The Role of Judges and Special Masters in Post-Settlement Claim Administration (Mealeys)
June 16, 2006
Fri, Jun 16, 2006By: Mark G. Boyko, Esq.
[Mark G. Boyko, an associate at Sandberg, Phoenix and von Gontard, P.C., in St. Louis, is deputy reporter for the CPR International Institute for Conflict Prevention and Resolution’s Commission on Facilities for the Resolution of Mass Claims. The commission, headed by Deborah Greenspan and Kenneth Feinberg, is charged with creating a guide for designing claims administration procedures in mass tort and other large scale litigation. Mr. Boyko earned his J.D. from the University of Missouri – Columbia in 2004 and his LL.M. from New York University in 2005. His practice includes products liability and class action defense. This article is the first in a series of columns by Mr. Boyko for Mealey’s Emerging Toxic Torts. Responses are welcome. Copyright 2006 by the author.]
Aggregate settlements are, at their best, the beginning of the end of litigation, and not an end in and of themselves. Some, by virtue of their relative simplicity, truly signal that years, if not decades, of conflict are approaching a resolution. For others, the birth of the Stipulation of Settlement sees more beginnings than endings. Litigation continues on various fronts, and the settlement itself sparks renewed conflict as interests and incentives shift for defendants, litigants and, certainly not least for members of the plaintiffs’ bar. Meanwhile, largely due to the hazards of these shifts, courts maintain their control over the parties and the settlement’s administration. This is true whether the resolution was reached after the certification of a class under Rule 23 and its state equivalents, whether settlement came in resolution of a bankruptcy or, in at least one recent decision, after consolidation by the Judicial Panel on Multidistrict Litigation. While recent efforts, including the work of the International Institute for Conflict Prevention and Resolution’s Commission on Facilities for the Resolution of Mass Claims, will shed added light onto the post-settlement role of the judiciary, all practitioners contemplating mass settlement should be equipped with a basic understanding of the continuing oversight any settlement may entail.
Judicial Supervision Of Aggregate Settlements
Under Rule 23(e), the district court judge has the duty to ensure that any class settlement is “fair, reasonable, and adequate.”1 The Manual for Complex Litigation instructs courts to apply various techniques to ensure that any settlement of dispersed personal injury class action meets Rule 23(e) criteria.2 These include the use of back-end opt-outs, limits on opt-outs, and claims facilities. Back-end opt-outs allow claimants to exclude themselves from the class at some future date as their injuries progress, and limits on opt-outs allow defendants to condition the global settlement on having the total number of opt-outs remain low. These devices are relatively easy for a court to supervise if necessary after initially approving a settlement following a fairness hearing and other pre-settlement procedures.3
Meanwhile, true post-settlement judicial supervision of mass tort cases occurs in three particular ways. First, the district court oversees the creation of the settlement and the criteria for administering claims. Second, the court may serve in some capacity as an appellate body to review individual awards made by a claims facility. Finally, the district court has discretion to essentially set the attorneys’ fees for all plaintiffs’ counsel. This role calls for judicial oversight not simply during a single “fairness hearing,” but, rather, on a continuing basis extending until the last claimant cashes the last settlement check.
The Role Of The Special Master
No matter the procedure used for aggregation, judges at both the federal and state level routinely appoint an aide, or “special master”, to be their eyes and ears (and gavels) in overseeing settlement administration. Oftentimes, the special master, rather than the parties, formulates the claims facility and claims processes, and may preside over individual claim determinations. 4 In federal court, these masters are appointed pursuant either to the settlement agreement itself or to Rule 53(1)(c), which provides for such appointments to “address pretrial and post-trial matters that cannot be addressed effectively and timely by an available district judge or magistrate judge of the district.” Typically, the judge will instruct the special master to consult with each side and submit an independent proposal for the design of any claims facility and the distribution, or mechanism of determining the distribution, of attorneys’ fees. The special master may then recommend the terms and conditions by which claimants file with, and are eligible to participate in, the settlement and provide oversight for the judge to ensure that claims are handled fairly and efficiency and that the settlement fund remains funded. Finally, special masters may serve as an internal appellate body, reviewing (or even making) determinations in individual claims.5
Determining Settlement Allocation
In light of limited judicial resources and the various agency problems in allowing plaintiffs’ counsel to set claimant awards, settlement agreements, often at the insistence of the trial court judge, frequently call for the appointment of a special master to “develop a proposed plan of allocation of distribution of the Settlement Fund, employing open and equitable procedures to ensure fair consideration of all proposals for allocation and distribution.”6 At that time, a special master is typically appointed to prepare an allocation plan subject again to the approval of the court.
