselves dealing with discovery counsel, with co-counsel, or with large client teams. And, because of differing roles, differing client agendas, or just plain old competition, those lawyers may not always work together smoothly. 

So, how can lawyers on each side best work with their co-counsel? We can glean some insight from a working paper from business professors Kristin Behfar, Ray Friedman, and Jeanne Brett.  “The Team Negotiation Challenge: Defining and Managing the Internal Challenges of Negotiating Teams” draws on open-ended interviews with a number of business executives to identify the issues that arise within teams. While the paper focuses specifically on negotiation within teams engaged in putting together a business deal, the dynamics will ring familiar to any lawyer who has ever had to coordinate a joint scheduling order, negotiate a common settlement, or file a joint brief.

Among the professors’ findings:

• Some of the largest challenges are posed by scheduling. In any large organization, simply coming up with the time to discuss issues can itself require a separate round of negotiations. (See also most lawyers’ Outlook inboxes.)
• Confusion over roles may create conflict. Not a surprising result, but still worth some attention. Among the issues the authors identify were negotiation among team members that must be ratified by separate department heads (read “each law firms’ partners).
• Personality conflicts are the greatest danger to negotiation. The authors found that teams that suffered relationship conflicts were less likely to be prepared for negotiations (since they were spending their time on the conflict instead of the substantive issues), suffered more stress and anxiety, and were more likely to escalate conflicts with the other side.
• Substantive differences make negotiation easier. One might not expect this to be the case, but it actually makes logical sense. If a team must negotiate substantive differences before presenting its public stance, it must – at least temporarily – resolve any toxic personality conflicts. (This jibes with the old saw that “Academic politics are so vicious precisely because the stakes are so small.”)

There are any number of takeaways from the article (its advice to develop nonverbal signals for “public” negotiations is particularly interesting), but the most important conclusion is one that I recognize from some of the mentors I’ve been blessed with over the years: reducing internal drama makes a litigation team more effective.

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Time is the ultimate budget constraint. Even the best of us only gets 24 hours a day. And sometimes, strategic decisions get made without perfect amounts of time. For class-action lawyers, this constraint is particularly clear in “rocket dockets” like the Eastern District of Virginia where deadlines are foreshortened and discovery can be massive.

But while we all have an intuitive feel for how time is a scarce resource for litigators, what does that actually mean when litigating? For one answer, we can look at Ortiz v. Fibreboard Corp., 527 U.S. 815, 863 (1999).

Issued more than a decade ago, Ortiz decided how parties could invoke Rule 23(b)(1)(B) (which governs class actions involving limited funds) in settling a mass tort action. The judges were explicitly considering when one can certify a settlement class when there may be a limited amount of money at stake. Strategically, though, it was the limits on time – not money – that made a difference in the case.

The procedural history is convoluted, but it culminated in the following situation: Fibreboard, an asbestos manufacturer, faced a steady influx of lawsuits; it was also embroiled in a prolonged fight with its insurer over who should pay for those lawsuits. As part of its strategy to limit liability, Fibreboard started talking about a global class settlement with selected plaintiffs’ attorneys. As the Supreme Court described the critical moment:

The settlement negotiations came to a head in August 1993, just as a California state appeals court was poised to decide the validity of the insurance policies. This fact meant speed was important, for the California court could well decide that the policies were worth nothing.

If the policies were worth nothing, then Fibreboard would have no insurance to cover its settlement costs. As a result, the plaintiffs, Fibreboard, and its insurance company hashed out the settlement details at a coffee shop near the courthouse in order to complete it by a midnight deadline.

The trial court, eager for a way to resolve this complex litigation, preliminarily approved the settlement. But once notice was issued, the settlement drew a host of objections – focusing on the use of Rule 23(b)(1) to certify the class (since there was no actual limited fund), and the finding that—despite clear conflicts among subclasses—the settlement passed muster under Rule 23(a). Nonetheless, the trial court gave final approval, and the Fifth Circuit affirmed.

The Supreme Court, however, decided that the clear requirements of Rule 23 took precedence over the realities of settling the case before it became unresolvable.

