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May 21, 2012 Articles

Do "Private Settlements" Exist in Mass-Tort Litigation?

By Paul D. Rheingold

Several authors recently labeled certain mass-tort settlements as “private” and suggested that, in this type of outcome, judges have little or no role. Jeremy T. Grabill, “Judicial Review of Private Mass Tort Settlements” [PDF], 42 Seton Hall L.R. 123 (2012); Rothman, “Bringing an End to the Trend: Cutting Judicial ‘Approval’ and ‘Rejection’ Out of Non-Class Mass Settlement” [PDF], 80 Fordham L.R. 319 (2011).

The type of settlement that these commentators regard as private is below the level of a class-action settlement or a multidistrict litigation (MDL), which is still in full operation. Examples given are the World Trade Center litigation and Vioxx. To this may be added the very recent Medtronic Sprint Fidelis litigation.

There is really no such thing as a private, non-judicially supervised mass-tort settlement, nor should such an animal be permitted to exist.

It is true that recent settlements of mass-tort litigations raise the issue of what degreeof judicial supervision is desirable in dealing with certain issues peculiar to the resolution of large numbers of cases, such as client fees, common-benefit fees, and common-benefit expenses. There are risks, to be sure, of unnecessarily aggressive judicial oversight. On the other hand, there are even greater risks in ceding too much power or authority to the settling attorneys to the possible detriment of their clients or fellow lawyers.

Putting the more private settlements in context, two well-recognized mass-tort-settlement procedures definitely involve judges: class actions and MDLs settled in a group.

Class-Action Settlements
Class actions under Fed. R. Civ. P. 23 and parallel provisions in many states permit the most judicial supervision of fees and expenses in mass torts. This is compelled by various provisions of Rule 23, sections (e) and (h).

Although class actions are only rarely involved these days in the settlement of mass torts, there are a few examples, arising usually out of limited-fund determinations. Limited-fund settlement classes resolved the Sulzer litigation (see Paul D. Rheingold, Litigating Mass Tort Cases (Thompson-Reuters 2006) § 7:47) and the Teletronics litigation (Rheingold, § 7:48).

MDLs, with Special Attention to Matrix Settlements
MDLs, by far the most common form of aggregating mass-tort litigation, stand somewhere between a class and an individual case when it comes to the judicial supervision of fees and expenses. There is no provision, parallel to Rule 23, that directly gives the court supervising an MDL the power to control fees, expenses, and the like. However, in practice, MDL courts have exercised considerable authority over these matters consistently enough so that such a role has been generally accepted. These include:

  • An award of common-benefit fees, including authorizing certain percentages to be withheld initially from the fees of lawyers in individual cases at the time of their settlement, and ultimately to set the final amount to be paid to the group of lawyers who did the work providing the common benefit. The rationale is that all lawyers and their clients benefited from the group’s work.
  • An award of common-benefit expenses, on the same basis as just stated for fees, but most often adding to the expenses the client pays.

Common-benefit assessment has become so routine that the MDL plaintiffs steering committee will normally set up the procedures for common-benefits withholding long in advance of any possibility of individual MDL cases being settled. The steering committee will of course seek to bring in the state-court cases as well. The Manual for Complex Litigation (MCL) Fourth [PDF] describes the necessary steps. § 22.297, p. 471 (citing the author). See also Rheingold, Ch. 3, 7. The powers of the MDL court are discussed in detail in In re San Juan Dupont Plaza Hotel Fire Litigation, 111 F.3d 220 (1st Cir 1997).

A variety of settlement methods exist if the litigation in the MDL is being compromised during its pendency. If it is being settled globally, with as much effort as possible to include all cases, a matrix settlement is often used. In a matrix settlement, injuries are ranked and paid set amounts depending on factors such as age, time hospitalized, unpaid medical bills, and the like. Because an MDL settlement is not a class action, the plaintiff must opt into the plan, or else the patient is treated as opting out and must proceed with an individual claim.

The exemplar par excellence of a matrix in an MDL-based mass tort is the Vioxx settlement. See § 9:39.50, 15:9. In the Vioxx MDL and three main state-court cases, approximately 50,000 cases were filed or claims tolled for heart attacks due to use of a prescription pain reliever. After a number of bellwether trials, the defendant, working with a special group of counsel (consisting mainly of the MDL steering committee) drew up a particularly complex matrix. This effort occurred with the knowledge, if not the urging, of the judges involved, but no court participated in the negotiations.

In Vioxx, the parties recognized that judicial involvement would be needed on several levels and built various roles into the terms of the settlement. The MDL judge was given a role of overseeing several aspects, including the common-benefit payment, the establishment of a fund from the cases as settled, and the determination of the proper fees to be paid to those active in the MDL and the settlement plan (devising, administrating, and more). Judge Fallon stated that he took on this task based both on his inherent authority under the MDL and the express terms of the settlement. See Rheingold, § 9.39:50.

