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Scope of Class Action Releases & Loss Aversion

Posted by Eric Kingsley | Nov 15, 2013 | 0 Comments

Class Action releases are the most difficult part of a settlement.  Once the number is reached the parties assume that the rest of the agreement will fall into place.  In conventional litigation that's usually true, but class litigation has many more moving parts that can create impasses.  There are some serious pitfalls that parties should be prepared to address up front and anticipate before they put an end to your settlement.

The first issue to consider is the WHO (Who is going to be released?).  While on the surface this seems self-evident its not as straightforward as it may seem.  The who question deals with the members of the proposed class.   Careful attention must be directed to how the class definition is defined in any settlement papers.  For example, if a class had been previously certified to a particular date, a savvy defendant may want to enlarge the release to include the release up to the present.  Two questions must be asked here.  Will the class settlement adequately compensate the certified class for this added time?  Alternatively, do you have information up to the present.

In Los Angeles Superior Court wait times for motions in the Central courthouse can be 5-6 months.  As such a release through preliminary approval could add 5-6 months of release assuming that the settlement is approved the first time around.  Second, does this added release add more people to the class who were not there before.  This can be especially difficult in high turnover business.  In a business that turns over its workers on an annual basis, the release in question could have the class size increase by over 10%.  These extra people had not even filled out job applications when the settlement agreement was signed.  Moreover, this may give a malicious defendant the green light to abuse its employees with reckless abandon leading up to the time of preliminary approval because those claims have been pre-released.  This is a recipe for disaster and potential class malpractice liability or at a minimum the denial of final approval.

This lead me to the WHAT (What is being released?).  Defense lawyers want the kitchen sink.  Their job is to protect their clients so I can't blame them for this fact.  This must be pushed back on in most instances.  CCP Section 1542 waivers should never be included in a class release except as to the named plaintiffs.

Broad releases are also out.  The only thing that can really be provided is a release of claims alleged in the complaint or that could have been alleged based on the same facts and circumstances alleged in the complaint.  There should be no exceptions to this release language to pass muster in California.  There may be some judges in low population counties that will approve a broader release but in the larger counties this is all you are likely to get and all a plaintiffs lawyer should offer.

We discussed earlier the WHEN, but it bear some emphasis here.  You should always make sure the releases do not go very far out.  Our firm tries to be reasonable and bring the claims through to the date of settlement and tries to estimate the data even if the data falls a little short.  Agreeing to a release date through preliminary approval can not be countenanced anymore because of long waits for motions. It should be rejected on the plaintiffs side.  Get a hard date when releases end, dont agree to a motion date that may or may not be approved for sometime.

Finally the WHY.  I have come to the conclusion based in large part of my reading of Thinking Fast, Thinking Slow by Daniel Kahneman that loss aversion plays a major part in the settlement narrative.  I also believe that many class settlements are for the benefit of the defendant and the plaintiff's lawyer.  This subjects probably deserves a post of its own but I'll offer a preview here.  

Plaintiffs take less than case value in most circumstances   When I say this I recognize that in a mediation one must evaluate risk   Defendant's by in large do not evaluate risk effectively and the defense lawyer in many cases can not offer or the defendant will not listen to a real assessment .  Mediators do assist in the process but only so much.  In fact recently, I feel that many defendant are prepared for the mediator and their effects have been somewhat inoculated against.  

Defendants almost never overpay.  Despite what both parties think, the human brain is hard wired for this result.  The pain and loss of writing a check almost always does not fully recognize the risk of potential loss in the future.  This factor is exacerbated when the potential for victory is on opposite ends of the spectrum.   A defendant with a 90% of success is much more willing to “roll the dice” rather than pay the 10 cents on the dollar that the case is worth.  As such while rationally a case with a value of $1 should settle for a dime, it almost never will.  If it settles at all it is likely to settle for significantly less than a dime because of defendant's loss aversion, and to some extent plaintiff's fear.  Even in case where the success for defendant is only 10%, 90 cents on the dollar is not being paid because the defendant in that circumstance would rather “roll the dice” than pay the 90 cents.  The defendant there reasons that he could pay the dollar if he loses but might get off paying nothing.  This fact usually results in settlements much lower than 90 cents.  Even in the center plaintiff still get less for the same reasons but the magnitude may be less.  One way fee shifting statutes should change the calculus even further and to some degree they probably do, but not enough based on their projected effect post-trial. 

My point is, that as plaintiff's lawyers, we need to fight against the urge to settle.  We need to be more unreasonable, and willing to go to trial to prove the point.  Obviously, this must be done ethically and with a client fully informed of the risks, but the more that plaintiff's push back and the more big verdicts that are out there the more the fear of getting smacked will counter act the loss aversion that leads to lower settlements.  Over time, assuming effective counsel with adequate resources to try the cases, if every case went to trial, the defense bar would get clobbered as against the settlement value currently paid out.  I expect this would be by a significant margin.  This should lead you to conclude that if you are staining to settle and its not a dog, you probably should go to trial.  Good luck.

Eric Kingsley with Kingsley & Kingsley has extensive experience with class action cases here in California. He is available to answer your questions and to help you understand your rights.  Please don't hesitate to call if you have any questions: 888-500-8469.

About the Author

Eric Kingsley

In practice since 1996, attorney and firm co-founder Eric B. Kingsley has litigated complex cases and authored numerous appellate briefs in both state and federal court on behalf of the California law firm of Kingsley & Kingsley, including over 150 class actions. Mr. Kingsley concentrates his pra...

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