Funding Irrationality

This Article challenges the conventional wisdom that claimants in class action settlement funds and other settlement funds make independent and rational settlement decisions. Cognitive psychologists and behavioral economists have long examined the way people make judgments and choices. Such studies show that decisionmakers routinely change their minds based on their view of the status quo, the timing of the decision, and the presence of seemingly irrelevant choices. Because of these cognitive biases, people will buy things they do not want, save too little for retirement, and make risky choices about their health and well-being based on the timing, context, and framing of the decision. Applying findings from cognitive psychology, I argue that people will make the same kinds of irrational decisions about their settlement options in a large settlement fund. As a result, cognitive biases threaten to undermine many of the stated purposes of large settlement funds-to provide claimants with access, efficiency, and equity superior to what they could obtain in traditional litigation. Accordingly, fund designers -judges, lawmakers, and special masters-should adjust settlement procedures to account for cognitive bias. I call this process funding irrationality -identifying and, in some cases, capitalizing on people\u27s cognitive biases in large settlement funds by altering the context, timing, and sequence of their settlement options. Fund designers, however, should avoid reforms that unduly eliminate settlement options, or that impose excessive administrative costs. Rather, the benefits of any reform-preventing avoidable harm to irrational claimants-must outweigh the potential costs, including the value of client autonomy, the chance of error, and the burden on the courts and public administrators

The Criminal Class Action

Over the past ten years, in a variety of high-profile corporate scandals, prosecutors have sought billions of dollars in restitution for crimes ranging from environmental dumping and consumer scams to financial fraud. In what we call “criminal class action” settlements, prosecutors distribute that money to groups of victims as in a civil class action while continuing to pursue the traditional criminal justice goals of retribution and deterrence. Unlike civil class actions, however, the emerging criminal class action lacks critical safeguards for victims entitled to compensation. While prosecutors are encouraged, and even required by statute, to seek victim restitution, they lack adequate rules requiring them to (1) coordinate with other civil lawsuits that seek the same relief for victims, (2) hear victims’ claims, (3) identify conflicts between different parties, and (4) divide the award among victims. We argue that prosecutors may continue to play a limited role in compensating victims for widespread harm. However, when prosecutors compensate multiple victims in a criminal class action, prosecutors should adopt rules similar to those that exist in private litigation to ensure that the victims receive fair and efficient compensation. We propose four solutions to give victims more voice in their own redress while preserving prosecutorial discretion: (1) that prosecutors and courts coordinate overlapping settlements before a single federal judge, (2) that prosecutors involve representative stakeholders in settlement discussions through a mediation-like process, (3) that courts subject prosecutors’ distribution plans to independent review to police potential conflicts of interest, and (4) that prosecutors adopt the distribution guidelines the American Law Institute developed for large-scale civil litigation to balance victims’ competing interests

The Criminal Class Action

Over the past ten years, in a variety of high-profile corporate scandals, prosecutors have sought billions of dollars in restitution for crimes ranging from environmental dumping and consumer scams to financial fraud. In what we call “criminal class action” settlements, prosecutors distribute that money to groups of victims as in a civil class action while continuing to pursue the traditional criminal justice goals of retribution and deterrence. Unlike civil class actions, however, the emerging criminal class action lacks critical safeguards for victims entitled to compensation. While prosecutors are encouraged, and even required by statute, to seek victim restitution, they lack adequate rules requiring them to (1) coordinate with other civil lawsuits that seek the same relief for victims, (2) hear victims’ claims, (3) identify conflicts between different parties, and (4) divide the award among victims. We argue that prosecutors may continue to play a limited role in compensating victims for widespread harm. However, when prosecutors compensate multiple victims in a criminal class action, prosecutors should adopt rules similar to those that exist in private litigation to ensure that the victims receive fair and efficient compensation. We propose four solutions to give victims more voice in their own redress while preserving prosecutorial discretion: (1) that prosecutors and courts coordinate overlapping settlements before a single federal judge, (2) that prosecutors involve representative stakeholders in settlement discussions through a mediation-like process, (3) that courts subject prosecutors’ distribution plans to independent review to police potential conflicts of interest, and (4) that prosecutors adopt the distribution guidelines the American Law Institute developed for large-scale civil litigation to balance victims’ competing interests

Judging Aggregate Settlement

While courts historically have taken a hands-off approach to settlement, judges across the legal spectrum have begun to intervene actively in “aggregate settlements”—repeated settlements between the same parties or institutions that resolve large groups of claims in a lockstep manner. In large-scale litigation, for example, courts have invented, without express authority, new “quasi-class action” doctrines to review the adequacy of massive settlements brokered by similar groups of attorneys. In recent and prominent agency settlements, including ones involving the SEC and EPA, courts have scrutinized the underlying merits to ensure settlements adequately reflect the interests of victims and the public at large. Even in criminal law, which has lagged behind other legal systems in acknowledging the primacy of negotiated outcomes, judges have taken additional steps to review iterant settlement decisions routinely made by criminal defense attorneys and prosecutors. Increasingly, courts intervene in settlements out of a fear commonly associated with class action negotiations—that the “aggregate” nature of the settlement process undermines the courts’ ability to promote legitimacy, loyalty, accuracy and the development of substantive law. Unfortunately, when courts step in to review the substance of settlements on their own, they may frustrate the parties’ interests, upset the separation of powers, or stretch the limits of their ability. The phenomenon of aggregate settlement thus challenges the judiciary’s duty to preserve the integrity of the civil, administrative, and criminal justice systems. This Article maps the new and critical role that courts must play in policing aggregate settlements. We argue that judicial review should exist to alert and press other institutions—private associations of attorneys, government lawyers, and the coordinate branches of government—to reform bureaucratic approaches to settling cases. Such review would not mean interfering with the final outcome of any given settlement. Rather, judicial review would instead mean demanding more information about the parties’ competing interests in settlement, more participation by outside stakeholders, and more reasoned explanations for the trade-offs made by counsel on behalf of similarly situated parties. In so doing, courts can provide an important failsafe that helps protect the procedural, substantive, and rule-of-law values threatened by aggregate settlements

Inside the Agency Class Action

Article published in the Yale Law Journal