The Judicial Oversight of Fees Charged to Individual Clients
The extent of the powers of the MDL judge over the fees individual attorneys charge their clients has been disputed. At the start of the litigation, lawyers for the plaintiffs will generally have entered into contingent-fee contracts used with individual clients, typically for 1/3 or 40 percent. When hundreds of MDL cases are settling and these attorneys are looking to collect their fees, the MDL court may seek to intervene to set a maximum percentage on the individual case fee. It may seek to do so sua sponte, or sometimes the defendant may seek to intervene, at least where the total to be paid includes fees (as opposed to a lump sum to be distributed whichever way matters work out). See Rheingold Ch. 7; § 7:53 (regarding the Albuterol settlement); § 15.4 (regarding Ephedra). MDL settlements are different from bankruptcy in that a Bankruptcy Court has extensive statutory control over fees. See Rheingold Ch. 12.

Judge Fallon in the Vioxx litigation intervened to consider the fairness of individual client fees. He capped them at32 percent, the rationale being in part that the individual lawyers typically do less of the work in mass torts and instead leave most of the work to the plaintiffs’ steering committee.

In other mass torts, the supervising judges have purported to exercise greater authority over fees. In the Zyprexa litigation, the rationale offered by Judge Weinstein was that the MDL litigation before him was a “quasi class action.” See Rheingold §  7:62:10. While this author supports judicial supervision, he questions its justification on a “quasi class” basis. Another rationale is that of Judge Kaplan’s concurrence in In re Zyprexa Products Liability Litigation, 594 F.3d 113 (2d Cir 2010), recognizing extensive powers of district judges to manage common-benefit funds.

Firm Inventory Settlements
A significant distinction exists between an MDL settlement that involves an opt in to a matrix setting forth payments and one where the inventories of individual firms are paid. The biggest area of controversy today as to the role of the courts on fees, expenses, and other windup matters in mass-tort cases is where the defendant adopts this firm-by-firm approach—what we now label inventory settlements. These cases almost always were originally part of an MDL supervised by one or more judges, but now the end game is not on a litigation-wide basis. Examples of recent inventory settlements include Baycol (see Rheingold § 15:8), Gadolinium, and Yaz-Yasmin.

The main issue is to what degree, if at any, the MDL court or equivalent state court judge have powers or responsibilities where portions of the litigation the judge is supervising are being resolved in firm-by-firm settlements. On the positive side, to the extent there was or is an active MDL where the parties had done all of the expected preparation for trial, the individual attorneys are obviously gaining from the workup. One may presume that these collective efforts brought the defendants to the table.

In many mass torts, even if the settlement is per firm and not per matrix, the cases have already agreed to pay into the common-benefit fund. This is because, at the outset, the settling attorney signed an agreement to have his or her cases participate in and benefit from the discovery.

Because such agreements are enforceable through the MDL, a judge is drawn into decision-making, as discussed in the MDL-matrix section above. If somehow the attorney did not sign an agreement, and especially if the case is in a state court, it may be difficult to enforce any common-benefit assessment. See Rheingold, Ch. 4.

Ethics Issues Raised with “All-or-Nothing” Mass Settlements
With the rise of inventory settlements have come several new trends. The most important is that defendants increasingly require that if a plaintiff-side law firm wants to settle any of its inventory, it must settle all. See Rheingold, Ch. 7, 14. This kind of requirement has led to great concern about the rights of individual clients. Because the settlement has certain matrix-like aspects to it, such as the defendant being willing to pay a certain amount for a given injury and having already paid that in the cases of other firms, the amount might be satisfactory for most, but not all, similarly situated clients of the particular law firm.

Extremely thorny ethical issues are raised whenever a law firm or group of lawyers works out a settlement that requires all or almost all clients in a group to settle, and there has been much writing on this, both from the academy and the bar. In 2010, the American Law Institute (ALI) weighed in with its “Principles of Aggregate Litigation.” See Rheingold § 2:106.

On the one hand, the settlement of litigation is almost always the greater good, and a few dissidents arguably should not be able to preclude the great majority of injured people from getting a settlement they want. On the other hand, there is no legally recognized collective good or will on the part of a group of injured persons, and, hence, the rights of individuals must be respected. The pertinent issue here is whether a judge who might otherwise have authority over common-benefit issues has a role in such all-or-nothing settlements—affirming them, blocking them, or seeking to modify them.

In events so far, most judges have avoided involvement—perhaps they were unaware of the questionable terms or chose to ignore the issue. However, Judge Fallon in the Vioxx litigation in unpublished opinions, for example, In re Vioxx Products Liability Litigation, 2010 WL 724084 (E.D. La. Feb. 18, 2010), ordered language in the settlement that adopted the all-or-nothing approach to be modified to the extent that each attorney had to exercise his or her independent professional judgment in the best interests of each client. See Rheingold § 14:13.50. While this is a tepid response, at least that court had the willingness to recognize the ethical dilemmas involved.

