The following post comes to us from Dana Remus, Associate Professor of Law at the University of North Carolina School of Law, and Adam S. Zimmerman, Associate Professor of Law at Loyola Law School in Los Angeles. It is based on their recent paper, “The Corporate Settlement Mill,” which is available here. 

Last month, General Motors hired Kenneth Feinberg, one of the nation’s most recognized experts in mass victim compensation,[1] to address the challenge of compensating victims injured by defective ignition switches.[2] Described by some as the “Special Master of America,”[3] Feinberg has deftly overseen many large funds, including those designed to provide relief to victims of the Boston Marathon bombing, the BP oil spill, and the terrorist attacks of September 11.

General Motor’s decision to retain Feinberg was different from his other engagements, however. In most other cases, a court, federal agency, or political official appointed Feinberg to independently oversee a complex settlement fund. General Motors, by contrast, seems ready to compensate certain categories of accident victims and their families all by itself—even as it moves aggressively to shut down other types of cases, including dozens of class-action lawsuits seeking compensation for economic losses like the diminished value of the recalled vehicles.

GM claims that it seeks to respond to these victims as part of a “civil and legal responsibility[4] to make things right, but its decision to create its own private compensation process also reflects a strategic response to the modern world of mass litigation and our administrative state. GM’s ignition defect has become not only a moral and public relations disaster for GM, but a huge financial drain; GM’s profits have fallen close to 85% since the news first broke of its faulty ignition switch.[5] According to the New York Times, the company faces not only the costs of repairing the 2.6 million recalled cars, but also the costs of new regulatory probes, criminal investigations, Congressional hearings, and legal claims that may run into the billions of dollars.

As we explore in our new paper, The Corporate Settlement Mill, GM’s decision to create its own mass settlement program is hardly unique. Over the past two decades, corporate defendants have increasingly relied on private settlement programs to resolve claims with large groups of people who often cannot afford the cost of counsel. Sometimes, they do so voluntarily as GM has done. In other cases, they are required by federal laws, regulatory bodies, or as a matter of complex litigation practice. These private settlement systems rely on corporate economies of scale to resolve massive disputes as comprehensively as a class action, but entirely outside of the court system. But even as federal laws encourage such private programs, few laws or rules hold the companies that create them accountable to the people they serve. Consider the following examples:

• Just weeks after the Deepwater Horizon exploded, causing the largest oil spill in the nation’s history (but months before Ken Feinberg became involved), BP opened one of the first of its 35 claim offices in a strip mall in Slidell, Louisiana,[6] as required by federal law.[7] Staffed by three claims adjusters outsourced from a private company, BP promised 30-minute, “one-on-one sessions” with any injured person wishing to file a claim for compensation. In just six weeks, BP paid out over $144 million to nearly 30,000 private parties through its corporate claim facilities.[8] But few rules spelled out who was eligible to recover, how parties should document their claims, and how BP itself should solicit input from shrimpers, oysterman or other far-flung businesses impacted by the spill.[9]

• Two weeks after a Costa Concordia cruise ship capsized off the coast of Tuscany, killing 30 passengers and stranding over 3,200, the Italian division of the Carnival Cruise Lines company offered each passenger over $14,000 for their psychological harm, medical payments, and cruise related expenses.[10] The settlement promised “an immediate response” without legal expenses, but the collective private settlement sought to head off a class action seeking ten times more in compensation than was offered through the settlement.[11]

• Following accusations that many of the nation’s largest banks executed “robosigned” mortgages or engaged in other sloppy mortgage practices, the Office of Comptroller for the Currency (OCC) entered into a landmark settlement requiring banks to perform an “independent foreclosure review” of past loans with borrowers.[12] Citing the banks’ comparative expertise in evaluating distressed loans, federal regulators permitted banks themselves to decide how many people would receive payouts ranging from $500 to $125,000. Although the OCC claimed to “spot check” the banks’ work, only 100,000 foreclosure files out of 4 million were reviewed for errors or fraud, far short of a statistically reliable sample.[13]

In our article, we explore the rise of these systems, which we call corporate settlement mills. We observe that they represent a current day version of the “no fault” programs with which policy makers have long experimented.[14] Like no fault programs, state-sponsored, high volume, corporate settlement mills promise many advantages as against slow-going, one-by-one case determinations made inside the courtroom. They promise to expand access to meaningful relief, offer injured victims more swift and consistent results, reduce court congestion, and deter and punish bad behavior.

