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

Just about anyone who owns a printer has strong opinions on toner cartridges. An enterprising group of plaintiffs' lawyers sought to capitalize on consumer annoyance with printer cartridges by filing three class actions in the Northern District of California against toner manufacturer Hewlett Packard.

Their cases didn't go so well. Some of the complaints were dismissed on the pleadings. They lost a bid at class certification. And trial court called their evidence of causation and injury "weak." These setbacks must have been particularly difficult because these plaintiffs' counsel had spent a great deal of time and money imposing discovery costs on HP, making the case particularly hard fought. When it came time to talk settlement, both sides were ready to be done with the case. They just faced the classic dilemma: HP didn't want to pay much, but class counsel wanted their fees.

So the parties turned to a classic solution: injunctive relief and coupons. Coupons tend not to cost a defendant much (and may bring it new business), but can be used to justify larger fee awards for class counsel. It sounds like a win-win, until one remembers that many absent class members don't like coupons very much, which has led to coupon settlements falling into disapproval in the last decade.

So when it looked like the plaintiffs lawyers were going to walk away with more than $2 million in fees and costs, while the plaintiffs would receive "e-credits" (electronic coupons) for toner that could only be redeemed on the company website (where prices were higher than other retailers'), the settlement drew objections, most notably from the Center for Class Action Fairness. [Disclosure: I have, pro bono, written several amicus briefs for the Center.]

The Ninth Circuit agreed with the CCAF's objection, and, in Feder v. Frank, 2013 U.S. App. LEXIS 9744 (9th Cir. May 15, 2013), it reversed the approval of the class settlement with orders to recalculate the attorneys' fees based on the actual redemption rate of the coupons.

In the course of doing so, the court provided a concise explanation of the costs and benefits of coupon settlements:

Typically, courts try to ensure faithful representation by tying together the interests of class members and class counsel. That is, courts aim to tether the value of an attorneys' fees award to the value of the class recovery. Where both the class and its attorneys are paid in cash, this task is fairly effortless. The district court can assess the relative value of the attorneys' fees and the class relief simply by comparing the amount of cash paid to the attorneys with the amount of cash paid to the class. The more valuable the class recovery, the greater the fees award. And vice versa.

But where class counsel is paid in cash, and the class is paid in some other way, for example, with coupons, comparing the value of the fees with the value of the recovery is substantially more difficult. Unlike a cash settlement, coupon settlements involve variables that make their value difficult to appraise, such as redemption rates and restrictions. For instance, a coupon settlement is likely to provide less value to class members if, like here, the coupons are non-transferable, expire soon after their issuance, and cannot be aggregated. Of course, consideration of these variables necessarily increases the complexity of the district court's task--comparing the ultimate "value" of the coupon relief with the value of a proposed fees award. And perhaps more importantly, the additional complexity also provides class counsel with the opportunity to puff the perceived value of the settlement so as to enhance their own compensation."

(Emphasis added, internal citations omitted.) And it engaged in a thorough analysis of the provisions of the Class Action Fairness Act (CAFA) that govern coupon settlements:

Indeed, if the legislative history of CAFA clarifies one thing, it is this: the attorneys' fees provisions of § 1712 are intended to put an end to the "inequities" that arise when class counsel receive attorneys' fees that are grossly disproportionate to the actual value of the coupon relief obtained for the class. This point cannot be overemphasized ...

(Emphasis added.) So the 9th Circuit found that the trial court had erred in using a lodestar calculation (which relies on the effort the attorneys expended instead of the benefit the class received) to determine the attorneys' fees in this coupon settlement. It quickly stressed,

however, that the responsibility for this error lies principally with the parties. Because the settlement agreement specifies that no coupons may issue until after entry of a final judgment, it would have been impossible for the district court to calculate the redemption value of the coupons as required by § 1712(a). By structuring the settlement in this way, the parties essentially invited the error here.

So what's the takeaway here? An oldie but goodie: trying to settle on the cheap can get expensive very quickly. If the settling parties don't provide real benefits to absent class members, they run a high risk of drawing objections that could scuttle approval of any classwide settlement.

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 Going through bankruptcy is traumatic enough; doing so and still having your credit report still list your discharged debts as "delinquent" is enough to drive some people to litigation. And that's how several credit agencies found themselves on the receiving end of a series of Fair Credit Reporting Act class actions.

In this case, the defendants settled, offering the plaintiffs injunctive relief and some pro-rated monetary relief, as well as paying attorneys fees and some incentive awards for the named plaintiffs.

The settlement drew objections, however. The trial court approved the settlement nonetheless, but on appeal, in Radcliffe v. Experian Info Solutions Inc., the Ninth Circuit Court of Appeals vacated the settlement. The problem, it held, was the incentive award agreement:

On or before October 19, 2009, Proposed 23(b)(3) Settlement Class Counsel shall file an application or applications to the Court for an incentive award, to each of the Named Plaintiffs serving as class representatives in support of the Settlement, and each such award not to exceed $5,000.00.

(Emphasis added.) Based on both the agreement and testimony at the fairness hearing, it was clear that the incentive provision was supposed to encourage the named plaintiffs to support the settlement. That, the court held, was a conflict of interest that rendered the named plaintiffs inadequate as class representatives.

But the court also expressed concern about the disparity in the size of the incentive awards, stating that this alone might be reason enough to disqualify the plaintiffs as inadequate:

There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards. Under the agreement, if the class representatives had concerns about the settlement's fairness, they could either remain silent and accept the $5,000 awards or object to the settlement and risk getting as little as $26 if the district court approved the settlement over their objections. The conditional incentive awards at issue here, like the disproportionately large awards in Staton, fatally alter the calculus for the class representatives, pushing them to be "more concerned with maximizing [their own gain] than with judging the adequacy of the settlement as it applies to class members at large."

(Emphasis added.)

Finally, the court also held that the provision meant that class counsel was not adequate to represent the class, because there were representing conflicting parties: the named plaintiffs who would receive the incentive award and the absent class members who would not.

Radcliffe appears to be part of a growing trend of courts of appeal watching out for the interests of absent class members. And that makes for an important takeaway: if the settling parties don't protect the absent class members, the courts will step in to do so.

NOTE - An earlier version of this post identified the Public Citizen Litigation Group as involved with the case.  While they are listed in the opinion as counsel, I have been informed that the brief they filed was on a collateral issue, not one objecting to the settlement.

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This week's article is a student comment: George Mason 3L Jennifer Johnston has published an interesting discussion of the problems that arise from cy pres distributions, Cy Pres Comme Possible to Anything is Possible: How Cy Pres Creates Improper Incentives in Class ActionSettlements, 9 J.L. Econ. & Pol'y 277 (2013). Her primary argument is that, since cy pres relief changes the incentives for key personnel in a class action settlement, it should only be used when there are assurances it will actually benefit absent class members.

Charitable cy pres distributions effectively add third parties to adversarial proceedings, in the form of charities and nonprofit organizations. Compared to the traditional incentives in the adjudicatory process, introducing another party into a traditionally bilateral proceeding generates significant changes in incentives structures. Judges are often given great discretion in approving a settlement. Typically, the judge is also given wide latitude to decide where to direct the cy pres award, thus giving the judge incentives to consider his own interests and those of a third party organization he views as worthy to receive the funds. Incentives that stem from the judge's discretion can create conflicts of interest, which in turn can create an appearance of impropriety on the part of the judge.

Other times, the plaintiffs' attorney or the defendant is left to decide where to direct the funds, pending approval from the opposing side and the judge. Since the plaintiffs' attorney's fee is often based on a percentage of the entire award, including the cy pres award, counsel for the class has a financial incentive to seek such an award. Cy pres has also created a "cy pres industry" where charities, nonprofits, and even law schools lobby the judiciary to direct funds to their organizations. In evaluating how cy pres has changed the incentives of parties involved, it is necessary to look at models of incentive structures for each party in a traditional adjudicatory class action proceeding and how these parties should ideally behave.

(Footnotes omitted, emphasis added.)

Johnston's solution is twofold: (1) keep more class actions in state court, where it may be easier to identify class members, and where unused funds may revert to the state, or (2) for federal class actions, require a second round of notice if there are significant unused funds. I'd question whether a second round of notice will accomplish much when many absent class members don't read the first notice in a class action, but that is an empirical debate worth having.

Johnston's comment is a cogent, well-researched, and clearly-organized discussion of the problems that arise from cy pres relief. It's well worth a read.

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Fordham law professor Howard M. Erichson has a new paper up at SSRN on "The Problem of Settlement Class Actions."  Based on dicta in the Supreme Court's opinion in Amchem Products, Inc. v. Windsor, courts have taken to certifying classes for settlement purposes only without worrying about "manageability," that is, whether the case could actually be tried as a class action.

As a result, settlement class actions have long posed strategic dilemmas for plaintiffs and defendants alike. Among them:

• How much can the defendant concede without compromising its ability to defend the case if the settlement falls through? (Not as much as you think.)
• Can a settlement-only class be too cheap? (Yes.)
• How wide can the parties cast their net in releasing claims? (Not too wide.)

Professor Erichson shares many of these concerns, which is why he advocates abolishing the settlement-only class, and only allowing settlements to proceed if the class has been certified for litigation. As evidence of the need for this shift, he cites two recent--and highly controversial--settlements: In re AIG and Sullivan v. DB Investments. As he puts it

AIG and DeBeers show what happens when courts follow the Supreme Court’s dicta [in Amchem] to its logical conclusion, rather than following the concerns that animated the Court’s decision. Armed with the Supreme Court’s modest permission to treat settlement classes slightly differently than litigation classes, these courts approved settlement class actions notwithstanding issues that go to the heart of class certification – in one case, the fraud-on-the-market doctrine, and in the other, significant variations in state law.

(Emphasis added.) Erichson draws the wrong lesson, though. He thinks questionable settlements like these occur because the plaintiffs lack leverage in negotiations:

By permitting settlement class actions without plenary class certification, the Court invited defendants to use the settlement class tool to resolve widespread liability through negotiation with deleveraged would-be class counsel. Moreover, by modifying the approach endorsed by the Court of Appeals, the Supreme Court opened up the possibility of class resolutions negotiated without even the leverage of future litigation class certification.

(Emphases added.)  That conclusion seems to ignore the facts of each case. In each of these cases, a class that could not have gotten certified for trial was certified for settlement. Think hard about that for a moment. In In re AIG, the plaintiffs brought a class that could not be certified because of individualized reliance issues. It settled for $72 million. In Sullivan, the plaintiffs settled a case on behalf of a class that included many unharmed class members for $295 million. Is the problem in either case that the plaintiffs lacked leverage?

GIven his misdiagnosis of the problem, Professor Erichson's solution misses the mark. Abolishing the settlement class action will not lead to better settlements. It may, in fact, lead to worse ones. The plaintiffs' leverage in settlement negotiations comes not so much from their promise of peace as from their threat of war. Litigating class actions has grown enormously expensive, and defendants will often settle claims that are less than meritorious because the settlement is cheaper than the costs of litigation. DB Investments did not pay $295 million for the preclusion of other cases--it did so because it was facing a default judgment. And AIG likely settled its case--in which it had a very strong argument against certification--because the costs of reaching that victory were simply too high.

The problem with these settlements was not that the plaintiffs lacked the leverage to cut a good deal; indeed, the indirect purchasers in Sullivan and the investors in In re AIG did just fine. The problem is that absent class members--who are not present for the negotiation--are too often sacrificed for these deals.

There is a solution to this particular problem, but it is one that plaintiffs, judges, and academics tend not to advocate. To protect absent class members, courts just need to vigorously enforce the adequacy requirement, and intervene in poor settlements sooner. Some courts are willing to do this. But for too many, this would interfere with many plaintiffs' current business model.  That's a shame. Defendants will manage just fine, but absent class members may not.

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 This week, the class action bar and legal blogs have been abuzz with the news that famed plaintiffs' lawyer Stanley Chesley has been disbarred by the Kentucky Supreme Court, a development that will likely lead to his disbarment in his home state of Ohio as well. (PDF of opinion here.)

In the course of laying out its background facts, the opinion confirms several plaintiff firm practices I've documented in the past. Among them:

• Filing on top of other plaintiffs. Chesley's initial involvement with the case came when he was hired to consult on a national settlement. After he did that, he filed a companion fen-phen case and moved to have it consolidated with the larger lawsuit, a motion his eventual colleagues vigorously opposed. This is not an unusual tactic among plaintiffs' firms, but it's rare to see it confirmed in print.
• Division of labor. The various plaintiffs lawyers engaged in a division of labor among firms. One firm prepared for trial; another rounded up the clients: Chesley served as lead negotiator.
• Money undoes everything. According to the opinion, the whistleblowers in the fen-phen case were law-firm partners of several of the disbarred lawyers, who grew suspicious of the new income streams to firm. When the settlement gets too rich, there are usually people around who will scuttle it, either out of a sense of integrity, or because they aren't getting their cut.

But, in this case, far more important than confirming how plaintiffs lawyers litigate are the lessons defense lawyers can learn about how to negotiate class settlements. Lessons

• Do due diligence on the lawyers one faces. It can be tempting to deal with class action lawyers who are inexperienced or have reputations that suggest they will agree to settlement offers quickly. Doing so may effect a settlement quickly, but it does not guarantee a settlement that will stand up to Rule 23(e) scrutiny.
• Require confirmation that the client has received offer. The largest problem with fen-phen settlements was that the defendants made one offer, but the one communicated to the class members was different. To avoid prolonged litigation over a settlement, it makes sense for the defendant to require some assurance that its offers are communicated effectively. Among other ways to do this, one can ask to communicate the offer to the named plaintiff itself, or require the named plaintiff to be present at any mediation. Neither of these tactics interferes with the attorney-client privilege: the plaintiffs counsel can still confer with their client and provide their unvarnished opinion of the offer. It does, however, reduce the errors that might arise in translation.
• Watch out for settlement red flags. When the fees are higher than the relief the class receives, or much of the relief is an intangible injunction, a defendant might infer that counsel is more focused on their own cut than on the interests of the absent class members. Those settlements are the ones most likely to be undone later.

What each of these lessons boils down to is negotiating a settlement with integrity. There are often financial and institutional pressures to settling quickly and cheaply (and fast, inexpensive settlements can be very good for class members, too). But the best way for a defendant to make sure that a settlement does not result in criminal investigations or huge objections is to make sure that--at the very least--its side of the street is clean.

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Today's case, Critchfield Physical Therapy, P.C. v. Techhealth, Inc., 2013 U.S. Dist. LEXIS 13440 (E.D. Mo. Feb. 1, 2013), is a short one, but it contains a valuable lesson.

Critchfield filed a class action against Techhealth. The basis of the lawsuit was not important enough for the court to mention in this opinion. What was important was that a mediation conference was scheduled in the case. A representative of Techhealth attended, as did its counsel. But on the plaintiff's side, only plaintiffs' counsel showed up. This is not an unusual arrangement in a class action: I have attended several class mediations over the years where I brought my client along, but plaintiffs' counsel (the real party in interest, as some courts acknowledge) did not.

In this case, however, the defendant demanded that the actual plaintiff show up. (A canny move, given that the plaintiff may well have different ideas of acceptable remedies--and acceptable fees--than its counsel.) When counsel refused, claiming that a representative was available by phone, the defendant shut down the mediation.

Then it moved for sanctions.

The court granted the motion. As it reasoned:

both Local Rule 6.02(B)(1) and the Order referring the case to mediation in this case required that a corporate representative of Plaintiff having authority to settle claims attend the mediation in person, unless otherwise agreed to by the parties or excused by the court. Attendance in person by the parties is not a mere technicality. It is what ensures a meaningful mediation and is the cornerstone of good faith participation. Merely "being available" by phone does not satisfy this requirement. Furthermore, the Court discerns no reason why there should be an exception for a named plaintiff in a putative class action. Such an exception would run contrary to a class representative's obligations as a representative of the class.

(Emphasis added; internal citations and quotations omitted.) The court did, however, reduce the sanctions by 30% because the defendant could have called the court during the mediation to resolve the issue, saving some costs.

So what's the takeaway? Plaintiffs are not optional in class actions, not even in settlement talks. Including the plaintiffs may well reduce costs (and fees) over time.

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 In the Northern District of California, Judge William Alsup keeps a standing order informing attorneys of how he will evaluate any proposed class action settlements. Now, one of his fellow judges has joined him. While Tijero v. Aaron Bros., Inc., 2012 U.S. Dist. LEXIS 183238 (N.D. Cal. Jan. 2, 2013) is neither a standing order nor a direct explanation of all the factors Judge Saundra Brown Armstrong might consider in a class action settlement--in fact, it appeared to be a bog-standard FLSA wage-and-hour case--it bears the distinction of being one of the few opinions to deny even preliminary approval to a proposed settlement.  And it did so without a single objection being filed. As a result, it does provide some valuable object lessons for attorneys looking for obvious pitfalls to avoid. Among those pitfalls:

Make sure the class members are the last ones to get paid. When a settlement is at hand, there are a lot of parties with their hands out, including the plaintiffs' attorneys (who may want to be paid first), named plaintiffs (who may want incentive payments), and claims administrators. So. much like a minimum wage paycheck, the award for the class member can get eaten up long before it reaches the allegedly wronged party. In this case:

After deducting attorneys' fees in the amount of $266,666.66 (which represents 33% of the common fund), costs in the amount of $30,000, incentive award payments to Plaintiffs in the collective amount of $10,000, claims administration fees in the amount of $68,000, and a PAGA penalty in the amount of $10,000, the net settlement amount, reflecting the amount available to pay claims made by class members, is projected to be $415,333.34. Based on the data provided by Defendant in connection with the mediation, class members were employed approximately 269,941 weeks for the period May 7, 2004 3 through the date of the mediation session. Assuming a total of 269,941 weeks and a net settlement fund of $415,333.34, the average net payout would equate to approximately $1.54 per week.

(Emphasis added, internal citations omitted.)  Leaving so little for the class members is a surefire way to make sure that the settlement attracts objectors or sua sponte criticism.

Make no effort to meet your Rule 23 burden. Sure, in practice class settlements are usually certified more frequently than adversarial class actions. (This is one reason why defense attorneys get so annoyed at the citation of settlement opinions to bolster a tenuous certification motion.) But the court is still expecting the parties to make it look like they put in the effort. In this case, the court continually stressed that the plaintiffs provided no facts and no details about commonality, typicality, or adequacy. As a result, the court refused to certify a class for settlement.

Shoot for an overly broad release. Defendants often want the broadest release they can get away with, as value for their settlement money. But shooting for a release that is too broad will attract the same kind of scrutiny as not paying the class members. In this case, in exchange for their $1.54 per week, the absent class members would have released not just their opt-out wage act claims, but their opt-in FLSA collective action claims. That was more than the court could stomach.

Offer no chance to object. It's no secret that most plaintiffs and defense attorneys don't like class action objectors.  So it probably made sense to both sides in this case to provide only 30 days to object to the settlement or opt out. But the Ninth Circuit has already held that objectors have a due process interest in contesting fee motions.  So minimizing the chances of getting an objection in is likely to raise red flags.

The takeaway here is one that I have reiterated for several years now. Trying to settle on the cheap gets expensive very quickly. For defendants, a settlement that actually pays something to the class members is more likely to be approved, even if it is less attractive to plaintiffs' counsel.

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As one might expect from a holiday week, last week produced few class action opinions.  On the other hand, the Economist had an excellent article on the peculiarities of bargaining with Somali pirates.  Based on two working papers in the past year, it examines "how two parties bargain when neither has good information available."  The money quote:

They found that Somali pirates pretend to be more sophisticated than they are, whereas shipowners pretend to be poorer. Nowadays both sides have an interest in a speedy resolution, since a prolonged negotiation incurs costs. For the shipowner, the cargo spoils and the ship goes unused. For the pirates, the captured crew must be fed and the ship guarded. And pirates cannot last long without a resupply of qat, which is to them as rum is to Captain Jack Sparrow. Settle too quickly, though, and one side or other is likely to get a poor deal.

(Emphases added.)  The first insight, that one side pretends to more sophistication and the other to fewer funds, may ring familiar to those involved in class action litigation.  The second doesn't translate quite as easily to the class-action context, but it does illustrate the difficulties in negotiating over longer periods of time.  Both papers (and the Economist's summary) are well worth a look.

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 ... from November's cases so far:

• CAFA has not changed the rule that a counterclaim cannot confer federal jurisdiction.  Resurgent Capital Servs., LP v. Thomason, 2012 U.S. Dist. LEXIS (W.D. Mo. Nov. 5, 2012) (remanding case).
• Courts get suspicious when parties widen the scope of a class action during settlement negotiations.  Smith v. Levine Leichtman Capital Partners, Inc., 2012 U.S. Dist. LEXIS 163672 (N.D. Cal. Nov. 15, 2012) (denying approval of settlement).
• If you're going to settle a class action, you still need a workable class definition.  Supler v. FKAACS, 2012 U.S. Dist. LEXIS 159210 (E.D.N.C. Nov. 6, 2012) (denying preliminary approval of settlement).

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 So, you may have noticed that posting has been slightly sporadic lately. There have been two big reasons for this: first, my daughter was born at the end of June, and blogging must sometimes give way to taking care of her; second, I have just delivered the manuscript for Betting the Company: Complex Negotiation Strategies for Law & Business (co-written with my old friend Andrew DeGuire) to my publisher. It should be out sometime in 2013, but the crimp it put in my schedule occurred now.

