Follow the Money: What Happens to the Proceeds of Class Action Settlements

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , ESOP , Settlements
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When you read in the paper about a large settlement in an excessive fee case or other claim involving a 401(k), ESOP or other ERISA governed plan, do you think about what happens next, and about how to distribute the money among the plan participants? I do, in cases where I have represented the class, but also in cases where I have defended the plan or its fiduciaries. As this article from Plan Advisor discusses, there are a lot of issues that go into deciding how to distribute the settlement among current plan participants and those who have left the plan. The article gives a good overview, and drives home a key point: there is a lot of complexity behind the scenes in figuring out how to distribute the money, which the media, reporting on the large figures of the settlement itself or on the large award to class counsel (which are both sexy subjects), tend to ignore or simply be unaware of, because it just isn’t that interesting to the public as a whole. But in real life, this part of a settlement is crucially important, and creates a fair amount of work for those who administer class action settlements and those who administer plans themselves.

Here are a few things I have observed and lessons I have learned over the years. First, the class definition in the litigation and which is used by the court in approving the settlement is hugely important. In class action litigation involving these types of plans, the class of affected participants is typically defined by the litigants and eventually approved by the court. If the parties and the court really focus on the definition, its terms can provide a great deal of guidance to the administrator with regard to exactly which current and former plan participants should receive distributions. Often, though, the class may have been superficially defined, in a manner that the lawyers feel will be sufficient to win court approval, but which may not, in fact, be precise enough to guide distribution of the proceeds and provide real guidance in that regard to the plan administrator. A focus on this issue by the lawyers negotiating the terms of a class action settlement can make a real difference when it comes time for the administrator to do the hard work of allocating the settlement proceeds.

Similarly, settlement documents in a class action, negotiated by the parties as part of closing a deal and obtaining court approval of the settlement, are usually replete with detailed explanations of as many facets of the settlement as the lawyers for both sides can think to cover. This is often, I hate to say, more often due to self-interest of the lawyers involved than to any higher motivation, as a detailed, comprehensive explanation of the settlement is often crucial to winning court approval of the settlement and to defeating objectors to the settlement who are part of the settlement class. There is nothing wrong with that per se, in that the class action system, with its awards of attorneys fees out of settlement proceeds and the checks and balances imposed by court oversight, is designed both to be driven by self-interest and to tamp down its unchecked excesses (I should note here that unlike many of its critics but like many of those who, like me, actually toil in the orchards of class action litigation, I find that this aspect of the system works pretty well in the vast majority of cases). A focus in these papers on settlement allocation – perhaps by including a subsection expressly directed at describing allocation of the proceeds in as exquisite of detail as possible - can greatly aid the administrator later on in distributing the settlement proceeds.

The International Paper Settlement and the Continued Vitality of Excessive Fee Claims

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries , Settlements
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One of the first long articles I wrote on ERISA (I had already penned some opuses on patent infringement litigation and insurance coverage disputes) was on excessive fee litigation, and was based, at heart, on the Seventh Circuit’s then recent decision in Hecker v. Deere. Titled “Retreat from the High Water Mark: Breach of Fiduciary Duty Claims Involving Excessive Fees After Tibble v. Edison International,” the article set forth my view that, in Civil War parlance, the decision in Hecker, which was being highly trumpeted by the defense bar at the time as a major victory, was, in fact, little more than the high water mark for plan sponsors and vendors in defending against excessive fee class actions. My thesis was that, when the decision was broken down and analyzed in its constituent parts (and particularly with a focus on the Court’s reasoning), it was unlikely that the decision would be replicated, and more likely that other courts would come to different conclusions in the future that would validate excessive fee claims and invigorate the theory as a basis for class action litigation.

From where I sit, four years of court decisions, settlements and courtroom results appear to have borne out my prognosis. Humble scribe that I am, I don’t believe I have ever pointed out before that I was right in this regard, but, as Thomas Clark pointed out earlier this week in an excellent post on the FRA PlanTools Blog, the recent $30 million settlement entered into by International Paper is solid evidence that I was right.

My real purpose for writing today, though, was to pass along his post on the settlement, which does an excellent job of breaking down the issues, the claims, the alleged breaches, and the settlement of the International Paper case. It comprehensively covers everything any outsider to the litigation would want to or need to know about the case.

