It is very difficult to settle complex, multi-defendant litigation on a group basis, notwithstanding the advantages of a group resolution, if there is no clear way to allocate responsibility among the defendants. A principal reason is what may be called “relative value” obstacles. In his best-selling book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions,”1 MIT economist Dan Ariely explains how powerful “relative value” is in decisionmaking.

One example is the wildly escalating effect that publication of executive and professional compensation has had in recent decades.2 One prominent mediator3 called this phenomenon “counting other people’s money”—measuring one’s own deal in terms of others’—and it goes beyond envy; it also involves our natural tendency to compare the easily comparable. As Ariely points out, with examples including shopping for houses, ordering magazines online, and selecting a possible romantic interest from a group of photos, “we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily.”4

Multi-defendant cases give rise to this phenomenon because they provide unique markers of “relative value.” The defense lawyer who settles an isolated, single-defendant case can always be second-guessed. But the unknowable nature of future trial results generally provides some raw material for justification. Multiparty cases are different. Defendants compare each other’s settlements and typically measure their own success or failure by other defendants’ results—often to a much greater degree than by the perceived value of their own settlement as a standalone proposition.

The problem of “relative value” may not be serious if the circumstances allow the defendants to agree upon an allocation formula, such as one based upon market shares. But what happens when the cases are not susceptible to a clear allocation approach, say, where a given company’s exposure revolves around its own unique pricing and sales activities? The company’s exposure might be much greater or much less than the exposure of another company that sold roughly the same amount of product over a comparable period. Each defendant also might have unique defenses.

The following discussion considers one particular device—”blind bidding”—as a creative solution to relative value problems in complex, multi-defendant litigation.5 The analysis assumes there is complex litigation against a group of defendants and no joint liability.6 The discussion draws upon experience in a number of complex settlements, including the use of blind bidding in the recent multi-class settlement in the nationwide Average Wholesale Price class litigation (AWP litigation) involving the American pharmaceutical industry.7

What Is It?

The term blind bidding here means a process involving a series of individual defendant offers (or pledges), the amounts of which are confidential to both other contributors and the plaintiffs, but not the mediator. The group offer is the sum of the individual pledges (except, as discussed below, where the parties agree to hold in reserve a portion of the money raised). The amounts of individual contributions remain confidential even after an agreement is struck. The defendants pay their shares into a single escrow account, where the individual contributions are bundled and sent in a single lump sum to the plaintiffs or, if a class, used for the benefit of class members pursuant to the class settlement agreement’s terms.

A typical way for defendants to maintain cohesion among themselves in a group mediation where the defendants’ proportionate responsibility is not clear is to make very small negotiating moves. These baby steps involve little risk. Yet, they also can destroy a mediation. Such a least-common-denominator approach likely will confirm plaintiffs’ counsel in the belief that a group mediation is a hopeless undertaking. The challenge, therefore, is to devise a mediation approach that holds some promise notwithstanding the complexities, especially given the strong tendency of companies to count each other’s money.

A blind bidding approach was proposed in the so-called Track Two mediation in the AWP Litigation to address these difficulties.8 Details of the Track Two mediation, conducted before professor Eric D. Green, are confidential. The following general discussion is intended to illustrate, however, based upon the experience in that mediation and other multi-defendant mediations, how blind bidding can work in multiparty negotiation.

If each company’s contribution to a proposed comprehensive settlement is known only to the mediator—that is, if all other parties are “blind” to the amount of a company’s individual contribution—then it is impossible for any one defendant to count anyone else’s money (at least without their consent). Furthermore, since neither the plaintiff, the court, nor the public knows the individual amounts contributed, plaintiffs suing elsewhere are not able to use a company’s individual contribution to a “blind funded” settlement as a way of prioritizing exposure among the defendants. Blind bidding or blind funding protects against this risk as well.

The “blind contribution” device has been approved in class and aggregate settlements as an innovative way to surmount negotiation problems and generate fair and adequate recoveries for plaintiffs.9 In class actions, so long as the amount of the settlement is adequate, objections as to the source of the funds should be rejected.10 But how can “blind bidding”—as meant above—succeed? After all, the temptation to “free ride” in such a group is enormous, and this temptation can lead companies to offer the sort of baby-step proposals that would doom a non-blind group approach.