So, to try to get back to my old two-a-week schedule, let me offer up three pieces of negotiating insight for class action settlements, derived from three older articles from the negotiating literature.

1. When we think people are acting spitefully, they may just be concerned with their relative rank. At least, that's the conclusion reached in Tatsuyoshi Saijo & Hideki Nakumara, The "Spite" Dilemma in Voluntary Contribution Mechanism Experiments, 39 J. Conflict Resolution 535 (1995) after the authors conducted a series of experiments on voluntary contributions. So it may behoove class action lawyers to look for ways to convince the other side that they're "winning" relative to their opponent.

2. Want to know if someone is lying in negotiations? Read Karl Aquino & Thomas E. Becker, Lying in Negotiations: How Individual & Situational Factors Influence the Use of Neutralization Strategies, 26 J. Org. Behavior 661 (2005), which offers five rhetorical strategies used by liars to make themselves feel better. Warning: these sound a lot like tactics used by both sides in a lot of heated litigation.

3. Some people like to split the difference when negotiating a compromise. That includes judges. But all "trimmers" to use Professor Cass Sunstein's term, are not alike. It may be worth your knowing whether your judge is interested in building consensus or just getting a tough case off her docket. Cass R. Sunstein, Trimming, 122 Harv. L. Rev. 1049 (2009).

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Today's case, Espenscheid v. DirectSat USA, LLC (7th Cir. 2012) is a little tricky, procedurally. Three plaintiffs filed an FLSA class action (and collective action) against DirectSat USA, LLC. The Northern District of Illinois originally certified a class, but then decertified it, at which point the plaintiffs each settled on an individual basis.

Now, here's the tricky part. Having settled the case, they appealed the decertification.

But wait, you ask. How could they do that? They settled their claims!

The plaintiffs' response: the settlement agreement reserved their right to appeal. Of course, they would still face a standing problem. Since their claims had been settled, they no longer had a stake in the case. So how did they justify their standing?

By pointing to a provision in the settlement agreement that said that they would seek incentive awards if the class were certified.

As Judge Posner describes the incentive awards in his opinion:

It is true that class actions are almost always the brainchild of lawyers who specialize in bringing such actions. But they still have to find someone who is a member of the prospective class to agree to be named as plaintiff, because a suit cannot be brought without a plaintiff. And a class action plaintiff assumes a risk; should the suit fail, he may find himself liable for the defendant's costs or even, if the suit is held to have been frivolous, for the defendant's attorneys' fees. The incentive reward is designed to compensate him for bearing these risk, as well as for as any time he spent sitting for depositions and otherwise participating in the litigation as any plaintiff must do. The plaintiff's duties are not onerous and the risk of incurring liability is small; a defendant is unlikely to seek a judgment against an individual of modest means (and how often are wealthy people the named plaintiffs in class action suits?). The incentive award therefore usually is modest--the median award is only $4,000 per class representative.

(Emphases added, internal citations omitted.) So, would that chance to receive a payment of a few thousand dollars be enough to justify the appeal? According to Judge Posner, yes:

It should have been enough. The prospect of such an award is akin to a damages payment agreed in a settlement to be contingent on the outcome of the appeal; and the prospect of such a payment, though probabilistic rather than certain, suffices to confer standing.

Of course, as he also pointed out, having standing to pursue an appeal and being an adequate representative of a class are two entirely different things.

It's true that having settled he will no longer have a stake in any damages that may be awarded to the class. And that will cast doubt on his adequacy to represent the class members, his interest in the case no longer being perfectly aligned with theirs.

In other words, since the named plaintiffs would only be in the case for their incentive awards, they would really only have an incentive to settle, and only on terms that allowed them their awards. This would align their interests with their lawyers' rather than the class's. And this is the reason why incentive awards can prove so problematic: they tend to align the interests of the named plaintiffs with their lawyers.

So what's the takeaway for defense lawyers? Make sure you check into whether the plaintiff is seeking an incentive award. (Many defense lawyers already ask this in deposition.) If they are, it may provide the basis for an argument about adequacy of representation.

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My apologies for missing last Thursday's post: life with a newborn occasionally catches up with one. Nonetheless, finishing out our July Class Action Summer Camp, today we'll focus on Rule 23(e) and class-action settlements. The vast majority of class actions settle, but because class-action settlements implicate so many different interests (the lawyers, the defendant, the absent class members, the court), they require an additional level of approval from the court. In addition, a number of different settlement structures have evolved that class-action lawyers must learn to pay attention to.

Ten Cases to Educate You

• Amchem Prods. Inc. v. Windsor, 521 U.S. 591 (1997).
• Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999). 
• Dewey v. Volkswagen Aktiengesellschaft, 2012 U.S. App. LEXIS 10932 (3d Cir. May 31, 2012).
• Jones v GN Netcom, Inc., 654 F.3d 935 (9th Cir 2011).
• Klier v. Elf Atochem N. Am. Inc., 658 F.3d 468 (5th Cir. 2011).
• Carnegie v. Household Int’l, Inc., 376 F.3d 656 (7th Cir. 2004).
• In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768 (3d Cir. 1995). 
• In re Volkswagen & Audi Warranty Extension Litig., 2011 U.S. Dist. LEXIS 30881 (D. Mass. Mar. 24, 2011).
• Arellano v. T-Mobile USA, Inc., 2011 U.S. Dist. LEXIS 21441 (N.D. Cal. Mar. 3, 2011). 
• Figueroa v. Sharper Image Corp., 517 F. Supp. 2d 1292 (S.D. Fla. 2007).
  

Further Reading:

• Martin Redish, et al., Cy Pres Relief & the Pathologies of the Modern Class Action: A Normative & Empirical Analysis, 62 Fla. L. Rev. 617 (2010).
• Christopher R. Leslie, The Significance of Silence: Collective Action Problems & Class Action Settlements, 59 Fla. L. Rev. 72 (2007).
• Geoffrey P. Miller & Lori S. Singer, Nonpecuniary Class Action Settlements, 60 L. & Contemporary Problems 97 (1997). 

Questions to Consider:

• What are appropriate attorneys fees for a settled class action?
• How much deference should courts provide to objectors?
• What indicators should courts look to in order to determine whether a classwide settlement is fair, reasonable, and adequate?

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One of the unusual things about being an expat for a prolonged period of time is watching US news from the outside. Even though I have access to any number of American news outlets, being in a place where I am not surrounded by people who all share the same obsession with the 2012 Presidential race does afford some interesting perspective. And there is no question that, even from this moderate distance, American politics does look unusually polarized right now: it appears that large part of the electorate disagree so fundamentally on basic principles that agreement on anything seems unlikely.

Or is it? In an old (as in mid-1990s) article, Chicago law professor Cass Sunstein described the phenomenon of "incompletely theorized agreements." (The article is Incompletely Theorized Agreements, 108 Harv. L. Rev. 1733 (1995).) It's often used to explain "gaps" in legal rules, but it also works as a negotiation strategy between parties that disagree fundamentally.

Professor Sunstein's proposed strategy is to agree where possible on particulars, without worrying about whether one agrees on the underlying abstract principles:

"My suggestion in this Commentary is that well-functioning legal systems often tend to adopt a special strategy for producing agreement amidst pluralism. Participants in legal controversies try to produce incompletely theorized agreements on particular outcomes. They agree on the result and on relatively narrow or low-level explanations for it. They need not agree on fundamental principle. They do not offer larger or more abstract explanations than are necessary to decide the case. When they disagree on an abstraction, they move to a level of greater particularity. The distinctive feature of this account is that it emphasizes agreement on (relative) particulars rather than on (relative) abstractions."

(Emphasis added.) Professor Sunstein sees these incompletely theorized agreements resulting from democratic deliberations. He points--for example--to the Federal Sentencing Guidelines, which, while not a model of theoretical coherence, did at least make it into law. He also points out that these agreements can work for parties that have limited time or limited bandwidth with which to make a particular decision.

What Professor Sunstein does not mention is that this strategy works in reverse as well. In other words, when one is negotiating a deal where the particulars are sticking points, one can often find agreement on some of the more abstract principles at work. (This in fact is the "principled negotiation" behind Getting to Yes; it was also a strategy at the 1787 Constitutional Convention, where the delegates would often make general proposals with literal blanks where more controversial specifics might fit in.)

In other words, where possible, one should find the points of agreement, and emphasize those. When one finds oneself in a stalemate, it may be worthwhile to change the level of generality of the discussion. (If you're getting stuck on details, talk principles; if you simply cannot agree on fundamental principles, perhaps certain specific proposals will still garner agreement.)

The other advantage, in a litigation context, is that this strategy will help you test the resolve of the other side. If it is willing to agree to specific details, then agreement is possible. If not, then it may very well be the case that your counterpart is more interested in the litigation (or conflict) for its own sake than in resolving the dispute.

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 This week, one of the few sandwiched between Queen Elizabeth's Diamond Jubilee and the yearly recurrence of the Fourth of July, this expat lawyer finds his thoughts turning to the founding of the United States. In particular, what a royal mess it might have been. After all, as a document, the constitution has lasted 225 years, and--some bumps aside--still works pretty well.

And it was a document that was produced by committee, a committee of 55 members. And, as it turns out, few members of that committee were present for the entire Convention. Instead, many of them took long leaves of absence for various reasons, including attending to their actual jobs and tending to sick or dying relatives. Not only that, but the document took on a number of seriously contentious issues, including the rules for representation of different states and the question of where--if at all--slavery might be permitted.

So, given all of the challenges the Constitutional Convention faced, how did it not turn out worse?

Then-law student Dana Lansky, offers an intriguing explanation in her Harvard Negotiation Law Review article Proceeding to a Constitution: A Multi-Party Negotiation Analysis
of the Constitutional Convention of 1787: the Convention delegates were very wary of the problems that a multi-party negotiation might face, and put a number of structural solutions into place. While the article is twelve years old, but it packs in a lot of insights about the dynamics of large, chaotic negotiations.

Lansky uses James Madison's notes from the Constitutional Convention as her primary source. (So keep in mind that there may be some bias based on the fact that the primary source is one of the negotiators. In this case, I don't think the potential bias disqualifies the article, since Madison had an interest in a successfully negotiated outcome.)

Among the helpful suggestions Madison (through Lansky) offers:

• Appoint a facilitator. At the Convention, the facilitator was George Washington. (The Pennsylvania delegation were actually the ones to nominate him, which allowed everyone to rally around him.) And, as the article points out, Washington took great pains to appear impartial during the Convention. (He rightly recognized that if he were simply viewed as a partisan for Virginia, then the negotiations would likely break down.  (For class action lawyers, this is one reason why mediation is so often a good option if one is considering settlement.)
• Break into smaller groups. Or, as we often like to call them, committees. As another excellent article on the Convention notes, the Convention relied heavily on committees to expedite daily business and work out thornier issues. In fact, the use of the committee had a long pedigree, stretching back through the English Parliament at the very least. The Convention delegates used committees to break deadlocks and facilitate compromise.
• Propose packages. When you have multiple negotiators, there will inevitably be multiple issues they care about. How best to address all of them? Virginia came up with a proposal for a number of issues, then proposed them as the "Virginia Plan," which basically worked like an agenda. While others (the New Jersey delegation and Alexander Hamilton, for two) proposed alternative packages, the Virginia Plan remained front and center during the various debates.
• Do your homework. Before the Convention, James Madison did the most homework, researching issues, writing out solutions, and making educated guesses as to how other states might react. Guess who had the most influence? (And guess how the Virginia Plan was proposed so early?)
• Be as vague as you can get away with. Allows you to focus on areas of agreement, avoid areas of disagreement. Framers would actually make proposals that had blanks: e.g., "the states shall be divided into districts _______," which postponed any debate about the nature of the districts until everyone had agreed on the principle. While those blanks would have to be filled in sometime, the earlier agreements produced some commitment to later negotiation.
• Allow a reconsideration or tabling rule. Allowing people to revisit issues allowed parties to move on from impasses before they become stalemates. It also allowed for time to negotiate beneficial linkages.  (Of course, under some circumstances, allowing parties to postpone discussions might simply lead to retrenchment, or opportunities to undermine negotiations.)
• Don't forget informal talks. The Convention lasted a long time, in a place that isolated a number of the delegates from their homes. As a result, they did much of their socializing with each other. And these informal talks allowed certain issues to proceed better than they might otherwise. Sharing a drink with your counterpart, or having other time when you talk about things that are not specifically related to the substance of the negotiation, can be a great way to build trust and learn where common ground may exist.

The Constitutional Convention was hardly a perfect gathering, and the tendency to mythologize the "Founding Fathers" can be overwhelming. But it is hard to deny that, in this case, a number of the delegates went to great pains to both recognize the challenges that faced them in a large group, and to address those as best they could. The fact that the document they produced has lasted as long as it has through as many challenged as it has says something about how well these techniques can work when used by a group of serious-minded negotiators.

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Sometimes, I run across articles while researching that don't justify a full-fledged post, but that do provide a few helpful nuggets. This week, I'm having just that issue. So here are three somewhat interesting ideas, with which you can do what you will.

How to manage your negotiating team.  There's not a lot groundbreaking in the Harvard Business School reprint, but the tips are still helpful. Most helpful one for lawyers? Give everyone on your team a role, even that new associate. At best, it facilitates group loyalty and exploits previously untapped strengths.  At the very least, it can be cheap training.

Too Little Too Late: How Out-group Negotiation Strategy Drives Intergroup Relations.  This paper tests an interesting paradox. When two groups negotiate and reach a late agreement, they're happier than if they reach an earlier one. But, at the same time, the late concessions that lead to a late-stage agreement reduce trust between the two groups. The conclusions make a weird sort of sense, but should provoke unease in anyone who has to engage in repeated negotiations.

The Framing of Games and the Psychology of Strategic Choice is an interesting followup to previous research on framing and priming. The most interesting nugget from this paper? It is possible to frame some games to create guilt aversion in negotiators--that is, a desire not to let the other side down.

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 There is, in the extensive literature on negations, much discussion of the concept of "issue linkage." In fact, it gets tossed around a lot without ever getting an explicit definition. But it's a very helpful concept that arises out of the literature on international relations. And it has its roots in a 1979 article in International Organization by Robert D. Tollison and Thomas D. Willett, An economic theory of mutually advantageous issue linkages in international negotiations. As they wrote:

[B]y linking the two negotiations so that high benefitsgo to A in one area and high benefits go to B in the other, there may be a possibility to secure agreement in both negotiations in a way that brings benefits to both countries and brings the outcome much closer to the aggregate efficiency or potential welfare frontier.

(The "aggregate efficiency frontier" is the authors' term for the best outcome for the most people.) If this sounds a lot like basic horse-trading, well, that's probably because that's what it is. But, as the authors pointed out even back then, making the trading that naked "is extremely unlikely to be politically feasible." For whatever reason (we human beings don't like feeling like commodities, various bribery statutes may forbid certain kinds of trades), we don't like to make our horse-trading that naked.

So how should lawyers engage in issue linkage? There are a few ways that have worked well over the years of asking for some degree of quid pro quo without having to sound like Hannibal Lector toying with Clarice Starling. For example;

• Professional courtesy. Stripped of its cultural baggage (and make no mistake, professional courtesy is a cultural phenomenon), is a way of allowing horse-trading on small issues without making an explicit quid-pro-quo. By recasting the issue as one of "professional courtesy," one can imply to the other side that small concessions will be respected without compromising larger issue. (This works only if it's not abused.)
• Argue explicitly for linkage. Remember when I pointed out that lawyers don't argue well in negotiation because arguments often don't matter? Well, sometimes maybe they do. But it's not in convincing the other side of the overall merits of our case. It's in convincing them that the issues we seek to trade off against each other actually are connected in some way that justifies the trade.
• Explicitly unlink some issues. When you explicitly unlink an issue (like attorneys' fees) from other issues, you are actually doing two things. First, you are explicitly saying that you have unlinked one issue from the others, meaning that no other negotiations will affect it, at least formally. But secondly, you're sending an implicit signal that all others issues are considered fair game to trade off against each other.

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 Nobody likes a leaky roof, but few people make a federal case out of it. Several plaintiffs' lawyers did, however, when they sued Volkswagen alleging that the sunroofs on certain vehicles would clog with debris, allowing water to leak in and ruin the interior of the car. The resulting case, Dewey v. Volkswagen Aktiengesellschaft, provides another look at the adequacy doctrine.

In Dewey, two different class actions were consolidated in the District of New Jersey, where they were referred to a magistrate judge. After two years of discovery, the parties entered into a settlement agreement. The basic terms covered three kinds of relief:

1. "Educational preventative maintenance information," available to everyone, which would show them how to prevent leakage.
2. Replacement of sunroof valve for select consumers.
3. An $8 million reimbursement fund, which could be collected by one subclass on a prorated basis, and a second subclass (the "residual" subclass) if there was still money left over.

There were objections, including one filed by the Center for Class Action Fairness.  [Disclosure: I have represented the CCAF pro bono before.] One line of argument from the objectors questioned whether a magistrate judge could actually preside over a classwide settlement, since the absent class members had not consented to the transfer.

The other challenged the adequacy of the named plaintiffs, because they had segmented the class into various groups (including the "residual" subclass).

The District of New Jersey decided that neither of these objections was reason not to certify the settlement class. The objectors appealed the certification.

The Third Circuit quickly affirmed the assignment to the magistrate judge. But it was more concerned with the kind of conflict would disqualify a named plaintiff from representing a class.  It identified the standard:

A conflict is fundamental where it touches the specific issues in controversy. A conflict concerning the allocation of remedies amongst class members with competing interests can be fundamental and can thus render a representative plaintiff inadequate. A conflict that is unduly speculative, however, is generally not fundamental.

(Internal quotations & citations omitted.) In this case, the objectors had identified two conflicts.

First, the objectors argued that, like in Amchem Products v. Windsor, there was a conflict between plaintiffs seeking to recover for past damage and present damage. The Third Circuit found this conflict to be "unduly speculative." But it cottoned to the other conflict that the objectors had identified.

The West Objectors argue that there is an intra-class conflict between plaintiffs in the reimbursement group and plaintiffs in the residual group. Because all representative plaintiffs are in the reimbursement group, the West Objectors argue, they cannot adequately represent class members in the residual group. We agree.

The reimbursement group has priority access to the $8 million fund. Only after their claims are satisfied can the administrator satisfy goodwill claims from the residual group. In order to sort the plaintiffs into these two groups, representative plaintiffs sorted the various car model runs by their claims rates. On this spectrum of claims rates, representative plaintiffs drew a line delineating the boundaries between the two groups. Those model runs with claims rates above the line were placed in the reimbursement group. Those model runs with a claims rate below the line were placed in the residual group. It was this line-drawing exercise that exacerbated the adequacy problem here.

(Emphasis added.) In other words, once the case became about the named plaintiffs deciding between "haves" and "have nots," and placing themselves exclusively with the haves, they had demonstrated that there was an insoluble intra-class conflict.

What can defense lawyers learn from this? Adequacy is about protecting the rights of the absent class members. That means that when challenging a proposed class--or when designing a classwide settlement that will survive scrutiny--the defense must think carefully about how best to protect the interests of the absent class members?

Isn't that supposed to be the plaintiffs' job? Sure. But there are a lot of opinions out there (like this one) that show that they don't reliably do so.

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Years ago, I took part in a mediation for a small consumer class action--not my first, and hardly my last. In that case, the mediator did something unusual, she showed up with homemade chocolate chip cookies. The mediation did not result in a settlement, but it went pretty smoothly. Afterwards, I asked the mediator about the cookie gambit. "I find it tends to promote cooperation," she said. "No one gets too aggressive around homemade cookies."

Was she right? There's been a lot of research into the phenomenon of priming, the idea that verbal or visual cues can predispose us to act in certain ways. But can it really effect significant changes in behavior?

Back in 2004, social scientists Varda Liberman, Steven M. Samuels, and Lee Ross set out to test the effect of priming using a social-science staple: the Prisoner's Dilemma.

The Prisoner's Dilemma, for those who don't geek out over game theory, is an example of a problem from game theory. It was first developed in the 1950s as a way of explaining why individuals might choose selfish paths that led to worse outcomes than cooperation, even when they knew that cooperating would lead to better outcomes.

The story that accompanies the Prisoner's Dilemma goes like this: the police arrest two criminals, and they put them in separate interrogation rooms. The DA has enough evidence to put them each away for a year, but if she can get one of them to confess, she can put the other away for 10 years. It both confess, they will each go to jail for six years.

So each prisoner faces a choice: talk or stay quiet. If both stay quiet, they each serve only a year in jail. So what's the dilemma? Sitting alone in an interrogation room, neither prisoner knows what the other will do. What each does know is this: if he stays quiet, he winds up in prison no matter what, and he could serve ten years if his partner confesses. If he talks he might do six years, or he might do none, and he knows the other prisoner is thinking the same way. And there is no honor among thieves ...

Liberman et al. conducted a series of experiments using the Prisoner's Dilemma with both Stanford undergraduates and Israeli Defense Force pilots. But then they proceeded to do did something interesting with the game; they renamed it. For half of their test subjects, they called it "The Wall Street Game." With others, they called it "The Community Game." 

The result? The name of the game had a significant effect on players' strategies. When the Stanford students played, half of the Wall Street games resulted in mutual defections. And half of the Community games played resulted in mutual cooperation. The game was structured slightly differently for the Israeli pilots, but provided similar results. When the game was called the Bursa (Wall Street) game, 16 of the 20 participants started out by defecting. When it was called the Kommuna (Community) game, 11 of the 20 participants started out by cooperating.