Grand Irony, or Just a Need for Better Litigation Tactics: Protecting the Severely Injured Plan Participant Against Reimbursement Claims under ERISA

Posted By Stephen D. Rosenberg In ERISA Statutory Provisions , Equitable Relief , Settlements
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Roy Harmon and the Workplace Prof have the story of a severely injured worker whose settlement with the tortfeasor was effectively taken, in its entirety, by the plan administrator - Wal-Mart - on a reimbursement claim in accordance with the administrator’s rights under Sereboff. Roy Harmon has a nice factual discussion of the problem demonstrated by the case, and the Prof raises the ante, pointing out the injustice this is working for the particular individuals involved in the case. No disagreement there. But what concerns me is a point that the Prof makes, in which he effectively characterizes this as a problem driven by ERISA; sayeth the Prof:

In short, a truly horrible situation under ERISA, and not that far-fetched when one comes to understand the manner in which the scope of equitable relief under ERISA and ERISA preemption work together to create what I call the "Grand Irony of ERISA": that employers now use ERISA as a shield against employees; the same employees whose benefits ERISA was supposed to protect.
A Kafka-esque scheme [if] there was one and yet another publicity black eye for Wal-Mart.

But, although I am speaking almost third hand with little knowledge of the actual facts of this exact case, it seems to me this is not an ERISA problem, but a litigation tactics problem. It seems to me that the first obligation of a plaintiff’s lawyer in this type of a situation is either to obtain a waiver or compromise from the plan of its right of reimbursement that will keep the bulk of the recovery in the hands of the severely injured plan participant, or if that is not possible (perhaps because the plan administrator refuses to do so), to include in valuing settlement the amount that will have to be paid back to the plan on a reimbursement claim. If that makes the settlement value so high that the case can’t settle, then so be it, and it becomes a case which simply has to be tried and the amount of medical bills that must be reimbursed to the plan becomes just one part of the damages that go up on the blackboard in front of the jury in calculating the damages that the plaintiff claims should be awarded to him; in this way, if the jury returns a verdict, the amount that must be paid back to the plan is only one portion of the money recovered by the plan participant, with the participant free to retain the remaining amounts, which ought to encompass awards for future care, future loss of earnings, and the like.

One can fairly ask whether this places the participant at risk of losing at trial and taking nothing, and the answer to that question is, of course, that this risk exists and is significant; avoiding that exact risk is, after all, why a plaintiff settles a case for less than full value. But the fact is that a settlement, such as the one involved in the case Roy and the Prof discuss, that does not significantly exceed the reimbursement owed to the plan- after or without compromise by the administrator -can leave the participant in the exact same spot as a loss at trial would, holding no money at all after the plan is reimbursed.

Litigation is a dynamic and ever changing organism, and, much like Newton's third law of physics, for every action during the course of a lawsuit there is a corresponding, if not necessarily equal and opposite, reaction. The situation presented by the admittedly horrible circumstances detailed by Roy and the Prof is one that needs to be resolved as part of playing out the end game of a lawsuit, not after the fact as a dispute over ERISA rights and remedies.

Given the tragic nature of the events in question, I don’t delve into this point lightly, or just because it looks like good blogging fodder. But in the discussions I have seen so far of this issue, and on the impact of ERISA on it, I haven’t seen this particular aspect discussed in detail, and I think it’s a point that simply cannot be overlooked by any plan participant or lawyer stuck in the same situation in the future.

Settle the claim, don't revise the plan

Posted By Stephen D. Rosenberg In Settlements
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My colleague, Carl Pilger,, who counsels companies and others on the design, implementation and operation of employee benefit plans at Miller & Martin PLLC,, in Atlanta, notes that in settling lawsuits brought by plan participants, one should avoid establishing a pattern of revising a particular plan term or requirement in a particular manner. Doing so may allow for the argument that the plan itself has, in effect, been revised in that manner on that particular point. Instead, as I make sure to do in my own practice when litigating cases on behalf of plans and administrators, the settlement papers should make clear that the particular claim is a unique situation, and no agreement has been reached as to the particular meaning that should be given to the plan term that was the subject of the dispute. Make the settlement a one off, but not a regular event.