Ortiz v. Fibreoard: Another blow to plantiffs' classes as a means to resolve "mass tort" litigation

1.

INTRODUCTION

Among the last decisions handed down by the United States Supreme Court in 1999 was Ortiz v. Fibreboard Corp.,' an asbestos settlement class action. This seven to two decision showed once again the high court's disdain for class certification of mandatory settlement classes as a means to dispose of mass torts. The Court's ruling set aside a $1.5 billion settlement against the Fibreboard Corporation. It cited primarily a failure to meet the traditional tests prerequisite to mandatory combining of plaintiffs in a "limited" fund "mass accident" suit under Rule 23(b)(1)(B)of the Federal Rules of Civil Procedure, as well as the potential conflict of interest of plaintiffs' counsels.2

Writing for the Court, Justice Souter noted that under the terms of the settlement, Fibreboard's ability to contribute just $500,000 while retaining most of its net worth did not represent "the best" that corporate defendant could do for the plaintiffs. In addition, the negotiation of two separate settlement agreements representing disparate amounts,' if simply agreed upon by the parties, failed the facial test for a "limited fund." Finally, by certifying this class as a whole, the decision of the Court of Appeals for the Fifth Circuit would omit as putative plaintiffs those with presently pending cases or those that had been filed, then dismissed and were allowed to re-file only upon developing a malignancy.'

The Ortiz decision enforces and corroborates the theme of Amchem Products, Inc. v. Windsor 6 another mass asbestos case in which the Court did not uphold the certification of a settlement class and called for Congress to create 1.4a national asbestos dispute-resolution scheme."" A theme repeated in Ortiz.'

What these decisions mean for the future of mass tort litigation is unclear. However, read together, they certainly indicate that close scrutiny will be given to the rights of putative plaintiffs potentially unrepresented in the class. Moreover, similar scrutiny will be applied to the reasoning behind the desired certification when the potential of high fees for settlement class counsel is present. The detailed reasoning behind the Ortiz decision is discussed next in an effort to delineate the circumstances under which the Supreme Court might approve a mandatory settlement class for a mass tort.

II.

CERTIFICATION OF A MANDATORY SETTLEMENT CLASS BASED ON THE "LIMITED FUND" RATIONALE

Rule 23 of the Federal Rules of Civil Procedure, entitled "Class Actions," sets out the circumstances in which class actions may be maintained. Joining numerous plaintiffs in the same suit is an age-old tradition' that has developed more fully in recent decades as a result of widespread injuries from technological advances.10

As the initial prerequisite, Rule 23(a) must be satisfied before any class action may proceed to certification. It provides that multiple members of a class may sue or be represented by one person if the following conditions are satisfied:

(1) the class is so numerous that joinder of all members is impracticable,

(2) there are questions of law or fact common to the class,

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and

(4) the representative parties will fairly and adequately protect the interests of the class.

Ortiz focuses on part (b)(1)(B) of Rule 23, which states that if part (a) is satisfied, then the court must look to whether individual actions would, create a risk of "adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interest of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests . . ."

The Fifth Circuit Court of Appeals affirmed the district court ruling" in the Ortiz case that the class was certifiable under Rule 23(b)(1)(B) and that the Global Settlement constituted a proper "limited fund."" The appeals court also found that any conflicts of interest were not "sufficiently serious" to compromise the quality of plaintiffs' counsel." Despite the language in Amchem/ Windsor that restricted a lower court's discretion to certify, following vacation, and remand with instructions to reconsider its earlier affirmance in light of Amchem/Windsor, the Fifth Circuit again affirmed the district court." The Supreme Court reversed in Ortiz.

III.

