¹ See “In re Agent Orange Product Liability Litigation,” Federal Supplement, vol. 597 (Eastern District of New York, 1984), p. 740; and “In re Agent Orange Product Liability Litigation,” Federal Supplement, vol. 611 (Eastern District of New York, 1985), p. 1396.

² The history of the Agent Orange case is chronicled in detail in Schuck, Peter H., Agent Orange on Trial: Mass Toxic Disasters in the Courts (Cambridge, Mass.: Harvard University Press, 1987).Google Scholar See also Schuck, , “The Role of Judges in Settling Cases: The Agent Orange Example,” Working Paper #36, Program in Civil Liability, Yale Law School, Sept. 1985.Google Scholar

³ Even Abraham Lincoln favored settlements. He addressed the following remarks to a group of young attorneys: “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses and waste of time. As a peacemaker, the lawyer has a superior opportunity for good. There will still be business enough.” Quoted in an editorial by Johnson, Gary T., Chicago Tribune, August 9, 1985.Google Scholar The source for Lincoln's remarks is Fragment: Notes from a Law Lecture, July 1, 1850.

⁴ See, for example, Bok, Derek, “A Flawed System,” Harv. Mag. (May-June 1983);Google ScholarBurger, Warren E., “Isn't There a Better Way?” American Bar Association Journal, vol. 68 (1982), p. 274Google Scholar, and “Agenda for 2000 A.D. — A Need for Systematic Anticipation,” Federal Rules Decisions, vol. 70 (1976), pp. 93–96; and Epstein, Richard A., “Settlement and Litigation: Of Vices Individual and Institutional,” University of Chicago Law School Record, vol. 30 (Spring 1984), p. 2.Google Scholar

⁵ “In order to produce a climate in which counsel may explore the possibility of early settlement, the judge should ask the views of counsel on the possibility of settlement at the first principal pretrial conference … [S]ettlement should always be encouraged.…” Manual for Complex Litigation, sec. 1.21.

⁶ “In any action, the court may in its discretion direct the attorneys for the parties and any unrepresented parties to appear before it for a conference or conferences before trial for such purposes as … facilitating the settlement of the case.” Federal Rules of Civil Procedure, Rule 16(a)(5).

⁷ Fiss, Owen, “Against Settlement,” Yale Law Journal, vol. 93 (1984), p. 1074.CrossRefGoogle Scholar For the text of the proposed amendment to Rule 68, see Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, “Preliminary Draft of Proposed Amendments to the Federal Rules of Civil Procedure,” Federal Rules Decisions, vol. 98 (1983), pp. 361–363.

⁸ See, e.g., Burger, “Isn't There a Better Way?” p. 275ff.

⁹ “The resolution of controversies and uncertainties by means of compromise and settlement is generally faster and less expensive than litigation; it results in a saving of time for the parties, the lawyers, and the courts, and it is thus advantageous to judicial administration, and, in turn, to government as a whole. Moreover, the use of compromise and settlement is conducive to amicable and peaceful relations between the parties to a controversy.” “Compromise and Settlement,” American Jurisprudence 2d, vol. 15A (Supp. 1985), sec. 5.

¹⁰ Fiss, “Against Settlement.” p. 1075.10 Fiss, “Against Settlement.” See also the response to Fiss by McThemia, Andrew W. and Shaffer, Thomas L., “For Reconciliation,” Yale Law Journal, vol. 94 (1985), p. 1660CrossRefGoogle Scholar, and Fiss's, rejoinder, “Out of Eden,” Yale Law Journal, vol. 94 (1985), p. 1669.CrossRefGoogle Scholar Federal District Court Judge Jack Weinstein also grapples with one of Fiss's, arguments in “In re Agent Orange Product Liability Litigation,” Federal Supplement, vol. 597, p. 760.Google Scholar

¹¹ Fiss, “Against Settlement,” p. 1075.

¹² We thank David Schlecker of the law firm of Anderson, Russell, Kill & Olick for giving us the benefit of his experience litigating and settling personal injury lawsuits.

¹³ The judge may do so sua sponte or at the request of counsel for either party.

