Docstoc

Supreme Court

Document Sample
Supreme Court Powered By Docstoc
					                Reprinted with permission from the August 16, 1999 edition of the New York Law Journal.

         Supreme Court Strikes Down Another “Settlement Class Action”
                                            By Robert A. Johnson
                                  Akin, Gump. Strauss, Hauer & Feld, L.L.P.


    The Supreme Court has struck down another attempt to use a federal class action to settle a huge
number of potential tort claims. Although the settlement would have been a creative and cost-efficient
way to resolve hundreds of thousands of cases, the Court held that it was not permissible under Federal
Rule of Civil Procedure 23, and that expediency of settlement does not permit the relaxation of federal
class action rules.
     The case, Ortiz v. Fibreboard,1 involved an estimated 186,000 future asbestos claims. During the
past 30 years, plaintiffs’ lawyers had filed thousands of cases alleging exposure to Fibreboard products
that contained asbestos, and were certain to file thousands more as new claimants came forward.
Fibreboard also had been engaged in massive litigation with two insurance companies over whether the
liability policies they issued in the 1950s had unlimited aggregate limits. Fibreboard prevailed in its
insurance coverage litigation in the trial court, but the insurance companies appealed. If the insurers
prevailed, there would be no insurance money for the asbestos claimants. If Fibreboard prevailed, the
insurance money was theoretically unlimited.
     Fibreboard wanted to put an end to the litigation. Fibreboard and certain asbestos plaintiffs’ lawyers
began negotiating a way to settle all of the outstanding claims, and to resolve all future claims yet to be
filed with a class action. Their idea was to create a class from which no one could opt out, and to
establish a separate trust fund that would be used to pay all future claimants. Fibreboard would be freed
to go about its business.
    Meanwhile, however, another case involving a “settlement class action” was working its way through
the courts, and ultimately would be rejected by the Supreme Court. That case, then known as the
“Georgine” settlement but eventually called Amchem Products Inc. v. Windsor on appeal,2 involved a
consortium of 20 manufacturers with enormous asbestos liability. The problem with Amchem was that it
was too broad in trying to encompass hundreds of thousands, if not millions, of people tied together by
the concern that each was, or some day might be, injured by exposure to asbestos—a concern which
included the effect on spouses and children.
    But what doomed the Amchem settlement was that it sought class certification under Federal Rule of
Civil Procedure 23(b)(3), where “questions of law or fact common to the members of the class
predominate.” The Supreme Court held that the “sprawling class” in Amchem did not satisfy Rule 23,
because the common questions did not predominate over questions affecting the proposed class’s
individual members.
     The parties in Fibreboard, however, crafted a clever alternative that sidestepped the “predominance”
requirement of FRCP 23(b)(3) by packaging their settlement under FRCP 26(b)(1)(B), which does not
have a “predominance” requirement. They sought to settle Fibreboard’s insurance claims for a fixed sum
of approximately $1.5 billion, then declared that the proceeds constituted a “limited fund” for settlement
purposes. Rule 26(b)(1)(B) addresses class actions in which “adjudications with respect to individual
members of the class . . . would as a practical matter be dispositive of the interests of the other members .
. . or impede their ability to protect their interests.” The idea of Rule 26(b)(1)(B) is that the first claimants
to a “limited fund” tend to deplete the assets at the expense of subsequent claimants—and so class action
treatment is warranted.
Not a “Limited Fund”
    But the Supreme Court rejected the Fibreboard settlement, holding that the proponents of a Rule
26(b)(1)(B) settlement “must show that the fund is limited by more than the agreement of the parties.”
The Supreme Court noted that Fibreboard itself paid only $500,000 into the fund, although the company
was sold in 1997 for $515 million—plus $85 million in assumed debt. The Court also noted that the
insurance proceeds would have been limited “if the total of demonstrable claims would render the
insurers insolvent, or if the policies provided aggregate limits falling short of that total.” Such was not
the case.
    The Supreme Court held that these facts did not fit into the historical characteristics of a “limited
fund” class action. The Court described “classic” limited fund cases as those involving “trust assets, a
bank account, insurance proceeds, company assets in a liquidation sale, proceeds of a ship sale in a
maritime accident suit, and others.” These examples have three characteristics.
    The first characteristic is that the fund is inadequate to pay all aggregated liquidated claims. Here,
however, the Court said there was no evidence in the record that the fund would be insufficient to pay
future claims. Indeed, the district court had concluded that “there is no way to predict Fibreboard’s future
asbestos liability with any certainty.” How, then, could the court conclude that the fund was insufficient?
     The second characteristic of the classic “limited fund” case is that all of the limited fund was to be
devoted to the claims, such that “the defendant or estate or constructive trustee with the inadequate assets
had no opportunity to benefit himself or claimants of lower priority by holding back on the amount
distributed to the class.” Here, however, “Fibreboard was allowed to retain virtually its entire net worth.”
Furthermore, with respect to the insurance portion of the settlement, the Court noted that there was no
factual finding that the settlement amount was the maximum that could be obtained from the insurers.
The Court acknowledged that the insurance companies had appealed the no-aggregate-limits decision in
the insurance coverage litigation, and that there was a substantial risk that the insurers would win on
appeal. But the district court had done nothing to quantify this risk, which would have been necessary to
support the argument that the settlement value of the insurance was the maximum that could have been
obtained.
    The third characteristic of the “limited fund” is that the claimants must be “treated equitably among
themselves.” Here, the Court found enormous conflicts of interest within the class, which the Court said
should have been divided into discreet subclasses. These conflicts were magnified by the conflicts of
interest of the plaintiffs’ counsel.

