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Class action mediation: lessons for the class

by Antony Collins on 27 May 2014


As the topic of European class actions returns to the agenda, Jed Melnick, a JAMS panellist based in New York, discusses his experiences of class action mediation in the US

Class actions are an alien concept in most European courts, although the UK, France, Belgium and the European Parliament have proposals for allowing limited collective action in litigation.

 In the US, class actions are a common route to court. In 2013, there were 234 securities class actions filed alone, according to consultancy NERA, with other claims for everything from misleading text messages to employment discrimination to oil spills.

US class actions are undoubtedly divisive. The securities plaintiff bar, at the peak of its powers, was likened to “highway robbers in pinstriped suits" by a US Chamber of Commerce group. Big business, in contrast, need to be held accountable for swindling customers or corporate wrongdoings.

The reality is somewhere in the middle. Legislation has helped curtail over-zealous lawyers, notably the Class Action Fairness Act 2005, but it is the courts that found the balance. Very few class action cases are ever tried to verdict; the majority are either dismissed or settled.

Jed Melnick, a JAMS panellist in New York, has extensive experience of mediating such actions and says mediation is “very common”: “The courts actually rely on mediation and the role of a reputable mediator as a way to show a settlement is fair and reasonable and has been reached by arms-length negotiations between the parties."

Class actions present unique challenges for mediation. The size of the class, the intricacies of each case, the larger number of claimants and the preferred outcome requires understanding the balance between the benefits and risks for both sides during negotiations. Plaintiffs need to be able to get the best and fairest settlement possible, usually somewhere between 2 and 25 percent of the initial claim for damages, because it can be risky and expensive to bring an action. Defendants must assess the transaction costs and business distractions in pushing a case all the way to trial.

"Establishing class-wide remedies can be complicated,” Melnick explains. “In securities litigation, plaintiffs have to prove that a company's directors and officers have misled the market and that when the truth was revealed the stock was impacted by the truth, which is not an easy thing to do in a market streaming with information. Actions in Ponzi schemes, meanwhile, require complicated damage theories measuring loss and identifying victims, whereas tort or environmental cases may have to put a monetary value on non-financial losses that have the prospect – as in all of these matters – of providing real relief across a class of impacted claimants."

Melnick believes the US experience presents some interesting lessons. First, early settlements can be good for everybody by saving time and costs, providing relief sooner rather than later to a class and not forcing each side to face risky motion practice. Melnick claims the insurance sector often drives settlement discussions too.

“In the US, there is a tier system – known as towers of insurance – where Company A will insure a case up to $10m, for example, Company B up to $20m, Company C up to $30m and so on,” he continues. “This system provides a fascinating set of motivations and economic analysis for each insurance carrier at each stage. For example, an insurance carrier might be motivated to settle a case early if it can save some portion of its layer, but interested in the outcome of motion practice if settlement would mean exhaustion of its layer. Balancing the purpose of the coverage, the settlement value of the case, any coverage issues based on the language of the policy that may exist and the timing of discussions is an art, not a science.”

Melnick adds that the involvement of a mediator can both drive the parties and allow for constructive overtures between the parties where parties, left to their own devices, might be afraid to do anything directly that might be perceived as weakness.

The key point, however, remains cultural. The abundance of class actions in the US as well as the propensity to settle shows that both sides are able to find common ground on cases that are not spurious. There is not the inclination to seek an ultimate judicial ruling; not the “winner or loser” mentality. It is a much more pragmatic, functional approach.

“Compromise is better than a loss or the long term expensive distraction of litigation,” Melnick concludes. “Current investors and shareholders may wish for the business to spend their time, energy and focus on whatever it is that the business is good at – few businesses are good at being litigants. There is no shame in settling a case; it can be good for business in the long-term by drawing a line under the case and bringing a defendant peace and a return to the plaintiff."

This post was written by Antony Collins who is a freelance journalist. He can be contacted at ac@acollinsmedia.com

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Topics: Mediation, Litigation, Panellist Q&A

Antony Collins

Written by Antony Collins