Privatizing Mass Settlement

B. Reconceptualizing the "Lesson of BP" A second level of scholarly commentary suggests that, even assuming arguendo that the private compensation fund pays out a reasonable level of compensation, claimants and defendants should still prefer an MDL settlement to a private claims fund. (121) The argument is that victims are better off because defendants pay more in damages, while defendants are better off because they receive more closure--particularly in high-value cases like the BP oil spill. (122) But, is this always true? I do not dispute the fundamentals on which these scholars rely--the decreased litigation costs, mitigation of adverse selection problems, and benefit of resolving the final "handful" of cases. (123) But I question whether these justify the extent of the premium suggested here, or whether something more was at play. 1. The Traditional Conception of the Deepwater Horizon Funds Issacharoff and Rave posit that there were three components of the MDL peace premium that justified the enhanced settlement values relative to the GCCF: decreasing litigation costs by settling in bulk, instead of through individualized negotiations; reducing the risk of adverse selection, whereby the individuals with the best claim opt-out of the settlement; and resolving all claims, thereby avoiding the disproportionate costs the final holdouts can impose upon a corporation. (124) But does this explain the more generous public settlement? It is true that the MDL's embedded class actions converted the claims from de facto opt-in structures to opt-out Rule 23(b)(3) classes. But, what did this buy? The GCCF had already processed $6.2 billion in payments to 220,000 claimants. In contrast, only 3,016 cases have been filed in the MDL. (125) Against a backdrop of an existing claims fund and a running statute of limitations, how many strong claims was BP buying peace as to? Put another way, how many individuals who had not filed in the GCCF nor already filed lawsuits were likely to come forward before the statute of limitations expired? Given this dynamic, the class settlement required BP to make payments calculated based upon a large number of claims that would never have been pursued but for the class action device. The claimants in the class action can be conceived in three basic categories: (1) those who, for whatever reason, did not file a claim before the GCCF and also would not ultimately file in the Rule 23 action either--essentially the "no action" absent class members; (2) those who did not trust the GCCF, often because of its ties to BP or other questions of legitimacy, but would participate in a Rule 23 settlement with similar terms negotiated at arm's length; and (3) the claimants who believed they were systemically undercompensated by formulaic damages, and thus would opt out of both the private and subsequent public suits. Having disaggregated the potential claimants in this way, it becomes easier to conceptualize the limited role of adverse selection. So long as the settlement obtains final approval, BP would obtain peace as to the first category of "no action" claimants. Regardless of whether it paid the lower or higher amount, these individuals would be in the class and precluded from subsequent litigation--but the victory would be rather hollow, since they would never have filed claims in either system. So too, the second group of claimants, who merely wanted a legitimate, arms-length process for damages determination, will participate in the settlement at the lower or higher value. For clarification purposes, one might label these the procedural legitimacy/non-opt-out class members--they will accept whatever terms are approved by class counsel and the court. It is only the third group of absent class members whose participation is driven by the settlement's terms. But, because the same grid applies to all claimants, in order to capture each additional absent class member in this third, "potential opt-out" group, all claimants must receive these increasingly favorable terms. …