Harry P Cohen, James P Tenney, Richard M Appel. International Corporate Law, Volume 40. November 1994.
As the asbestos crisis continues to resound through the U.S. courts, the sheer volume and complexity of asbestos-related actions threatens the judicial system’s ability to resolve and compensate legitimate claims by individuals exposed to asbestos.
The ambitious efforts of the asbestos industry to settle vast numbers of claims proved futile in stemming the burgeoning backlog. Recognizing the need for an alternative solution to the asbestos litigation disaster. members of the Plaintiffs’ Bar and representatives of the asbestos industry crafted an innovative settlement agreement containing a dispute resolution mechanism designed to process and redress future asbestos claims fairly and expeditiously. The agreement, recently approved in Georgine v Amchem Products, could have a wide-ranging impact on the asbestos crisis by removing a substantial portion of the asbestos cases from the court system, while also serving as a model for future settlements.
The genesis of the asbestos litigation crisis can be traced to the late 1960s when plaintiffs’ counsel first began filing personal injury and wrongful death suits against asbestos manufacturers and distributors. As the fundamental legal theories of liability became established in the ensuing decade, litigation increased dramatically. By the early 1980s plaintiffs began to face significant delays as dockets across the country started to expand exponentially with asbestos-related cases. Compounding the problem, claimants faced erratic jury verdicts where persons with little or no impairment could receive verdicts, while victims suffering catastrophic illnesses might receive nominal damages. Moreover, transaction costs (mainly attorneys’ fees and litigation costs) were exceeding claimants’ recoveries by nearly two to one.
In 1986, state and federal courts already overburdened by asbestos cases saw the filing rate of new suits quadruple to 24,000 per year. Saddled with enormous liabilities and the overwhelming costs of defending thousands of asbestos-related claims, numerous asbestos manufacturers were on the road to bankruptcy. By 1990, the asbestos situation further deteriorated, as bankruptcies and new case filings continued unabated and the backlog exceeded 70,000. In March 1991 a committee of federal judges, appointed by Chief Justice William H Rehnquist to study the asbestos litigation crisis, reported that “he [asbestos] situation has reached critical dimensions … [and] is becoming a disaster of major proportions to both the victims and the producers of asbestos products, which courts are ill-equipped to meet effectively.”
Shortly after the report was issued all federal personal injury asbestos litigation was ordered to be transferred to Judge Weiner of the US District Court, Eastern District of Pennsylvania for consolidated proceedings. The hope was to foster global settlement. Talks were initiated that attempted to fashion a national settlement that would provide an alternative resolution mechanism for future asbestos claims. Although progress was made towards a global resolution of the crisis, these efforts eventually broke down.
The Centre for Claims Resolution (CCR) is a non-profit-making corporation maintained by certain asbestos producers and distributors for the processing of asbestos-related claims. Believing that a fair and equitable solution to the crisis could be found, the CCR continued talks with two of the most respected and active plaintiffs’ firms in the asbestos litigation arena. These exhaustive negotiations lasted for over a year, culminating in the filing of the class action and Stipulation of Settlement in Georgine.
From the onset, the filing of the Georgine class action and Stipulation of Settlement met with stiff resistance. Various objectors, including some class members, contested the court’s subject-matter jurisdiction over the case and whether the notice programme that permitted potential claimants to opt out of the settlement satisfied constitutional requirements of due process. After ruling that its jurisdiction was proper and that the notice plan complied with the requirements of due process, the court conducted extensive hearings to determine whether the settlement is fair and reasonable to class members.
Terms of the Settlement
The Georgine settlement is a complex agreement which establishes a schedule of benefits and an administrative procedure for compensating class members who meet certain asbestos exposure and medical requirements.
The Georgine class members consist of all US residents occupationally exposed to asbestos and asbestos-containing materials, and their family members who received secondary exposure, who had not sued any CCR defendant before the Georgine action was commenced and who had not opted out of the settlement during the notice period which effectively ended in January 1994.
The stated objective of the settlement agreement is to:
- Provide an alternative dispute mechanism for processing future asbestos claims;
- Pay claims quickly with low transaction costs;
- Pay cash compensation to those who suffer actual impairments and disabilities; and
- Provide adequate funds to guarantee compensation for all exposed persons who in the future develop such impairments or disabilities.
Towards this goal, the settlement agreement provides a dispute resolution mechanism outside the tort system, limits attorneys fees to between 20% and 25% of the amount awarded, commits CCR defendants to compensating 100,000 claimants over the next 10 years and restricts benefits solely to claimants who have manifested an asbestos-related physical impairment. The settlement agreement is to remain in force for an initial 10-year period, after which the CCR defendants have the option to withdraw.