THE FIFTH CIRCUIT'S MISTAKES

Following much of its reasoning process from Amchem/Windsor, the Supreme Court reviewed the Federal Rules criteria requiring satisfaction for limited fund certification of a class." In his opinion for the majority, Justice Souter paid special attention to the intent of the Advisory Committee in drafting Rule 23(b)(1)(B). Mandatory class certifications, Souter said, are reserved for relatively rare situations. They are those in which "'lawsuits conducted with individual members of the class would have the practical if not technical effect of concluding the interests of the other members as well, or of impairing the ability of the others to protect their own interests.""' One attribute of these groups is the "shared character of rights claimed or relief awarded" such that individual adjudication would affect in some way the potential relief available to the others. " Those suits often included a distribution of funds from an entity such as a trust, usually one whose assets were insufficient to cover all expenses owed. The Court gave as examples squandered investments by a common investor, a ticket agent who takes the fare for his personal use, and a probate situation involving a will."

The characteristics that draw these situations together, and are now to be considered criteria upon which to base mandatory class certification, appear to be:

(1) the total claims exceeded the total definite maximum fund;

(2) the whole of the fund was for the claims; and

(3) "the claimants identified by a common theory of recovery were treated equitably among themselves," i.e., that everyone potentially entitled to recovery is represented fairly in the class structure."

The Court explicitly stated that these characteristics would be "presumptively necessary ... to satisfy the limited fund rationale for a mandatory action."" The opinion then gathers support from the Rule 23 Advisory Committee that recommend this narrow construction should be followed rather than allowing the broader interpretation.21 Amchem/Windsor had recently admonished against widening the gap for nontraditional class certifications, citing the Rules Enabling Act on the point that "rules of procedure shall not abridge, enlarge or modify any substantive right. 1121

Therefore, the Court held that the record below did not support certification of the class based on a failure to demonstrate that the fund was truly limited, because the attempt to show a "limited" fund was based on exclusions and misallocations of assets contrary to the Court's Amchem/Windsor decision.

IV.

VALUATION PROBLEMS

Souter's opinion effectively disparages the lower courts' "uncritical adoption of figures agreed upon by the parties in defining the limits of the fund and demonstrating its inadequacy,"23 and further states that heightened scrutiny will be undertaken when the lower courts certify mandatory class actions. Moreover, the fairness hearing under Rule 23(e) is not to be considered a substitute for a careful examination of the facts. Specifically, the settling parties must give concrete evidence of the limits of the fund, its insufficiency and subject their supporting evidence to challenge .21

The Court is skeptical of the limited nature of the "fund" in this case, especially given the two different settlement agreements for differing amounts, apparently payable to different claimants, and the disputed insurance amounts at risk in other litigation. The Court notes that the assets could be considered "limited" if the claims would render the insurers insolvent, or if the policies themselves had limits below the amount of the total dmonstrable claims.25 This case presents neither such limiting factor. The district court appeared too quick to accept the settlement figures, and the court of appeals to affirm, with the Supreme Court noting that settlement value is not always indicative of the maximum amount available.26 The Court also notes that counsel had "great incentive to reach any agreement in the global settlement negotiations that they thought might survive a Rule 23(e) fairness hearing, rather than the best possible arrangement for the substantially unidentified global settlement class."27 Specific evidentiary findings, then, become a prerequisite to surviving a challeng to mandatory settlement class certicication.

V.

EQUITY AMONG MEMBERS OF THE CLASS

Turning to the question of fairness among members of the class, the Court sets out two main issues: (1) the inclusiveness of the class and (2) distribution among the class members. First, the Court noted that the class excludes "myriad" claimants. Included are those with previously settled claims who could only sue on development of an asbestos-related malignancy, plaintiffs with pending actions at the time of the certification of the class, and plaintiffs in an "inventory" class who had to settle (supposedly) in order to reach the global settlement." The Court makes clear that counsel representing parties who they then try to exclude from the mandatory class, thereby subjecting them to the possibility of disparate treatment from their other clients, will not have their class certified. Since it would be sheer speculation to divine how the unsettled claims would play out, the Court would not allow the possibility. In addition, settled inventory plaintiffs fare better almost immediately than the class to be certified. Finally, the agreement provides for no subclass when there are conflicting interests .21