Class Conflicts
     The proposed class in Fibreboard was made up of “all persons with personal injury claims against
Fibreboard for asbestos exposure who had not yet brought suit or settled their claims” as of August 27,
1993; “those who had dismissed such a claim but retained the right to bring a future action against
Fibreboard; and past, present and future spouses, parents, children, and other relatives of class members
exposed to Fibreboard asbestos.” Excluded from the class were claimants with actions then pending
against Fibreboard, as well as those who had settled some claims against Fibreboard but had retained a
right to sue if they developed an asbestos-related cancer. The proposed settlement involved creation of a
trust to pay the class members’ claims. The settlement limited the amount of the trust assets that could be
paid out in any given year in an effort to protect the trust’s assets, so that they would be available to
compensate injured class members whose claims developed in the future. If a shortfall occurred in any
year, payments during that year were to be prioritized so that the sickest claimants were paid first. The
settlement allowed litigation against the trust, although it capped awards at $500,000 per claim and
precluded recovery of punitive damages. It also limited attorneys’ fees to 25% of the compensation paid




                                                     2
to a claimant. Furthermore, the proposed class did not provide individuals with a right to opt out of the
class.

Members Too Dissimilar
     The Supreme Court held that these class members were too dissimilar to be placed in one class
without discreet subclasses and separate counsel. The Court identified a distinction between those
presently suffering injury and those who had been exposed to asbestos but not yet had any physical injury
develop. The Court also noted that the class included claimants who were not yet born. Furthermore, the
Court found that a distinction should have been made for those exposed to Fibreboard products before and
after 1959, the expiration date of Fibreboard’s most valuable insurance policy. The Court said that each
of these subclasses should have had separate counsel to address their conflicts of interests.
    Additional problems were created by two sets of asbestos claimants that were excluded from the
class. Fibreboard had negotiated with class counsel a separate settlement for an “inventory” of 45,000
already-pending claims. These claims were settled for dollar amounts higher than average, but only one-
half of the money was paid upon closing. Payment of the second half was contingent either on reaching a
global settlement of the future claims or on Fibreboard’s success in the insurance coverage litigation.
This last condition meant that the plaintiffs’ lawyers had an added incentive to reach a quick settlement of
the putative class. The Court said: “Class counsel thus had great incentive to reach any agreement in the
global settlement negotiations that they thought might survive a Rule 23(e) fairness hearing, rather than
the best possible arrangement for the substantially unidentified global settlement class.” The Court found
that this conflict magnified the error of declaring the amount of the negotiated settlement to be a “limited
fund.” “Those separate settlements, together with other exclusions from the claimant class, precluded
adequate structural protection by subclass treatment, which was not even afforded to the conflicting
elements within the class as certified.”
     The second set of excluded claimants were those with unsettled presently pending cases, estimated by
a guardian ad litem to number 53,000 claimants. “[T]here can be no question that such a mandatory
settlement class will not qualify when in the very negotiations aimed at a class settlement, class counsel
agree to exclude what could turn out to be as much as a third of the claimants that negotiators thought
might eventually be involved, a substantial number of whom class counsel represent,” the Court said.
    In an impassioned dissent, Justices Stephen Breyer and John Paul Stevens said that the district court
had adequately addressed these conflicts of interest, making 76 separate findings of fact regarding
potential conflicts and how they had been addressed. Justice Breyer argued that there was no competent
counsel who was not already conflicted by virtue of Fibreboard’s past practice of settling cases contingent
upon resolution of the insurance dispute. He concluded that “judges can and should search aggressively
for ways, within the framework of existing law, to avoid delay and expense so great as to bring about a
massive denial of justice.”
Due Process Concerns
    The majority also expressed “serious constitutional concerns” about the Fibreboard class, particularly
because it would bind future unknown claimants and had no provision for claimants to opt out. The Court
said that “the certification of a mandatory class followed by settlement of its action for money damages
obviously implicates the Seventh Amendment jury trial rights of absent class members.”3 The Court
noted that “a mandatory settlement-only class action with legal issues and future claimants compromises
their Seventh Amendment rights without their consent.”
    An additional concern for the Court was that the mandatory class would deny these future unknown
claimants their day in court. The Court declared that that might be appropriate in “certain limited
circumstances,” such as when a non-party’s interests are adequately represented by someone with
identical interests, or “where a special remedial scheme exists expressly foreclosing successive litigation