A partial answer lies in the reality that early group offers are almost always rejected. Because this is so and because no individual company’s blind contribution would be known to others, a company could offer a significant sum and risk nothing. If the individual amount offered were less than the amount the company would be willing to pay to settle on its own, then even under a worst case scenario—proposal accepted—the company would be doing better than it expected to do in a single-company deal. If every defendant reaches this logical conclusion, then the opening contributions from each defendant should be robust, generating unexpected momentum.

Some Concerns

Encouraging parties to think this way offers some, but not enough, promise—not enough, because even with confidentiality protection, companies likely would still be anxious. One fear would be losing control over the total amount of the group offer to be made to the plaintiffs. The total of the defendants’ pledges might exceed the amount that a rational negotiator for the whole group might offer. In such event, the plaintiffs’ expectations might soar to unrealistic heights. This concern can be addressed, however, by asking the mediator to report on the total amount of pledges before communicating an offer to the plaintiffs. The offer amount could then be adjusted downward if deemed too high (in which event the parties would have excess funds, a reserve, available for the next round).

Another concern could be that in-house and outside counsel would not want to appear to be more loose with their money than, on average, their counterparts are. Such a lawyer is vulnerable to charges of not being tough enough. One solution is to convince some companies to act as leaders—that is, to be deliberately out of step in the opening rounds as a matter of strategy. If several companies were to agree among themselves to raise collectively a surprisingly large amount of money toward the first offer, the dynamic could shift dramatically. Plaintiffs’ counsel might be convinced that a global settlement offers promise after all. Such a gambit might also shock smaller contributors into rethinking their own strategy. The mediator could reinforce this reaction if he were to tell the group that the major contributors were not guaranteeing they would remain part of the large group if others did not accelerate their contributions in the next round. At the same time, the higher-contributing companies would still have the assurance that they would be offering individual amounts that, if accepted, would be below what they would be willing to pay in standalone settlements.

Success likely would still depend upon the parties’ willingness to cede to the mediator some responsibility to control against possible free riders. A group conference call devoted to the question is one way to obtain group consent to a limited grant of power to the mediator, say, to allow the mediator to tell a party if he thinks the party is unreasonably out of line. No defendant is likely to object to that restricted role. The objection would immediately signal that the objecting party is a likely free rider, and other defendants would have reason to exclude that party from the group settlement effort. It is crucial that the parties have confidence in the mediator to act as policeman, however, and that the mediator is willing to take on the burden and capable of doing so.

When such a mediator, so empowered, tells a defendant that its offer is unreasonably low, the defendant almost certainly will ask what additional amount would remedy the problem. A skillful mediator should be able to guide that party back to the group in lieu of being exposed as an underperformer and forced to go it alone. This latter possibility has a bracing effect on free riders.

In Practice

A dynamic such as this led to the 11-company, three-class nationwide settlement in the AWP Litigation. The final result was a collection of $125 million on a blind basis, something that none of the companies or class counsel or the court would have considered possible in the absence of some way to control against the relative value problems so endemic to multiparty settlements.

Blind bidding may help resolve disputes in a variety of contexts. For example, it may be useful (and in fact has proved so in the past) in disaster situations, such as a major oil spill giving rise to property and personal injury claims in multiple locations and involving numerous potentially responsible parties that are wary of agreeing to an apportionment of fault. Blind bidding also may facilitate the resolution of complex insurance coverage disputes, such as where a policyholder is seeking insurance coverage for liabilities allegedly due to bodily injury or property damage that has taken place over many years.

A policyholder facing such claims may seek to settle them and in doing so seek to monetize the insurance asset (perhaps to fund settlement). The situation could involve numerous insurers that sold policies at various different times during the period of alleged injury or damage, and at various different levels of coverage, such as primary, umbrella or first-layer excess, or upper-layer excess. Each insurer asserts that its potential obligation to the policyholder is unique and cannot rationally be compared with other insurers’ obligations. Because one insurer’s contractual obligations can be affected by the actions of other insurers, coverage disputes may be difficult to resolve in a group setting; one insurer that has policies in key “positions” in the overall coverage chart could block the resolution. In a group insurer mediation, the insurers might all rally to the “lowest common denominator,” i.e., the position of the most rigid insurer. For these reasons, it is extremely difficult to reach a multiparty settlement in such circumstances; settlements typically involve individual insurers. Blind bidding offers one potential for achieving a global resolution.