¹⁴ Although the word “price” calls the idea of money to mind, defendants often agree to provide services in lieu of, or in addition to, cash. In-kind relief is especially likely to be offered or requested in cases alleging civil rights violations. For example, in “Women's Committee for Equal Employment Opportunity v. National Broadcasting Co.,” Federal Rules Decisions, vol. 76 (Southern District of New York 1977), p. 173, a case brought under Title VII of the Civil Rights Act of 1964, the defendant agreed to revamp its policies concerning the employment and promotion of women and to award back pay. When in-kind relief is agreed to, the parties ask the judge to enter a consent decree in which their rights and obligations are spelled out in detail.

¹⁵ Judges use a variety of tactics to bring parties together. In the Agent Orange case, for example, Judge Weinstein appointed a special master for settlement, told counsel how he was likely to decide close issues, arbitrated disputes, set limits on the settlement price, and required counsel to attend a marathon bargaining session immediately before the trial was to begin. See Schuck, Agent Orange on Trial.

¹⁶ See Posner, Richard A., Economic Analysis of Law, 2nd ed. (Boston: Little, Brown & Co., 1977), pp. 434–441.Google Scholar

¹⁷ See, for example, “Beecher v. Able,” Federal Reporter 2d, vol. 575 (Second Circuit 1978), p. 1010, a securities fraud case in which the parties disagreed over their rights to an unused portion of a settlement fund.

¹⁸ “[A] claim need not be valid or well founded to support a compromise, and as long as there has been good faith, the courts will not inquire into the merits of a claim or the actual rights of the parties … [T]he courts will not inquire into the validity of a claim which was compromised in good faith …” “Compromise and Settlement,” sec. 17. See also Fiss, “Against Settlement,” p. 1082.

¹⁹ “Compromise and Settlement,” sec. 16.

²⁰ The grounds for invalidating a compromise or settlement are illegality, fraud, duress, undue influence, and mistake. See ibid., secs. 27–34.

²¹ Fiss, “Against Settlement,” p. 1086.

²² Epstein writes that “Early in teaching I received this advice from a shrewd and experienced lawyer. ‘You can tell the sign of a good deal — everyone leaves the room happy. You can also tell the sign of a good settlement — everyone leaves the room unhappy.’” “Settlement and Litigation: Of Vices Individual and Institutional,” p. 3.

²³ We thank Leo Katz of the law firm of Mayer, Brown & Platt for suggesting this formulation of the matter. Also, see Fiss, “Against Settlement,” pp. 1085–1087.

²⁴ Since settlements may occur at any time prior to final judgment, the amount of information available to parties who settle may also vary considerably. For example, there may be more reason to think that a plaintiff who settles to avoid an appeal after winning at trial is entitled to compensation than there is to think that a plaintiff who settles before trial is so entitled because more information may be available about the former's claim than about the latter's. Even so, since many cases settle before trial, and since additional resources could be invested in gathering and processing information whenever a case settles, it is plausible that we could promote compensatory justice more fully by trying every complaint to finality. Moreover, settlements and trials differ procedurally in relevant ways. For example, trials, but not settlements, are held in public, are conducted in accordance with rules of evidence, involve the formal presentation and argument of issues of law and fact, are subject to appeal, and are often decided by judges who rationalize their rulings in written opinions. If, as we have assumed, these procedures tend to increase the reliability of trials as means of discerning the validity of claims, our confidence that claims that are vindicated at trial are in fact valid may greatly exceed our confidence that people who settle deserve the payments they receive.

²⁵ See Kronman, Anthony, “Paternalism and the Law of Contracts,” Yale Law Journal, vol. 92 (1983), p. 763CrossRefGoogle Scholar, for a discussion of nondisclaimable rights. See Feinberg, Joel, “Legal Paternalism,” Canadian Journal of Philosophy, vol. 1 (1971), p. 105CrossRefGoogle Scholar, for a discussion of related philosophical issues.

²⁶ Kronman, “Paternalism and the Law of Contracts”, pp. 770–774.

²⁷ See Fiss, “Against Settlement”, pp. 1076–1078.

²⁸ See Note, “The Availability of Excess Damages for Wrongful Refusal to Honor First Party Insurance Claims — An Emerging Trend”, Fordham Law Review, vol. 45 (1976), pp. 164–166.