"the dissent argues that conflicts both within this certified class and between the class as certified and those excluded from it may be mitigated because separate counsel were simply not to be had in the short time that a settlement agreement was possible before the argument (or likely decision) in the coverage case. But this is to say that when the clock is about to strike midnight, a court considering class certification may lower the structural requirements of Rule 23(a) as declared in Amchem, and the parallel equity requirements necessary to justify mandatory class treatment on a limited fund theory.

In other words: somewhere, a clock is always ticking. What's most interesting about this case is not the final decision that a court should not pay attention to a ticking clock, but that both the majority and the dissent recognized that ticking clocks matter to the parties. Because they do. Briefs have deadlines. So do settlements. There is always a ticking clock, and that clock may very well limit the options available to a party, and force some decisions that, had they but world enough and time, the parties would make differently.
 

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Over the last week, I provided a brief review of the new biography of disgraced (but largely successful) class-action plaintiff’s lawyer William Lerach, and a discussion of some of his psychological quirks that one might encounter in some other plaintiffs’ lawyers. Today, I’m closing out my discussion of Circle of Greed by looking at some of the strategies that class-action plaintiffs’ lawyers employ that may not make it into reported cases. As with the “psychology” post, I’ve included page references to the book for those following along at home.

• Smaller settled cases fund larger, riskier cases. One business strategy that plaintiffs’ firms employ is to take on a number of smaller cases that may settle more easily (say, because they involve straightforward issues or technical statutory violations). These settlements provide a steady income stream that can fund larger, riskier cases (like Lerach’s pursuit of Enron). (165)
• Smaller settlements with minor defendants can fund pursuit of larger targets. This same tactic applies within a larger case. In a case with multiple defendants, if some defendants are willing to settle early, the plaintiffs may be able to leverage larger settlements from later settlors. (380)
• Publicity is a major tool for plaintiffs’ lawyers. Lerach viewed leaking information to the media as a valid tactic for putting pressure on defendants. (177) And often, a sustained publicity campaign would also help him win battles to be appointed lead counsel. (330)
• Making the fight personal can be an effective tool. Lerach’s teams would sometimes file fraud claims against directors so that they could not invoke their D&O insurance policies, putting their personal finances on the line. (162) He would also seek to make trial as embarrassing as possible for the defendants, in order to increase the leverage in settlement discussions. (116) In one case, he went so far as to retain a fellow trial counsel whom he viewed as particularly obnoxious in depositions, specifically so that he would get under the defendants’ skin, provoking them into making errors in their testimony. (120)
• The strongest plaintiffs’ cases are often the simplest. Lerach was notorious within his own firm for “the chart”: a simple presentation that contrasted a defendant’s stock price with the allegedly dishonest statements its executives made. (116) It was a compelling trial exhibit, settlement tool, and organizing principle for Milberg’s (and later, Lerach Coughlin’s) stock-drop cases. And the primary reason it was compelling is that it laid out a simple, hard-to-contradict story.

None of these strategies were unique to Lerach. And while some may seem like “dirty pool” to some defendants, it’s important to keep in mind that they serve larger purposes – some are part of the business model, some are part of the competition among plaintiffs’ lawyers, and some are aimed more at settlement than winning an immediate tactical battle. The better a class-action defendant understands the strategies the other side employs, the better it will be able to counter them. And while it may not have been their primary goal, Patrick Dillon and Carl M. Cannon have given defendants a good resource for deepening that understanding.

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University of Pittsburgh Law Professor Rhonda Wasserman has posted a working paper to the Social Science Research Network (SSRN) with the weighty title “Transnational Class Actions and Interjurisdictional Preclusion.”  While it spends a great deal of time reviewing the current state of the literature on preclusion in class actions and class-action regimes in other countries (both useful surveys to have), the paper asks a simple but important question for class-action defendants: If a defendant settles a class action involving more than one country’s citizens, can it enforce the agreement against all of the class members?

This is not an abstract question. Multi-national class actions are becoming more common.  And for many defendants, the one benefit of class-action litigation is that it offers a degree of finality that one cannot find in individual litigation, and only rarely in mass torts.

