I don’t usually do guest posts–Class Action Countermeasures is largely a solo proprietorship–but Adam Schulman of the Center for Class Action Fairness spotted a new settlement tactic out in the wild that proved interesting enough to justify an exception. [Inevitable disclosure, since I have done some work for the Center, I have worked with Adam before.] So, without further ado, Adam:
The Opt-Out Refund
As an attorney with the Center for Class Action Fairness, I spend a good deal of time evaluating prospective class action settlements for defciencies. (Disclaimer: I write this blog post only in my individual capacity, not as a representative CCAF), Recently, I stumbled upon a very unique provision in the settlement of the Publication Paper Antitrust Litigation that I wanted to call attention to. The structure of the settlement itself was routine, establishing an $8 million common fund for direct purchasers of publication paper.
But it added something very different to that usual framework.
As the Class Notice details,
If a Class Member elects to exclude itself from the Settlement… the Settlement Fund will be reduced by 75% of the amount of money that Class Member would have received had it filed a valid Claim Form.
The settlement agreement itself refers to this as an "Opt Out Refund." In multiple years of in depth analysis of class action settlements, I’ve never seen a provision like this. The most comparable term that would be fairly standard is a "walk-away" provision, whereby the defendant reserves the right to terminate an agreement if the number of opt-outs exceed a certain level
One may ask, is this novel "Opt Out Refund" provision a positive or a negative development? My answer is that it very positive, it is good for absent class members, it is good for defendants, and it is good for class counsel who are willing to wager that they have arrived at a fair and adequate settlement. I like it because it makes the opt-out right of absent class members mean something. It attaches actual consequences and weight to the decision to opt out. It allows absent class members to affirmatively register their dissent. One reason that people sometimes opt out of settlements is that they want to disavow any participation in the action, and disavow that allegations that the representative plaintiffs purport to bring on their behalf. This provisions allows them to in effect give their award back to the defendants. I think it’s brilliant.
But this provision isn’t just good for class members, it’s good for defendants. There’s a commonality of interest between the individual opt out and the defendant with this type of provision, because parallel to opt-out who wants to disavow the allegations of the settlement, it allows defendants to say, "No. We believe our customers, clients, employees, etc don’t subscribe to these claims. We think they’ll opt out."
A skeptic may rejoin, "but the garden variety consumer class action sees very minimal exercise of opt outs, so it really doesn’t matter if you offer class members this option." The premise is correct, class members very rarely exercise their right to opt out. But on the other hand, if you had this type of opt-out empowerment in a settlement, you may well see opt-out rates climb.
Because I always analyze settlements through the lens of absent class member rights, I can see the potential counter-argument that an opt-out refund means class members aren’t getting firm notice as to the total amount in the settlement fund. But, I don’t think this argument ultimately carries the day for two reasons. Firstly, in this type of common-fund claims made settlement, class members won’t know what their individual claim will be worth even if they did know the precise aggregate value of the fund. This is because how many individuals will submit claims is an unknown variable in and of itself. Second, notice arguments have much more force when information is available to the settling parties, yet they choose to withhold it. As the Ninth Circuit explained recently in Dennis v. Kellogg, 697 F.3d 858 (9th Cir. 2012), "just trust us" is not an acceptable legal principle for class counsel to rely upon.
It is a credit to class counsel (Cohen, Milstein, Toll & Sellers among others) in this Publication Paper case that they would wager their end fee award on having achieved a good result for class members. That is how the system is supposed to work.
In conclusion, I view the "Opt Out Refund" as an innovative means to give opt-out rights greater active meaning, while at the same time achieving a synergy with defendants’ interests in paying less money. I don’t think the federal rules of civil procedure require this extra punch added to the right of opt-out, but it strikes me as a clever idea and a very positive development for the law of class action settlements