Agencies fail to provide necessary fairness when they compensate large groups of people.
Over the past decade, agencies collected over $10 billion from regulatory violators to compensate people hurt by massive frauds, false advertising, and defective drugs. Like class action settlements, large agency-based settlements take advantage of economies of scale to compensate multiple people through a single, comprehensive scheme. And, in many cases, the end result is a large fund managed by the same private administrators who commonly oversee class action settlements.
However, agencies lack many procedures for compensating victims that characterize large-scale private litigation. Administrative agencies may fail to hear victims’ claims, identify potential conflicts between parties, or afford anything more than cursory judicial review over the settlement and distribution of awards. Complicating matters, an agency may sue the same wrongdoer, for the same funds, on behalf of the same set of victims, as parties to a privately initiated lawsuit. Even so, few guidelines exist to instruct agencies as to how or whether they should coordinate with private actions.
Take Bernard Madoff. Shortly after Madoff committed the largest criminal fraud in United States history, regulators sought to compensate victims with his seized assets. In what some have called “reality show kind of fighting,” Madoff’s victims sharply contested the distribution of his property. Because of the nature of the fraud, some long-term investors lost their life savings while others made less than they thought, but actually profited from the scheme. Still others lost millions without ever knowing their money was invested with Madoff.
Three kinds of proceedings—bankruptcy, private class actions, and Securities and Exchange Commission (SEC) actions—will determine how those victims are paid. In bankruptcy and class action proceedings, the Madoff victims will be entitled to an array of procedural protections, separate attorney representation, and payouts based on their different statuses. The bankruptcy and class action rules rest, in part, on the idea that victims benefit from an opportunity to voice their interests, explicit criteria about any award settlement, and independent judicial review of the fairness of the entire settlement. However, if the SEC exercises its power to compensate the same claimants with the defendant’s same assets—as the SEC originally indicated that it would do—it could do so without virtually any of the safeguards, transparency, or review that exist in complex litigation.
Assuming public agencies should remain in the mass compensation business—a big assumption—I argue that agencies should adopt aggregate settlement procedures, so that they, in effect, perform the same job as private class settlement actors.
This is not to say that class settlements set the gold standard for procedural justice. One could argue that regulatory agencies, as publicly accountable actors, may accomplish traditional class action goals more fairly and inexpensively than private attorneys. Because they are government bodies, agencies arguably possess more authority to rely on political processes, like rulemaking, to invite many people to participate in the settlement. Many also consider agency settlements incidental to their primary obligation to sanction those who violate the law.
However, agency settlements may frustrate court access just like class actions. Agency settlements may “crowd out” private litigation by exhausting the limited funds of a defendant, requiring that the claimants waive rights to sue, or simply foreclosing class action litigation. In addition, like private class counsel, agencies may have conflicts with the victims they compensate. Agencies may succumb to capture by the businesses they regulate, seek quick settlements to resolve embarrassing missteps in regulatory policy, or lack incentives and input to address victims’ interests.
As a result, both agency and class action settlements share a common structural feature of representative litigation—the loss of control by the injured parties entitled to relief. In both class action and agency settlements there are practical limits to how much any massive scheme can fully represent the interests of so many different claimants. Precisely for these reasons, courts cannot certify class action settlements without meeting very strict requirements. No equivalent rules exist for agency settlements.
What would make agency settlements fairer without compromising the agency’s public mission? Consider two of my proposals: negotiated rulemaking and “hard look” review.
First, agencies could adopt procedures under the Negotiated Rulemaking Act of 1990 to ensure that victims are heard, to formulate guidelines for payment, and to encourage effective judicial review. Negotiated rulemaking provides a process for stakeholders’ representatives to participate directly in a large settlement. Under this procedure, the agency appoints a mediator, who identifies parties interested in a final settlement. The parties then develop a settlement distribution plan under a negotiated rulemaking process, subject to agency oversight. Although originally conceived as a way of avoiding contentious court battles over environmental regulations, negotiated rulemaking would resemble judicially supervised mediations that precede private aggregate settlements. Many agencies already informally reveal proposed distributions to major stakeholders before finalizing a large settlement. Negotiated rulemaking makes that process more regular and transparent, while offering a public forum for parties to participate in their own redress.
Second, a court could use “hard look” review to limit conflicts of interest between parties in overlapping class action and agency settlements. Under hard look review, the court does not scrutinize regulatory actions de novo; instead, it considers whether the agency justified its decision-making process and whether the process was reasonable. Hard look review would require agencies articulate arguments supporting and opposing the proposed settlement, explain the complex trade-offs made by the agency, and require an explanation for the final settlement terms. Accordingly, courts would police conflicts of interest in poorly developed settlements, while otherwise respecting agency expertise.
Agency settlements reflect a new trend, where public actors compensate people for privately felt harm. Increasingly, class action attorneys, regulatory agencies, state attorneys general, and even criminal prosecutors commence actions seeking the same funds, against the same defendant, for the same conduct, and on behalf of the same set of victims. Yet commentators ignore how the convergence of these legal regimes alters the responsibilities of public actors to provide private parties justice. Who checks against indifference or conflicts of interest? How does the state assure transparency? Who decides on an appropriate way to distribute settlement proceeds? Only through examining such questions can we shed light on the state’s ability to provide procedural, distributive, and corrective justice to victims of collective harm.