To answer that question, Wasserman reviews a report of the British Institute of International and Comparative Law, which surveyed the preclusion doctrines of various European countries, including (among others) the United Kingdom (England and Wales), Germany, France, and Romania. As Wasserman reports, the Institute comes to three conclusions:

• Claim preclusion in Europe is “quite a bit narrower than the transactional test that is applied widely in the United States.” In particular, European courts are less likely to give preclusive effect to classwide settlements.
• “[A]bout half of the participating European countries do not accord their judgments issue preclusive effect.”
• “[A] review of the European class action and collective action vehicles reveals a deep reluctance to bind those who neither commence litigation in their own name nor affirmatively choose to opt in.”

What does this mean for class-action defendants? It actually has two implications, both equally important:

First, a defendant looking to settle a multi-national class action should be very sure of the preclusion doctrines in the countries where it may seek to enforce any settlement agreements.

But second, a multi-national class action may not be superior to other forms of litigation, because it may not resolve the dispute for various members of the class.
 

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Defendants walk a thin tightrope over a deep chasm when they have to litigate and settle a class action. On the one hand, litigating a class action vigorously requires the defendant to argue that a class is not certifiable. On the other, to settle a case on a classwide basis, the parties have to convince the court to certify a class.

At the best of times, a defendant may have to explain in one class action why it did not oppose certifying a settlement class in a similar lawsuit. But the danger of this tightrope is even clearer when a settlement falls through. Then, defendants face the possibility that most of their arguments against certification of a litigation class will be foreclosed.

For a stark example of this dilemma, look no further than Carnegie v. Household Int’l, Inc., 376 F.3d 656 (7th Cir. 2004). In Carnegie, the defendants were a bank and a tax preparer who jointly offered tax-refund anticipation loans. The plaintiffs alleged that the tax preparers never disclosed that they received a fee for offering the loan as well as an ownership interest in the loan, both evidence of self-dealing by a supposed fiduciary.

The parties settled, and the trial court approved the settlement, but the Seventh Circuit (Posner, J.) reversed, because it was worried about collusion between the plaintiff and defendant. On remand, the trial court refused to approve a settlement, asked the defendants for any objections to certification, and proceeded to certify a class over their objections. When the defendants appealed the certification, the Seventh Circuit held that – because

In the previous round of this protracted litigation the defendants had urged the district court to accept the giant class as appropriate for a global settlement, had prevailed in their urging, and so are now precluded by the doctrine of judicial estoppel from challenging its adequacy …

The consequences are less severe if the settlement merely falls apart at the trial court level. Instead of judicial estoppel, the defendant only has to explain to the court why it’s reversing itself on the arguments it made in favor of certification.

So what can defendants do to minimize these risks? Most important, they should think carefully about the implications of a class settlement before arguing for certification. Proposing a classwide settlement with an inadequate representative, or where common issues do not predominate, may pose long-term problems. If a settlement still appears to be the best bet, then the defendant should highlight the potential unmanageability of a class trial, even when briefing the fairness of the settlement. Should the settlement fall through, that will be the defendant's best argument against certifying a class, and highlighting manageability problems may actually aid the settlement because it shows the court there may not be another means of getting the entire class the relief it seeks.
 

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Earlier this week, the AmLaw Litigation Daily reported on what was almost a groundbreaking moment in class-action settlement. Back in August, a judge in the Eastern District of New York had agreed to allow the parties in a class-action to explore securitizing a large class-action settlement. (In other words, they’d finance the settlement by carving it up and selling pieces of it as financial instruments, effectively getting a loan from the market to pay the settlement.) The deal wasn’t to be, however, the parties backed off of it; and the defendants decided to pay the class in a series of lump-sum payments.

I’ll leave it to those better-versed in finance and economics to say whether securitized settlement debt is a good policy choice, or a sound investment. I’m more interested in how defendants will approach it strategically.

Any behavior unavoidably sends a signal to those who are watching. And since no one has tried this particular innovation yet, the largest question looming is: what will taking on securitized settlement debt signal to other parties? There are three potential audiences a defendant will have to consider:

1. The Market. Companies sell off debt all the time. But most of that debt is from loans, which may very well signal healthy efforts at growth. Selling off liabilities incurred in litigation may well signal that a company needs a cash infusion to cover the consequences of its bad conduct. That’s the kind of signal that could drive down a stock’s price, making shareholders very unhappy. (The court-appointed expert believed that investors would also be suspicious of novel securitizations given the economic downturn.)
2. The Public. Yes, PR matters. And while one might think that the average newspaper reader may find this topic drier than the latest celebrity happenings, popular media has begun equating some securitization practices with corporate malfeasance. Companies may think twice about compounding the bad press from their alleged illegal conduct with the bad press that might result from engaging in unpopular financial tactics.
3. Other plaintiffs. Class-action plaintiffs’ counsel have made it their business to pay close attention to corporate behavior. If a corporate defendant agrees to securitize its settlement debt in one instance, that may signal to other plaintiffs that the company is a relatively easy mark, or that it may anticipate having to fund other class-action settlements in the future. And that may raise the question of whether the company currently anticipates very specific future settlements.

