November 4, 2009
The Trouble with All-or-Nothing Settlements
My new paper, The Trouble with All-or-Nothing Settlements, is now available on SSRN. I presented it at last week's symposium in Kansas on "Aggregate Justice: Perspectives Ten Years After Amchem and Ortiz." The theme of the conference got me thinking about the shift in mass dispute resolution. The failed settlements in Amchem and Ortiz were driven by defendants' insistence on peace, and defendants today often demand similar comprehensiveness. Much of the action, however, has shifted from settlement class actions to non-class aggregate settlements. Rather than peace through Rule 23, defendants try to obtain peace by negotiating settlements with all-or-nothing clauses, mandatory withdrawal provisions, or other terms to ensure comprehensiveness. Too often, however, such all-or-nothing settlements lead to ethical problems. This paper is my attempt to unpack the various problems engendered by such deals. Here's the abstract:
When defendants settle litigation involving multiple plaintiffs, they often insist that they will settle only if they obtain releases from all or nearly all of the plaintiffs in the group. Judges, lawyers, and academics largely accept the drive for comprehensive settlements as a given, and many embrace such settlements as a positive goal. All-or-nothing settlements, however, create uncommon pressures and opportunities for abuse. Exploring a number of recent mass settlements that have led to disciplinary proceedings, civil litigation, and criminal prosecutions, this article shows the pressures and opportunities that arise out of defendants' insistence on bringing all claimants into a deal.
The article describes seven types of ethical problems created by demands for fully inclusive settlements. First, all-or-nothing settlements create client-client and lawyer-client conflicts of interest. Second, such settlements exacerbate problems concerning the allocation of settlement funds, including incentives to misallocate. Third, they create a risk of strategic hold-outs as savvy clients may attempt to extort additional money by withholding consent. Fourth, they create an incentive for lawyers to keep settlement money in reserve as a slush fund to ensure full participation, leading to problems of misallocation and client deception. Fifth, they generate loyalty problems by pressuring lawyers to withdraw from representing non-settling clients. Sixth, they create special problems concerning clients’ informed consent to aggregate settlements. And seventh, they introduce a risk of collusion as the interest of plaintiffs’ counsel aligns with the defendant’s interest in getting every plaintiff to sign on to the deal. Although all-or-nothing settlements provide peace for defendants and value for claimants, the troubles they engender suggest that the current love affair with comprehensive settlements - evident in academic writings, judicial pronouncements, and defendant demands - should be tempered by a realistic appreciation of the ethical downside.
I'd be very interested in any comments readers may have. If you have thoughts or suggestions either about the overall analysis or about any of the specific settlements discussed in the paper, please feel free to e-mail me directly or to comment on the blog.
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