Second, simply having asserted the difficulty in treating the different claimants on apro rata basis, the settlement must at least provide procedures to attempt to remunerate the plaintiffs fairly, a process not present in the settlement agreements in Ortiz. The Amchem/Windsor case gives guidance in this respect, providing for a division between present and future claims into "homogeneous subclasses" under Rule 23(c)(4)(B ).30 Such a process would ensure that each plaintiff is represented fairly and adequately. Further, the Court noted differences among plaintiffs, who were exposed to asbestos before and after 1959, when Fibreboard's insurance policy with Continental expired. Although the Court conceded that at some point there must be an "end to reclassification with separate counsel," these instances were well within the parameters of the Amchem/Windsor decision.3 ' Finally, even if the settlement allocates resources fairly among the conflicting classes, the injuries are not all at the same stage, and to treat them equally is not acceptable. The class members' "common interest" in compensation from insurance funds itself is not enough to allow certification.12

Third, the use as "limited funds" of an amount lower than the actual funds available renders the certification unsupportable. The Court lists this as a consideration, but does not say whether it alone would be fatal to certification. With the other factors, however, it is indicative of a failure to meet the requirements of Rule 23(b)(1)(B) .31

VI.

NOTEWORTHY DICTA

Justice Souter concludes by clarifying some points and answering Justice Breyer's dissent. The overriding message is that the Court is bound to follow the dictates of Rule 23 "as we understood it upon its adoption."34 Alterations must be made, the majority says, only through the Rules Enabling Act process. Subdivision (b)(1)(B) was not intended to be enlarged by the courts. Only the opt-out provision of subdivision (b)(3) may be expanded judicially.

The Court reiterates the need for an independent valuation of the available funds for a settlement, noting again the separate, backup agreement made at the insistence of plaintiffs' counsel and that this backup agreement was "inadequate" as an independent benchmark figure. Additionally, time constraints and the inability to procure counsel quickly in order to meet intraclass equity standards cannot be used as an excuse to "lower the structural requirements of Rule 23(a)."Il

Finally, Fibreboard's retention of nearly all its net worth is unacceptable in certifying the "limited fund." Citing Amchem/Windsor again, the Court hammers home that a fairness hearing (under 23(e)) does not dispense with the requirements of Rule 23(a) and (b). "Economic temptations" of counsel are too great, the Court says, to allow such exigencies.

VII.

CONCLUSION

What, then, can the "mass torts" practitioner take from the AmchemlWindsor and Ortiz duo? It is at least that until Congress, through the Rules Enabling Act, fashions a specific rule regarding this type of class action, settlement agreements that do not meet the "traditional paradigm" will not be certified for mandatory status. The Advisory Committee did not envision the use of separate, "backup" settlement agreements, calling "limited" those funds that are only limited by the agreement of the parties. Likewise, it did not see providing for inconsistent treatment of plaintiffs when the economic incentives for counsel are strong and the results might allow infringement of constitutional rights.

Even if a rationale for a mandatory limited fund could be used for a settlement class of tort claimants, the following requirements would have to be met: (1) the fund must be demonstrated as limited through an independent showing, not merely by the parties' agreement; and (2) the class must include unsettled claimants and resolve intra-class conflicts through independently represented subclasses.16

The AmchemlWindsor case, therefore, is strengthened and given increased definition. The Court will allow certification only in limited cases, and those only within the framework created by the Advisory Committee. Legislative intent is given high credence, and through the explicit language in the majority opinion, Congress is called upon once more to give direction to asbestos litigation and its kind. Unless Congress acts, mandatory class certification for mass torts is unlikely to be upheld except in extremely limited circumstances.

*The author wishes to express his appreciation to Erika Kroetch, a third-year student at William & Mary College of Law, for her contributions to this effort.

I- U.S. -, 119 S. Ct. 2295 (1999). 2M., 119 S. Ct. at 2213.