²⁹ See, for example, “In re Cuisinart Food Processor Antitrust Litigation”, Trade Cases (Commerce Clearing House), vol. 1983–2 (District of Connecticut, 1983), ¶ 65,680, p. 69,472, in which the damages alleged ranged from $32 to $75 per class member and the class contained in excess of 1.5 million members, so that Cuisinart's total possible liability after trebling was between $144 million and $337.5 million. See also “Phillips Petroleum Co. v. Shutts”, Supreme Court Reports, vol. 105 (1985), p. 2965, a suit for failure to pay royalties on oil leases, in which claims averaged $100 per member for a class of 28,100 people. The use of the class action device to threaten defendants with extraordinary litigation expenses and liabilities prompted one author to write of the “in terrorem” effect of class antitrust actions, and to describe them as “legalized blackmail”. Handler, , “The Shift from Substantive to Procedural Innovations in Antitrust Suits — The Twenty-Third Annual Antitrust Review”, Columbia Law Review, vol. 71 (1971), p. 9.CrossRefGoogle Scholar

³⁰ See Coleman, Jules, “Liberalism, Unfair Advantage, and the Volunteer Armed Forces”, Fullinwider, Robert K., ed., Conscripts and Volunteers: Military Requirements, Social Justice, and the All–Volunteers Force (Totowa, NJ: Rowman & Allanheld, 1983).Google Scholar It is worth nothing that power imbalances may obtain at trials, too. Wealthy parties may be able to hire better lawyers and to maneuver more freely than poor ones. However, trial procedures are designed to reduce the impact of such imbalances in ways that settlement procedures are not. For example, a trial judge can ask questions, suggest motions, and take other steps to ensure that a proceeding is fair, and the appeals process provides a measure of security that obvious imbalances will be redressed.

³¹ “Globus v. Law Research, Inc.,” Federal Supplement, vol. 287 (Southern District of New York 1968), p. 188, affirmed in part and reversed in part, Federal Reporter 2d, vol. 418 (Second Circuit 1969), p. 1276, certiorari denied, United States Reports, vol. 397 (1970), p. 913.

³² Federal Supplement, vol. 278, p. 199.

³³ Federal Reporter 2d, vol. 418, p. 1288.

³⁴ For discussions of indemnification, see Oesterle, Dale A., “Limits on a Corporation's Protection of Its Directors and Officers from Personal Liability”, Wisconsin Law Review, vol. 1983 (1983), p. 513Google Scholar; Bishop, Joseph W. Jr., “New Problems in Indemnifying and Insuring Directors: Protection against Liability under the Federal Securities Laws”, Duke Lam Journal, vol. 1972 (1972), p. 1153CrossRefGoogle Scholar; and Bishop, , “Sitting Ducks and Decoy Ducks: New Trends in the Indemnification of Corporate Directors and Officers”, Yale Law Journal, vol. 77 (1968), p. 1078.CrossRefGoogle Scholar

³⁵ In the opinion affirming “Globus” the Court of Appeals noted that the Securities and Exchange Commissions “has announced its view that indemnification of directors, officers and controlling persons for liabilities arising under” the securities laws is against public policy. Federal Reporter 2d, vol. 418, p. 1288.

³⁶ For example, had Law Research and Blair & Co. settled Globus, Blair & Co. would have been entitled to an indemnity per the underwriting agreement. See, for example, “Cambridge Fund, Inc. v. Abella”, Federal Supplement, vol. 501 (Southern District of New York, 1980), pp. 598, 618 (distinguishing Globus on the ground that “unlike the situation in [“Globus”, here] there has been no adjudication of willfullness — only the entry of a consent order with such findings”).

³⁷ Indeed, in view of the size of the judgement after the first appeal — approximately $32,500 — it is startling that they continued to press their claims at all.

³⁸ It is worth nothing that after losing on the indemnification issue Blair & Co. sued Law Research for contribution — allocation of responsibility for a judgment among defendants each of whom is liable for it in its entirety — and won. “Globus, Inc. v. Law Research Service, Inc.,” Federal Supplement, vol. 318 (Southern District of New York 1970), p. 955, affirmed sub nom “Globus v. Law Research Service, Inc.,” Federal Reporter 2d, vol. 442 (Second Circuit), p. 1346, certiorari denied sub nom “Law Research Service, Inc. v. Blair & Co.,” United States Reports, vol. 404 (1971), p. 941. Even so, since indemnification and contribution are distinct claims, settlements of the indemnification issue would have been against public policy. It would have further reduced Blair & Co.'s liability.

