BP, buyer’s remorse and the future of mass tort settlements

July 11, 2013

The oil giant BP has recently done a very good job of casting itself as the victim of greedy plaintiffs lawyers looking to get rich by submitting unwarranted claims for businesses that weren’t actually harmed by the Deepwater Horizon oil spill. Did you see the company’s full-page advertisements to that effect in The Wall Street Journal and The New York Times? Or maybe you read smart pieces by Paul Barrett of BloombergBusinessweek (“How BP Got Screwed on Gulf Oil Spill Claims”) or Joe Nocera of the Times (“Justice, Louisiana Style”), who both pointed out that the court-appointed lawyer serving as the administrator of BP’s multibillion-dollar class action settlement is himself a onetime plaintiffs lawyer – as is the New Orleans federal judge overseeing the deal. (Lawyers representing BP claimants, I should note, dispute just about everything BP says about the judge and the administrator.)

Nocera made the rhetorical point that lots of people don’t particularly mind that a multinational oil company responsible for a perceived environmental tragedy might have to fork over some extra billions. According to Nocera, we should nevertheless be troubled by BP’s “fleecing,” if for no other reason than the disincentive BP’s experience offers to future defendants facing an onslaught of claims. Nocera credits BP with behaving honorably after the oil spill, setting up an out-of-court claims facility to get more than $6 billion quickly into the hands of injured property owners and businesses. “Yet its efforts to do right by the Gulf region have only emboldened those who view it as a cash machine,” Nocera said. “The next time a big company has an industrial accident, its board of directors is likely to question whether it really makes sense to ‘do the right thing’ the way BP has tried to.”

BP’s rock-star appellate lawyer, Theodore Olson of Gibson, Dunn & Crutcher, made a similar argument in a brief to the 5th Circuit Court of Appeals, which heard BP’s arguments for mercy earlier this week. BP went to the appeals court after U.S. District Judge Carl Barbier approved the class action administrator’s interpretation of how business economic losses should be calculated under the settlement. In the oil company’s view, Barbier and the administrator, Patrick Juneau, have essentially rewritten settlement terms to invite claims by businesses that suffered no losses attributable to the oil spill. The BP deal “could serve as a positive landmark in American jurisprudence because of its ambitious size, its innovative nature, and the speed with which it was negotiated to compensate injured parties,” Gibson Dunn wrote. “Instead, it is poised to become an indelible black mark on the American justice system.

The 5th Circuit, based on the account of a Reuters reporter who attended this week’s hearing, seems reluctant to ride to BP’s rescue. If the appeals court declines to act, class action detractors will have an even more potent argument that corporate defendants are at the mercy of trial lawyers. To expand on Nocera’s point, the next big company contemplating a mass tort settlement will be even less likely to make a deal if it knows it won’t be bailed out by appellate judges.

With that hypothesis in mind, I thought it would be worth taking a quick look at why BP entered its class action settlement with oil spill claimants (and, of course, their lawyers), what BP got and gave up in the deal, where BP and the settlement administrator parted ways, and, most importantly, what the lesson of this settlement is for future defendants. From my read, the takeaway for the next mass tort defendant should not be “Don’t Settle.” Instead, it should be “Make ‘Em Prove It.”

For BP, as for most mass tort defendants, settlement seems to have been driven by a quest for certainty. Corporate defendants almost always tell the same story in mass tort litigation: They can deal with big liabilities so long as they know the upper limit. Uncertainty, on the other hand, is unmanageable. And the out-of-court claims facility BP funded right after the spill couldn’t supply certainty because not all claimants were willing to sign away their right to sue. To achieve finality on oil spill claims, BP had no choice but to reach a global settlement in federal court.

Reasonable minds can and do differ on whether plaintiffs lawyers advised clients not to participate in the out-of-court process because they were focused on their own fees. But in a fascinating forthcoming article for the Louisiana Law Review, New York University law professor Samuel Issacharoff and NYU law school fellow Theodore Rave argue that, paradoxically, oil spill claimants received better recoveries in the class action – despite the higher transaction costs presented by $600 million in legal fees for their lawyers – than they did for the same claims in the out-of-court process. Issacharoff is anything but a disinterested analyst. He is counsel to the plaintiffs lawyers on the BP steering committee who negotiated the class action settlement and, indeed, argued for them at the 5th Circuit this week. But according to his article, the class action’s enhanced recoveries for claimants are so self-evident that objections to the settlement came mostly from non-class members who wanted to get in on the deal and from BP co-defendant Halliburton, which considered settlement terms too generous.