'The first agreement, known as the "Global Settlement Agreement," provided for $1.535 billion, all but $0.010 billion of which would come from the two primary insurance companies, and the remainder of which, save the $500,000 from Fibreboard, would come from other insurance sources. At the request of plaintiffs' counsels, a "backup" agreement was reached, known as the "Trilateral Settlement Agreement." This second agreement provided for $ 2 billion in funds should the Global Settlement fail. Id. at 2304.

Ild. at 2312-14, 2316.

'See id. at 2318-20.

6521 U.S, 591 (1997) [hereinafter Amchem/Windsor].

7M. at 598 (citing Judicial Conference ad hoc Committee on Asbestos Litigation Report 3, 27-35 (Mar. 1991)). This proposed legislation to create the Asbestos Resolution Corporation was introduced by Rep. Henry Hyde this term and is in hearings. See BusiNESS INSURANCE, July 5, 1999, at 1, 57.

1119 S. Ct. at 2303.

11d. at 2308 (citing numerous books and articles on the subject).

"See generally Patrick J. Hagan, Mass Torts: The Windsor Decision and Considerations for a Coordinated Defense, 48 FED'N INS. & CORP. COUNS. Q. 335 (1998).

"See Ahearn v. Fibreboard Corp., 162 F.R.D. 505, 517 (E.D. Tex. 1995). 12 See In re Asbestos Litigation, 90 F.3d 963 (5th Cir. 1996).

13M. at 976-82.

"See In re Asbestos Litigation, 521 U.S. 1114 (1997); 134 F.3d 668 (5th Cir. 1998). By this time, Judge Parker who had approved the settlement on the trial bench was a member of the Court of Appeals for the Fifth Circuit. He abstained from all considerations.

"It is interesting to note, however, that the Court did not begin with its analysis of Rule 23(b)(1)(B), but first explained two "threshold matters." Ortiz, 119 S. Ct. at 2307. The Court said that Article III nonjusticiability claims, though normally considered first, would be delayed until after the "statutory" analysis of Rule 23 certification concerns, which the Court deemed "'logically antecedent... to Article III concerns. Id. (citing Amchem/Windsor). Second, the Court brought out the "disregard" by the court of appeals of "Amchem's explanation of the governing legal standard." Id.

16M. at 2308. "Id. at 2309.

18 Id. at 2309-10.

191d. at 23 11. 2'Id. at 2312. 111d. at 2313-14.

22Amchem v. Windsor, 521 U.S. at 613 (citing 28 U.S.C. 2072(b)). The Ortiz Court noted that leaving some potential plaintiffs out of the class, as this agreement would do, could infringe upon their Seventh Amendment jury trial rights, as well as their due process right to "one's day in court." Ortiz, 119 S. Ct. at 2314.

23 Id.

21M. at 2316. Another problem in these cases is the ability to identify the actual number of claimants, unlike the traditional probate case in which legatees are named and creditors can be tracked. The Court did not tackle this point, along with difficult threshold jurisdictional issues.

"Fibreboard's policy with Continental Casualty Company, for example, had "no aggregate limit." Id. at 2303.

I'M at 2317. 27M. at 2318.

21M. In the opinion and record regarding the Trilateral Settlement Agreement, no dollar amount is given for the settlement of inventory cases and existing claims; however, outside confidential sources indicate those amounts may total more than twice the amount of the certified "limited" fund.

191d. at 2319.

"See Amchem/Windsor, 521 U.S. 591. " Ortiz, 119 S. Ct. at 23 20.

32jd.

31Noting that the district court may have had the minimization of transaction costs in mind, the Court raises, but does not answer, the following question: "[i]f a settlement thus saves transaction costs that would never have gone into a class member's pocket in the absence of settlement, may a credit for some of the savings be recognized in a mandatory class action as an incentive to settlement?" Id. at 2322.

34 Id.

311d. at 2323. 36 Id.

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