³⁹ Throughout this section we have assumed that the policy of preventing people from insulating themselves from the legal consequences of securities fraud is correct. This assumption is questionable, that is, it is possible that Globus was wrongly decided and that indemnification agreements are unobjectionable. An argument to this effect could be made on the ground that issuers who can monitor underwriters efficiently should be permitted to offer insurance as a means of enticing underwriters to handle their securities. Even if Globus was wrongly decided, however, the analytical point that people may use settlement agreements to accomplish ends they are legally forbidden to achieve by means of contracts would remain intact. Only, the example we have used would be impeached. In Other words, the general point that settlements may undermine sound public policy goals would survive a showing that the policy of forbidding indemnification in securities fraud cases is unwarranted. It is the general point, not the example suggested by Globus, to which we are committed.

⁴⁰ This is the case, for example, when judges perform their Tunney Act duty to determine that a proposed settlement of a government antitrust suit is in the public interest. United States Code, title 15 (1980), sec. 16(e). It is also the case when judges perform their duty to assess the fairness, reasonableness, and adequacy of proposed settlements to class actions. See footnote 75.

⁴¹ It must be noted that settlement agreements contrary to public policy could be negotiated even if all complaints were tried. Parties would simply need to conspire with each other to achieve this result. Our suggestion is only that the frequency of such agreements may decline as the rate of trials increases. We thank Don Regan for helping us clarify this point.

⁴² This paragraph draws heavily on examples and arguments discussed by Owens Fiss. In addition to “Against Settlement”, we direct the reader to the following articles by Fiss: “The Supreme Court 1978 Term — Forward: The Forms of Justice”, Harvard Law Review, vol. 93 (1978); “The Social and Political Foundations of Adjudication”, Law & Human Behavior, vol. 6 (1982); and “Objectivity and Interpretation,” Stanford Law Review, vol. 34 (1982). To avoid misleading the reader, we should also note that trials can affect the interests of nonparties in much the same way that settlements can. However, third parties can sometimes intervene in trials in ways that they cannot intervene in settlements, as when a dispute is resolved before a complaint is filed.

⁴³ Fiss, “Against Settlement,” pp. 1078,–1082.

⁴⁴ ibid., p. 1085.

⁴⁵ It is estimated that public funds were used to support the federal courts (excluding the Supreme Court) in the following amounts in 1985: judges' salaries, $74,540,000; salaries of supporting personnel, $370,228,000; fees of jurors and commissioners, $42,000,000; expenses of operation and maintenance of the courts, $101,500,000;space and facilities, $140,000,000; and court security, $25,500,000.Annual Report of the Director of the Administrative Office of the U.S. Courts (1984) (Wash., D.C.: Government Printing Office, 1985), pp. 78–80. Although these fixed costs apply to both civil and criminal matters, the former far outnumber the latter. In 1984, 261,485 civil cases and only 36,845 criminal cases were filed in the U.S. District Courts; ibid., pp. 4–6.

⁴⁶ This may come as a surprise to readers who think that litigation costs are already prohibitively high.

⁴⁷ See Posner, Economic Analysis of Law, pp. 400–401, 419–427.

⁴⁸ For a discussion of the conditions under which it may be fair to require people to defray the costs of public goods they consume, see Arneson, Richard J., “The Principle of Fairness and Free-Rider Problems”, Ethics, vol. 92 (1982), p. 616.CrossRefGoogle Scholar

⁴⁹ Class action settlements are an exception to this rule. And, of course, we realize that precedents concerning the enforcement of settlements arise from settled cases. However, even these precedents emerge only because claims are taken to trial.

⁵⁰ Even Richard Posner, a proponent of settlements, writes that “[i]f the function of the legal system were solely to settle disputes, it would be appropriate to impose the entire costs of the system on the disputants.” Economic Analysis of Law, p. 401.

⁵¹ “[T]he settlement rate is an important determinant of the direct costs of resolving legal disputes. Beyond a certain point, however, a further increase in the settlement rate would increase the total costs of dispute resolution by reducingthe production of precedents below the optimal level.” ibid., p. 434.

⁵² ibid., p. 422.

⁵³ See ibid. for a presentation of this view.

⁵⁴ See Epstein, “Settlement and Litigation: Of Vices Individual and Institutional,” for a discussion of the trend away from “bright line” rules.

⁵⁵ The number of civil cases filed annually increased by more than 100% between 1977 and 1984. Annual Report of the Director of the Administrative Office of the U.S. Courts(1984), p. 4.