                                                     3
by nonlitigants, as for example in bankruptcy or probate.”4 But the Court said “the burden of justification
rests on the exception,” and found that burden unmet by the Fibreboard settlement.

Issues Left Open
    Nevertheless, the Court left open the door for future efforts to use settlement class actions to dispose
of large numbers of tort cases in a cost-effective manner. “We do not, it is true, decide the ultimate
question whether Rule 23(b)(1)(B) may ever be used to aggregate individual tort claims.”
     The Court also acknowledged that “the elephantine mass of asbestos cases” presents extraordinary
problems: “dockets in both federal and state courts continue to grow; long delays are routine; trials are
too long; the same issues are litigated over and over; transaction costs exceed the victims’ recovery by
nearly two to one; exhaustion of assets threatens and distorts the process; and future claimants may lose
altogether.”5 The Court suggested that some future settlement class action could take these factors into
account, so long as the provisions of Rule 23 are not short-circuited. “If a settlement thus saves
transaction costs that would never have gone into a class member’s pocket in the absence of settlement,
may a credit for some of the savings be recognized in a mandatory class action as an incentive to
settlement? It is at least a legitimate question, which we leave for another day.”
Conclusion
    The Supreme Court said quite clearly that a fund is not limited just because the parties say that it is,
and that there are “serious constitutional concerns that come with any attempt to aggregate individual tort
claims on a limited fund rationale.”
   What then is the solution? Nothing presently exists in the federal judicial scheme other than
bankruptcy. As the Court noted, bankruptcy offers an exception in which the due process rights of future
unknown claimants can be addressed against the competing interests of resolving the debtor’s estate.
     The only other possibility is Congressional action, either to amend Rule 23 or to create a mechanism
for resolving asbestos claims generally. In a concurrence joined by Justices Antonin Scalia and Anthony
Kennedy, Chief Justice William Rehnquist wrote that “unless and until the Federal Rules of Civil
Procedure are revised,” the settlement class proposed in Fibreboard could not withstand scrutiny.
Nevertheless, he applauded “the near-heroic efforts” of the district court “to make the best of a bad
situation,” and concluded that the “the ‘elephantine mass of asbestos cases’ . . . cries out for a legislative
solution.” Although the Supreme Court made a similar plea in the Amchem decision two years ago, to no
avail, this time there may be a congressional response: the House Judiciary Committee was to begin
hearings July 1 on legislative proposals to resolve asbestos claims.

           Robert A. Johnson is a partner at Akin, Gump, Strauss, Hauer & Feld, L.L.P. in New York,
           New York.

Notes:

1
    No. 97-1704, decided June 23, 1999.

2
    117 S. Ct. 2231 (1997).
3
    Citing Ross v. Bernhard, 396 U.S. 531 (1970) for the proposition that since the merger of law and equity
    in 1938, “it has become settled among the lower courts that ‘class action plaintiffs may obtain a jury trial
    on any legal issues they present.’”




                                                        4
4
    Citing Martin v. Wilks, 490 U.S. 755, 762 n.2 (1989).

5
    Quoting from its prior decision in Amchem Products, Inc. v. Windsor, 521 U.S. 591, 598 (1997).




                                                      5

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:12/16/2011
language:
pages:5