Conclusion

There are a number of ways to create and maintain cohesion among mediating coparties in the wide array of multiparty disputes. Given how powerful perceptions of relative value can be, however, any group mediation’s success likely will depend upon strategies to deal with the urge to count other people’s money. Blind bidding, although rarely used, has proved in certain circumstances to be such a strategy.

Peter W. Morgan, a partner, serves as the general counsel and co-leader of the complex dispute resolution group at Dickstein Shapiro. Nicholas J. Zoogman is a partner in the group.

Endnotes:

1. Dan Ariely, “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (2009).

2. Id. at 15-19.

3. The late David I. Shapiro, who co-mediated the Agent Orange settlement with Kenneth R. Feinberg (see infra note 9) and subsequently established a mediation practice in Great Britain.

4. “Predictably Irrational,” at 8.

5. For discussion of the rich variety of problems confronting mediators and courts in “megacases,” see Eric D. Green, “Symposium: The Role of the Judge in the Twenty-First Century: Re-Examining Mediator and Judicial Roles in Large, Complex Litigation: Lessons from Microsoft and Other Megacases,” 86 B.U.L. Rev. 1171 (2006).

6. Cases in which the defendants’ liability is joint and several produce a different dynamic and complexities. For example, an antitrust plaintiff typically seeks to settle with a single defendant first at a lower price and then proceed against the other defendants one by one, with each settling defendant paying more than the one before. This article is limited to situations in which one defendant’s settlement would not so directly affect another defendant’s exposure.

7. In re Pharm. Ind. Average Wholesale Price Litig. (MDL No. 1456) (Civil Action No. 01-12257-PBS) (D. Mass.).

8. The MDL Judge (U.S. District Judge Patti B. Saris) divided the MDL defendants into two groups: Track One and Track Two. There were five companies in Track One and 11 in Track Two. The Track One defendants tried but were unable to reach a global Track One resolution.

9. For example, the class of Vietnam veterans and their families were able to secure $180 million from defendant chemical companies in In re “Agent Orange” Product Liability Litigation, 597 F. Supp. 740, 863-64 (E.D.N.Y. 1984), a highly contentious and politically charged case, by agreeing that individual contributions would be maintained in a sealed agreement provided to Judge Jack Weinstein.

In the Brooklyn Naval Shipyard asbestos litigation, In re Joint E.&S. Dists. Asbestos Litig., 737 F. Supp. 735 (E.D.N.Y. and S.D.N.Y., N.Y. Sup. Ct. 1990); see In re New York City Asbestos Litig., 129 F.R.D. 434 (E.D.N.Y. and S.D.N.Y., N.Y. Sup. Ct. 1990), the special master charged with settling the cases used the blind device to deal with the problem that “arguments among individual defendants over their relative culpability and respective contributions to any settlement routinely disrupt attempts at global settlement.” Jack B. Weinstein & Eileen B. Hershenov, “Symposium in Honor of Edward W. Cleary: Evidence and Procedure for the Future: The Effect of Equity on Mass Tort Law,” 1991 U. Ill. L. Rev. 269, 301-02 (1991); see also Kenneth R. Feinberg, “Symposium on Business Dispute Resolution: ADR and Beyond: Creative Use of ADR: The Court-Appointed Special Settlement Master,” 59 Alb. L. Rev. 881, 888-90 (1996). The United States has settled complex Superfund litigation on a similar basis. United States v. Gencorp Inc., 935 F. Supp. 928, 934-35 (N.D. Ohio 1996).

10. See Jerold S. Solovy, Patricia Lee Refo & Ruth A. Bahe-Jachna, “Class Action Controversies,” in “Current Problems in Federal Civil Practice” 1994, at 404 (PLI Litig. & Admin. Practice, Course Handbook Series No. H4-5183, 1994). “[F]or Rule 23(e) to be satisfied, the court must determine only that sufficient compensation is being paid to the class, without necessarily speculating as to the appropriateness of the contributions of the various settling defendants.” In re Jiffy Lube Sec. Litig., 927 F.2d 155, 159 (4th Cir. 1991); see Alvarado Partners, L.P. v. Mehta, 723 F. Supp. 540, 548 (D. Colo. 1989); In re Cendant Corp. Litig., 264 F.3d 286, 296 (3d Cir. 2001).