One further twist in the experiment provides two more insights. In each case, the experimenters chose their subjects by going to authority figures who knew the participants. For the Stanford students, they went to resident advisors; for the pilots, they went to flight instructors. In each case, they asked the authority figures to stack the deck by giving them the people they thought were most cooperative and the ones they thought were most competitive.

Statistical analysis of the game results showed two things: (1) priming works even on people we think are predisposed to act in the opposite way, and (2) people tend to be very bad at predicting how competitive or cooperative someone will be based on personality alone.

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 I hope everyone had a good Memorial Day weekend. This week, we take a brief look at a number of opinions that were decided last week, none of which are revolutionary, but all of which are useful to defendants at some stage of the class action. Think of it like a Memorial Day barbecue, a little something for each course.

Discovery. Both plaintiffs and defendants like to serve contention interrogatories, and both also like to give vague answers. It's part of the chess game that is pretrial discovery, and it can be frustrating to both observers and participants. In Fulghum v. Embarq Corp., 2012 U.S. Dist. LEXIS 72643 (D. Kan. May 24, 2012), the court decided it had had enough of the squabbling over identifying which documents could identify the class:

The interrogatory asked Plaintiffs--not Defendants--to identify the group of retirees who fell within the applicable plan documents. Plaintiffs, therefore, would have that information. Furthermore, if the process is as simple and mechanical as Plaintiffs contend, the Court questions why Plaintiff did not perform the analysis. Plaintiffs do not offer any reasons why Judge O'Hara's ruling is clearly erroneous, but instead assert that their answer was appropriate. Plaintiffs have spent more time arguing over the appropriateness of their interrogatory response than necessary to respond to the request.

(Emphasis added.)  Moral: while a little fencing is OK, you must answer your interrogatories with substance at some point.

Offer of judgment. A plaintiff files a FCRA class action. The defendant files an offer of judgment for $25,000, a comfortable amount more than the maximum statutory damages plus an attorneys' fee. Does that moot the class action? According to Sanchez v. Verified Person, Inc., 2012 U.S. Dist. LEXIS 70128 (W.D. Tenn. May 21, 2012), yes it does.

[I]f a named plaintiff's claim is mooted by an offer of judgment made before certification of the class or the filing of a class certification motion, dismissal of the action is required.

(Internal quotation marks omitted, emphasis added.)  The court found the rule unnecessarily harsh, but still applied it to dismiss the action. (The opinion includes an discussion of how the timing of an offer of judgment may affect its validity; the discussion is interesting because it gets so convoluted. This level of complication may be the beginning of a tip towards the Seventh Circuit's rule in Damasco v. Clearwire Corp.)

Certification. Consider this the entree in our little picnic of class-action rulings. Johnson v. Harley Davidson Motor Company Group, LLC, 2012 U.S. Dist. LEXIS 72048 (E.D. Cal. May 23, 2012) concerned an alleged defect that caused surfaces on certain motorcycles to heat to a temperature that might burn skin. The court found three problems with certifying a class: (1) There was no uniform design to the motorcycles, (2) There were

literally zero complaints about the allegedly excessive heat. Literally zero complaints suggest this is a public-policy-driven lawsuit instead of a client-driven lawsuit.

(Emphasis added, internal citation omitted.) The third problem was that (3) regulation by the National Highway Traffic Safety Administration was a superior remedy to a class action.

Notice. Everyone knows that Rule 23(b)(3) requires the "best notice practicable," and that that usually means individually-mailed notice. But what if the defendant sends the notice by bulk mail to nursing homes for distribution to residents there? Not good enough, says the Northern District of Oklahoma:

The mailing of Notice Packets in bulk to these 49 care facilities does not comport with due process because there is no evidence that the potential Class Members ever actually received their packets.

Childs v. United Life Ins. Co., 2012 U.S. Dist. LEXIS 70113 (N.D. Okla. May 21, 2012) (emphasis added).  The court took special care to explain its concerns, which primarily had to do with the structure of the proposed settlement. Because the plaintiffs were guaranteed a particular fee, their incentives were "decoupled" from maximizing the number of class members to respond; and because the defendants had a reversion clause, their incentive was to minimize the number of respondents.

Moral: the simpler the settlement, the better the odds of it getting through. If you can't make a simple settlement, it may be that it's not really a case worth settling.

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Barbarians at the Gate by business journalists Bryan Burrough and John Helyar is rightly considered a business classic. (It was also made into a hugely entertaining HBO film with James Garner as RJR Nabisco CEO F. Ross Johnson, Jonathan Pryce as buyout specialist Henry Kravis, and future Sen. (and Law & Order DA) Fred Thompson as American Express executive Jim Robinson.) It tells the story of how a group of executives from RJR Nabisco tried (spoiler: unsuccessfully) to buy the entire company in a leveraged buyout. It is an excellent example of business reporting, and an fascinating read. It also provides a number of lessons for those who negotiate on behalf of corporations. Among them:

Intangibles matter. Johnson's first company, Standard Brands, merged with Nabisco in part because of the fact that Ross Johnson decided he liked Nabisco Chairman Bob Schaeberle. Johnson went from "Who the f*@& is this guy?" to a merger in a matter of weeks once he met with Schaeberle. (His newfound fondness for Schaeberle, however, did not prevent Johnson from effectively ousting him once the merger had been effected.)  Similarly, back in 1956, RJ Reynolds decided against buying pharmaceutical company Warner-Lambert because one of RJR's senior vice presidents visited the Warner-Lambert chairman and learned he sailed a company-owned yacht. His reaction? "This is not for us. These are not our kind of people."

So intangibles, be they personality or corporate culture, can often make or break a deal. The same lesson applies in litigation. Plaintiffs' lawyer Jan Schlichtman famously botched a settlement negotiation in the H&R Grace litigation by throwing a settlement conference so lavish it convinced the defendants their money would be better spent fighting him than funding future conferences for other defendants.

Negotiations have costs. Throughout Barbarians at the Gate, the various parties involved in the proposed buyout worry about the fees the deal will generate.  Well, some don't worry as much as rejoice.  As an executive at Shearson (one of the investment banks) swoons when he considers the money he might make:

"Oh the fees! The upfront fees alone--for advising and money lending and a 'success fee,' maybe $200 million in all--would be a gigantic boost to Shearson's flagging earnings. And it wouldn't stop there …"

(Emphasis in original.) All complex negotiations have costs like these. In addition to just the usual costs in time, bringing outside parties in costs money. And that money must be subtracted from the bottom line of the deal. (The same holds true for litigation. Accommodating objectors (often by paying them off, sometimes by increasing the value of the settlement) costs money. So does notifying a proposed class.)

Everyone leaks information, whether they mean to or not. There are, of course, a number of direct strategic leaks in the course of the various wheelings and dealings that made up the RJR Nabisco LBO. But there were also moments when trying not to leak information wound up leaking information. For example, investment banker Jeff Beck [http://www.nytimes.com/1991/04/07/books/heard-on-the-street.html] had been pestering Johnson for months to try some kind of merger or LBO. So when Johnson was considering the LBO, he stopped taking Beck's calls. Beck immediately called Henry Kravis.

"I think it's time to do something about RJR," Beck said.
"Why is that?" Kravis wondered.
"For some reason Johnson's stopped taking my calls. He's having Jim Welch call me back. We ought to just have a meeting and make an offer."
"You're probably right," Kravis said.

Even the act of not communicating can communicate information. When the stakes are high, it is safe to assume the other side is taking back-bearings.

There are many, many more object lessons in Barbarians at the Gate. It is the perfect storm of complications in a corporate negotiation, one that contained a number of adversarial elements. As a result, it's well worth the read, for lawyers who represent corporate defendants, and for anyone who wants to see how an intensely competitive atmosphere (much like that among class-action plaintiffs) can make even the simplest proposed deal into something much, much more complicated.

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 I've written before about priming, the tendency of us humans to adopt emotional states if we are exposed to words with emotional content. But there are other psychogical effects that can influence negotiating in unseen, and unwelcome, ways. One of the most common of these is the problem of anchoring.

What is anchoring? As Dan Orr and Chris Guthrie write in their 2006 article Anchoring, Information, Expertise, and Negotiation: New Insights from Meta-Analysis, it's the tendency of any negotiation of numbers (like the price of a home) to cluster around the first number thrown out. Experiments have shown that this actually happens. And it can happen in odd ways. For example, social scientists have been able to influence a person's estimate of the value of a home in Des Moines, Iowa by showing them the median home price in the far more expensive Honolulu; or, better yet, they have influenced people's estimates of the African membership in the UN by spinning a wheel of fortune and reporting the number the arrow pointed at.

In essence, anchoring is a subset of priming, just one that focuses on numbers. Much as we can be primed by words to act in certain ways, we can also be "primed" by numbers that we see.

Like all heuristics, anchoring is often adaptive. For example, when estimating how much we will have to pay to purchase a house, it is usually reasonable for us to rely on the initial list price because it often conveys meaningful information about the actual market value of the home. Problems can arise, however, in two circumstances. First, we can get into trouble when we over-rely on an anchor. In the home purchase example, for instance, we are at risk of over-paying for the house if we are unable to adjust sufficiently away from its list price. Second, we can get into trouble if we rely on an irrelevant or uninformative anchor. If, for example, a newspaper article recounting the median home price in Honolulu influences the amount we are willing to pay for a small house in Des Moines, we are also at risk of over-paying for that home. (Likewise, if our estimate of African membership in the United Nations is influenced by the spin of a wheel of fortune, anchoring is obviously influencing our judgment in untoward ways.)

To test whether anchoring really wound up influencing actual negotiations, Guthrie and Orr performed a statistical meta-analysis on previous studies. (A meta-analysis is a method of statistical analysis that aggregates studies in the same field; performed properly, it can offer results that are more statistically sound than any individual study.) Their conclusion:

Our meta-analysis demonstrates that anchoring has a powerful influence on negotiation outcomes.

From this, they drew a few tactical recommendations. First, they leapt to the same conclusion as most do when they first hear of anchoring: bid high (or low) to start out, in order to sway your counterparty into moving their price closer to yours. Of course, most negotiators already do this, and there is only so far one can move out of a general range before it becomes obvious what one is doing, which may actually cause certain agreements to fall through.

Guthrie and Orr do identify another tactic, however, which is to use anchoring on oneself to counteract any external anchors. In other words, to the extent that one can set high explicit goals before sitting down at the table, one can counteract the anchoring effect of any opening offers at the table. (One might consider this the "I'm not going to pay a lot for this muffler" strategy.)

Guthrie and Orr also talk about the importance of using a good "outside" strategy as a way of defending against anchoring effects. What is an "outside" strategy? Basically, it's any strategy that gets the negotiator out of her own head, since that is where the anchoring effect is happening.

This outside, 'policy' approach improves decision-making by changing the dimensions of the choice-set. A good example of an outside strategy is the prevention of 'independent' auditors from working with a bank or brokerage firm for more than, say, five consecutive years. Rather than simply advising auditors to be impartial, or expecting them to be professional and direct in delivering bad news to the company responsible for their employer's financial growth, the outside strategy removes the threat to integrity by eliminating its source.

(Emphasis added.)  Simple bans are an outside strategy, as are bright-line rules. (The controversial Federal Sentencing Guidelines were an effort by Congress to either keep judges from anchoring too low, or an attempt to impose an alternative anchor.) But so is consulting an impartial third party, such as a consultant or a local expert. And it's possible that having a client back at home with high expectations also constitutes a good defense against anchoring; it's certainly something that works for a number of defense counsel.

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We've been talking about negotiations on Wednesdays here for several months now. And while most of that discussion has focused on how to reach principled agreements, even with parties you may not like, there is no denying the fact that sometimes, people lie when negotiating. Or, at the very least, they shade the truth.

This tendency makes sense. To the extent that negotiations are an exchange of information about what agreements will provide the most value to both sides, and to the extent that we all leak information without knowing it, it is just sound strategy to try to keep some information private. There are several ways one can do this. One is to outright lie; another is simply to use accurate information to mislead.

And there are other tactics that can, under certain circumstances, succeed at reaching an agreement even if they're not commonly accepted or liked. One can use the ruse of an agreement to gain valuable information from the other side. Similarly, one can use threats or intimidation to force an agreement where one might not otherwise exist. (For example, corporate defendants--and courts--often worry that plaintiffs' lawyers use class actions to leverage small, easily resolved individual complaints into large cases that will justify large attorneys' fees by threatening bet-the-company litigation.)

So what is to keep lawyers from doing all of this? Is there any law that regulates negotiations? Well, sort of.

First of all, lawyers are not above the law itself. So laws that prohibit outright fraud or other forms of deceptive conduct that might arise in negotiation will apply equally to lawyers. But, in addition, the law governing lawyers' professional duties has evolved to regulate some of this conduct as well. The best-known of these rules is probably the ABA Guidelines on Settlement Negotiations.  And while these are not the last word on lawyers in negotiations, they do provide a good starting point.

First and foremost, the ABA Guidelines say that a lawyer cannot outright lie about a material fact.

"In the course of representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person; or
(b) fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6."

(ABA Guideline 4.1.) Unlike fraud, these prohibitions against misstatements do not require the other side to actually rely on the misstatement. (In other words, it is the misrepresentation itself that is a problem, not the harm it does to the other side. This makes sense; lawyers have enough PR problems without being known to condone lying.) That said, the ABA is quick to clarify that by misstatements, it does not mean all misstatements. Just the ones about provable facts.

The prohibition against making false statements of material fact or law is intended to cover only representations of fact, and not statements of opinion or those that merely reflect the speaker’s state of mind.

The Guidelines point out that this allows a certain amount of "puffing," or strategic misinformation. (As one colleague once pointed out, they allow him to react to settlement offers by talking about how angry he is, even if the offer is well within what his client has told him is acceptable.)

Moreover, a lawyer sometimes has a duty to disclose certain information, at least to correct misrepresentations by his client.

The duty to disclose may arise in at least three situations: (1) a lawyer has previously made a false statement of material fact or a partially true statement that is misleading by reason of omission; (2) a lawyer learns of a client’s prior misrepresentation of a material fact; and (3) a lawyer learns that his or her services have been used in the commission of a criminal or fraudulent act by the client, “unless such disclosure is prohibited by the ethical duty of confidentiality.”

Nor may lawyers use the settlement process "in bad faith." (ABA Guideline 4.3.1.) What does that mean?

It is not bad faith for a party to refuse to engage in settlement discussions or to refuse to settle. Settlement is not an obligation, but an alternative to litigation. The choice to pursue it to fruition should be that of the client. However, it may be impermissibly deceptive, and thus an act of bad faith, for a lawyer to obtain participation in settlement discussions or mediation or other alternative dispute resolution processes by representing that the client is genuinely interested in pursuing a settlement, when the client actually has no interest in settling the case and is interested in employing settlement discussions or alternative dispute resolution processes solely as a means of delaying proceedings or securing discovery.

Finally,

A lawyer may not attempt to obtain a settlement by extortionate means, such as by making extortionate or otherwise unlawful threats.

(ABA Guideline 4.3.2.) The ABA is quick to add that, of course, that threatening a party with a valid civil claim is permissible, as is "reminding" the party of the costs of fighting a civil claim in court. So there is some leeway for lawyers to use the threat of a lawsuit to

Now, as with any subject matter involving lawyers--who have, as a profession, never met a rule they couldn't argue around--these ethics rules are not the last word on what lawyers may (or may not) do in the service of negotiating for their clients. Like the Pirate Code, they turn out to be more of a guideline. That is one reason why the ABA Guidelines alone are 71 pages of rules and commentary, instead of a quick, bullet-point list of commandments. And, of course, the barriers to making a complaint to the appropriate licensing body can create some more space for underhanded tactics. But the ABA Guidelines do mark an important starting point. And I will be revisiting exactly what kinds of tactics have been upheld as legitimate and what have not.

Meanwhile, however, it is worth remembering that while underhanded tactics may occasionally work, they carry a heavy cost. A party that believes that it has been treated unfairly will not trust the trickster a second time. And reputations spread. Negotiators known to be dishonest or to employ underhanded tactics will find it harder to reach agreements with other parties as well; also, no one likes to be branded as untrustworthy. And it is these threats, as much as any worry about ethical sanctions, that keep many lawyers in line.

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Harvard Law Professor Robert Mnookin has written a lot about negotiation. Seriously, a lot. His most recent book, Bargaining with the Devil, is about how to negotiate long-standing conflicts with lots of bad blood. Or, as he puts it:

By "bargain" I mean attempt to make a deal--try to resolve the conflict through negotiation--rather than fighting it out. By "Devil," I mean an enemy who has intentionally harmed you in the past or appears willing to harm you in the future. Someone you don't trust. An adversary whose behavior you may even see as evil.

(Emphasis added.)  Mnookin's primary concern with "bargaining with the Devil" is that negotiating with an enemy carries with it a number of "negative traps," patterns of thought and behavior that leave the parties mired in conflict instead of actually resolving issues. He examines this issue through the lens of three primary examples: (1) Nelson Mandela's discussions with the Afrikaner government; (2) the resolution of a long-standing legal dispute between IBM and Fujitsu; and (3) a bitter labor dispute at the San Francisco Symphony Orchestra.

Among the most useful lessons Mnookin offers:

Beware of preconditions. As Mnookin points out, preconditions are often designed to deprive the other side of any leverage (by, for example, taking the only issues one side cares about off the table). As a result, they send an unequivocal signal that one side is not actually interested in negotiating through the issues. So the next time plaintiffs' counsel tells you that they're happy to talk settlement, but only on a classwide basis, save yourself the time. She's just told you she's not ready to talk yet.

Personal connections can be important. Often the mere act of dealing with a rival feels like too much of a compromise. I have certainly, in my time, dealt with clients who believed that even dignifying a class action complaint with negotiation was doing nothing more than encouraging bottom-feeding behavior. (In some cases, they were right. But in some cases, the refusal to negotiate more knee-jerk than considered.) How does one make it past this initial reluctance to negotiate? Mnookin offers the example of Nelson Mandela, who was able to secure compromises from the all-white South African government by making (and then maintaining) personal connections with individual Afrikaner leaders. Once they had a personal connection to Mandela (as well as a sense of mutual respect), they could "make concessions and yet maintain one's self-respect."

Reinforce the value of cooperation to your own side. Mnookin draws on Robert Putnam's work on two level games. He points out that in resolving a dispute, both parties usually must deal with disgruntled (and possibly polarized) constituents back home. And, as Mnookin points out, no matter how skilled the negotiator is, if her constituents do not understand the importance of compromise, then there will not be an agreement. His suggestion? Continually reinforce the benefits of any compromise with your constituents.

I have a much deeper understanding of how difficult it is to change the negotiation culture of an organization. It requires not simply initial "buy-in" but constant reinforcement. … Without this reinforcement, their natural fears--the negative traps--may reappear.

Mnookin's work is useful for class-action defendants on two levels. First, since there does tend to be some polarization and demonization between plaintiffs and defense counsel, it is useful to see what he recommends for negotiating with parties one might find deeply distasteful. Second, and every bit as important, Mnookin provides a detailed look at three extremely difficult negotiations. That alone is worth the price of the book.

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Much has been written in the last few years about cy pres relief (relief that goes, not to class members, but to ) in class action settlements. While plaintiffs and defendants still find cy pres to be a valuable for increasing settlement amounts, the practice has come under increasing fire from some scholars and courts who view it more as a way of inflating settlement amounts to justify attorneys fees.

Last week, the First Circuit weighed in on the debate in Rohn v. TAP Pharmaceutical Products, Inc. Its take: while cy pres relief is a valid tool for providing relief to absent class members, courts should not have the discretion to decide where the funds actually go.

The procedural posture of the case is a little complicated. Rohn is one of the constituent cases of the In re Lupron Marketing & Sales Practice Litigation. The appellants are one subclass of plaintiffs, who challenged a cy pres distribution of $11.4 million to the Dana Farber/Harvard Cancer Center and the Prostate Cancer Foundation. (They argued that the money should have gone to them, as consumers.)

The First Circuit took the opportunity to state some of the principles it follows when reviewing cy pres relief. It elected not to follow Judge Jones's suggestion in her concurrence to Klier v. Elf Atochem (5th Cir. 2011) that courts prefer reversion settlements to cy pres. Instead, it adopted the "reasonable approximation" standard.

Both case law and the ALI Principles support our adoption of the "reasonable approximation" test. As to whether distributions reasonably approximate the interests of the class members, we consider a number of factors, which are not exclusive. These include the purposes of the underlying statutes claimed to have been violated, the nature of the injury to the class members, the characteristics and interests of the class members, the geographical scope of the class, the reasons why the settlement funds have gone unclaimed, and the closeness of the fit between the class and the cy pres recipient.

The First Circuit was also not sympathetic to the plaintiffs' claim that they deserved the money, since they had already received full relief, and

It is well accepted that protesting class members are not entitled to windfalls in preference to cy pres distributions

However, the First Circuit also expressed one concern about cy pres relief, namely that the court itself should not be the entity deciding where cy pres funds should go.

Distribution of funds at the discretion of the court is not a traditional Article III function, as many courts have recognized …

What's the takeaway for defense lawyers? Cy pres is still OK, but make sure that the third party receiving the relief is closely related to the gravamen of the lawsuit.

