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.

CATEGORY – Settlement