But unlike most comprehensive legislative attempts to initiate “no fault” programs, which died a long time ago,[15] corporate settlement mills are being embraced by defendants and increasingly encouraged by the United States legal system. The Oil Pollution Act of 1990, for example, required BP to set up its own claim facilities to automatically reimburse claims for damages in the Gulf of Mexico.[16] Federal regulatory agencies require airlines,[17] common carriers,[18] and banks[19] to develop mass settlement programs through regulations and enforcement actions. And increasingly, courts have rejected class actions when defendants have already established “superior” out-of-court plans to compensate consumers or recall goods.[20] In each case, state actors have pressed putative corporate defendants to establish their own settlement programs that rely on commercial economies of scale to resolve disputes quickly, predictably, and in a high volume.

Corporate settlement mills, however, may impose costs of their own. Defendants who settle repeat cases in obscurity invite abuse, offer inconsistent payouts, and may undermine public regulatory goals to deter future bad behavior. Claimants may unwittingly waive valuable rights because the defendants, as “repeat players” in the system, enjoy inherently superior bargaining positions. And by removing whole classes of disputes from the public realm of the courts, corporate settlement mills may undermine the rule of law. Absent reform, the downsides of corporate settlement mills may outweigh their potential contributions to the goals of increased access, equality, and efficiency. The challenge, which we address in our article, is to minimize the costs of large private settlement systems while maintaining their advertised benefits of increased access, efficiency, and consistency.

The existing literature offers powerful, parallel critiques of settlements reached in individual cases,[21] class actions and complex litigation,[22] criminal plea bargains,[23] and legislative and executive compensation “funds.”[24] Corporate settlement mills are different and potentially more dangerous than these arrangements, however, because they represent far more than an extension of parties’ rights to contract in the “shadow of the law.”[25] Even as public actors encourage corporate settlement mills, interested private parties may exclusively design, operate, and in some cases, oversee them entirely. Corporate settlement mills thus raise the question about how far policymakers may go to privatize our public, and historically neutral, process of adjudication.[26]

In some ways, lawmakers’ support of corporate settlement mills reflects a broader governmental trend to privatize public services. When public actors require that corporations themselves establish rules to resolve disputes with consumers and other individuals, they delegate the judiciary’s core task—adjudication—to private parties. Corporate settlement mills therefore raise fundamental and important questions about privatization: Why is it acceptable to shift public functions to private corporations, and to trade formal adjudication for more efficient but private dispute resolution?

Drawing on literature that addresses the growing privatization of government functions, we argue in our article that corporate settlement mills can serve as an appropriate alternative to public adjudication when policymakers adopt internal and external accountability mechanisms to ensure that these privatized systems remain answerable to the regulators, courts, and claimants that rely on them. We suggest several ways to begin creating and implementing such reforms, including: (1) consumer or other stakeholder participation in the design of corporate settlement systems, (2) more comprehensive prospective administrative regulation for the operation of corporate settlement systems, (3) revised ethical standards for the lawyers who design these systems, and (4) enhanced judicial review of liability waivers acquired through these systems.

[1] Linda Przybyszewski,  What Is Life Worth? Attorney Kenneth Feinberg Has the Answer, Time, Apr. 2, 2014, available at http://time.com/47527/gm-recall-kenneth-feinberg-retained-victim-compensation/.

[2] Hillary Stout & Danielle Ivory,  G.M. Talks to Families With Claims Over Defects, N.Y. TIMES, May 2, 2014, available http://www.nytimes.com/2014/05/03/business/gm-in-settlement-talks-over-recalledcars.html?_r=0.

[3] Ashby Jones, Spotlight on Ken Feinberg: Special Master of America, available at http://blogs.wsj.com/law/2010/01/14/spotlight-on-ken-feinberg-the-special-master-of-america (last checked Feb. 28, 2014). In the interest of full disclosure, one of the co-authors, Adam Zimmerman, has worked with Ken Feinberg on the September 11 Victim Compensation Fund.

[4] Martha Neil,  GM hires disaster master Ken Feinberg as auto recall grows; he will look at victim compensation, ABA Journal, Apr. 1, 2014, available at http://www.abajournal.com/news/article/amidst_growing_auto_recall_gm_hires_disaster_master_ken_feinberg_is_mulling/.