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 Last week, I talked about some of the limitations of using Getting to Yes when negotiating class actions. But Getting to Yes has other limitations as well, ones well worth lawyers' consideration. For example, in his 2003 article: Panacea or Pandora's Box?: The Costs of Options in Negotiation, Vanderbilt Professor Chris Guthrie takes on the question of just how useful generating new options (or "creating value") can be in negotiation. His answer is that it's less useful than one might think.

Relying on existing experimental research, new experimental research, and "real-world" empirical evidence, the Article identifies four potential costs associated with option generation: option devaluation, context dependence (both contrast and compromise), non-compensatory decision making, and decision regret. Taken together, these "option costs" stand for the ironic proposition that negotiators who heed the option-generation prescription may be more likely than those who ignore it to enter into inferior agreements with which they may be less satisfied. In short, option generation may not be the panacea its proponents imagine, but rather a Pandora's box that can lead negotiators astray.

(Emphasis added.)  So how exactly do these four "option costs" work?

1. Option devaluation. Basically, the more options one offers, the less attractive any option will seem.

Because the process of comparison brings to mind the relative advantages and disadvantages of the options under consideration, and because each option's disadvantages are likely to loom larger than its advantages, loss aversion implies that comparisons will decrease the attractiveness of every option under consideration.

2. Context dependence. A more generalized form of his first cost, context dependence means that negotiators do not evaluate options in a vacuum; instead, they compare them against the other options they face. (See how that includes the first "option cost"?)

Psychologists have discovered, however, that people's assessments of initially considered options are often systematically influenced by the emergence of an additional, irrelevant option. People "make context-based inferences about the worth of alternatives whether or not the context provides a valid basis for such inferences."

This effect means that once there are multiple options on the table, it becomes easier to manipulate your counterpart's decisions by introducing options that--while not strictly relevant--will sway them towards options more favorable to you, either by making them seem more attractive by contrast, or by making them seem like a reasonable compromise.

3. Non-compensatory decision making. This is a way of saying that, confronted with lots of options, people do not act like rational maximizers.

When several options are available, negotiators may make decisions based not on an evaluation of all available information (compensatory decision making), but rather on the basis of a simplified decision-making process (non-compensatory decision making).

I've discussed some of these forms of decision making before.  It's worth noting that Guthrie may be underestimating their effects. Non-compensatory decision making occurs frequently, not just when one is confronted with multiple options.

4. Decision regret. What is decision regret?

For every yes there must be a no. To decide one thing always means to relinquish something else. As one therapist commented to an indecisive patient, "Decisions are very expensive, they cost you everything else." Renunciation invariably accompanies decision. One must relinquish options, often options that will never come again.

In other words, decision regret is an extreme form of buyer's remorse. The more options there are in a negotiation, the more likely the negotiator will be dissatisfied with her decision, because she will be looking back at those options she decided against with rose-colored glasses.

Guthrie's takeaway from this--and remember, he's a law professor--is that you should always involve a lawyer in negotiations that might involve multiple options.

Lawyers are more likely than others to use compensatory rules when assessing negotiation options because lawyers are among the more rational and analytical members of society. Researchers have used psychological tests like the Myers-Briggs Type Indicator (MBTI) [http://www.myersbriggs.org/my-mbti-personality-type/mbti-basics/], as well as brain-dominance testing [http://www.ipn.at/ipn.asp?BHX] instruments, to demonstrate this analytical orientation. Indeed, neuroscientists have "selected lawyers when they wished to test an occupational group that is characteristically analytical in its preferred mode of thought." This is not to say, of course, that lawyers are pure "rational actors" who are impervious to the effects of psychological "biases" in decision making; in fact, lawyers, like other novice and expert decision makers, are susceptible to such biases. However, experimental evidence suggests that lawyers are more likely than others to be able to resist these biases and make decisions rationally.

Personally, I think this may be overestimating the rationality of lawyers.  However, Guthrie's point may work better if it's made simpler--when confronted with multiple options in a negotiation, it is worth consulting a neutral, relatively objective third party. They may not be more "rational" than other human beings, but they won't be as invested in the specific decision, and that should provide the detached double-check the negotiator needs.

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Last Friday, Thomson/Reuters reporter Alison Frankel (who should be on every class-action lawyer's RSS feed) wrote about an example of a new strategy class-action defendants have developed over the past few years. That strategy? Work with the government. In this case, publishers Harper Collins and Hachette--two of the defendants in both the Justice Department's recent price-fixing complaint and a class action making the same allegations--have settled with 16 state attorneys general. Harper Collins has announced that it plans to settle with the other 34 state AGs as well if possible. Leaving aside the fact that settling with a government agency often the right thing to do when accused of wrongdoing, it also provides several immediate benefits to defending subsequent class actions.

From Frankel's piece:

For the defendants, there are obvious benefits to reaching quick settlement with state regulators rather than slogging through litigation with class action lawyers who've already sunk millions into working up the case. The AG parens patriae cases aren't subject to the same requirements as federal court class actions (although they do have to be approved by Cote, who is overseeing all of the e-books litigation). There are also no attorneys' fees for the state AGs, which means cheaper settlements for defendants. In the muni bond derivatives litigation, class counsel repeatedly argued that defendants preferred to make deals with the AGs because the private lawyers would demand bigger settlements.

Settling with state AGs (or the Justice Department, for that matter), offers two other benefits for class action defendants as well.

First, it provides an excellent superiority argument should the class action proceed. Action by government agencies is often superior to a class action, in no small part because the government can tailor the remedy as it sees fit. (More support for the fact that state AG settlements are superior: CAFA requires parties to report class-action settlements to state AGs, not the reverse.)

Second, and related, negotiating with the government undermines one of the plaintiffs' most common rhetorical justifications, that class actions are necessary for deterrence because the government cannot effectively regulate corporate misconduct. After all, if the government has already effectively regulated the conduct in question, then there is no need for a class action to "fill in the gaps." At that point, if plaintiffs' counsel is still pushing the case, it becomes clearer to the court that it's really about the fees, not the public good.

It's interesting, because this likely means that class actions as a device do have some general benefit. They encourage negotiations with appropriate government authorities. The irony is that this benefit does little, if anything, for plaintiffs' counsel.

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Anyone who writes or talks about negotiation strategy eventually has to address Getting to Yes.  It's the 800 pound gorilla in the negotiation field, and it has produced a vocabulary that, while occasionally jargony and unwieldy, is in constant use. Far more importantly, it contains some outstanding advice on how to negotiate in almost any context, even with difficult counterparties.

So, assuming that you've never read the book, what's it about? Getting to Yes advocates a method known as "principled negotiation." As the authors describe it, principled negotiation:

suggests that you look for mutual gains wherever possible, and that where your interests conflict, you should insist that the result be based on some fair standards independent of the will of either side. The method of principled negotiation is hard on the merits, soft on the people. It employs no tricks and no posturing.

In general, principled negotiation is an outstanding overall strategy, in no small part because it tends to work whether or not the other side uses it too. (And, for lawyers in particular, it has an added benefit. If you are continually referring to some fair, objective standard, then if the negotiation breaks down you are very well placed to defend your position in front of a mediator, arbitrator, or judge.)

In explaining this principle, Fisher & Ury present two primary insights that can help negotiators. Unfortunately, each also presents some specific problems in the class-action context:

BATNA - the "Best Alternative To Negotiated Agreement."

The reason you negotiate is to produce something better than the results you can obtain without negotiating. What are those results? What is the alternative? What is your BATNA--your Best Alternative To a Negotiated Agreement? That is the standard against which any proposed agreement should be measured. That is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your interest to accept.

(Second emphasis added)  In business deals, the best alternative is often some agreement with someone else. In litigation, the best alternative to a negotiated agreement is litigation. And, more importantly, the best alternative for a defendant is the money it pays to the class and counsel, while plaintiff counsels' best alternative is the fees they will collect. (This is what class-action scholars call the agency problem with class actions.) The calculus is a little different than what Fisher & Ury have in mind.

"Creating value." - This is Fisher & Ury's other big insight. Their big example of it involves two children fighting over an orange:

[A]ll too often negotiators end up like the proverbial children who quarreled over an orange. After they finally agreed to divide the orange in half, the first child took one half, ate the fruit, and threw away the peel, while the other threw away the fruit and used the peel from the second half in baking a cake.

Leaving aside the fact that the authors' kids bake a heck of a lot more than I did in my youth, this kind of creating value can work extremely well in business negotiations. By taking a step back, the two sides can often agree on a division that allows each to get more value out of an agreement than they might out of just splitting the pot in two.  And there are no shortage of attempts to "create value" in class action settlements as well.  The difficulty is that Rule 23 constrains some of the creativity lawyers might exercise. This is not a bad thing. The "orange" problem that class-action lawyers are trying to solve is that the defendant does not want to pay much, but class counsel want large fees. So "creating value" in the class action context often means giving the class members something that doesn't cost much, but can be claimed as valuable enough to justify large attorneys' fees. And those are the exact agreements most likely to draw objections.

Despite these issues, Getting to Yes is still the definitive book on negotiations, and much of the advice in it (from how to evaluate your best alternatives, to how to deal with more coercive tactics from the other side) is extremely valuable. Class-action lawyers just have to make sure that in following the book's advice, they're not running up against the specific strategic problems posed by complex litigation.

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 In class actions, we have negotiations between two organizations. On one side is a corporation or firm, an organization in the truest sense. On the other is an "organization" of class members represented by one or more plaintiffs. Does this affect the way that negotiations are handled?

Almost certainly. As Professors Mark Gradstein, Shmuel Nitzan, and Jacob Paroush wrote twenty years ago in their Public Choice article, Collective Decision Making and the Limits on the Organization's Size, one reason organizations cannot grow beyond a certain size is that making decisions becomes too difficult. Or, as they put it:

Expansion confers both benefits and costs. Benefits include improvement in the organization's decisions from inclusion of another mind involved with the resolution of the problems the organization faces. The costs include a lengthening of the decision-making process which may result in an increase in the direct payment for managerial time as well as an increase in the likelihood of failure to make decisions on time.

(Emphasis added.) In other words, the larger the organization, the harder it is to make quickly when necessary.

The authors also consider how the "technology" of decision making affects how large the organization can grow. By "technology," the authors mean the rule for making decisions (say, majority rule, or representation under Rule 23). But it also makes sense that communications technology (like conference call capability, email, or some kind of social media) may influence the size of an organization.

The application to class-action negotiations should be fairly obvious. The larger the defendant, the more defense counsel will have to make sure it knows exactly who to consult at the client when working out a deal, particularly if counsel is under time pressure. But, equally important, the more diverse the class, the more the defendant will have to make sure that it's addressing all of the major interests within the class. To do otherwise may invite objections to, and ultimately rejection of any deal the parties bring before the court.

This analysis, of course, assumes a best-case for having multiple decision makers. The article does not consider whether the number of decision makers may actually decrease the quality of the decisions. Instead, they assume that adding decision makers enhances the quality of the decision, because more brains are better than fewer. For some kinds of decisions, this may well be true.  But for many other cases, too many cooks can spoil the broth.  (This is the difference between crowdsourcing and gridlock.) Of course, where that is the case, you're not really deciding between benefits and costs, just costs and more costs.

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Last week, New York Times reporter Matt Bai published a comprehensive look at the breakdown of the negotiations over extending the debt ceiling in July 2011. Congressional negotiations over debt have no direct application to negotiating class action settlements, but there are still a few lessons we can take from the article when handling any kind of complex negotiation.  Here's five:

1. In-person meetings can go a long way toward starting off negotiations. I've written before on why beginning negotiations in writing (something lawyers love to do) can be a risky strategy. But Bai's account shows how something as simple as a golf game may help break an impasse.

[President] Obama and [Speaker] Boehner had themselves started meeting furtively in the White House, in secret negotiating sessions that grew out of a much-discussed golf outing in June. Over a few drinks at the clubhouse at Andrews Air Force Base, Boehner suggested they might be able to use the impending debt crisis to achieve something ambitious and significant — not just the kind of cuts that [House Majority Leader Eric] Cantor and [Vice President] Biden were discussing, but fundamental reforms to entitlement programs and the tax code too, a sweeping modernization of the federal budget. The president agreed that they should try to get something started ...

(Emphasis added.)  Particularly when a deal may be necessary, but the parties have been locked in accusation and recrimination, meeting in person can help refocus everyone on mutual interests instead of sticking points.  You have to be a real jerk to avoid small talk and pleasantries in a situation like that; and it's surprising how far those can go toward building just a little but of necessary goodwill. 

2. Confirm all major developments in writing. According to Bai, these negotiations started with drinks at a golf course clubhouse. But they began in earnest after Obama negotiators Jack Lew and Rob Nabors confirmed this conversation in an email.

In this case, Obama’s principal negotiators — Jack Lew, then his budget director, and Rob Nabors, his top aide on legislation — sent a proposal to Boehner’s team that included $1.5 trillion in new revenue over 10 years. The White House negotiators knew this had about as much chance of happening as a meteorite falling on the Capitol, but the real question was whether Boehner was willing to go some distance toward meeting them on the revenue side of the ledger, or whether he would stick to Cantor’s hard line against any form of new taxes.

(Emphasis added.)  Negotiation theorists talk about "creating value" and "getting to yes," but we all often overlook the basic mechanics of a complex negotiation: it involves exchanging complex proposals, which is best done through writing.

3. Sometimes the hardest negotiators are your allies.  Bai's account makes much of "cryptic" early emails and "furtive" or "secret" meetings. Why? Because Speaker Boehner's political allies were not necessarily fans of the deal he was trying to put together.

Meanwhile, political pressure was building from inside Boehner’s leadership circle. Cantor, who had heard about the Obama- Boehner talks only when Biden happened to mention it, was nonplused at having been excluded and appalled that Boehner was offering more revenue. He and others pressed the speaker to drop the idea of a comprehensive deal …

(Emphasis added.)  The Republicans were not the only ones who opposed aspects of the deal. Bai also mentions that some provisions "unsettled the stomachs of some White House aides." Even the much vaunted "Gang of Six" apparently had difficulty from its more polarized members. And, much like competing plaintiffs' lawyers, the Gang of Six wound up undercutting the deal between the White House and the Speaker's office.

4. The negotiator matters.

Like in class action litigation, politics involves large teams of people who take on different tasks. Often, that means that certain members of a team earn reputations with the other side. The simplistic account of the debt negotiations (which Bai indulges at times) is that Republicans would not make a deal because they could not stand the President personally. What's more interesting is that, at least at one point, continuing the negotiations required one side changing its negotiators.

[I]t wasn’t Obama but rather one of his chief aides who Boehner had decided was the problem. For weeks leading up to the breakdown in talks, Boehner and his top lieutenants — Barry Jackson, his chief of staff, and Brett Loper, his policy aide — had been talking principally to Jack Lew and Rob Nabors at the White House. But they had become exasperated with Lew, who, in their view, talked a lot but offered few concessions. Lew, whose detailed knowledge of the budget outpaced anyone else’s in the room, always seemed to have a better idea than whatever Boehner was proposing, and these ideas seemed to Boehner like more complicated ways of describing positions they had already rejected. The problem with Lew, Boehner bluntly told the president when he called, is that he just didn’t know how to get to “yes.”
Boehner thought he had a better shot with Bill Daley, the president’s chief of staff, and Timothy Geithner, the Treasury secretary. Daley had made a point of reaching out to Boehner since joining the administration, and he was known to be a pragmatist and a dealmaker. Geithner, clearly rattled by the possibility that Treasury might default on its debt, had been issuing almost daily warnings to Congressional leaders about the mounting fear in the markets. Send me Daley and Geithner, Boehner told the president, and let’s see what we can do.

(Emphasis added.)  Similarly, Cantor's presence in a later meeting wound up undermining a later negotiating session when he directly contradicted Speaker Boehner in front of the President, clearly signaling that the Speaker might not be able to sell any deal to his party.

5. At the end of the day, the negotiations don't matter if they don't close. Like in evidence, what gets said in the negotiation often stays in the negotiation. The President and the Speaker exchanged a number of proposals; they came close to agreement on a number of broad strokes that might have broken the deadlock both sides were fighting. But once the negotiations broke down, the previous concessions didn't matter at all. Part of this is because once the negotiations break down, parties tend to revert to their more adversarial stances. (In litigation, this is an ethical necessity for a zealous advocate; in politics, it's a practical one.) And part of this is because incomplete negotiations may damage the negotiators.

Now, with another debt battle looming, the chance of resurrecting some kind of grand bargain doesn’t seem very promising. Obama and Boehner have spoken only a handful of times. The administration’s most driven dealmaker, Bill Daley, never recovered from the episode, which poisoned his relationship with Harry Reid, who blamed Daley for having kept him and other Senate leaders in the dark as the negotiations unfolded. Daley resigned in January and was replaced by Jack Lew — the guy whom Boehner and his aides tried to sideline.

In other words, it's important in the negotiation to act as honorably as you can, so that if it falls through, you can preserve your credibility--with your colleagues, with your client, and with the other side.  It's equally important because you don't know who you may face across the table next time.

Of course, all of these takeaways depend, in part, on how much one believes Bai's account as opposed to the competing stories from President Obama, Speaker Boehner, and various other news outlets. But partisan allegiances aside, many of these maneuvers ring true to those of us who have had to negotiate complex business deals or litigation settlements. Bai laments the political culture that makes this kind of negotiation so difficult. But the same problem frequently arises in other negotiations (like class actions) where parties find themselves pivoting from heated adversarial rhetoric to attempting to compromise.

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 Lawyers like text. We trust it. Whenever possible, we send emails and letters confirming agreements (or even disagreements) with the other side. And there are good reasons to favor the written word when negotiating, such as the fact that it favors deliberation rather than fast-talking.

But sometimes, text can put us at a disadvantage. As Professor Carrie Sperling argues in her article Priming Legal Negotiations Through Written Demands, demand letters--which often open any negotiation of legal dispute (and are sometimes legally required)--can actually provoke behavior that would undermine any negotiation. The difficulty arises from a phenomenon known as priming, the tendency of people to human beings are susceptible to being placed in various emotional states simply by exposure to words that reflect those states.

When a person's recent perceptions incidentally and unknowingly influence his behavior, his behavior has been "primed." For instance, when people play a word game that contains terms "relevant to the elderly," like grey, old, wrinkle, and Florida, they walk more slowly after finishing the word game than people who played a word game with "age non-specific words" like birds, tree, and book. Unbeknownst to the players with the first set of words, they were primed to conjure the "elderly" stereotype. By unconsciously priming this stereotype, the players behaved more like their perception of the stereotype, that is, they walked more slowly.

(Emphasis added.)  Why should lawyers care about this? Well, as Professor Sperling points out,

Although few studies have attempted to link the effects of priming to legal negotiations, a couple of studies are of particular importance to lawyers crafting initial demands. An early study in priming demonstrated that exposing participants to competitive words, even subliminally, led participants to play a Prisoner's Dilemma Game more competitively. The prime had particularly strong effects on participants already predisposed to competitive behavior. Therefore, demand letters delivered in a framework of competition with competitive terms may likely cause already competitive lawyers to intensify their aggressive behaviors.

(Emphasis added.)  Similarly, studies of students who have been primed with words that might encourage cooperation before negotiating a used-car purchase have resulted in the students' reaching agreement faster, and report more satisfaction with the outcome of the negotiation.

As Professor Sperling observes (and at least my experience would corroborate), many lawyers frame their demand letters by putting out a strong version of their case. For most of us, that tactic may very well prime a competitive response rather than one that seeks to reach an agreement.

Defense counsel in class actions often face two different kinds of cases. In one, the plaintiff files a class action that is clearly meritless, even if the plaintiff hasn't realized it yet. In these cases, priming may not matter that much. But in the other kind of case, a consumer may stumble across a widespread problem that the defendant has been looking to correct. In these cases, it may actually make sense to make a more conciliatory approach, one that would prime cooperation rather than competitive behavior.

But wouldn't that conciliatory approach signal there's something to the plaintiff's case? A fair question, and it would be interesting to see some studies devoted specifically to this issue. In the meantime, however, it makes sense for defense lawyers to consider the possibility that--in certain cases--being less aggressive at the beginning of the case may actually reduce the costs of litigation long-term.

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 In honor of an approaching book deadline, I'm introducing a new feature. Most Wednesdays, there will be a brief piece here on negotiation strategy, pulled from a case study or scholarly literature on negotiations. (Negotiation is an important part of a class action lawyer's life, particularly because so many cases end in settlement.) This will likely continue until the book itself is out sometime in early 2013.

So, today's question: Why do so many lawyers make arguments during settlement negotiations, if the real goal is to reach some kind of an agreement? They can't possibly think they're going to persuade the other side, can they?

This is the question Robert Condlin asks in an old Maryland Law Review article: "Cases on Both Sides": Patterns of Argument in Legal Dispute Negotiation, 44 Md. L. Rev. 65 (1985). Condlin's thesis is that when it comes to negotiation, lawyers are terrible arguers:

Negotiation argument is seen as more simplistic, chaotic, predictable, and illogical than is generally believed to be the case, partaking more of stylized dance or game-playing than of political discourse or analytical investigation. These qualities suggest that it is discounted in negotiation because it ought to be.

As Condlin observes after reviewing several transcripts of a negotiation exercise, the law students engaging in the exercise offer "little more than unsupported, self-serving conclusions." Condlin doesn't have a great explanation for this phenomenon. He blames legal education in part, since in 1985, law school focused almost entirely on doctrinal analysis. However, 28 years later, most law schools offer at least some practical courses, including courses in negotiation. (The most famous at this point is Harvard's Program on Negotiation.) And yet, most lawyers engage in the same patterns of argument as they did then.