None of these considerations means that securitizing class settlements can’t work, but lawyers (particularly defense lawyers) tend to be risk-averse.  That will make many defense attorneys (and their clients) hard sells for this tactic, particularly if they think the practice sends out all the wrong signals.

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Vanderbilt law professor Brian Fitzpatrick’s year-old paper “The End of Objector Blackmail” has received a fair amount of attention from various lawyer-bloggers and lawyer-tweeters in the last week.  The chatter stems from the attention he draws to a practice known as quick-pay provisions – provisions to pay plaintiffs’ counsel immediately when settling a case, even before the class has received any relief.

The logic behind these provisions is that, if plaintiffs’ counsel were paid up front, they wouldn’t have to bribe objectors to drop their objections to the proposed settlement, which would reduce the amount of litigation over the “fairness, reasonableness, and adequacy” of the settlement. The paper is an interesting read: it exposes a little-discussed tactic already in use by a number of lawyers, and mounts a compelling defense of the quick-pay provision (even though Fitzpatrick ultimately suggests a more sweeping reform to “fix” the professional objector problem). But Fitzpatrick’s paean to quick-pay glosses over a number of its drawbacks for lawyers in the trenches:

1. Quick-pay provisions will be a tough sell for some defendants. This will come as no shock, but many defendants will hesitate to pay plaintiff’s counsel early in the settlement process. Even though a plaintiff’s and defendant’s incentives align for much of the class settlement process, each party retains a healthy skepticism of the other side. Obviously, this skepticism can be overcome, or Fitzpatrick would have no paper. But the success of these provisions in securities-fraud class actions does not guarantee their acceptance elsewhere.
    
2. Quick-pay provisions do not insulate against “principled” objectors. Some objectors – like state attorneys-general or advocacy groups do not object for the money. Instead, they represent the public interest, specific ideological agendas, or even both. These objectors will proceed whether or not they can hold up the settlement, because delaying settlement until they’re paid is not their goal.
    
3. Quick-pay provisions may themselves become the basis for objections. Observers tend to be very suspicious of settlements in which plaintiff’s lawyers make out significantly better than class members. That’s one of the reasons for the strong opposition to coupon settlements.  A provision where plaintiff’s counsel gets paid long before (and likely far more than) the class – as Fitzpatrick concedes – smells strongly of self-dealing. Since the provision has yet to be tested in an adversarial process, it’s very possible that courts could find that quick-pay provisions render the settlement unfair to the absent class members.

Am I saying that quick-pay provisions are never useful? Not at all. There are professional objectors (or, as one court called them “remoras”) who object only for the fees, and quick-pay provisions may very well deter them. However, indiscriminate use of quick-pay provisions (and when have lawyers in the aggregate not employed new tactics indiscriminately?) could throw the tactic into disrepute, which would blunt their effectiveness just when the parties need them most.

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Martin Redish, joined by Peter Julian and Samantha Zyontz, is coming out with a new article, "Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis." It's well-researched, and well-written, but I want to address the strategic implications of some of their arguments.

Cy pres relief (from the old Norman, roughly meaning "next best") is a form of relief courts use when they cannot distribute damages to the entire class, either because some class members cannot be found, or because some won’t bother to collect. The defendant sets aside the total amount it will pay, and anything left over after distribution gets donated to an appropriate non-profit that would approximate relief to the class. Cy pres relief has been controversial. Supporters argue that it can enhance deterrence by increasing the defendant's payout, can provide social good by funding organizations with noble goals, and can help parties agree on larger settlement amounts. Critics argue that cy pres relief is often used to inflate plaintiffs' attorneys' fees (which increase with the size of the settlement), and that the "charities" often don’t help the class -- they're frequently law schools or even nonprofits that benefit the defendants.