[5] Bill Vlasic,  Hurt by Vehicle Recalls, G.M.’s Profit Falls 85%, N.Y. TIMES, Apr. 24, 2014, available at http://www.nytimes.com/2014/04/25/business/general-motors-net-income-falls-85.html action=click&contentCollection=Business%20Day&module=RelatedCoverage&region=Marginalia&pgtype=article.

[6] Christine Harvey,  BP Opens Slidell Claims Center to Help People Affected by Gulf Oil Spill, TIMESPICAYUNE, May 17, 2010,  available at http://www.nola.com/news/gulf-oilspill/index.ssf/2010/05/bp_opens_slidell_claims_center.html.  See also Legal Liability Issues Surrounding the Gulf Coast Oil Disaster: Hearing Before the H. Comm. on the Judiciary, 111th Cong. (2010)(testimony of Darryl Willis, Vice President, Resources, BP America),  available at http://judiciary.house.gov/_files/hearings/printers/111th/111-130_56642.pdf.

[7] The Oil Pollution Act of 1990, 33 U.S.C. §§ 2705(a), 2713, 2714(b).

[8] Amy Schoenfeld,  Where Are BP’s Compensation Checks Landing?, N.Y. TIMES, Jul. 4, 2010, at BU1.

[9] Jonathan Tilove,  BP Trying to Limit its Payouts, Lawyers Say, TIMES-PICAYUNE, June 10, 2010 (describing “ongoing concerns related to delayed processing times for larger loss claims, claims pending with no action taken, payment calculations for individual loss of income claims … translation of claims material and accessibility for the hearing-impaired”), available at http://www.nola.com/news/gulf-oilspill/index.ssf/2010/06/firm_bp_is_using_to_handle_oil.html.  See also Josh Wingrove,  BP Pulls Disputed Waiver for Workers, GLOBE & MAIL (Toronto), May 3, 2010, at A11 (describing allegations that BP sought “to pull the wool over” the eyes of local fishermen by requiring litigation waivers); Campbell Robertson, Along Gulf, Many Wary of Promises After Spill, N.Y. TIMES, May 10, 2010, at A12.

[10] Nicole Windfield,  Costa Cruises Offers $14,460 Per Person For Concordia Cruise, HUFFINGTON POST, Jan. 27, 2012,  available at http://www.huffingtonpost.com/2012/01/27/costa-cruises-disastercompensation_n_1236148.html.

[11]  Id.

[12] U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-13-277, LESSONS LEARNED COULD ENHANCE CONTINUING REVIEWS AND ACTIVITIES UNDER AMENDED CONSENT ORDERS 15–20 (2013),  available at http://gao.gov/products/GAO-13-277 [hereinafter “GAO INDEPENDENT FORECLOSURE REVIEW STUDY”]; OFFICE OF THE COMPTROLLER OF THE CURRENCY, INTERIM STATUS REPORT: FORECLOSURE RELATED CONSENT ORDERS 10–13 (June 2012),  available at http://www.occ.gov/news-issuances/newsreleases/2012/2012-95a.pdf 

[13]  Id. at 7–10 nn.24–26.

[14]  See JOHN F. WITT, THE ACCIDENTAL REPUBLIC (Harvard 2004) (describing efforts to adapt workers compensation and other models to United States tort law in the early 1900s).

[15] Nora F. Engstrom, An Alternative Explanation for No-Fault’s ‘Demise’. 61 DePaul L. Rev. 303, 306-07 (2012); KENNETH S. ABRAHAM, THE LIABILITY CENTURY: INSURANCE AND TORT LAW FROM THE PROGRESSIVE ERA TO 9/11, at 100 (2008) (observing that the no-fault movement had “breathed its last breath”); Robert L. Rabin, The Renaissance of Accident Plans Revisited, 64 MD. L. REV. 699, 725 (2005).

[16]  See,  e.g., The Oil Pollution Act of 1990, 33 U.S.C. §§ 2705(a), 2713, 2714(b).

[17]  See 14 C.F.R. § 250.1-9 (2012) (describing the Department of Transportation’s amended “Airline Denied Boarding Compensation” policy).