So we could blame law schools for teaching poorly, or we could look to see whether there's some use to the shallower legal arguments used in negotiation.

And there is. Condlin himself, while he doesn't focus on it, provides two telling pieces of evidence. The first comes from one of the exercise transcripts, where a law student roleplaying a Legal Aid lawyer says:

Let me just ask you one question. How much is it worth to you to litigate this question, to determine once and for all, to get a judicial determination as to whether this regulation creates a legally protected expectation not to be transferred absent, according to Meachum, serious misconduct or other occurrences? I mean, I think you will recognize that this regulation was only promulgated to get around the whole reclassification hearing requirement, the ICC [Institutional Classification Committee] reclassification hearing requirement. This is a blatant attempt to try to circumvent that. There hasn't been any judicial determination. The Legal Aid Society would just love nothing better than a case like this, which involves the transfer from a minimum security to a maximum security, and most importantly in our case, the fact that our prisoner, our client, was not given any medical treatment for his heroin addiction in a maximum security prison. I think that the Society would like nothing better than to have a case as egregious as that to test this regulation.

(Emphases added.) The other comes from the transcript of a negotiation training video, where the lawyer says:

I'm always agreeable to resolving cases at an early stage. There really is only one issue though and that is how much your client wants to pay my client before we get this matter into court. This is the type of case, Mr. Harris, that I like to try and I want to try. I think you know why. When you have someone ripping off the public as your client has been doing and I'll have no difficulty establishing fraud in this case. I've got a client who is an indigent gal, whose husband is an invalid. First of all, I can't understand why you even sued her. You're not going to collect any money anyway and you know that. And the counterclaim is as valid a counterclaim as I've ever filed, and you know I've been successful in the past and I'll be successful in the future. And as emotional as this case is, where you knock a gal out of her job because of selling her a car which is defective. I'm absolutely convinced we're going to prevail and we're going to get a substantial judgment of compensatory damages.

(Emphasis added.) These both provide, in the course of their bluster, a primary reason lawyers may argue (and do so shallowly) during negotiations. They're previewing the arguments they'll make during any substantive motions or trial. Since most class-action negotiations take place against the not-so-implicit threat of bet-the-company litigation, providing a preview of one's best arguments may in fact make for compelling leverage in negotiation.

So why not make the arguments better? Why are they so often off-the-cuff instead of carefully researched for maximum effect? Most lawyers are loath to give away their best arguments, even if that fear is largely groundless.

What can defense lawyers take from this? First, it pays to have some sense of your argument before going into negotiation. But more importantly, negotiations can be an important tool for seeing just what plaintiffs think they have as a case.

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Negotiation consultants David Lax and James Sibelius, authors of the excellent book 3D Negotiation, have a new working paper out on what they call the "Negotiation Campaign." In it, they argue that the most successful negotiators do not consider their jobs to involve a single, big negotiation. Instead, they are engaged in a sequence of negotiations--some internal, some external--that ideally will bring about the desired big deal.

[C]onsider Boeing’s $11 billion sale of 787 Dreamliners and other planes to Air India in late 2005. A naïve understanding of this transaction might envision two monolithic entities, Boeing and Air India, hammering out the terms, overcoming a price gap and cross-cultural differences. Yet the messy reality leading to that ultimate target deal involved an extended negotiation campaign: literally dozens of individual but linked negotiations, orchestrated on several fronts, involving an array of parties over time and across borders. Negotiations on internal corporate fronts garnered support and approval from the engineering, operations, finance, and marketing divisions, as well as top executives and boards of directors. Negotiations on the external financial front involved banks, export promotion agencies, and leasing companies. And given the Indian state’s ownership stake in the airline, negotiations on the political/national front concluded with Boeing agreeing to partner with Indian manufacturers to supply a certain amount of domestic content and to create local maintenance and pilot training organizations. Successfully orchestrating these component negotiations on multiple fronts finally generated sufficient support for the record-breaking target contract.

(Emphases in original.)

This provides a useful way of looking at class-action practice. The applications for plaintiffs' counsel are obvious: they frequently sue more than one defendant, and often have to consider each defendant's general counsel's office, board of directors, and insurance companies in offering any kind of settlement package. But there are applications for defense counsel as well, because defense counsel often have to negotiate on multiple fronts.

• They must negotiate on an internal front with their clients, finding out what their strategy is, and in turn letting them know what is and is not possible. And, of course, clients are not always monolithic. There may be competing factions within a GC's office, or the GC may need to convince the CEO or other executives of the importance of various strategies.
• * Defense counsel often also has to negotiate on a regulatory front, where compromises made with attorneys general or other administrators can have consequences in later negotiations. (I've talked before about the ways in which regulatory compliance and class-action defense overlap.)
• * And, of course, defense counsel must negotiate on a litigation front with plaintiffs', often--when different counsel bring competing or overlapping lawsuits--more than one.

Or, as Lax & Sibelius put it:

While doing one deal well requires a certain set of skills, designing and executing a broader negotiation campaign calls for a more strategic approach: artfully putting a number of deals together, often on multiple fronts, to realize a larger result, typically an ultimate target agreement with sufficient support in the right quarters to make it stick. In other cases, negotiation campaigns aim to block undesirable outcomes or shore up negotiating weakness at the target table.

(Emphases in original.)

This consideration of negotiation as a campaign instead of individual engagements is not revolutionary. It's just grand strategy by another name, something the best class-action lawyers have long had to master. But Lax and Sibelius don't have to be revolutionary, they just have to be very good at explaining what they mean, and breaking it down into a series of usable steps. And that they do, quite well.

Go, read. I promise it's worth it.

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 I've spent a lot of time over the last two years poking (as best I can) into the head of the entrepreneurial plaintiff's lawyer. That is, the plaintiff's lawyer that treats her lawsuits like business opportunities, keeping a diversified portfolio and working to maximize the profit from each opportunity. But there is another kind of lawyer that brings class actions, one often referred to as the "cause lawyer." Rather than working for profit, this group is motivated by a desire for social change. Cause lawyers are rarer in class action practice, but they're not nonexistent. So, how does the class action defendant deal with a cause lawyer?

Colorado professor Deborah Cantrell has a new article Lawyers, Loyalty and Social Change (Oxford comma omitted in original), which tackles just that question.

According to Professor Cantrell, one can distinguish cause lawyers by their incentives. Cause lawyers are (clearly) not motivated by the money. Instead, they tend to be motivated by the advancement of a single social cause. As Professor Cantrell puts it, it is the

common feature of social change advocacy – that participants, including cause lawyers, identify strongly with their side of the issue and distrust with a similar intensity participants on the other side. In fact, this Article argues that such hyper-loyalty is considered a core condition and baseline requirement of the relationship between cause lawyer and cause client.

(Emphasis added). It is this "hyper-loyalty" that defines the cause lawyer:

In contrast to much for-profit lawyering, cause lawyering brings with it robust notions of solidarity between client and lawyer. The proposition is that there is more solidarity between the cause lawyer and client because both of them understand their work together to be situated within a larger interest in social change. … Independent of their legal relationship, the lawyer and client are loyal to each other because of their shared commitment to their cause (whatever it may be). Their “cause loyalty” is stronger than the typical professional loyalty between lawyer and client. It is hyper- loyalty.

(Emphasis added.) Cantrell traces that hyper-loyalty to a few causes. Since many cause lawyers appear to come from "elite" backgrounds (law school costs a lot of money, and cause lawyering may require some independent income since it pays much less than other legal work), hyper-loyalty may be a compensatory mechanism to assure poorer clients that the lawyer is truly on their side.

Moreover, this hyper-loyalty may also stem from cause lawyers' tendency to the see world as bipolar, divided into a clear "us" and "them."

Additionally, a constitutive part of social change, or cause, work is that cause advocates are pushing against the status quo. In order to mobilize a collective for action, there must be some sense that there is a group pushing for change and a group content with the status quo – in other words, some sense of “us” and “them."

(Emphasis added.) Most lawyers wind up buying into their clients' mindsets to some degree. (It can be hard not to.) But many for-profit lawyers can distance themselves from their clients by noting that every client its day in court, regardless of its views. Cause lawyers, by contrast, may hold a sincere and deep belief that their clients are in the right--why else would the lawyer represent them? In fact, Cantrell notes, some cause lawyers (or cause clients) may have deep suspicion of outside sources of funding, since they may threaten to change a cause into an "industry."

Cantrell identifies two problems with the cause lawyer's hyper-loyalty. First, if the lawyer is hyper-loyal to the cause, she may wind up selling out her individual client:

the worry is that cause lawyers will understand their true loyalty to be to the cause, and thus view their clients as one of several pieces of an advocacy strategy to be deployed. Clients become pawns, not empowered individuals.

On the other hand, if the lawyer is hyper-loyal to the client, not the cause, then she risks a polarized view of the world, in which others are either "friends" or "enemies," with little middle ground, and little room to negotiate. In that case, a cause lawyer may take actions that benefit her individual client, but sacrifice the actual cause. (And, in class action, the cause is likely to include the absent class members.)

So, how does the class-action defense lawyer deal with cause lawyers? Professor Cantrell's analysis suggests a few tactics to keep in mind:

• Focus on non-monetary compensation when negotiating. Courts are often suspicious of non-monetary compensation in class actions. But if one is negotiating with a cause lawyer, actual changes in behavior may be the real relief her client (and the class) seeks. These changes will have to be genuine, of course. Given the tendency for cause lawyers to view "enemies" with heightened suspicion, they're unlikely to be satisfied with lip service, and they have little monetary incentive to accept minor changes so long as there are large fees.
• Focus on the adequacy of the class representative. Given the risk that the lawyer and the client may be too loyal to each other (resulting in, say, demands for outsized incentive payments), it is doubly important that someone--most often the court--is paying attention to the needs of the absent class members.
• Focus on the adequacy of class counsel. If the lawyer is hyper-loyal to the cause, then she may make some moves that show an insufficient regard for her fiduciary duty to either the named plaintiff or to the absent class members (to the extent that they are just another means to support the cause). In those cases, the defense will want to make sure that the Court is paying attention to the needs of the class, as opposed to the lawyer.

It remains a central irony of class action practice that, regardless of whether the plaintiff's lawyer is motivated by money or loyalty to a larger cause, her incentives are not going to line up with her client's much of the time. As a result, it remains the case that the strongest class-action defenses often focus on what is best for the absent class members.

UPDATE - Russell Jackson of Consumer Class Actions & Mass Torts has some additional, less cynical, and of course, well-taken advice on how to deal with cause lawyers (or, as he likes to call them, "true believers").  If you've popped over here from there, welcome!  If not, do check out his take as well. 

(He's also, finally, picked himself up a Twitter feed ...)

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 Today's classic opinion comes from a time that may seem foreign to most modern class-action practitioners. Not only is it pre-Dukes, it is pre-Amchem. And yet it's likely one of the most influential class-action opinions of the last twenty years. In re GM Pick-Up Truck Fuel Tank Products Liability Litigation (3d Cir. 1995) involved an alleged design defect in GM pick-up trucks over a fifteen-year period. The plaintiffs had alleged that GM's side-mounted fuel tanks were likely to catch fire during side-impact accidents.

So far, this sounds like many other hard-fought products-liabilty class actions. But, in this case, GM chose not to fight. Instead, after only four months of consolidated litigation, GM settled with the plaintiffs' lawyers, and agreed to a certified class for settlement purposes only.

The settlement drew out a number of objections, but the trial court approved the classwide settlement anyway. Notably, once it had found the settlement to be fair, reasonable, and adequate, it did not bother to actually conduct a Rule 23 inquiry. Instead, it just certified the class.

So the objectors appealed. And the Third Circuit agreed with them. Its largest central holding (one accepted enough that it is not often debated today) was that a settlement class must still meet the requirements of Rule 23. But, more importantly for today's litigators, it also concluded

that the settlement is not fair and adequate; more precisely, we hold that the district court abused its discretion in determining that it was, primarily because the district court erred in accepting plaintiffs' unreasonably high estimate of the settlement's worth, in over-estimating the risk of maintaining class status and of establishing liability and damages, and in misinterpreting the reaction of the class

The court also identified a particular danger of settlement-only classes, that does not exist (or at least not to the same extent) for litigation classes.

Despite the potential benefits of class actions, there remains an overarching concern-that absentees' interests are being resolved and quite possibly bound by the operation of res judicata even though most of the plaintiffs are not the real parties to the suit. The protection of the absentees' due process rights depends in part on the extent the named plaintiffs are adequately interested to monitor the attorneys (who are, of course, presumed motivated to achieve maximum results by the prospect of substantial fees), and also on the extent that the class representatives have interests that are sufficiently aligned with the absentees to assure that the monitoring serves the interests of the class as a whole. In addition, the court plays the important role of protector of the absentees' interests, in a sort of fiduciary capacity, by approving appropriate representative plaintiffs and class counsel.

And this, the court held, was why adequacy was so important in settlement-only classes.

Without determining that the class actually was adequately represented, the district judge has no real basis for assuming that the negotiations satisfactorily vindicated the interests of all the absentees. The focus on the negotiation process also cannot address the part of the adequacy of representation inquiry intended to detect situations where the named plaintiffs are unsuitable representatives of the absentees' claims. To state that class members were united in the interest of maximizing over-all recovery begs the question. Although that observation might allay some concern about a conflict between the attorney and the class, a judge must focus on the settlement's distribution terms (or those sought) to detect situations where some class members' interests diverge from those of others in the class. For example, a settlement that offers considerably more value to one class of plaintiffs than to another may be trading the claims of the latter group away in order to enrich the former group.

(Emphasis added.) The court in this case found that the class had not been adequately represented, and that the settlement was not fair, reasonable, or adequate. In deciding that the settlement was not appropriate, the court specifically found that :

1. The parties had overstated the likelihood the plaintiffs would lose at a contested certification hearing.
2. The parties had overstated the value of the settlement to the class.
3. The silence of absent class members did not mean consent.
4. The difference in treatment between fleet owners and individual truck owners suggested that the settlement was not fair.
5. The court had not made an adequate finding that counsel's fees were appropriate.

There are three reasons In re GM Pickup is a classic case. One, it's one of the first cases to deal with the problem of the settlement-only class, and as a result, it has been heavily cited since. Two, it's a comprehensive look at the issues involved in class-action settlements. (And it was recognized so at the time. How often do you see a concurrence that calls the main opinion "a truly masterful opinion" and a "a most thorough and scholarly analysis"?) Three, take another look at that list of findings. Each of those is a problem that recurs in class actions, frequently.  In re GM Pick-Ups was a historic opinion. And those who do not learn from history are doomed to repeat it.

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 While it remains popular among settling lawyers and courts, the doctrine of cy pres in class actions (where defendants wind up paying charities with an ostensible link to the gravamen of a lawsuit) has been garnering criticism for some time. A few federal district courts (including the Southern District of New York and the District of New Hampshire) have questioned the application of cy pres in specific cases. Last year, Professor Martin Redish published an article questioning whether cy pres relief violates the Rules Enabling Act. After that, John Beisner and Jessica Miller of Skadden Arps published a working paper through the Chamber of Commerce expanding on the critique. And the press has begun to pay attention as well.

Now, a federal appellate court (the Court of Appeals for the Fifth Circuit) has weighed in as well, in Klier v. Elf Atochem, Inc.  Alison Frankel provided excellent immediate coverage of the opinion here, but Judge Higginbotham's opinion (coupled with Judge Jones's concurrence) does far more than just call the doctrine of cy pres into question.

Before we get into what else it did, a quick recap of the background. The defendant, Elf Atochem (now Arkema, Inc.), had previously settled a class action in Texas state court that had accused one of its agrochemical plants of contaminating the local environment with arsenic and other toxic chemicals. The class action ultimately settled for $41.4 million, which was supposed to be distributed among three subclasses:

• Subclass A included class members who had suffered actual physical injuries (primarily cancer, stillborn pregnancies, or other birth defects).
• Subclass B included class members who had been exposed to chemicals, and wanted medical monitoring.
• Subclass C included class members who had suffered damage to their property.

The settlement agreement did not include a provision for a cy pres distribution, or for reversion of unspent funds to the defendant. It was approved, and the settlement funds were paid out to the various subclasses according to the agreements' terms. (As one might expect, this meant that Subclass A members did not receive what they considered full compensation for their injuries.) After the funds were paid out, the claims administrator reported that $830,000 remained unspent from Category B. As the Fifth Circuit described what happened next:

Taking an inexplicably narrow view of their duty to the class, class counsel did not respond.

Arkema, however, did, suggesting the remainder could be donated to a scholarship fund and two local museums. One of the Subclass A members (Ralph Klier) objected, arguing that the funds would be better spent on the injured who had only been partially compensated. The court disagreed, and designated the charities, as well as a local genealogy and history library.

Klier appealed, and the Fifth Circuit agreed with his arguments. As Judge Higginbotham's opinion put it:

Because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible "only when it is not feasible to make further distributions to class members." Where it is still logistically feasible and economically viable to make additional pro rata distributions to class members, the district court should do so, except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.

(Internal footnotes omitted.)  The opinion would be notable for this discussion of cy pres alone. But, as it turns out, it went far further. What else did it do?

It provided a gimlet-eyed statement of the benefits defendants get out of class actions. Judge Higginbotham began his opinion with a description of the settlement from the defendant's point of view.

The defendant paid substantial sums for res judicata protection from the claims of persons assertedly injured by the toxic emissions of an industrial plant near Bryan, Texas.

Defendants may settle cases for other reasons: it may be cheaper to settle than to continue to litigate, for example. Or the specter of classwide liability may provide the proverbial "hydraulic pressure" to settle. But the primary benefit the defendant receives is, in fact, preclusion of any further claims.

It renders a stark critique of medical monitoring. One question lurks behind the issue that prompted the appeal: why were there extra funds in the medical monitoring subclass? The opinion does not shy from the answer:

First, the initial participation rate was low. Some 329 members of Subclass B—less than three percent of the total subclass membership—opted to receive medical monitoring in lieu of a cash payment; just 221 attended their first monitoring examination.

In fact, the opinion's description of medical monitoring is even more damning, noting that most of those 221 members eventually dropped out of the program as well. Plaintiffs often proffer medical monitoring as a means of helping class members, but few scholars or pundits have followed up on whether medical monitoring programs actually work. Assuming this was a typical medical monitoring program (and we have no reason to assume it wasn't), it would appear that the benefits of medical monitoring programs are overhyped.

It makes a strong case for reverter settlements. Judge Jones wrote separately, primarily to suggest that if the settlement agreement had not waived the defendant's right to a refund of unspent funds, then it could have simply collected them. According to Judge Jones, reverter settlements are superior to cy pres settlements because they are not subject to the same abuse as cy pres. (And she spends some time, relying in no small part on Professor Redish, detailing that abuse.) As Judge Jones points out, a reverter settlement does a better of job of actually determining the value of the benefits to the class. If funds revert to the defendant, that's an indication that the class was not harmed as much as the parties thought at first. (Judge Jones describes this in contract terms, as a "mutual mistake.")

These critiques are not likely to be popular. Many defendants have a vested interest in cy pres awards, because they allow them to settle cases quickly with a minimum of fuss. But in the long term, making sure settlements reflect the actual benefits to class members serves defendants' interests. If it turns out that the techniques lawyers use to inflate settlement value--such as cy pres and medical monitoring--do not pass muster with courts, then perhaps plaintiffs' lawyers will file fewer cases that require these kinds of inflation.

(Hat tip to Alison Frankel of Reuters, who first reported on this case when it came out.)

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It's no secret that most class action plaintiffs and defendants usually view each other with great suspicion from across a great divide. (I can't say all; I have a few good friends among the plaintiffs' bar, and I think quite highly of several plaintiffs' lawyers regardless of any substantive disagreements.) What may be surprising, though, is research that shows that this mutual distrust not just a paycheck-induced mental state, but a smart choice for both clients and the lawyers themselves.

At least, that's what a recent set of experiments conducted by several business professors suggests. Authored by Professors Sandy Jap, Diana Robertson, and Ryan Hamilton (this one, not this one), The Dark Side of Rapport describes two possible pitfalls for lawyers who develop rapport with the opposing side.

First, lawyers who develop rapport may be more likely to compromise their clients' interests. This is not necessarily all that surprising. Depending on the client, the lawyers may have longer-term relationships with each other. And a lawyer may justify compromising his client's interest in all kinds of ways, such as telling himself that the long-term relationship with opposing counsel will benefit future clients, or that the compromise is the only way to get the client at least some of what she wants.

Second, lawyers who develop rapport with each other may be more likely to deceive each other. At first glance, this may seem counterintuitive. If you have a rapport with someone, aren't you more likely to try to keep their trust?  Aren't we more inclined to deceive the jerk than the guy with whom we can see eye-to-eye? As it turns out, negotiators will often hide or downplay bad news in order to maintain the rapport that they have.

How did he researchers discover these issues? The experiments were built around a negotiation exercise known as the Bullard Houses case. Bullard Houses is designed for negotiation training. It pits a property seller (who absolutely does not want the property used for commercial purposes) against a hotel developer (who is trying to keep a low profile about its preferred locations). So Bullard Houses is designed to create an impasse; unless, of course, someone either lies or compromises her client's interests. The authors tweaked the conditions of the exercise in various ways to encourage rapport. (Specifically, they encouraged one group to negotiate face to face instead of by instant-messaging; they had another group engage in team-building exercises; and they "primed" a third group by having them think happy thoughts.) They then looked at how many members of each group resolved the impasse in some way. In general, conditions that encouraged rapport encouraged resolution. (The researchers also tried to prime one group with reminders about duty, ethics, and reputation. It didn't help.)

