The paper uses two recent class settlements, In re AIG and Sullivan v. DB Investments, Inc., as the springboard to discuss settlement class actions. Erichson argues that the problem with class settlements isn’t that the would-be class counsel will collude with defendants to reach a deal that sells out the rights of absent class members. Instead, he says that plaintiffs’ lawyers simply lack sufficient leverage to negotiate a fair deal because (1) the practice of certifying settlement classes that aren’t manageable for trial means that they can’t realistically threaten to take the case to trial; and (2) the defendant has monopsony power and so can “purchase” a class-wide release from any class-action plaintiff’s lawyer. To ameliorate these problems, Erichson proposes to ban settlement classes and permit courts to certify classes only if they could be tried.
Trask contends that Erichson has misdiagnosed the problem, noting that if the plaintiffs had lacked leverage the defendants in AIG and Sullivan wouldn’t have paid so much to settle class actions that likely couldn’t have been certified over the defendants’ opposition.
I think Trask is right, and that Erichson’s attempt to re-frame the problem with settlement class actions is mistaken. To begin with, settlement negotiations take place before the settlement class is certified, when the plaintiff still can threaten to obtain class certification over the defendant’s objections (or at the least, to inflict millions of dollars of asymmetric class discovery costs on the defendant). With these weapons in hand, plaintiffs often have lots of leverage over defendants—which is precisely why many defendants are forced to settle claims of even dubious merit.
Moreover, Erichson’s worry about a class-action defendant’s monopsony power ignores the fact that in most class actions, there is only a single class counsel on the other side of the table. In the cases in which multiple plaintiffs have filed class actions, transfers and the MDL process usually lead to coordination and the appointment of a single interim lead class counsel. And even when there are still multiple plaintiff’s firms at the table, the one that can obtain the highest settlement price from the defendant in theory could use the surplus to pay the other plaintiff’s firms to cooperate.
Of course, it’s not always a good thing when this happens. As many observers have suggested, class counsel are often focused on maximizing attorneys’ fees rather than the class recovery—a problem that may be exacerbated when there are many mouths to feed. In other words, the real problem is that courts do not always try to align the incentives of class counsel and the class by tying fee awards to amounts actually recovered by class members.
At bottom, Erichson seems suspicious of settlement class actions because he thinks that cases as a rule are settling for too little. But when a class action lacks merit—and studies suggest that a high percentage of class actions do—a reduction in the price of class settlements is a cause for celebration, not concern.