In contrast with the power of an MDL judge to regulate fees and costs in the context of a mass settlement, the issue in inventory settlements is whether the process is so private that the court has no role. That is the argument made in the Gabril article, supra. The analogy is made to the individual case, where the plaintiff and the defendant settle out of court. Except under special circumstances relating to fiduciary, such as a wrongful death or an infant, the parties can arrange what they want, within the boundaries of state rules regarding maximum fees and how expenses may be handled.

This argument has been carried over to settlements not quite as private as the inventory settlement, such asthe World Trade Center litigation. While the author generally supports that view, there are instances where experience teaches that some oversight is valuable if only to prevent fraud or the deception of clients. Regarding costs, the law firm might be seeking to impose improper expenses, such as ones for which it is obligated to pay, versus a legitimate case expense.

But what if the firm had 1,000 clients, all with similar liability, causation, and damages issues, and each was signed up to an otherwise permissible 40 percent fee? If aware of this, some judges might seek to reduce the fee uniformly, as they have in situations where they have more direct control.

The World Trade Center Litigation
The unusual situation of a judge interjecting himself into a privately negotiated mass settlement recently occurred in the World Trade Center litigation arising out of the September 11, 2001, terrorist attack. The Air Transportation Safety and System Stabilization Act (49 U.S.C. § 40101) vested exclusive jurisdiction over all 9/11-related litigation in the Southern District of New York, which led to the selection of Judge Alvin Hellerstein. See Grabill, supra; Effron, “Event Jurisdiction and Protective Coordination: Lessons from the September 11th Litigation” 81 So. Cal. L.R. 199 (2008).

Part of the 9/11 litigation was brought by rescue workers who had developed illnesses they alleged were due to exposure. The role played by Judge Hellerstein in the management of this litigation is closely analogous to the MDL model discussed above, but obviously not identical.

In 2010, the parties (claimants and the defendants—the city of New York, the Federal Emergency Management Agency (FEMA), and contractors and insurance companies) announced a settlement. This settlement was not worked out with the judge, nor did it incorporate any provisions that would involve the court. This is about as private an agreement on a mass tort as you can get. However, Judge Hellerstein ultimately became involved in its terms and operations.

Judge Hellerstein opined that the settlement was not fair to all of the claimants. His view led to renegotiations that produced a much larger settlement. Although he had no direct authority, the judge approved this settlement, using factors similar to those employed in the class-action context. The court viewed its power as similar to that of an MDL judge. In later proceedings, the court also became involved in determining whether a firm participating in the litigation was acting ethically in attempting to drop representation of certain of its clients. In re World Trade Center Disaster Site Litigation, 769 F. Supp.2d 650 (S.D.N.Y. 2011).

The 2011 Sprint Fidelis Settlement
A rare matrix settlement with no true judicial supervision recently occurred in the Medtronic Sprint Fidelis mass-tort litigation. See Rheingold § 9:69. The unique way that the settlement occurred bore heavily on the situation. The Sprint Fidelis litigation began normally enough, with an MDL encompassing a large number claims alleging defective lead wires for pacemakers. But all of the claims—the entire MDL—were dismissed on grounds of federal preemption. In Re Medtronic, Inc. Sprint Fidelis Leads Products Liability Litigation, 623 F.3d 1200 (8th Cir 2011). While that appeal was pending, the parties settled, but not in time to avoid affirmance.

The Sprint Fidelis settlement provided some $268 million to settle all claims. It was a private settlement, not involving the district judge. But sensing that they needed some sort of supervision, the parties appointed a retired judge from the same court and who had other mass-tort experience to be a “Third Party Neutral.”

The roles assigned to the neutral in the Sprint Fidelis settlements related to the usual issues of establishing the common-benefit fees and expenses, plus oversight of “appeals” from decisions made as to individual payments. Another virtually unique factor in this resolution was that, while it was nominally an opt-in settlement, a plaintiff’s opt-out right was illusory because the court has already held that there was no cause of action.

This review of recent mass-tort settlements, including those that some might characterize as “private,” indicates that, in one way or another, a judge has played a role in all of them. Indeed, as far as this author is aware, there have been no mass settlements where a judge had no role. Hence, the author would not agree with the conclusion in the Grabill paper that it is desirable to have private settlements, where the judge has no role, as an analogy to a one-on-one settlement. A mass of similarly situated plaintiffs can be seen as a fiduciary group akin to children, incompetents, or a death case. Those appointed by a court to represent the claimants in mass-tort litigation should be viewed as having fiduciary duties extending to the entire group.

Keywords: litigation, mass torts, settlements, multidistrict litigation, class actions, judicial supervision

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