In many settlements, these allocation and design decisions are made before settlement is ever approved in a fairness hearing. In these cases, the special master or other entity administers the settlement in a very ministerial way. Other cases have confirmed settlements where a special master retains significant discretion to allocate settlement funds, and the special master continues to make recommendations for change to the district court judge years after the initial settlement was approved.7 The district court has “broad supervisory powers with respect to the administration and allocation of settlement funds,” and appellate courts review these judicial decisions under the “abuse of discretion” standard.8
The Determination Of Claimant Awards
While the special master makes only “recommendations” to the district court in the best way to establish claims process and administration, his role or the role of the claims facility generally shifts when determining awards for individual claimants. Here too, special masters may be deputized either by the settlement agreement itself or by Rule 53. Judicial review can and should shift accordingly. While settlement agreements may provide for a neutral within the facility to make “final and binding” decisions, debate continues as to whether these decisions can be reviewed, and, if so, how much deference to which they should be entitled. Few decisions have addressed the issue of whether this neutral remains a servant of the court, essentially requiring a judge to exercise de novo review of the special master’s individual determinations, or whether these findings and awards are entitled to deference analogous to a trustee’s, an arbitrator’s, or under a different standard of review.
In In re Sulzer Orthopedics and Knee Prostheses Products Liability Litigation, the Sixth Circuit U.S. Court of Appeals recently affirmed a district court decision not to review determinations by a special master who had been selected to oversee the settlement and make “final and binding” decisions on individual claims. (398 F.3d 782 [6th Cir. 2005]). Meanwhile, in Turner v. Orr, the Eleventh Circuit U.S. Court of Appeals held the settlement agreement envisioned the use of a Rule 53 special master, whose recommendations were reviewable by the district court. (722 F.2d 661 [11th Cir. 1984]).
In Turner, the parties had attempted to agree on a particular special master, but the district court ultimately selected the special master when the parties failed to reach a consensus. The Court of Appeals held that MEALEY’S Emerging Toxic Torts Vol. x, #x Month x, 2006 3 “absent an explicit indication to the contrary, when the parties provided for a ‘special master’ they intended a Rule 53 special master.” Id. at 664. This is particularly true in light of district court’s continuing obligation to monitor the settlement pursuant to Rule 23(e). Id. at 665-666.
In contrast, the Court of Appeals in Sulzer Orthopedics determined that the “final and binding” language in the Settlement Agreement, with no explicit right of appeal, definitively prevented the District Court from reviewing claim determinations of the special master, holding that the agreement did not contemplate judicial review.
While the issue is of little import where the responsibilities assigned to the special master are essentially ministerial, some settlements deputize a special master with a relatively free hand to fashion individual awards. Where a special master, brought on for this purpose, is considered a servant of the court under Rule 53, the district judge can expect frequent appeals from the special master’s ‘recommendations.’ However, where the special master is treated as an arbitrator, whose jurisdiction comes not from the court but, rather, from the settlement contract, judicial review is presumably limited based on the “manifest disregard” standard of review and challenges that the special master exceeded his jurisdiction. Meanwhile, courts have “gone so far as to term the district judge in the settlement phase of a class action suit a fiduciary of the class, which is subject therefore to the high duty of case that the law requires of fiduciaries.”9 What remains unclear is whether class members successfully challenge a special master for failing to fulfill that duty.
Judicial Supervision Of MDL Settlements
Judicial supervision of mass settlements is only contemplated by the Federal Rules in cases where aggregation was achieved by class action or bankruptcy. However, the risks of settlement collusion and collective representation can also be found in large-scale aggregation via joinder, consolidation, or multi-district litigation. In these cases, as in class actions, the traditional lawyer-client relationship breaks down and individuals surrender meaningful control over their claims.10 Recognizing this reality, U.S. District Judge Jack B. Weinstein’s recent decisions in the Zyprexa MDL 1596 have expanded judicial supervision of aggregate settlements beyond the traditional realms of class actions and bankruptcy.
Zyprexa, a medication for schizophrenia and bipolar disorder, has been linked to the development of diabetes and other diseases. In June 2005, Zyprexa manufacturer Eli Lilly & Co. agreed to a $690 million settlement covering about 8,000 lawsuits then pending in an MDL before Judge Weinstein in the Eastern District of New York. Citing the large numbers of plaintiffs and coordination of plaintiffs’ attorneys, including the formulation of a steering committee, Judge Weinstein reasoned that just as judicial supervision is required to prevent exploitation of absent class members in Rule 23 aggregation, such supervision is necessary in the “quasi-class action” realm of multi-district litigation. The role of courts in both cases, he found, is fiduciary in nature and the parties are thereby subject to the “general equitable power of the court.”11
Kenneth Feinberg, chairman of the CPR International Institute for Dispute Resolution’s Commission on Mass Torts and a frequent special master, observed that Weinstein is concerned “not about absent class members, but whether the plaintiffs’ attorney representing more than one client can fairly represent all.”