So what does this suggest for class action lawyers? The primary lesson may be to maintain a cordial distance from the other side. There's no reason to unnecessarily provoke opposing counsel, but a conscientious lawyer may remember not to get too chummy, either.

Another implication--peculiar to class actions--is that courts (and defense counsel) may need to be careful of rapport between plaintiffs' attorneys and clients. After all, rapport works both ways. And there is already some evidence that, where possible, class-action attorneys select plaintiffs that are easier to manipulate.  In a legal sense, the client's job is to represent the interests of the proposed class. But if the client is more interested in maintaining a rapport with her attorney (either because of the emotional satisfaction, or because that may be the best way to get the attorney to fight for an incentive payment), then the plaintiff may have a strong incentive to compromise the interests of class members she has never met for the interests of the attorney with whom she works.

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Mass torts have long been a problem for the American judicial system. Today, it's Vioxx, the BP oil spill, and Chinese drywall. Fifteen years ago, it was asbestos, Agent Orange, and silicone gel breast implants. Back in the 1980s and 1990s, when mass torts first threatened to overwhelm crowded dockets in various jurisdictions, the courts carefully considered whether to use class actions as a means of resolving thousands of similar tort claims.

And, at that time, Columbia University law professor (and recent Daily Show guest) John Coffee wrote an in-depth examination of the various problems and conflicts of interest that arose when courts tried to use Rule 23 to solve the mass tort problem: Class Wars: The Dilemma of the Mass Tort Class Action.

Professor Coffee began by providing an excellent working definition of a mass tort:

Mass tort litigation is characterized by several unique features: (1) a predictable evolutionary cycle during which the value and volume of individual claims starts low and then spirals upward; (2) high case interdependency so that litigated outcomes in any mass tort area quickly impact on the settlement value of other pending cases in that same field; (3) a highly concentrated plaintiffs' bar, in which individual practitioners control exceptionally large inventories of cases, sometimes totaling in the tens of thousands; and (4) a capacity to place logistical pressure on individual courts that is simply unequalled by any other form of civil litigation.

Over time, courts have progressively held that mass torts are not well-suited for class-action treatment, particularly not in the form of "settlement classes" (that is, class actions filed specifically to enforce a pre-existing settlement agreement between plaintiffs and defendants). And Professor Coffee spends much of the article discussing the difficulties that arise from doing so. The portions of his discussion that remain most relevant have to do with the conflicts of interest that arise from aggregated settlements.

On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs. Not only have the interests of these subclasses clearly conflicted, but the class counsel has explicitly traded off the interests of subclasses against each other, obtaining substantial compensation for one subclass in return for a waiver of cash compensation by anoth- er. In such multiparty negotiations between the defendants and different subclasses of plaintiffs, even the well-meaning plaintiffs' attorney shifts inevitably from the role of an advocate and adviser for clients to the role of a philosopher king, dispensing largess among his client subjects.

While the specific cases may have changed, the fundamental dilemma remains the same, however, whether it is a class action or just a series of consolidated tort cases. Any resolution of mass torts has to accommodate (1) the plaintiffs' desire for redress of some kind, (2) the defendant's desire for global peace, and (3) the plaintiffs' attorneys' desire for fees.

And Professor Coffee discusses a number of issues that still resonate. While the explicit development of "settlement classes" has waned, defendants will still take advantage of filed class actions to try to achieve releases of larger issues through a classwide settlement. And Coffee's descriptions of inventory settlements and settling future claims are both still relevant today.

So what can modern defendants take from this article? The most useful portions have to do with objection-proofing possible settlements:

• Negotiate down attorneys' fees. It makes sense to negotiate on fees more closely than defendants have done in the past. While it doesn't matter as much to the defendant who gets paid (from a fiscal, not emotional, standpoint), courts care. And courts are beginning to eye "clear-sailing" and quick-pay provisions with greater suspicion.
• Try to give the class some cash benefit. Courts have long been suspicious of non-monetary benefits. And they're expressing their concerns more openly.
• Make sure subgroups are separately represented. In a discussion that seems especially prescient today, Professor Coffee notes that "On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs." A defendant interested in a global settlement of certain complaints could do worse than to insist that subclasses receive separate counsel. (Among other advantages, counsel who are both zealous and ethical can help the defendant reduce payments for true nuisance claims.)

Be advised, the advice to be gleaned from Professor Coffee's article, particularly in light of current settlement case law, doesn't make for easy or cheap class settlements. But as I've said for some time now, for defendants, settling on the cheap can get really expensive.

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[Note: Many thanks to the folks at the WLF Legal Pulse for asking me to write this entry. It's cross-posted there.]

Given the stakes of class actions, which transform small-dollar claims into bet-the-company litigation, settlements are hardly unusual. And given the minuscule recoveries most class members receive compared to their lawyers' multi-million paydays, neither are objections to those settlements. What is unusual is for a court to reject a settlement because of these objections. And what’s even more unusual is for the court to put a small doctrinal booby trap into its rejection. But last week, the Second Circuit did just that.

The class action in question, In re Literary Works in Electronic Databases Copyright Litigation, involved a copyright challenge. The plaintiffs were freelance authors; the defendants were large publishers with electronic databases. The plaintiffs accused the defendants of "publishing" their articles in various electronic databases (like LEXIS/NEXIS) without their permission and without paying them. Back in 2001, the Supreme Court endorsed their theory in a parallel case, N.Y. Times Co. v. Tasini.

In the years since, the plaintiffs' claims were consolidated before the Southern District of New York, and underwent extensive mediation in front of mediation guru Kenneth Feinberg. By 2005, the parties had reached a classwide settlement that the district court approved. The settlement compensated three different categories of class members:

• Category A included works registered with the US Copyright Office in time to be eligible for statutory damages under the Copyright Act.
• Category B included works registered with the Copyright Office by 2002, but not in time to qualify for statutory damages.
• Category C--which comprised more than 99% of the claims--included later- and unregistered works.

Many authors held claims that fell into more than one category. As structured, the settlement would pay (on average) around $1,000 for each Category A claim, $150 for each Category B claim, and $60 for each Category C claim. The settlement was capped at $18 million. If the freelancers submitted more than $18 million in claims, a provision known as the "C reduction" kicked in. The "C reduction" did just what it said on the label; it reduced the payments to Category C claimants until the $18 million cap was reached. If it exhausted the C claims, it reduced A and B claims on a pro rata basis.

The settlement drew a number of objections, primarily from authors in Category C. By the time they appealed the order approving settlement, the objectors had identified three major problems: (1) the release was too broad (it released all future claims, which gave the publishers a free pass to republish any articles they had already wrongfully published); (2) the class representatives had sold out the Category C claimants with the "C reduction"; and (3) the settlement process had been unfair.

The majority (the panel split, 2-1) was unconcerned about the breadth of the release. In fact, it specifically noted that in most classwide settlements, if one did not release all future claims, the defendant had no real incentive to settle. It also found the process challenge to be moot.

But the majority was concerned with the adequacy of the class representatives under Rule 23(a)(4). One key measurement of adequacy is whether there are any conflicts of interest in the class. Here, the majority found that the "C reduction" showed that "[t]he selling out of one category of claim for another is not improbable ..." And it saw only one solution:

Only the creation of subclasses, and the advocacy of an attorney representing each subclass, can ensure that the interests of that particular subgroup are in fact adequately represented.

That's right. Each subclass would require its own independent attorney.

The rationale is simple: how can the value of any subgroup of claims be properly assessed without independent counsel pressing its most compelling case?

(Emphasis added.) But while the rationale may be simple, the execution is likely to be anything but. Class-action lawyers are a notoriously competitive lot. Many of them find it extremely difficult to work with each other, in part because they find it hard to trust each other. So finding a separate lawyer (presumably from a separate firm) for each subclass who will "press its most compelling case" will be extraordinarily difficult for them. This is good news for defendants, who often watch class actions rife with conflicts of interest get certified. Of course, class-action lawyers are also notably inventive; it will be interesting to see what they come up with to get around this requirement.

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Richard Nagareda's object in Mass Torts in a World of Settlement, his only book-length theoretical work, was to show how settlements operate in a world in which aggregated litigation is common, and trial almost unheard of.

One of Nagareda's primary observations is that settlements of mass torts are best handled by some administrative apparatus. In the meantime, the legal system is evolving to become more administrative in response to these mass torts.

Nagareda starts from the premise that mass torts deal with "generalized" wrongs. (He argues that this phenomenon arises largely from industrialization, which allows for both wide distribution of products, and large-scale accidents. In other words, mistakes are bigger in the industrialized world.) He also points out that the vast majority of tort claims are resolved by settlement rather than trial, and that the settlement agreement "describes a business transaction." That fact, the transformation of legal controversy into business transaction, explains much about how class-action and mass-tort firms operate.

So, according to Nagareda,

Mass torts accentuate the role of lawyers as agents. As in traditional tort litigation, the endgame for a mass tort dispute is not trial but settlement. But the scope of the settlement differs. Here, the most ambitious settlements seek to make and enforce a grand, all-encompassing peace in the subject area of the litigation as a whole. Lawyers, once again, act as the designers of these deals, and the strategic motivations of lawyers on both sides shape the design of the peace.

(Emphasis added.) On the plaintiff side, entrepreneurial lawyers create the connections among individual mass-tort plaintiffs. As a result, they wind up with the best information about the "price" of the legal claims each plaintiff is asserting. That price is the price the defendant pays for a release from all claims related to the subject matter of the litigation. So the business deal that these lawyers are looking to strike is cash for the plaintiffs (and their lawyers) in exchange for peace from litigation for the defendants.

These transactions take considerable resources to set up. Plaintiffs' firms have to invest considerable resources into demonstrating causation, which they generally separate into "general" and "specific" causation. General causation shows the capability for harm. (There is a link between cigarettes and lung cancer.) Specific causation shows the harm actually occurred. (These cigarettes caused this case of lung cancer.)

But developing a theory of causation--particularly general causation--takes money. Experts need to be paid. So do those people who process the discovery the plaintiffs get from defendant corporations. It also points out that it costs money to recruit clients (which helps explain the rise of plaintiff "referrer" firms).

Moreover, plaintiffs who assume control of mass-tort litigation are asserting control not just against the defendant, but also against other plaintiffs' lawyers and even--to some extent--against the courts. And, if mass torts go on long enough, the endgame for the litigation may not be settlement, but bankruptcy, another administrative-like function of the courts.

So why do plaintiff lawyers spend so much money? Because it pays, richly. As several legal scholars have revealed, the "effective hourly rate" [http://www.manhattan-institute.org/lawyer_barons/index.html] of mass-tort lawyers is usually in the tens of thousands of dollars. (More about Professor Brickman's work next month.) As a result, Nagareda observes, a law firm's investment in litigation does not necessarily track the specific substantive merits of the case. Instead it tends to track the likelihood that a specific litigation will pay off in fees.

On the defendant side, the largest influence on settlement strategy is insurance. So Nagareda spends considerable time on the role of insurance in creating mass tort settlements and, in particular, the phenomenon of "stacking insurance." Stacking insurance means buying primary insurance, then excess insurance. Insurers in turn will buy reinsurance. What all this means is that a number of entities beyond the defendant may have an interest in the final settlement. And many of them have to invest resources in monitoring the progress of the litigation. (This is not always the case. In smaller class actions or mass torts, the defendant may be effectively self-insured.)

Nagareda does address classwide settlements specifically: he considers them good enforcement mechanisms for bought peace. (This is, in fact, how Amchem and Ortiz wound up in front of the Supreme Court; each case involved a court that took legal shortcuts in order to resolve a mass tort through a classwide settlement.) The primary problem with class settlements, however, (as Judge Easterbrook once pointed out) is that there's no chance to go through the "pricing" phase. But what classwide settlements do offer is preclusive effect. If the settlement doesn't prevent further lawsuits, it's not of much value to the defendant. (And this helps to explain the rash of recent cases involving preclusion.)

In general, Nagareda's insights are useful for defense attorneys. The more a defense attorney understands the "business plan" that drives plaintiffs in aggregated litigation, the better equipped she is to defend against it.

Nagareda's book also helps to explain why attempts at true administrative settlements, such as the BP spill fund, are not more successful. The plaintiffs' trial bar has a powerful financial incentive to oppose more administrative settlement mechanisms. Those mechanism may be more efficient, and they may get more money to claimants in less time and with less conflict, but they do so at the expense of attorneys' fees.

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 There is no question that Wal-Mart Stores, Inc. v. Dukes will be the most-cited case in class-action practice for years to come. But before Dukes, Amchem Products, Inc. v. Windsor was the Supreme Court's definitive announcement of its interpretation of Rule 23 standards.

What's interesting about the case is that it involved a class-action settlement. The Windsor (before, Georgine) case was never supposed to be litigated. Instead, it was a settlement class. The proposed settlement class was a response to the asbestos litigation crisis (courts in the 1990s had been swamped by personal injury claims related to asbestosis), and was supposed to "achieve global settlement of current and future asbestos-related claims."

So, after a series of asbestos cases were consolidated, attorneys for both sides began negotiating a global settlement. As the Court described the proposed settlement document:

[I]t proposed to settle, and to preclude nearly all class members from litigating against CCR companies, all claims not filed before January 15, 1993, involving compensation for present and future asbestos-related personal injury or death.An exhaustive document exceeding 100 pages, the stipulation presents in detail an administrative mechanism and a schedule of payments to compensate class members who meet defined asbestos-exposure and medical requirements.

As one might expect, the proposed settlement drew a lot of objections from multiple sources. The objectors challenged the lack of an inflation adjustment (which meant that older claimants would be compensated less), the low compensation levels to many class members, and the inclusion of claims for medical monitoring. They also objected "strenuously" to the adequacy of the class representatives (not surprising, given the vastness of the class and the willingness to throw in just about every claim possible).

Despite the objections, the trial court approved the settlement. The Third Circuit reversed, based solely on the issue of certification. The settling parties appealed to the Supreme Court, which granted certiorari.

Given the number of issues at stake (the parties had sought certification under several provisions of Rule 23), the Court began with a number of definitive statements of class certification requirements. Among them, for Rule 23(b)(1)(A):

Rule 23(b)(1)(A) "takes in cases where the party is obliged by law to treat the members of the class alike (a utility acting toward customers; a government imposing a tax), or where the party must treat all alike as a matter of practical necessity (a riparian owner using water as against downriver owners).

And, for Rule 23(b)(3):

In the 1966 class-action amendments, Rule 23(b)(3), the category at issue here, was "the most adventuresome" innovation. Rule 23(b)(3) added to the complex-litigation arsenal class actions for damages designed to secure judgments binding all class members save those who affirmatively elected to be excluded.

(Internal citations omitted.) The Court noted that plaintiffs (and sometimes defendants) had become more inventive in their uses of the class action device over the years.

"In the decades since the 1966 revision of Rule 23, class-action practice has become ever more "adventuresome" as a means of coping with claims too numerous to secure their "just, speedy, and inexpensive determination" one by one. See Fed. Rule Civ. Proc. 1. The development reflects concerns about the efficient use of court resources and the conservation of funds to compensate claimants who do not line up early in a litigation queue."

The Court also held that settlement status was relevant to certification, but the fact that a case was settling did not mean that a court could ignore all of the Rule 23 requirements. Instead:

Confronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, see Fed. Rule Civ. Proc. 23(b)(3)(D), for the proposal is that there be no trial. But other specifications of the Rule--those designed to protect absentees by blocking unwarranted or overbroad class definitions--demand undiluted, even heightened, attention in the settlement context. Such attention is of vital importance, for a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold.

The Court then held that, in this case, the parties had been too adventuresome. On their own, the personal-injury asbestos claims required inquiries into causation for each injury that would predominate over any common issues. And, given the kitchen-sink nature of the claims the parties had included, the individual issues had only compounded. The court also found that the parties could not demonstrate adequacy. As it put it:

The adequacy inquiry under Rule 23(a)(4) serves to uncover conflicts of interest between named parties and the class they seek to represent.

In this case, ether was a clear, irreconcilable conflict between injured and exposure-only plaintiffs:

In significant respects, the interests of those within the single class are not aligned. Most saliently, for the currently injured, the critical goal is generous immediate payments. That goal tugs against the interest of exposure-only plaintiffs in ensuring an ample, inflation-protected fund for the future.

And, finally, the Court offered a suggestion that has yet to get any real traction:

The argument is sensibly made that a nationwide administrative claims processing regime would provide the most secure, fair, and efficient means of compensating victims of asbestos exposure. Congress, however, has not adopted such a solution. And Rule 23, which must be interpreted with fidelity to the Rules Enabling Act and applied with the interests of absent class members in close view, cannot carry the large load CCR, class counsel, and the District Court heaped upon it.

The proposal for an administrative solution to mass-tort claims like asbestos is an interesting one that deserves more discussion. And, in this Thursday's post, we'll look at one academic's efforts to address just that issue.

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 This month's look at "classic" class action scholarship focuses on the article Nonpecuniary Class Action Settlements by Geoffrey Miller and Lori Singer. Like the name suggests, nonpecuniary settlements are settlements that don't require cash payments to the absent class members. According to Miller and Singer, they include:

• Coupon settlements.
• Monitoring settlements, "where the defendant endows a fund whichis used to identify and compensate for future harm allegedly arising from the defendant's product or conduct"
• Securities settlements, "where the defendant distributes stocks, puts, or warrants instead of cash to membersof a class as consideration for a release of claims for alleged wrongdoing"
• Reverter fund settlements, where the defendant may keep any unclaimed funds
• Fluid recovery settlements (also known as cy pres)

(It's interesting to note that Miller and Singer do not consider forms of injunctive relief like "corporate therapeutics," injunctions where the defendant agrees to change its offending behavior. This omission is likely due to the fact that these techniques were not yet in common use in 1997.) According to Miller and Singer, their

goal is to replace some of the recent hysteria about coupon and other nonpecuniary settlements with a more balanced account that identifies the benefits, as well as the costs, of such agreements.

Non-monetary settlements are attractive to defendants because they don't have to spend as much. (The benefit usually costs less--sometimes far less--than its cash equivalent.) They are attractive to plaintiffs because they allow them to place a dollar value on the settlement that is large enough to justify large attorneys' fees. (I don't have to point out that it is extremely rare for a class-action plaintiff to actually run a class action, do I?)

Miller and Singer identify the largest problem with nonpecuniary settlements as one of valuation. From their perspective, that means that both the defendant (who wants to pay less in total) and the plaintiffs' counsel (who wants the largest possible fee) have an incentive to manipulate the valuation of the nonpecuniary elements.

When nonpecuniary settlements are being negotiated instead of cash awards, there is an added level of complexity because the defendant and class counsel have an opportunity to manipulate the valuation of the settlement in order to serve their individual purposes. The problem of sacrificing class recovery for the attorneys' fee becomes exacerbated. Because the fee is typically in cash, the ratio of the fee to the class recovery can be manipulated by exaggerating the value of the nonpecuniary class settlement. Thus the fee may seem a smaller percentage of the class recovery than it is in fact.

These are not necessarily bad things. Defendants would argue--and economic analysis would back up--that a nonpecuniary benefit that costs them little but is worth a great deal to a class member creates wealth. (But let's be clear: not every coupon is going to be worth more to a class member than it cost the defendant.) Plaintiffs' counsel would argue--and some academics would support--that larger fees will deter bad conduct more efficiently than cash to the class. And Miller and Singer argue that when the defendant shares its savings with absent class members (say by providing them with coupons for free-of-charge and free-of-strings products), a nonpecuniary settlement can actually achieve the rarest of goals, creating value for all parties.

Miller and Singer's article came out eight years before the Class Action Fairness Act institutionalized some of the critiques of coupon settlements, making it more difficult to provide that form of nonpecuniary relief. But, as almost any class-action lawyer will admit, nonpecuniary relief remains in high demand among both plaintiffs and defendants. Sometimes it will create value, but often it still results in settlements that draw valid objections.

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 As both plaintiffs and defendants get more sophisticated, the problem of how to litigate mass torts grows more complicated. In particular, both litigants and courts struggle with the question of when a verdict should have preclusive effect in mass tort litigation, and when it should not. Before he passed away last year, Vanderbilt law professor Richard Nagareda made some progress on this question in Embedded Aggregation in Civil Litigation, an article for the Cornell Law Review. As Nagareda put it:

Each instance involves what this Article labels as a situation of “embedded aggregation.” In each, a doctrinal feature of what is ostensibly individual litigation—the scope of the right of action asserted, the nature of the remedy sought, or the character of the alleged wrong—gives rise to demands for the suit to bind nonparties in some fashion, above and beyond the ordinary stare decisis effect that any case might exert. An aggregate dimension, in short, is “embedded” doctrinally within what appears to be an individual lawsuit. That aggregate dimension, in turn, gives rise to demands for binding effect of a commensurately aggregate scope.

(Emphasis added.)  Nagareda looked at three types of litigation in particular. First, he examined the uses of offensive collateral estoppel in FOIA litigation. (Several courts have declined to apply one information-seeker's victory against a government agency to collaterally estop the agency from opposing anyone else seeking the same information.) Second, he examined the policy arguments over punitive damages. (Lawyers often argue for punitive damages based on company policies or histories of bad behavior, which necessarily imports actions that would give rise to other litigation.) Finally, he looked at the controversial Vioxx settlement. (Vioxx settled a large number of personal-injury claims with "inventory settlements," where plaintiffs' counsel had to agree to settle cases on behalf of all their clients to qualify.)

