Damage Averaging-How the System Harms High-Value Claims *

By Kishinevsky, Rony | Texas Law Review, April 1, 2017 | Go to article overview

Damage Averaging-How the System Harms High-Value Claims *


Kishinevsky, Rony, Texas Law Review


The disappearance of the American civil trial has paved the way for a new order of dispute resolution-one marked by alternatives such as arbitration, mediation, and, above all, settlement. Nowhere has that shift been seen more than in tort cases.1 In 1962, one in six tort cases went to trial; by 2002, only one in forty-six was tried.2 in large part, this shift reflects the arrival of mass tort settlements, with headline-making examples such as Agent Orange, asbestos, tobacco, and Vioxx.3 Whether it is the extreme cost, the uncertainty and unpredictability, or the potential for massive exposure (especially for the defendants), defendants and plaintiffs in mass tort cases avoid trials at all costs. Today, less than 1% of all mass tort cases proceed to trial.4

As a consequence of the vast majority of mass tort cases being settled by agreement between the parties, allocation of the settlement proceeds has become a massive undertaking, filled with ethical and practical difficulties for plaintiffs' attorneys entrusted with allocating aggregate settlement proceeds (as is the case in the majority of mass tort settlements).5 When one or a small number of claimants settle with a defendant, it is relatively easy to determine how the proceeds of the settlement are to be split; it is far more difficult when a defendant establishes a $4.85 billion settlement fund for almost 50,000 claimants, as Merck & Co. did to settle nationwide multi- district litigation (MDL) over the drug Vioxx.6 As can be imagined, those claimants took Vioxx for various periods of time; had drastically diverse medical histories, employment opportunities, and family situations; and exhibited numerous other differences-no two claimants were identical in all regards. Had any of those claimants taken their case to trial, a jury would have been able to consider the facts and circumstances of each situation in determining an appropriate verdict. However, the individual settlement award for each Vioxx claimant was ultimately based on the calculation of "points" pursuant to negotiated formulas, grids, and matrices; while some variances between claimants affected their settlement payout, the settlementallocation plan minimized, or even ignored, other important differences between claims that could or would have affected their expected value at trial.

Such an allocation method-known as "damage averaging," which occurs when a settlement-allocation plan does not adequately reflect unique differences "between claims that could or would affect their expected value at trial"7-has become a valuable arrangement for distributing settlement proceeds in complex mass tort actions. Yet, while damage averaging provides an efficient, objective, and equitable (both horizontally and vertically) system for apportioning settlement proceeds among claimants, it may inadequately compensate those claims which our legal system should value most-the high-value claims of the most seriously injured claimants.8 Thus, while I will argue that the benefits of the overall use of damage averaging in mass tort settlements significantly outweigh the negatives, the allocation method is limited by its undervaluation of high-value claims and could be significantly improved.

In Part I of this Note, I further define and explain damage averaging as well as investigate why high-value claims are likely undervalued under such a system, while, conversely, low-value claims are typically overvalued. In Part II, I explain why damage averaging use has greatly expanded in mass tort settlements and examine the benefits and negatives of a damageaveraging allocation method. Next, in Part III, I discuss alternatives to damage averaging and present an argument for why damage averaging is the best current arrangement for the distribution of settlement proceeds. Finally, in Part IV, I recommend solutions to ensure that high-value claims are accurately9 valued-proposals that have the potential to reduce (or even eliminate) undervaluation of such claims and meaningfully improve the outcomes of damage-averaging apportionment. …

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