Issacharoff doesn’t suggest that BP and Kirkland & Ellis, which negotiated the class action for BP, were somehow hoodwinked by plaintiffs lawyers. Instead, BP paid what Issacharoff calls a “peace premium” to buy finality. In exchange for more generous recoveries to claimants, he said, the company insisted upon certain conditions designed to assure that the class action settlement would end its civil liability for the oil spill: “A walk-away provision, a firm cut-off date, transparent and consistent procedures, and a shift from an opt-in model to an opt-out model … may have contributed to BP’s ability and willingness to pay claimants more under the class action settlement than through the (claims facility),” Issacharoff wrote. Indeed, he said, BP was so shrewd about the mass tort settlement process that it kept secret the percentage of opt-outs that would trigger the walk-away provision so that plaintiffs lawyers couldn’t easily aggregate opt-outs and hold the settlement hostage.

BP’s lead outside counsel on the settlement, Richard Godfrey of Kirkland, didn’t respond to my email requesting comment, but Ted Olson told me Thursday that Kirkland isn’t to blame for BP’s subsequent problems with the settlement. “I have no quarrel with anything Kirkland did,” said BP’s appellate counsel. “I don’t fault, and I don’t think it’s fair to fault, anyone in the process.” The settlement itself was fine, in Olson’s formulation. What’s wrong is the way that the judge and the claims administrator decided, after the settlement was approved, to interpret accounting terms like losses, costs and profits whose plain meaning should have been self-evident and not open to interpretation. According to Olson, BP doesn’t have buyer’s remorse about the deal it made; it believes instead that it’s being held to a deal it never signed. “I don’t think anybody could have anticipated this distortion of (accounting) terms,” Olson said.

But there’s an argument to be made that BP left itself open to that possibility when it agreed to a relatively low standard of proof for businesses making claims based on economic losses. Take a step back from rhetoric about unwarranted claims and look at exactly what BP is complaining about. The company is not asserting that the claims administrator has permitted businesses that don’t meet the settlement agreement’s causation criteria to submit claims. It is asserting that after businesses get through the initial screen of causation, they’ve been permitted to make claims based on losses that have nothing to do with the oil spill. That’s because, according to BP, the claims administrator doesn’t properly account for month-to-month variations in business costs. If a business happened to spend a lot of money on, say, a new computer system in the year after the oil spill, it could conceivably make a claim in the class action for any loss on its books the month it paid for the new tech, as long as it showed a profit in the corresponding month the year before the spill.

That’s pretty disturbing, and BP’s papers include some outrageous examples of claims for economic losses that seem unrelated to the spill. BP also cites advertisements by Gulf Coast plaintiffs lawyers boasting that they’ll find a claim in your books even if you don’t think you’ve experienced spill-related losses.

Let’s remember, though: Disputes over the accounting of losses only arise for claimants who qualify under the class action’s causation standard. Olson told me BP wanted to be flexible on causation. “We were trying to be reasonable and thoughtful,” he said. BP even knew its low causation bar would result in “false positives.” The claims administrator’s brief to the 5th Circuit cites emails in which BP lawyers admit they’re expecting undeserving claims to satisfy the causation standard.

The company calculated that such claims would fail in the loss-accounting procedure, which was intended to be the more rigorous part of the claims process. That’s how the settlement went awry for BP, when the claims administrator and the judge supposedly rewrote the accounting dictionary.

I asked Olson if it was a mistake for BP to agree to such a low bar for causation. “You can always second-guess,” he said.

Olson contends the lesson of BP’s settlement is that when defendants can’t rely on judges and administrators to apply widely accepted accounting terminology and methodology, they should be cautious about mass tort settlements. “You start to say, ‘Maybe I shouldn’t do this sort of thing,’ or maybe you shouldn’t do it in a particular venue,” Olson said. “If (defendants) are in Louisiana or someplace like it, they might not do it.”

I, however, go back to the “peace premium” Issacharoff discussed. Defendants will almost always be willing, eventually, to buy certainty. The cost and terms of such transactions will vary since the state of the art in mass tort settlements changes all the time. (Witness BP’s innovation of keeping secret the walk-away opt-out percentage.) Future defendants will learn from BP’s experience that proof of causation should be a tougher obstacle, or that definitions for even basic accounting terms must be negotiated and spelled out. They’ll incorporate those particular safeguards into the next major mass tort settlement – and then plaintiffs lawyers will try to discern some other loophole to squeeze through or loose thread to pull.

That’s the way the system has worked for a long time. And regardless of BP’s experience, that’s the way it will continue to work.

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