[18]  See 49 U.S.C. §14706(f) (permitting carriers to limit liability to shippers to $.60 per pound of any shipped good or another value by “a written agreement” so long as the agreement is maintained with the Federal Motor Carrier Safety Administration and offers the shipper two or more settlement options). Accord Hughes Aircraft v. N. Am. Van Lines, 970 F.2d 609, 611–12 (9th Cir. 1992).

[19]  See INTERIM STATUS REPORT: FORECLOSURE RELATED CONSENT ORDERS , supra note 12.

[20]  See,  e.g., Berley v. Drefus Co., 43 F.R.D. 397 (S.D.N.Y. 1967) (refusing to certify class for those purchasing unregistered stock after defendant set up program to refund purchase price); Chin v. Chrystler Corp., 182 F.R.D. 448 (D.N.J. 1998) (refusing to certify class of plaintiffs with defective anti-lock brakes after Chrysler instituted plan to reimburse owners of vehicles with defective ABS systems); In re ConAgra Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689, 699-701 (N.D.Ga. 2008); In re Aqua Dots Prods. Liab. Litig, 270 F.R.D. 377 (N.D. Ill. 2010) (refusing to certify class of consumers who purchased toys that produced comas when swallowed because of voluntary recall and refund program);  accord In re Phenylpropanolamine (PPA) Prods. Liab. Litig., 214 F.R.D. 614 (W.D.Wash.2003) (finding effective recall of pharmaceuticals containing PPA more efficient that class litigation).  See also Eric P. Voight,  A Company’s Voluntary Refund Program For Consumers Can Be A Fair and Efficient Alternative to a Class Action, 31 REV. LITIG. 617 (2012); Andrea Joy Parker, Note,  Dare to Compare: Determining What “Other Available Methods” Can Be Considered Under Federal Rule 23(b)(3)’s Superiority Requirement, 44 GA. L. REV. 581 (2010).

[21]  See Owen M. Fiss,  Against Settlement, 93 YALE L. J. 1073, 1085 (1984).

[22]  See, e.g., John C. Coffee Jr.,  Class Wars: The Dilemma of the Mass Tort Class Action, 95 COLUM. L. REV. 1343, 1367–84 (1995); Howard M. Erichson,  Informal Aggregation: Procedural and Ethical Implications of Coordination Among Counsel in Related Lawsuits, 50 DUKE L.J. 381, 386–401 (2000); Charles Silver & Geoffrey P. Miller, The Quasi-Class Action Method of Managing Multi-district Litigations: Problems and a Proposal, 63 VAND. L. REV. 107 (2010); Howard M. Erichson & Benjamin C. Zipursky, Consent Versus Closure, 96 CORNELL L. REV. 265 (2011).  See also PRINCIPLES OF THE LAW OF AGGREGATE LITIG. § 3.06 Reporters’ Notes (2010).

[23] Rachel E. Barkow,  Institutional Design and the Policing of Prosecutors: Lessons from Administrative Law, 61 STAN. L. REV. 869, 873 (2009); Stephanos Bibas,  Plea Bargaining Outside the Shadow of Trial, 117 HARV. L. REV. 2462 (2004); Gerard E. Lynch,  Our Administrative System of Criminal Justice, 66 FORDHAM L. REV. 2117, 2149 (1998).

[24]  See, e.g., Linda S. Mullenix,  Prometheus Unbound: The Gulf Coast Claim Facility as a Means for Resolving Mass Tort Claims—A Fund Too Far, 71 LA. L. REV. 819 (2011); Elizabeth M. Schneider,  Grief, Procedure, and Justice: The September 11th Victim Compensation Fund, 53 DEPAUL L. REV. 457, 489 (2003).

[25] Robert H. Mnookin & Lewis Kornhauser,  Bargaining in the Shadow of the Law: The Case of Divorce, 88 YALE L.J. 950 (1979); Robert Cooter et al.,  Bargaining in the Shadow of the Law: A Testable Model of Strategic Behavior, 11 J. LEGAL STUD. 225 (1982).

[26] Tumey v. Ohio, 273 U.S. 510, 24–26 (1927) (tracing principle of independent and public adjudicators to 14th Century England); Gibson v. Berryhill, 411 U.S. 564 (1973) (“It is sufficiently clear from our cases that those with substantial pecuniary interest in legal proceedings should not adjudicate these disputes.”). See also Judith Resnik, Procedure as Contract, 80 NOTRE DAME L. REV. 593, 622–27 (2005)