For defendants, cy pres relief is a mixed blessing. It’s useful in crafting settlements, but plaintiffs in contested class actions may invoke it as a way of persuading a court to certify a procedurally problematic class.

Redish and Co. side squarely with the critics. "In a variety of ways, use of cy pres threatens to create or foster ‘pathologies’ of the modern class action." (By "pathologies," they mean ways in which class actions exceed the legal limitations imposed by the Constitution and the Rules Enabling Act.) Their primary criticism is that class actions are procedural, not substantive devices (a familiar argument for defense counsel). As a result, they argue, cy pres relief shouldn't be available to class plaintiffs any more than it would be to an individual plaintiff.

It’s an interesting argument doctrinally. But from a pragmatic standpoint, it's difficult to see who would make it. While plaintiffs have argued for cy pres relief when seeking to certify a class for litigation, they usually invoke it when the parties are settling. At that point, both plaintiffs and defendants have aligned interests (finalizing the settlement), so presumably they’ve both agreed to include cy pres relief.

That leaves objectors. However, most objectors tend to be members of the class action plaintiffs' bar. (Usually, they're either plaintiffs from competing class actions, or plaintiffs' counsel who have a sideline in objecting to class settlements for cash.) In either case, they're unlikely to raise an argument that might be used against them in the future. There are some tort-reform groups that, for ideological reasons, object to some settlements that include cy pres relief. But, for the most part, Redish's argument is an intriguing one that practitioners are unlikely to encounter.
 

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Figueroa v. Sharper Image (S.D. Fla. 2007) provides a case study in how a rushed class settlement can go wrong. The settlement drew objections almost immediately, invited interference from lawyers pursuing competing class actions, witnessed intervention from various state Attorneys General, and even earned a judicial rebuke. What happened?

First, some background. The plaintiffs had all bought ionizing air purifiers from Sharper Image. After Consumer Reports announced there was no evidence that the purifiers did any purifying, several plaintiffs' firms filed class actions. The Figueroa plaintiffs were later filers, so Sharper Image filed a Motion to Stay and Abate, arguing the suit was a copycat that could wait until the other cases were finished. The court denied the motion after the plaintiffs added new causes of action and another defendant, so the parties conducted class-related discovery and briefed class certification.

Right before the certification hearing, the parties informed the court they had agreed to a settlement. Part of what was driving the settlement, they said, was that Sharper Image was close to bankruptcy, and could not afford a protracted trial or massive damages. The proposed settlement provided:

1. a $19 coupon,
2. a chance to buy a new purifying attachment for $7
3. some modifications to Sharper Image's advertising

It also contained an extremely broad release and a non-disparagement provision.

The court expressed misgivings, but set a date for a preliminary fairness hearing, which, remarkably, drew several objectors. (Objectors usually appear at the final fairness hearing.) The court rejected this first agreement, but preliminarily approved one that limited the release and dropped the non-disparagement provision.

Once notice went out, objectors appeared in droves. Most notably, 36 state Attorneys General – all notified pursuant to the Class Action Fairness Act – protested that the coupons did not provide real relief to the class. In response, on the last day for objections, the parties filed an amended settlement that addressed some concerns, but kept the coupons. (This eleventh-hour amendment drew further objections.)

The parties then submitted a third agreement that made the coupons transferable, and added a provision for cy pres relief. But objectors still complained that the settlement was a "reverse auction" -- where defense attorneys pick the most compliant plaintiffs' lawyers from competing class actions, and settle on unduly favorable terms, precluding the other class actions. The court rejected the settlement. While it found no evidence of collusion, it agreed that Sharper Image had conducted a reverse auction:

Sharper Image selected counsel confronted with a most precarious position, insisted upon amendments to the pleading to broaden the scope of this litigation to obtain a global peace, and then proceeded to . . . convince Class Counsel to accept highly undesirable terms to settle the case.

As a result, the settlement was “not the product of informed, arms-length negotiations between effective Class Counsel and the Defendant." The court was sending a clear message: settlements resulting from reverse auctions would not be tolerated. From a strategic standpoint, the lesson is broader: in class actions, trying too hard to settle on the cheap can get very expensive.

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