⁵⁶ See Miller, Geoffrey P., “An Economic Analysis of Rule 68,” Journal of Legal Studies, vol. 15 (1986), p. 93CrossRefGoogle Scholar; and Priest, George L., “Regulating the Content andVolume of Litigation: An Economic Analysis,” Supreme Court Economic Review, vol. 1 (1982), p. 163.CrossRefGoogle Scholar

⁵⁷ “A tort settlement, conceptually and in practice, is intended to compensate an individual for injuries to his or her person.” “In re Agent Orange Product Liability Litigation,” Federal Supplement, vol. 611, pp. 1424–1425.

⁵⁸ Classes can be both plaintiffs and defendants. In this paper, however, we will be concerned with only plaintiff classes.

⁵⁹ Class members are not permitted to exclude themselves when, for all intents and purposes, the trial of a class action would be dispositive of their interests. For example, the trial of a school desegregation class action would adjudicate the rights of allminority students, even those who wished to exempt themselves from the lawsuit.

⁶⁰ A rational person will refuse to sue on a claim when the opportunity cost of a lawsuit exceeds its expected return (the payoff given that the lawsuit may be won, lost, or settled times the probability of each outcome).

⁶¹ “Phillips Petroleum Co. v. Shutts,” Supreme Court Reports, vol. 105 (1985), p. 2965.

⁶² ibid., p. 2974.

⁶³ See “In re Cuisinart Food Processor Antitrust Litigation,” and “In re Corrugated Container Antitrust Litigation,” Federal Reporter 2d, vol. 643 (Fifth Circuit 1981), p. 195.

⁶⁴ See “Ohio Public Interest Campaign v. Fisher Foods,” Federal Supplement, vol. 546 (Northern District of Ohio 1982), p. 1.

⁶⁵ Federal Supplement, vol. 611, p. 1411.

⁶⁶ In “In re Corrugated Container Antitrust Litigation,” p. 220, for example, Judge Tjoflat wrote, “It is self-evident that … [a] distribution should be weighed heavily in favor of plaintiffs whose claims” (emphasis added) are most likely to succeed at trial.

⁶⁷ “Whether or not the defendants have formally admitted some responsibility for defects in their products and for possible injuries to some plaintiffs, the public canjustifiably assume, for perhaps the first time, that there is some merit to the claimsof those exposed to Agent Orange that they are suffering because of their war and post-war experiences.” “In re Agent Orange Product Liability Litigation,” Federal Supplement, vol. 597, p. 749.

⁶⁸ “All the settlements release the claims of all class members for the entire eighteen-year period of the alleged conspiracy. Thus it is appropriate that some compensation be given for purchases made in the pre-statute of limitations period.” “In re Corrugated Container Antitrust Litigation,” Trade Cases (Commerce Clearing House), vol. 1981–1 (Southern District of Texas 1981),¶ 64,114, p. 76,717, affirmed, Federal Reporter 2d, vol. 659 (Fifth Circuit 1981), p. 1329.

⁶⁹ “Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class action device.” “Deposit Guaranty National Bank v. Roper,” United States Reports, vol. 445, p. 339, rehearing denied, United States Reports, vol. 446 U.S. (1980), p. 947. See also “State of West Virginia v. Chas. Pfizer & Co.,” Federal Reporter 2d, vol. 440 (Second Circuit 1970), p. 1090.

⁷⁰ See Schuck, Agent Orange on Trial.

⁷¹ Sugarman, Stephen, “Doing Away with Tort Law,” California Law Review, vol. 73 (1985), p. 598.CrossRefGoogle Scholar

⁷² Preliminary results of a 20-year study of people who worked with Agent Orange suggest that it neither decreased the subjects' longevity nor caused their deaths. Miami Herald, Dec. 28, 1985, p. 7A.

⁷³ Except when the parties explicitly recognize their validity, as discussed further below. See the text immediately preceding and accompanying footnote 80.

⁷⁴ See the text accompanying footnotes 18–22.

⁷⁵ “Cotton v. Hinton,” Federal Reporter 2d, vol. 559 (Fifth Circuit 1977), p. 1330. Settlements of class actions must be approved by judges because Rule 23, which empowers plaintiffs to bring class actions, also provides that “[a] class action shall not be dismissed or compromised without the approval of die court. …” Federal Rules of Civil Procedure, Rule 23 (e).

⁷⁶ See Part I, sec. (.1).