Based on this authority, Weinstein appointed four special masters to recommend the allocation of attorneys’ fees and expenses, with the idea that attorneys’ fees would be “the lesser of the maximum reasonable fee schedule they recommend, the fee agreed upon between the client and the attorney in the individual case, and the maximum amount permitted under the applicable local state rules or statues.”12 The special masters, including Mr. Feinberg, recommended that most attorneys’ see their fees capped at 37.5 percent of recovery, which Judge Weinstein adjusted downward to 35 percent. At the same time, Weinstein gave the special masters permission to vary the fee cap within the range of 30 percent to 37.5 percent in individual cases and specifically granted attorneys and claimants the right to appeal any such adjustments to him.
Weinstein’s determination that a federal court can interfere with a contractually agreed upon attorneys’ fee recognizes a reality beyond that contemplated by the federal rules. Judicial supervision of attorneys’ fees for class action are accepted, or, more accurately,Vol. x, #x Month x, 2006 MEALEY’S Emerging Toxic Torts 4 required under the Federal Rules. This makes sense as those fees are often paid at the expense of absent class members, who never retained counsel and have few means of negotiating a fair fee.
With defense and plaintiffs’ counsel both pushing for settlement, the judge and his appointed special master become a sort of representative for the interests of class members lacking the “motivation, knowledge, and resources” to protect themselves.13 While MDL plaintiffs are represented by counsel of their choosing, and likely have contingency fee agreements with them, those retail attorneys and their clients benefit collectively from the work of those on the plaintiffs’ steering committee, and, therefore, owe at least some portion of their settlement share to the leading plaintiffs’ counsel who oversaw uniform discovery, argued motions and otherwise protected the interests of all cases in the MDL.
The drafting of a settlement and conclusion of a fairness hearing often represents the end of the beginning of what will become years of judicial supervision. This oversight extends not only to a determination of attorneys’ fees, but frequently to the construction of the claims facility and determination of its procedures. Such oversight is explicitly called for where aggregation of claims comes as a result of class certification or bankruptcy. Recently, the push to extend and define judicial supervision has reached appeals by individual claimants and judicial oversight of aggregate settlements consolidated through multidistrict litigation. In recognizing the real incentives of attorneys and defendants in these cases, Judge Weinstein and others are reaching into a frontier not contemplated by the current Federal Rules. In the end, such efforts mark a new beginning of their own.
1. The Class Action Fairness Act of 2005 imposes certain other obligations on any district court judge reviewing class settlement that are beyond
the scope of this article.
2. Manual for Complex Litigation, Fourth, §22.922.
3. For examples, see Diet Drugs, 2000 WL 1222042 (E.D. Pa. Aug. 28, 2000) (describing back-end opt-out provisions); and In re: Silicone Gel Breast Implant Prods. Liab. Litig., MDL No. 926, Order No. 27 (N.D.Ala. Dec. 22, 1995) (discussing limits on opt-outs).
4, Oftentimes, multiple special masters are used, however, for simplicity, this article uses the singular.
5, A classic example of this relationship is In re Agent Orange, described in Mullenix, Linda S., Taking Adequacy Seriously: the Inadequate Assessment
of Adequacy in Litigation and Settlement Classes, 57 VAND. L. REV, 1687, 1724-25 (2004).
6, In re: Holocaust Victim Assets Litigation, Settlement Agreement §7.1.
8, In re: Holocaust Victim Assets Litigation, 424 F.3d 132, 146 (2nd Cir. 2005).
9, Reynolds v. Beneficial National Bank, 288 F.3d 277, 280 (7th Cir. 2002).
10, Chamblee, Elizabeth L., Unsettling Efficients: When NonClass Aggregation of Mass Torts Creates Second-Class Settlements, 65 LA. L. REV. 157 (Fall,2004).
11, In re: Zyprexa Products Liab. Litig., 2006 WL 768673 (E.D.N.Y. March 28, 2006).
12, In re: Zyprexa Products Liab. Litig., 233 F.R.D. 122 (E.D.N.Y. 2006).
13, Barbara J. Rothstein & Thomas E. Willging, Managing Class Action Litigation: A Pocket Guide for Judges, Federal Judicial Center, 2005.
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