[co-author: Jason Marsili*]
Given the number of class actions and other representative matters filed across the country, a phenomenon known as the reverse auction has increasingly evolved over the past decade, which affects both the process by which these types of cases are resolved and the resulting settlement terms. Lawyers involved in reverse auctions have diametrically opposed viewpoints on the procedural and substantive fairness of the mechanism. Plaintiffs’ lawyers view the reverse auction as a defense tactic used to drive settlement values below what they deem as fair, reasonable, and adequate. Defense counsel views it as an opportune strategy for obtaining the best possible settlement for their clients, especially when facing a multitude of lawsuits alleging the same or similar claims. With more and more cases being resolved through mediation, many neutrals find themselves standing in the crosshairs of these divergent perspectives.
Reverse Auctions Explained
The reverse auction is a process in which the roles of the buyer and seller are reversed. Although many lawyers may not be familiar with the terminology, most people have experienced its results. Priceline, Kayak, Hotwire, Expedia and countless other discount travel websites utilize the reverse auction mechanism to match travelers with airline tickets, rental cars, and hotel rooms at reduced prices from providers that have agreed to offer such products or services at the lowest price. In the context of class actions and other representative matters, the reverse auction works in a similar fashion when multiple lawsuits are filed against the same entity.
Consider a class action against a company headquartered in Illinois. One law firm may file a class action against it in California while another law firm files an identical action in New York. A third law firm files a case in Texas and so on and so forth. When facing multiple nationwide (or statewide) class actions alleging the same or similar claims, a defendant may negotiate a settlement of one case that will have preclusive effect and terminate the litigation in the other jurisdictions. If that occurs, the law firms that brought the other cases are relegated to the role of objector counsel and may have a very difficult time getting the settlement disapproved by the court and may not receive compensation. Therefore, each law firm is incentivized to be the law firm to negotiate a settlement with the defendant so that it receives the resulting attorneys' fees.
Given the dynamic between the firms, the defendant can pit the plaintiffs’ law firms against each other and offer a settlement to the one willing to accept the terms most favorable to the defendant. Unlike a typical auction, in which buyers bid higher and higher prices, in the reverse auction, plaintiffs’ class action lawyers compete to accept the lowest settlement amount.
Efforts to Stop Friendly Fire
While defense law firms view the reverse auction as an effective strategy to represent clients that face multiple class actions alleging the same or similar claims, plaintiffs’ law firms have sought recourse from the only parties equipped to stop the phenomenon from occurring: themselves. In the context of employment law, the California Employment Lawyers Association (CELA)—a statewide organization of attorneys representing employees—has promulgated guidelines to reduce the prevalence of reverse auctions. Among these guidelines, CELA encourages mediators not to facilitate reverse auctions and maintains a list of neutrals who abide by its guidance.
Process v. Substance
Of course, any class action settlement is subject to court approval, and Rule 23 of the Federal Rules of Civil Procedure has long mandated that courts approve class action settlements only if they are “fair, reasonable, and adequate.” In 2018, Congress codified Rule 23(e)(2) to enumerate four primary areas of focus for courts to consider in approving class action settlements. The first two areas address procedural aspects, looking to the litigation and the negotiations that produced the settlement. The second two areas focus on the substantive terms of the proposed settlement. The Advisory Committee noted that attention to procedural concerns was an important consideration for scrutinizing the substance of any proposed class settlement.
Notably, the reverse auction focuses attention on the process by which a settlement is reached, but the objection aims to uncover a resulting substantive unfairness to the settlement terms. The JAMS Mediators Ethics Guidelines state that “a mediator should be aware of the potential need to withdraw from the case if procedural or substantive unfairness appears to have undermined the integrity of the mediation process.” Additionally, the guidelines indicate that a “mediator should be aware of and avoid the potential for bias ... based on any pre-existing knowledge of or opinion about the merits of the dispute being mediated.”
Perspectives on Neutrality
The reverse auction presents numerous issues and challenges for a mediator. As an overriding consideration, mediators do not choose the cases they mediate. Therefore, it is not clear whether a mediator will ever know that multiple class actions with similar claims have been filed against a common defendant. But what should a mediator do if the mediator is made aware that multiple class actions are currently pending?
Consider the following three scenarios: (1) the mediator does not know and is not informed by the parties that other similar class actions exist; (2) the mediator is made aware at some point prior to the scheduled mediation session that other class actions are pending against the defendant; and (3) the defendant uses the existence of the other pending actions as leverage during the mediation session.
The first scenario poses little issue for the mediator as it reasonably cannot be expected for the mediator to address circumstances that are unknown and uninformed.
The second scenario may require the mediator to inquire of the parties more about the other pending matters without the mediator forming any opinion on the existence of the reverse auction or making a decision on whether to proceed with the scheduled mediation. It is conceivable that the other pending actions may be relatively young or that plaintiffs’ counsel in those matters have chosen to sit back while the scheduled mediation occurs. The mediator’s role is to settle the case before him or her on terms that will be approved by the court. The mediator’s obligations should not extend to potential stakeholders who are not parties to the mediation. The mediator may inquire of the parties to the mediation about those potential stakeholders, but it is not for the mediator to act unilaterally on their behalf.
The third scenario is the thorniest and may require the mediator to withdraw from the mediation. If, during the session, the defendant suggests that it will settle on terms no greater than X or otherwise settle a related matter on those terms, the reverse auction becomes apparent. Should the defendant expect the mediator to communicate that message to plaintiffs’ counsel during the session, the mediation has now become the conduit of the reverse auction. The question then arises whether the integrity of the mediation process has been undermined by this gambit, and the answer to that question must be answered by the mediator on a case-by-case basis.
In the end, the class action settlement will be subject to court approval and objection. The court’s role is to determine whether there was a reverse auction that resulted in an unfair and inequitable settlement for the class. Non-settling plaintiffs’ counsel have the ability to object to the proposed settlement and persuade the court that the case was subject to the reverse auction and the settlement that was reached is not fair and equitable. Ultimately, the parties and mediator must rely on the court to consider the effect of the reverse auction on the settlement and determine if the settlement terms are unfair or inequitable for the class and should not be approved.
*Jason Marsili is a partner at Rosen Marsili Rapp LLP and the founder of Marsili Mediation Inc.