⁷⁷ Several cases attest to the fact that class counsel may attempt to “buy off” named plaintiffs, and that named plaintiffs may be receptive to such overtures. See, e.g., “Plummer v. Chemical Bank,” Federal Rules Decisions, vol. 91 (Southern District of New York 1981), p. 434 (disapproving a proposed settlement in which named plaintiffs were to receive “substantially more benefits” than other members of the class);and “Holmes v. Continental Can Co.,” Federal Reporter 2d, vol. 706 (Eleventh Circuit 1983), p. 1144 (reversing and remanding lower courtdecision approving settlement under which the eight named plaintiffs would have received half of the settlement fund).

⁷⁸ For an excellent discussion of the effect of attorneys' fees on settlement rates see Miller, Geoffrey P., Agency Problems in Settlement (unpublished typescript, University of Chicago, 1986).Google Scholar

⁷⁹ “In re Corrugated Container Antitrust Litigation,” Federal Reporter 2d, vol. 643, p. 219 [quoting “In re Equity Funding Corp. of America Securities Litigation,” Federal Reporter 2d, vol. 603 (Ninth Circuit 1979), p. 1465].

⁸⁰ “Compromise and Settlement,” sec. 4.

⁸¹ “In re Folding Carton Antitrust Litigation,” Federal Reporter 2d, vol. 744, p. 1258. Judge Flaum was confused because he failed to see the effect adjudication has on class members' legal rights. He cited “Boeing Co. v. Van Gemert,” United States Reports, vol. 444 (1980), p. 482, one of the few class actions ever to be won at trial, for die proposition that class members are the equitable owners of settlement funds. When a class wins at trial its membersacquire rights to compensation. It is therefore true that they are entitled to payments. However, when a class action settles, the validity of members' claims is neverproved. Consequently, class members may not be the equitable owners of shares in a settlement fund and Boeing is off point.

⁸² “If the spouses and children of the veterans were ‘completely without any colorable legal claims against [the] defendants, it would [be] an abuse of the court's discretion to allow them to share in the settlement fund.’” “In re Agent Orange Product Liability Litigation,” Federal Supplement, vol. 611, p. 1411 [quoting “In re Chicken Antitrust Litigation American Poultry,” Federal Reporter 2d, vol. 669 (Fifth Circuit 1982), p. 238].

⁸³ It is consistent with the view that the right to sue, or the power to exercise thatright, transfers from class members to a class on certification (rather than at settlement) that individual class members cannot sue on claims on which a class action is already pending, although people who have opted out of a class may do so. Moreover, since class members retain the right to settle with a defendant individually at any time during the pendency of a class action, the most appropriate reading of the facts seems to be that, by remaining in a class, members grant the class the nonexclusive authority to exercise their right to settle. That is, they empower a class to settle on their behalf if they do not do so themselves.

⁸⁴ Newbergon Class Actions (Colorado Springs, Colo.: Shepard's/McGraw–Hill, 2d ed. 1985), sec. 10.05.

⁸⁵ See Smith's, Judge J. Joseph opinion in “State of West Virginia v. Chas. Pfizer & Co.,” Federal Reporter 2d, vol. 440, p. 1091.Google Scholar

⁸⁶ “North Carolina v. Chas. Pfizer & Co.,” New York CM Court, vol. 69 (Southern District of New York 1970), p. 839.

⁸⁷ The sample replies are quoted in Newberg on Class Actions 2d, sec. 8.39, where it is suggested that they “typify the misunderstanding attendantsuch notice.”

⁸⁸ Federal Supplement, vol. 611, p. 1396; see also Schuck, Agent Orange on Trial.

⁸⁹ “Colson v. Hilton Hotels, Inc.,” Federal Rules Decisions, vol. 59 (Northern District of Illinois 1972), p. 324.

⁹⁰ “Ohio Public Interest Campaign v. Fisher Foods,” Federal Supplement, vol. 546, p. 1.

⁹¹ “Grossman v. Playboy Clubs Int'l, Inc.,” Civil No. 882939 (L.A. Super. Ct. 1970).

⁹² This case is discussed in Handler, “The Shift from Substantive to Procedural Innovations in Antitrust Suits,” p. 10.

⁹³ “Phemister v. Harcourt Brace Jovanovich,” No. 77C39, slip opinion (Northern District of Illinois Sept. 14, 1984). We thank Victor Freedman of the law firm ofFried, Frank, Harris, Shriver & Jacobson for bringing this case to our attention.