Based on these three examples, Nagareda concluded that:

Contrary to some voices in the literature, this Article contends that the constraints on class certification elaborated over decades of real-world experience are not hypertechnical bugaboos. Rather, they stem ultimately from a well-taken notion of “preclusive symmetry”—an insistence that the plaintiff class ought not to be positioned to wield the bargaining leverage of a class-wide trial without, at the same time, affording to the defendant the assurance of a commensurately binding victory were the defendant, rather than the plaintiff class, to prevail on the merits.

This is not to say that aggregation of some kind is never the solution to these problems of embedded aggregation. However, Nagareda identified three factors that might influence courts to allow some kind of aggregate preclusive effect in litigation. Those are:

• "Standing." Standing here does not mean constitutional standing, just whether the party suing the defendant was the party actually harmed. (So, for example, a plaintiffs that seeks punitive damages for acts that didn't harm her is probably not entitled to them.)
• Divisibility of remedy.  Nagareda's analysis here seems similar to the one used for Rule 23(b)(1). He asked whether "the court could, as a practical matter, afford [the proposed remedy] to the plaintiff at hand without affecting the application or availability of the same remedy to other persons who are non-parties to the plaintiff’s lawsuit."
• Is the wrong widespread? In other words, is it something that would apply to a large number of people, like a design defect or a failure to warn?

Nagareda ultimately argues that these kinds of "embedded aggregation" cases call for some "hybridized" form of aggregation. Unfortunately, Nagareda's description of "hybridized" aggregation is somewhat vague. But it does identify several lines of thought that defendants should be aware of: either because they may yield some interesting settlements proposals (like in the Vioxx cases) or because they foreshadow arguments that plaintiffs' counsel will use in future mass torts.

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One of the earliest questions a defendant must face when litigating a class action is whether to fight or settle. Most lawyers worth their salt would advise their clients to look at the costs of litigating the case, and balance that against the expected payout (damages discounted by the probability of losing), perhaps taking into account the likelihood that the settlement will encourage the particular plaintiffs' firm to sue again. In a recent article titled Law in the Shadow of Bargaining: The Feedback Effect of Civil Settlements, Duke Law School professor Ben Depoorter suggests a few other reasons why defendants might think twice before settling large cases.

Depoorter identifies many of the same settlement pressures that we know defendants already face.

For instance, idiosyncratic settlements are more probable when a disputant is concerned with maintaining a professional reputation. A party may be able to exploit a defendant’s need to avoid the negative attention of court proceedings and induce settlement offers that exceed legally available remedies. Concerns with the “headliner effect” of a dispute may thus lead to settlement outcomes that are above the expected value of the case at trial.

What Depoorter points out is that settlements themselves create precedent.

First, prior settlements exert “peer pressure” on similarly situated parties, effectively weakening their position in comparable disputes. Innovative settlements serve as benchmarks to ambitious lawyers, making plain- tiffs in future disputes more demanding and thus more reluctant to accept settlements below those that parties in prior settlements received.

Second, due to their noncoercive nature, settlements may frame the normative outlook on particular claims or disputes. A novel legal claim for tort compensation might be considered outrageous at first, but will be perceived as less extraordinary if it has been gratified by a prior concession in a settlement agreement. As a settlement precedent reduces the apparent unreasonableness of any claim, it becomes harder for similarly situated parties to contest similar claims in future cases. Judges, for instance, may interpret settlement precedents as expressive statements regarding the appropriateness of compensation. Once a novel legal claim for tort compensation has been gratified by a similar concession in a private settlement agreement, parties will perceive future claims as less extraordinary.

How do lawyers find out about other settlements? People talk, and they observe. It's human nature. So, given large law firms (where, leaving aside firewalls, lawyers can share shoptalk safely) and the extensive informal networks plaintiffs use, news of settlements can disseminate more quickly than it did even ten years ago. Technology helps, too. Organizations like the plaintiffs' bar's American Association for Justice will report on public settlements, and even blogs critical of sweetheart settlements (like this one, Russell Jackson's, or the Center for Class Action Fairness) report on individual settlement agreements, including the amounts the class receives and the amounts the lawyers got paid.

What does this mean for defense lawyers? It means that it's always a good idea to consider settlement offers within the larger context of the client's goals. There is often strong pressure on defendants to settle a given case--as many courts have recognized, class actions create a skewed incentive to settle. But unless the client is truly a company facing a single, one-off case, its settling one class action on favorable terms may very well create leverage for the next plaintiffs to file a complaint.

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The caper was a simple one: the money was just sitting there unclaimed, so Kevin Waltzer would claim it.

In this case, the unclaimed money was sitting in common funds for three securities class-action settlements--In re Nasdaq Market-Makers Antitrust Litigation, In re Cendant Corporation Litigation, and In re BankAmerica Corporation Securities Litigation. To claim it, Waltzer posed as a financier who had traded the stocks at issue in each case. With the help of several accomplices (including one at the accounting firm that made the disbursements for the settlement) Waltzer cleared more than $40 million before he was caught by the IRS, and turned on the rest of his crew.

Today's case, United States v. Negroni, details the fallout from the scheme. The legal issue revolves around whether the trial court had justifiably departed downwards from the Federal Sentencing Guidelines when sentencing several of the defendants. The Third Circuit said it did not, and remanded the case for resentencing. Its primary reason for doing so was oddly similar to some class action appeals -- the trial court had not adequately explained its reasons for the downward departure.

But what's more relevant to class-action practice is the nature of the scheme. The defendants here were fraudulently claiming proceeds from securities class-action settlements. And, like with most criminal activity, it's hard to imagine that the crooks who got caught were the only ones committing the crime.  

Negroni shows that there is good reason to build verification mechanisms into a class settlement. Plaintiffs' lawyers often argue that these mechanisms serve only to depress claims. But Negroni shows exactly how individuals can make false claims; and the richer the proposed settlement, the more likely it is that it will attract con men like the defendants here.

Less important from a practical perspective, but more interesting from a theoretical one, this decision undermines the more extreme versions of deterrence that some academics use to justify increasing attorneys' fees in class actions. If class actions were only about deterring bad conduct and it didn't matter where the money went, there'd be no reason to punish these defendants. In class actions, there is rarely a high claims rate against the common fund.  So, from a "pure deterrence" perspective, the fact that this money went to con men instead of deserving shareholders should not matter. But, of course, it does matter. And why is that? Because courts recognize that class actions--like other civil lawsuits--are devices for making wronged victims whole, as opposed to simply deterring alleged bad actors. Even if current practice occasionally renders that goal a legal fiction, it's an essential legal fiction. Shattering our suspension of disbelief by allowing con men to walk away with the proceeds, whether they be posing as class members, lawyers, or experts, does extraordinary damage to a delicately balanced system.

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 Brian Fitzpatrick's argument that courts should approve more fees for class action plaintiffs' lawyers has generated its share of discussion. And a few months ago, the Seventh Circuit weighed in (sort of), during an argument about fees for objectors in In re Trans Union Corp. Privacy Litigation.

Judge Posner (who has decided a number of class action appeals this year) wrote the opinion, and observed:

It is a curiosity of class action litigation that often there is greater ferocity in combat among the class lawyers over the allocation of attorneys' fees than there is between the class lawyers and the defendants. The contest among the lawyers is a zerosum game. But the contest between them and the defendants is a positive-sum game because the class lawyers are naturally very interested in the fee component of any settlement, while the defendants care only about the size of the settlement, including fees. So the lawyers may be willing to settle for less for the class if the defendants will help them obtain a generous fee award, and the defendants will be happy to help them if the sum of the fee award and the relief granted to the class is smaller than it would be if the class lawyers pressed for more generous relief for the class. ...

Indeed, class lawyers may try to fend off interlopers who oppose a proposed settlement as insufficiently generous to the class; and given the role of such interlopers in preventing cozy deals that favor class lawyers and defendants at the expense of class members, their requests for fees must not be slighted.

(Emphasis added.)  In this case, the original class action involved the leaking of confidential personal data. The appellant was an objector (Dawn Wheelahan) who had been awarded $2.7 million in fees after challenging the original Trans Union settlement. (Pre-objection, the lawyers were going to settle for $40 million--$20 million in cash and $20 million in in-kind relief. Post-objection, the case settled for $110 million--$75 million in cash, $35 million in in-kind relief.) Wheelahan argued that $2.7 million was not enough; she should have received $14 million--20% of the additional $70 million she got for the class.  And, in a twist peculiar to class actions:

She is not opposed by the class action defendant, Trans Union, because this is a "common fund" suit; attorneys' fees come out of the amount of damages awarded the class, and so Trans Union has no stake in the dispute over fees. Wheelahan's only opponents are some of the other class lawyers, who fear that an increase in the amount of fees awarded to her would come at their expense. They don't object to an increase in the total fees awarded, or indeed to an increase in the share awarded to her that would not reduce their fees. With the class members unrepresented and the defendant indifferent to the overall award of attorneys' fees, we must decide the appeal with limited assistance from an adversary presentation. But this is a standard dilemma in class action adjudication, as we noted at the outset, and may be unavoidable without elongating the litigation disproportionately to the stakes in the fee dispute.

(Emphasis added.) Much of Judge Posner's discussion focuses on the special master's method of determining fees in the case (which, in typical Posnerian fashion, contains an excellent summary of research on the subject). I won't further summarize an already-dense explanation, but I will highlight two comments the opinion makes on the special masters. First, the opinion points out that courts need not place much weight on the previous arrangement between class-action lawyers and plaintiffs:

The special master arrived at these figures by first determining the total amount of attorneys' fees that would be reasonable to award and then allocating that amount among the lawyers. He placed little weight on the contingent fee agreements between the lawyers and the "clients" (the named plaintiffs in the class actions), recognizing that named plaintiffs are usually cat's paws of the class lawyers.

(Emphasis added.) The opinion also tries to untangle the knotty question of how much value an objector adds to an improved settlement. Is it just the difference between the two settlements? Judge Posner thinks that may overstate the case:

In making these adjustments the special master was wrestling with a problem of joint causation. The final settlement was the result of the combined efforts of MDL counsel and of the other two class lawyers. The fact that these efforts were successive rather than simultaneous has no significance. The MDL counsel created an asset—the expected gain from the lawsuits— the value of which they did not realize. The efforts of the other lawyers enabled the full value to be obtained.

(Emphasis added.) All told, the opinion concludes that objectors' counsel was underpaid by approximately $1.4 million. In fact, it concludes that all of the attorneys may may have been underpaid, but only those who appealed (here, objector's counsel) are entitled to any extra money. Judge Posner is no stranger to the effects monetary incentives can have on litigants; here's hoping he's prepared for the logical consequence of that part of his ruling.

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 Most professional objectors are fee-seekers (or, as one court called them, "remoras"). But not all; some, like the Public Citizen Litigation Group and the Center for Class Action Fairness, are non-profits that seek to keep class settlements for the benefit of class members instead of class counsel.

Alan B. Morrison, one of the founders of the Public Citizen Litigation Group and a member of the American Law Institute, has long experience in objecting to class actions. As he has put it:

What we found was that all the lawyers in every case, as well as virtually every district court judge, were very unhappy to see us and not at all pleased with the substance of our objections. To say that we were considered the proverbial skunk at the garden party would be about as politely as it could be put, even though the Rules clearly gave class members the right to appear and object.

In a recent article in the George Washington Law Review, he explains--from a nonprofit objector's point of view--the effect of the "little changes" in the ALI Principles of Aggregated Litigation. Among them:

• Shifting focus from the predominant relief to the kind of relief in approving settlements. This gets to a problem that has been hotly discussed lately: can a court certify a class seeking monetary relief under Rule 23(b)(2)? The ALI prescribes looking at the kind of relief (money, injunction) rather than which relief "predominates." It seems primarily concerned with allowing class members to opt out when money is at stake; an option available under Rule 23(b)(3) but not Rule 23(b)(2).
• Requiring courts to look for structural conflicts in the class.  As Morrison summarizes: "The ALI now more broadly forbids the certification of a class when there are structural conflicts that may result in one group of claimants being short-changed to the benefit of another, and it included a special provision dealing with the problem of future claims."
• Blessing the lodestar cross-check. In other words, the ALI has approved courts calculating what counsel's hourly fees would have looked like, and using that figure as a benchmark for determining whether the contingency fee is outsized.
• Making the results of the claims procedure public. Doing so keeps objectors informed, and may provide incentives to keep attorneys fees in line with actual relief to the class.

So what can defense lawyers learn from Morrison's review of the ALI? Be transparent in the settlement process. It's a simple--though hardly an easy--lesson. The temptation for most defense lawyers is to make a strong showing of serving the client's interest by selling class counsel on a settlement with large fees, quick-pay or clear sailing provisions, and relief that appears valuable but doesn't cost much. But if the settlement appears to be the result of collusion, then it will invite objections, or rejection by the court. As I've pointed out before, settling on the cheap can often prove extremely expensive. The ALI's Principles of Aggregate Litigation only reinforce that lesson.

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NYU professors Geoffrey Miller and Gerald Rosenfeld have written an article on "intellectual hazard." Their basic point is that organizations are subject to various biases in the way they process information (what the legal scholars call "heuristic biases.") Miller and Rosenfeld are standing on the shoulders of a lot of previous scholars in this article (including Office of Information and Regulatory Affairs Administrator Cass Sunstein and Chicago professor Richard Thaler), but their article is worth pointing out for two reasons: first, it provides one of the most current attempts to classify various biases; and second, they do a good job of applying those biases to help explain the roots of the 2008 financial crisis. According to Miller and Rosenfeld, these biases can be divided into three main categories:

• Complexity bias, which stems from the human brain's need to absorb information in manageable chunks. Examples of complexity bias include oversimplification bias (the tendency to oversimplify complicated ideas or sets of facts, losing important information in the process) and authoritative bias (the tendency to accept information from experts or superiors without examining it critically).
• Incentive bias, which stems from humans' tendency to serve their own self-interest. Examples of incentive bias include herding behavior ("Everyone else at my company can't be wrong ..."), cognitive dissonance (the ability to compartmentalize conflicting information rather than resolve the conflict), and loss aversion (the tendency to spend disproportionate effort avoiding or "making up" losses).
• Asymmetry bias, which gives unequal weight to pre-formed conclusions. Examples of asymmetry bias include status quo bias (the tendency to prefer the current state of affairs), the ostrich effect (the tendency to ignore negative information), and regret aversion (the tendency to put off difficult decisions that may result in regret).

Miller and Rosenfeld's taxonomy isn't perfect. For example, their definitions of loss aversion and regret aversion seem to overlap, which may stem in part from the fact that their definition of loss aversion differs subtly from others' definitions.

Nonetheless, Miller and Rosenfeld do an excellent job of explaining why these biases will exist in large organizations, and illustrating how those biases can result in a disastrous outcome. And this is where their work becomes important to class-action defense lawyers. Because class actions tend to address large, complex legal and factual issues, heuristic biases are prevalent, both in the client defendant and the plaintiffs' bar.  Both the client defendant and the plaintiffs' lawyer tend to represent organizations that have committed to a course of action (bet-the-company litigation) with large risk and heavy uncertainty, meaning that these biases will come into play as they evaluate new information about the litigation. In particular, these biases can come into play as each side evaluates possible settlements. As a result, it is important for the defense attorney to identify which biases may be at play, and either counsel her client accordingly, or decide on a strategy that will overcome her adversary's bias.

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 It's been a busy week, so please accept another set of links to class-related news in lieu of a full-fledged post.  Regular posting will resume next week.  

• Dukes discussion - On Tuesday, the Washington Legal Foundation hosted a panel on the upcoming Wal-Mart v. Dukes argument.  Panelists included Mike Murphy, Rachael Weinfeld, and yours truly.  It was an interesting discussion, especially Mike's take on how the Supreme Court would rule, and Rachael's discussion of the importance of the Daubert inquiry to class certification.  
• Dukes discussion II - Today, the American Constitution Society is hosting a panel on the same topic.  It's moderated by Michael Selmi, and panelists will include Marcia Greenberger, Adam Klein, Suzette Malveaux, and me.  It should also be a very interesting discussion.
• Lessons from Google Books - On Tuesday afternoon, the Southern District of New York refused to approve the Google Books settlement.  Glenn Lammi of the WLF has taken the opportunity to--like Judge Alsup--draw some lessons about what its opinion means for best settlement practices.
• More on circularity - Remember the circularity problem?  Securities class actions take money from a shareholder-owned corporation and return it to shareholders, minus attorneys' fees.  Why doesn't this critique apply to company-to-company litigation?  Amanda Rose and Richard Squire have a theory.  
• One shameless self-plug: recent searches that have led to this site include  "adequacy of counsel" "collective vs. class action conflict," "environmental class action," "motion to strike class allegations," "class acton interrogatories," "named plaintiff deposition," and "All Writs Act."  As well as on this blog, you can information about those subjects in the Class Action Playbook by me and Brian Anderson.  (Sections 2.8, 3.1.2, 3.1.6, 4.2.5, 4.5.4.1, 4.5.4.4, and 9.1.3 respectively.)

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Last year, class-action plaintiffs' lawyer (and author of the New Jersey Appellate Law Blog) Bruce Greenberg published an article in the St. John's Law Review on "Restricting Objectors." (The cite is 84 St. John's L. Rev. 949; the Law Review appears to be a few issues behind in posting articles on its site.) Not surprisingly, Greenberg has a few objections to objectors. As he puts it:

In at least two ways, professional objectors harm the class members whose interests they claim to represent. First, professional objectors' almost invariably groundless objections delay the provision of relief to class members who, in most instances, have already waited years for resolution. Second, by feeding off the fees earned by class counsel who took the risk of suing defendants on a purely contingent basis, as is the normal practice in class actions, professional objectors create a disincentive for class counsel to take on such risky matters. That disincentive clashes with the public interest, repeatedly recognized by courts, to incentivize class counsel to handle such cases.

Greenberg's article is well-written and informative, but there's one issue he has trouble overcoming. Greenberg's criticisms of objectors sound remarkably like some defendants' ' criticisms of plaintiffs' counsel. Specifically:

• He assumes that objectors' arguments are always baseless.
• He argues that objectors actually undermine the interests of their clients.
• He assumes that the objectors' adversaries (in this case, plaintiffs' counsel) are largely blameless.
• His rhetoric implies that objectors provide little benefit.

This kind of rhetoric can be very useful (and even accurate) in a brief, directed against a single opponent. It's less so in a scholarly article describing an entire category of lawyers.

The article has the same problems as many practitioners' articles about class actions--by plaintiffs or defendants. It assumes the worst about the authors' opponents. (Something I've been accused of myself..) Strategically, it's important for a lawyer to maintain a three-dimensional picture of his adversaries. And, from a scholarly standpoint, nuanced portraits are of far more use than two-dimensional ones.

In short, it's best if we treat our opponents as just as human as we are: capable of both admirable and less-admirable actions.

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I don't usually say whether I think a class-action opinion is good or not.  For one thing, this blog has been about strategy rather than policy.  For another, I'm a practicing attorney, and I'd rather not try to second-guess judges who have to sort through layers of contentious briefing in order to decide issues in class actions.

But I'm going to make an exception for an opinion I just ran across by Judge Alsup of the Northern District of California.  This is a good settlement opinion; moreso for the fact that it has been issued before the parties have made a settlement proposal.  To highlight just three of the areas Judge Alsup warns both parties about before they've entered negotiations:

On adequacy of representation:

Is the plaintiff an adequate representative with standing? Is plaintiff motivated to and qualified to act on behalf of those he or she seeks to represent? Are there shortcomings in the plaintiff that would be advanced to defeat a class certification motion? What is the litigation history, criminal history, and relationship to plaintiff's counsel? In an employment case, how long did the plaintiff work for the employer? The opinion of the lead plaintiff as to the fairness of the settlement to absent class members must be provided to the Court, along with an opinion by counsel. Adequacy of counsel is not a substitute for adequacy of the representative.

On expansion of the class:

Typically, defendants vigorously oppose class certification and/or argue for a narrow class. In settling, however, defendants often seek to expand the class, either geographically (i.e., nationwide) or claim-wise (including claims not in the complaint) or person-wise (e.g., multiple new categories). Such expansions will be viewed with suspicion. If an expansion is to occur it must come with an adequate plaintiff and one with standing to represent the add-on scope and with an amended complaint, not to mention due diligence as to the expanded scope. The settlement dollars must be sufficient to cover the old scope plus the new scope. Personal and subject-matter jurisdiction over the new individuals to be compromised by the class judgment must be shown.

On incentive payments to class members:

If the proposed settlement by itself is not good enough for the named plaintiff, why should it be good enough for absent class members similarly situated? Class litigation proceeded well for many decades before the advent of requests for "incentive payments," which too often are simply ways to make a collusive or poor settlement palatable to the named plaintiff. A request for an incentive payment is a red flag.

What makes this such a good opinion?  It's clearly written, and provides real guidance on thorny issues that actually come up in settlement negotiations.  But most importantly, it shows that Judge Alsup thinks hard and clearly about the strategic incentives both plaintiffs and defendants face when settling a class action.  For all of the appellate opinions out there discussing the various factors that can spring from Rule 23(e)'s requirement that settlements be "fair, reasonable, and adequate," this may be the single best opinion I have read on classwide settlement.   I usually hope my clients don't have to end up in court litigating a class action, but if they do, they could do a lot worse than Judge Alsup.

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 Back in 2005, researchers at (among other institutions) Columbia, the University of Texas, and Microsoft began to look at certain types of new-fangled communications technology (email and instant-messaging) and wondered whether it mattered which medium one used when negotiating complicated agreements.

So they conducted an experiment. They took a bunch of business students from Stanford and Northwestern, and they told them to negotiate selling a car. They made half of the students buyers, and half sellers. They gave each pair eight issues to negotiate (including price, color, trim, and warranty specifications), and confidential instructions about how much they valued each issue. They gave half of the sellers simple arguments they could use to bluff a buyer who asked for a yellow car (coincidentally, all of them), and half more complex arguments. And they told half of the pairs to negotiate by email, and half by instant message.

The result: sellers who used instant messaging and intricate arguments enjoyed a much greater advantage than sellers under other conditions. Or, as the authors put it:

The ideal argument is one that is hard to rebut, of course, and what we have demonstrated is that an argument’s effectiveness is influenced by conversational dynamics in addition to its content. The communication medium one uses to negotiate supplies expectations about turn-taking tempo, and consequently how long one has to respond. While a simple argument was ineffective regardless of communication medium, we found that an intricate argument was effective if there were expectations of a rapid turn-taking tempo (generated by communicating with Instant Messaging), but was ineffective when there were only vague expectations about turn-taking (generated by communicating with E-mail). Thus one not only needs to craft good arguments, one also needs to be able to apply them fluently. Being at a loss for words can mean being at a loss for dollars.

In other words, conversational media (like instant messaging, telephone conversations, and face-to-face meetings) may favor fast talkers.

What does this mean for negotiation of class-action settlements? Classwide settlements already tend to involve complex issues, many of which involve the intricacies of Rule 23(e). While many lawyers pride themselves on their persuasive abilities, it may be best to use devices that disrupt conversational rhythms (like correspondence and mediation) if one wants to neutralize the effects of the other side's fast-talking.

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 Still fighting a virus and a heavy schedule, so my apologies for providing only a brief post this week.  

So let me point you to a working paper from the American Antitrust Institute, titled Indirect Purchaser Class Action Settlements.  The paper was prepared by plaintiffs' lawyers, and is

intended to respond to the contentions made by corporate interests that indirect purchaser antitrust actions benefitted only plaintiffs’ attorneys and resulted in, at best, cy pres recoveries for the indirect benefit of the class members.

While the paper may have been written to rebut "corporate interests" (presumably critics of class actions), it does provide a case-by-case inventory of settlements in indirect purchaser class actions. That inventory may be useful for any number of purposes, including valuing upcoming settlements and determining the amount of fees class-action attorneys tend to receive.  

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 Twenty-two years ago, political scientist Robert D. Putnam published an article in the journal International Organization. Titled "Diplomacy and domestic politics: the logic of two-level games," it argued that international trade negotiators have a more complicated job than most believe. Not only must they convince the negotiators across the table of the mutual benefits of their particular requests, they must also persuade their constituents back home ("behind the table") to accept the deal they ultimately work out.

Since Putnam published his article, this insight--that negotiators on behalf of organizations must negotiate both "across the table" and "behind the table"--has been cited so often it feels like just common sense. But Putnam did not limit himself to just identifying this two-level game. He also explored just how it affected the conduct of the negotiations themselves. And some of his conclusions can certainly inform how class-action lawyers negotiate class-action settlements.

For example, Putnam found that

the lower the cost of "no-agreement" to constituents, the smaller the win-set. [Ed. note: "win-set" refers to the set of agreements that could be ratified.] Recall that ratification pits the proposed agreement, not against an array of other (possibly attractive) alternatives, but only against 'no-agreement.' No-agreement often represents the status quo, although in some cases no-agreement may in fact lead to a worsening situation; that might be a reasonable description of the failed ratification of the Versailles Treaty.

(Emphasis in original.) This insight reflects one that negotiation scholars have known for a while: the better one's alternative to an agreement with the other side (sometimes referred to with the unwieldy phrase BATNA, or "Best Alternative to Negotiated Agreement"), the less likely a negotiation will succeed. Putnam also explained that

In this sense, some constituents may offer either generic opposition to, or generic support for, Level I agreements, more or less independently of the specific content of the agreement, although naturally other constituents' decisions about ratification will be closely conditioned on the specifics. The size of the win-set (and thus the negotiating room of the Level I negotiator) depends on the relative size of the "isolationist" ,forces (who oppose international cooperation in general) and the "internationalists" (who offer "all-purpose" support). All-purpose support for international agreements is probably greater in smaller, more dependent countries with more open economies, as compared to more self-sufficient countries, like the United States, for most of whose citizens the costs of no- agreement are generally lower. Ceteris paribus, more self-sufficient states with smaller win-sets should make fewer international agreements and drive harder bargains in those that they do make.

There are, of course, some important differences between trade negotiators and class-action lawyers. Class-action defense lawyers are legal agents of their clients, which means they may have less room to deviate from instructions than trade negotiators. And class-action plaintiffs' lawyers often have clients that lack the power to direct the litigation. In fact, in a class action, thethe class members often don't have a preference between "no agreement" and any agreement, because most of them aren't aware of the litigation at all. So the plaintiffs' counsel can cut whatever deal they see fit.

This is an important justification for fairness hearings on settlement. And it helps to explain why objectors have played such an important role in the development of caselaw on class-action settlements is that they have the incentive to act like an interested constituent of the plaintiffs' lawyers, rejecting deals that are no better than "no agreement" on behalf of the class.

So what can class-action defense lawyers take from this article? For those looking to ensure a lower-cost settlement process, it is worth considering not just what the plaintiffs' counsel will agree to, but what objections may get raised at the fairness hearing.

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 For plaintiffs' counsel, one of the most important questions in a class-action settlement is how they will get paid. In McDaniel v. County of Schenectady, the Second Circuit explicitly compared the various methods of determining attorneys' fees in class actions. McDaniel was a civil-rights case challenging strip-search policies for pretrial detainees. Approves settlement of the class action. The lower court approved the settlement, but awarded less in fees than the plaintiffs would have wanted. The analysis provides a good discussion of the advantages and disadvantages of both lodestar and percentage fees.

The case took three years of "vigorous" litigation, and approximately 1000 hours of plaintiff time. (Does this seem like a lot? It's six months of billing for a single defense associate, but for many smaller-firm practitioners, it may be close to an uninterrupted year of work.) At that point, the parties were ready to settle. The district court approved the settlement, but used a lodestar method to calculate attorneys' fees instead of a percentage of the common fund. The plaintiffs appealed.

The Second Circuit began by noting that

Although we have acknowledged that "the trend in this Circuit is toward the percentage method," it remains the law in this Circuit that courts "may award attorneys' fees in common fund cases under either the 'lodestar' method or the 'percentage of the fund' method."

So it looked at the differences between lodestar and percentage of fund.

The lodestar method is not perfect. It creates an incentive for attorneys to bill as many hours as possible, to do unnecessary work, and for these reasons also can create a disincentive to early settlement. Under certain conditions, moreover, lodestar awards can create the near opposite incentive, encouraging attorneys to settle before trial even when it is not in their clients' best interest. While under the lodestar method lawyers share the "downside" risk of trial (i.e., the possibility of an adverse judgment, and hence no fee), they do not share in the potential economic "upside" (i.e., fees as a percentage of a large common fund), especially since trial requires comparatively fewer hours than the process of trial preparation.

(Emphasis added, internal citations omitted.) That said, the court also found problems with awarding a percentage fund:

As we indicated in Goldberger, this Circuit's adoption of the lodestar method was precipitated by the perception that percentage fees "tended to yield too little for the client-class, and an unjustified 'golden harvest of fees' for the lawyer." Particularly in cases that result in a very large monetary award, the percentage method holds the potential to result in attorneys' fees many times greater than those that would have been earned under the lodestar of hourly rate multiplied by hours worked. The principal analytical flaw in Appellants' argument for a presumptive percentage award as a "benchmark" in common fund cases lies in the assumption that there is substantial contingency risk in every common fund case that would justify such a multiplier.

Moreover, although the percentage method has the advantage of aligning the interests of plaintiffs and their attorneys more fully by allowing the latter to share in both the upside and downside risk of litigation, it can create perverse incentives of its own, potentially encouraging counsel to settle a case prematurely once their opportunity costs begin to rise.

(Emphasis added, internal citations and quotations omitted.) It's interesting that neither fee award seems to align the interests of the class with the interests of the lawyers. While some might argue that aligning those interests shouldn't matter, others view this inability to align incentives as one of the central struggles in class-action practice. 

Ultimately, the Second Circuit affirmed the district court's use of the lodestar method. So how is this case useful for defense counsel? Aside from providing a balanced critique of percentage-of-fund fees (which can be more expensive for defendants), it lays out very clearly the advantages and disadvantages of the different methods of calculating attorneys' fees in class-action settlements.

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Classwide settlements are different from regular settlements in a few important ways. Most notably, they require approval from the court, which must ensure that the settlement is "fair, reasonable, and adequate." That extra step raises an important question, when does a classwide settlement bind the parties: when it's signed, or when it's approved? Earlier this year, the Third Circuit provided an answer in Ehrheart v. Verizon Wireless.

The case involves the Fair and Accurate Credit Transaction Act (FACTA), which required merchants to obscure credit-card information on receipts. The statute was intended to prevent identity theft, but proved controversial in class-action litigation because it allowed plaintiffs to sue for staggering damages even when the violation was technical and no consumer could have been harmed. As a result, Congress passed the Clarification Act, which removed liability for technical violations that did not result in any harm to the consumer.

In Ehrheart, the named plaintiff sued Verizon for a technical FACTA violation. Verizon began settlement negotiations, reached a final agreement, and got preliminary (but not final) approval from a federal district court in Pennsylvania. Before the final approval hearing, the Clarification Act became law. So Verizon moved to vacate the preliminary approval order (which the court granted), and then for judgment on the pleadings (which the court also granted). The plaintiffs, who had just watched what was likely a lucrative settlement vanish before their eyes, appealed.

On appeal, Verizon argued that a classwide settlement agreement is not binding until the court has issued its final approval order. (This argument makes sense; if the court does not approve the settlement, the parties have to start from scratch.) While the argument had convinced the trial court, the Third Circuit did not accept it.

In vacating its order granting preliminary approval to the settlement, the District Court lost sight of three important points that guide our decision today. First, there is a restricted, tightly focused role that Rule 23 prescribes for district courts, requiring them to act as fiduciaries for the absent class members, but that does not vest them with broad powers to intrude upon the parties' bargain. Second, a strong public policy exists, which is particularly muscular in class action suits, favoring settlement of disputes, finality of judgments and the termination of litigation. Third, our jurisprudence holds that changes in the law after a settlement is reached do not provide ground for rescission of the settlement.

What can defendants learn from this? Keep an eye on all circumstances surrounding a case; you never know when legislative action may moot the plaintiffs' claims. More importantly, don't sign a settlement agreement unless you're willing to be bound by it no matter what happens.

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Skadden attorneys John Beisner, Jessica Miller, and Jordan M. Schwartz have drafted a white paper for the Institute for Legal Reform titled "Cy Pres: A Not So Charitable Contribution to Class Action Practice."  Relying heavily on Martin Redish's critique of cy pres recovery, they trace cy pres relief from its "pre-Christian" origins as a means of distributing estates to its most recent abuses. Their final recommendation is interesting, and fairly moderate:

in order to mitigate the legal and ethical concerns associated with cy pres awards, any application of the cy pres doctrine—even in the context of settlements—should be subject to two critical limitations. First, whenever a settlement agreement includes a cy pres component, the fees awarded to class counsel should be tied to the value of money and benefits actually redeemed by the injured class members—not the theoretical value of the cy pres remedy. Such a restriction would be consistent with the intent of the Class Action Fairness Act (“CAFA”), which mandates that any portion of plaintiffs’ counsel’s fees that is based on the value of coupons awarded to class members “shall be based on the value to class members of the coupons that are redeemed,” rather than the theoretical value of the coupons available to class members. Extending the CAFA coupon requirement to class action settlement cases involving cy pres would help ensure that plaintiffs’ attorneys vigorously represent and defend the interests of absent class members by maximizing the benefits actually redeemed by the class members.

Second, the parties (rather than the court) should determine whether residual settlement funds should be disposed of through cy pres—and if so, to what charities. Such an approach will minimize the risk that judges will use their influence to steer cy pres funds to their preferred charities.

(Internal footnotes omitted.)  

So what can defense lawyers use in this white paper? It provides a cogent summary of the best arguments against cy pres relief. More specifically, it offers an argument against those plaintiffs who seek certification by arguing that using cy pres relief will avoid the need to confront individualized issues in a case:

extending cy pres to litigated class actions would violate the Rules Enabling Act—and threaten the integrity of the judicial process—by using Federal Rule of Civil Procedure 23 to dramatically alter the substantive law. Under the Rules Enabling Act, a rule of procedure or evidence may not “abridge, enlarge or modify any substantive right.” This is so because using a procedural rule to alter the substantive law would interfere with the powers of Congress and state legislatures to decide governing laws. Notably, courts have rejected other efforts to transform substantive law in the context of aggregate litigation in similar contexts; of most relevance here, courts have rejected “fluid recovery” theories—under which plaintiffs seek to prove “class” damages rather than individual damages of each class member—as violating the Rules Enabling Act.

(Emphases added; internal footnotes omitted.) This situation is more than just a hypothetical. Most notably, Judge Jack Weinstein tried to use this tactic to avoid confronting individualized issues when certifying a class tobacco purchasers, a decision that was heavily criticized at the time. (The Second Circuit eventually reversed him.) It's also a good example of the growing trend of relying on the Rules Enabling Act to argue against sloppy certification analyses that effectively change the fundamental rights of the parties.

(Hat tips to Ted Frank and Jordan LeClerc for spotting.)

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 On Monday, I reported on the passing of Vanderbilt Professor Richard Nagareda. Given the widespread recognition of his contributions to studying aggregated litigation, it seemed appropriate to revisit one of his better articles: Aggregation and Its Discontents: Class Settlement Pressure, Class-Wide Arbitration, and CAFA, which originally appeared in the Columbia Law Review in 2006. 

In this article, Professor Nagareda took three debates over class-action practice -- (1) do class actions create undue settlement pressure? (2) can arbitration clauses override the use of the class-action device?; and (3) did the passage of CAFA threaten to abrogate the Supreme Court's holding in Klaxon v. Stentor Electric Manufacturing Co. (1941) that federal courts must apply state choice-of-law principles -- and used them to ask a broader question posed by class-action practice:

When should the law become concerned, as a normative matter, that the affording or withholding of aggregation is not a matter of mere procedural format but amounts instead to an unauthorized, back-door method of reform for substantive rights?

After a careful examination of the (then-) state of the law for each of these issues, Professor Nagareda came to the following conclusion:

The debates over class settlement pressure, waivers of class-wide arbitration, and CAFA each pose questions about the relationship between aggregate procedure and substantive law. In these high-stakes disputes, one side or the other seeks to characterize the availability of aggregation as merely a cosmetic matter, whereas the opposing side seeks to probe its practical effects. Interestingly enough, plaintiffs and defendants make different arguments along these lines in different settings.

The law should cut through the advocacy on both sides by situating all three debates along a common metric of institutional authority. Each is ultimately a debate over when the affording or the withholding of aggregation is not merely a matter of procedural format, but also a way to alter substantive law.

Each of Professor Nagareda's questions has gradually been answered by the evolution of class-acton doctrine and civil procedure doctrine. While undue settlement pressure is always a concern, defendants have been handed better tools (like the much-used Iqbal ruling) with which to minimize the in terrorem effect of large but meritless cases. The Supreme Court has granted certiorari to hear the Concepcion case, which should provide an answer to whether arbitration clauses can preclude classwide consumer litigation in certain circumstances. And, while the Shady Grove decision did not directly address the clash between CAFA and Klaxon, it does provide guidance for how federal class-action rules should interact with state substantive law.

That said, there's still a great deal that class-action lawyers can take from this article. First, Professor Nagareda did an outstanding job of picking apart the tactics that underlay each side's approach to these three issues. There is a reason that this article is generally considered seminal.

Second, Professor Nagareda identifies an important rhetorical technique, which is the sliding scale each side employs in characterizing the effect of class-action rulings. In essence, the bigger the change a side wants, the more likely they are to gloss it as "cosmetic." Class-action defense lawyers have long known that one of the best ways to show a court the problems with a class proposal is to focus on how the case would actually be tried.  Professor Nagareda brought both scholarly rigor and intellectual honesty to bear on how that argument plays out under various circumstances.  

And finally, Professor Nagareda's article provides an excellent reminder that there is much to be said for standing back from the nitty-gritty of the rules at times and asking the larger question of what each of your arguments actually means. As he illustrates here, sometimes the answer really will be surprising.

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One of the larger points of contention in class-action settlements is the size of the attorneys' fees. Indeed, with a few exceptions, no one defends the size of attorneys fees, and the most heated criticisms decry the size of the fees compared to the recovery the class actually receives. Which is what makes a recent case from the Ninth Circuit, In re Mercury Interactive Corp. Securities Litigation, so surprising: it turns out that Rule 23 already has one simple, often-ignored measure for limiting the amount of fees class counsel can charge.

The Mercury case arose after public disclosures that Mercury's then-CEO, CFO, and General Counsel had participated in a scheme to backdate stock options. (Backdating, for those who remember the bull market, is a practice of revising the date that individuals were granted stock options to allow for the largest possible profit on the stock. In other words, someone who was backdating options would revise the grant date to reflect the lowest possible stock price. When the grantee exercised the option, he'd pay a lower price for valuable stock.)

Like with many (but not all) securities class actions, this one settled quickly. As part of the settlement approval process, the district court held a fairness hearing, and provided a deadline for objections. However, the court set the deadline for objections before the plaintiffs' counsel's fee application deadline. That, as one might guess, presented a problem for the objectors: without seeing the details of plaintiffs' fee proposal, it was extremely difficult for them to evaluate whether it was properly justified.

One of the objectors, the New York State Teachers' Retirement System, nonetheless tried to challenge plaintiffs' fees, submitting a generalized objection to the anticipated 25% contingency fee. The district court approved the fee anyway, stating in part that:

[The objectors] do not object to any line item of work that was done, but rather they simply believe that the amount of the contingency fee should be 18 percent rather than 25 percent.

Teachers appealed, arguing that, in approving plaintiffs' fees, the district court had violated Rule 23(h). Rule 23(h), which governs awards of fees and taxable costs, provides that:

In a certified class action, the court may award reasonable attorney's fees and nontaxable costs that are authorized by law or by the parties' agreement. The following procedures apply:

(1) A claim for an award must be made by motion under Rule 54(d)(2), subject to the provisions of this subdivision (h), at a time the court sets. Notice of the motion must be served on all parties and, for motions by class counsel, directed to class members in a reasonable manner.
(2) A class member, or a party from whom payment is sought, may object to the motion.
(3) The court may hold a hearing and must find the facts and state its legal conclusions under Rule 52(a).
(4) The court may refer issues related to the amount of the award to a special master or a magistrate judge, as provided in Rule 54(d)(2)(D).

The Ninth Circuit reversed, holding that the district court had abused its discretion by violating Rule 23(h). In fact, it went even further, stating that

the practice borders on a denial of due process because it deprives objecting class members of a full and fair opportunity to contest class counsel's fee motion.

Why would this rise to the level of a due process violation?  As the Ninth Circuit pointed out

During the fee-setting stage of common fund class action suits such as this one, plaintiffs' counsel, otherwise a fiduciary for the class, becomes a claimant against the fund created for the benefit of the class. This shift puts plaintiffs' counsel's understandable interest in getting paid the most for its work representing the class at odds with the class' interest in securing the largest possible recovery for its members.

(Internal quotations omitted.) As a result, by requiring plaintiffs to submit a fee request before objections are due, Rule 23(h) provides an important check on plaintiffs' counsel at exactly the moment their interests diverge from those of the class.

Allowing class members an opportunity thoroughly to examine counsel's fee motion, inquire into the bases for various charges and ensure that they are adequately documented and supported is essential for the protection of the rights of class members. It also ensures that the district court, acting as a fiduciary for the class, is presented with adequate, and adequately-tested, information to evaluate the reasonableness of a proposed fee.

This may seem like an obvious point, one that hardly requires an entire blog post. But a number of trained lawyers have missed it over the years, and not just the lawyers and courts that have made submitting objections before fee requests "a common practice." When Professor Brian Fitzpatrick defended "quick-pay" provisions--and when I critiqued that defense--neither of us took into account the obvious problem; quick-pay provisions (which pay plaintiffs' counsel before the settlement has been approved) clearly violate the procedure dictated by Rule 23(h).

So what's the takeaway for this case? Always read the rules. Rule 23 exists to enable class actions, but also to ensure that, at all times, absent class members are adequately protected. And those protections often exist to rein in the excesses of plaintiffs' counsel.

EDITED AT 11:30 AM TO ADD:

Ted Frank, of the Center for Class Action Fairness, has commented to point out that the majority of quick-pay provisions allow payment after approval, but before appeals have been exhausted, which means that they would not facially violate Rule 23(h).  And I should note that Professor Fitzpatrick accurately described the timing of payment in his article.  The takeaway from this?  Bloggers should reread old posts if they're going to revisit them later; especially if it turns out they were right the first time.

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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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