⁹⁴ We assume for now that extinguishing the right to sue imposes a wrongful loss on class members. We dispute this assumption below.

⁹⁵ We will use the phrases “expected value of a claim at trial” and “size and strength of a claim” interchangeably.

⁹⁶ See, for example, Polinsky, A. Mitchell, An Introduction to Law and Economics (Boston:Little, Brown & Co., 1983), p. 29Google Scholar; and Murphy, Jeffrie and Coleman, Jules, The Philosophy of Law. An Introduction to Jurisprudence (Totowa, NJ: Rowman & Allanheld, 1984), p. 243.Google Scholar

⁹⁷ See Silver, “Using Class Action Settlement Funds Justly and Wisely,” for a discussion of other reasons that could be given in support of the practice of dividing settlement funds among class members.

⁹⁸ 28 U.S.C. 2042.

⁹⁹ Richard Epstein has raised the concern that the proposal to escheat settlement funds to the federal government would blur the distinction between public civil proceedings and private class actions. Under this proposal, defendants who settle private class actions would pay money into public coffers, just as they do when they lose or settle public proceedings. But, Epstein's objection continues, if what we want to see is the payment of money into public coffers, what role remains for private class actions? In other words, by denying class members settlement payments, have we not obviated the need for class actions altogether?

If it were true that the escheat option would blur the distinction between private and public lawsuits, it would be a real question whether a private form of action should be available. It would not follow, however, that merely because the categories of public action and private action were merged that private class actions would cease to serve any purpose. It might be reasonable to make both public and private proceedings available, for example, because the plaintiffs' bar is better than the government at monitoring some kinds of illegal activities. Thus, even if it would be appropriate to conceptualize class actions as public proceedings in the event that settlement funds were not divided among class members, it may still be reasonable to empower private citizens to bring class actions.

More to the point, the distinction between private and public actions would remain even if class members were denied settlement payments. After all, class actions can and occasionally do go to trial, and when classes prevail at trial their members acquire rights to damage payments. Since class actions can go to trial, a difference between class actions and public proceedings would remain even if the practice of dividing settlement funds among class members were abolished. The difference would be that class actions could sometimes result in civil recoveries, whereas public proceedings can result in only fines and penalties.

Further, it is in any event wrong to think of payments made in settlement of civil suits as fines. As mentioned above, when class actions settle, ordinarily no findings of guilt, liability, or wrongdoing are made. By contrast, a fine is paid after a public proceeding only when a defendant is adjudged guilty of an offense. The difference between fines and settlement payments is important both morally and legally. From a moral point of view, settlement payments carry none of the opprobrium associated with fines and penalties because they do not indicate that a norm of behavior has been violated. From a legal point of view, a settlement payment is a good faith attempt to buy peace of mind, not an admission of guilt, and the obligation to make a settlement payment arises under a contract, not under public law.

The only possible reason to lump settlement payments together with fines and penalties is that the former have the same effect as the latter on defendants' behavior. From a defendant's point of view, it may make little difference whether money passes into public coffers or the hands of individual defendants. The economic result is the same in either event because in both cases a cost is associated with an activity as a result of a lawsuit. For the same reason penalties and fines may deter people from violatingthe securities laws, the prospect of having to make a settlement payment may deter a manufacturer from producing a new and potentially defective product line.

It seems likely that defendants view settlement payments like fines and adjust their behavior to minimize both. This is not, however, a good reason to put fines and settlement payments in die same category. To the contrary, it is a reason to keep the two kinds of payment distinct. When the prospect of a fine dissuades a person from violating the law, a form of behavior is deterred which, according to prevailing social policy, ought to be deterred. However, when the prospect of a settlement payment causes a person to refrain from an activity, there is less reason to be happy with the result because the behavior that is deterred may, in light of social policy, be desirable. For, example, suppose we want to encourage manufacturers to market innovative products that increase social welfare, while, at the same time, we empower people who are injured by defective products to sue for compensation and to settle when they like. If the prospect of having to make settlement payments deters manufacturers from marketing products that are sound, fewernew products will be made available to the public than is desirable under this policy. Thus, if settlement payments have the same affect as fines on people's behavior, there is added reason to be concerned about the level of settlement activity in our society, the reason being that settlements may deter people from acting in desirable ways.