Compensation for claims under the agreement are to be submitted to the CCR, which will process the claims in accordance with specific provisions set forth in the settlement. The settlement agreement contains several provisions for resolving disputes regarding the application of the settlement to individual claimants and provides for annual monitoring of CCR’s administration of the settlement by class counsel and the United States’ largest labour organization, the AFL-CIO, which represents many potential claimants occupationally exposed to asbestos and has endorsed the Georgine settlement.
The settlement also limits the number of qualifying claims that CCR will pay each year. Although the settlement controls the timing of payments, the CCR defendants are obliged to pay all qualifying claims received during the settlement’s initial 10-year period. Indeed if the maximum limits were ever reached, CCR defendants would be paying more claims at a faster rate than they ever have in the past.
The Georgine settlement uses objective medical criteria in an attempt to compensate claimants fairly and equitably. The basic qualifications for compensation are:
- Evidence of occupational-related exposure to asbestos in products manufactured or supplied by one or more of the CCR defendants; and
- Evidence of a medical condition sufficient to meet the defined medical criteria. Evidence of asbestos exposure must be sufficient to demonstrate exposure to asbestos on a regular basis, over a protracted period of time and near the claimants workplace. This has become known as the frequency, regularity and proximity standard.
The four medical categories eligible for cash compensation are mesothelioma, a form of cancer of the lining of the lung or abdomen; lung cancer; certain other cancers such as colon-rectal tumours; and non-malignant conditions, defined as asbestosis and bilateral pleural thickening. For claimants in the non-malignant category to receive cash compensation, they must produce clinical evidence demonstrating actual scarring of the lung tissue, accompanied by abnormal pulmonary functioning.
The settlement agreement limits compensation for each medical condition to specific ranges, subject to minimum and maximum values, based on historical settlement averages.
Even if a claimant is able to prove an extraordinary claim (see below), the court-approved compensation schedule substantially limits the potential award to negotiated averages.
To assist in evaluating the fairness, adequacy and reasonableness of the Georgine settlement, the court conducted extensive and protracted fairness hearings involving the testimony of 29 witnesses over a period of more than five weeks. The issues debated included the history of asbestos litigation in the United States, the negotiation and operation of the proposed settlement, the reasonableness of the medical criteria set forth in the settlement and the ability of the CCR defendants to meet their financial obligations under the settlement.
Objections were raised concerning the overall fairness of the medical criteria to be utilized in determining a claimant’s qualification for compensation. The objectors contended that certain medical criteria contained in the settlement were arbitrary or simply incorrect. Based on the testimony of the settling parties’ experts, the court found that the medical criteria, viewed as a whole, met the settling parties objectives of compensating substantially all claimants with asbestos-related cancer or impairments. According to the court, the medical criteria in the settlement agreement “presents a sound and workable compromise of current medical and scientific opinion on important and sometimes difficult issues related to asbestos exposure and disease.”
One particularly contentious point relates to pleurals–claimants with thickenings and lesions on the outer lining of the lungs. The settlement excludes pleurals from qualifying for immediate cash compensation because they have not manifested an asbestos-related physical impairment–one of the eligibility criteria. Instead, the settlement offers pleurals a package of insurance-like benefits (including tolling of any applicable statute of limitations) that will assure that, if their condition worsens and an actual impairment occurs, compensation will be available. Only in the unusual case where extensive pleural thickening occurs on both lobes of the lung and is accompanied by abnormal pulmonary tests will claimants be eligible for an immediate cash payment.
Objections to the exclusion of pleurals from standard compensation centred on the claim that individuals with pleural changes alone can have functional impairment and require expensive medical monitoring, rendering their exclusion improper. Objectors had historically received settlements from CCR defendants in a range of between $12,000 and $15,000. Such settlements have typically included full releases, immunizing the defendants from future lawsuits even where the pleural condition developed into malignancy. Relying on the testimony of the settling parties’ experts, the court rejected this argument, finding that pleural changes alone “will in the vast majority of cases cause no symptoms, no change in physiology and will not have any effect on the individual’s life span.” The court also found that the group of benefits offered pleurals has significant value because if they do become impaired due to asbestos exposure, they will receive cash compensation without having to suffer the uncertainty, delays and expense of the current tort system.
Further objections raised at the hearings concerned the fairness of the compensation schedule, particularly the absence of any adjustment for inflation. Under the settlement, a claimant who qualifies for compensation has several options for receiving payment:
- The simplified payment method whereby the claimant receives the minimum value in the appropriate medical category over a short period of time;
- The individual payment procedure whereby the claimant will receive compensation over a somewhat longer time period in a negotiated amount between the minimum and maximum value for the appropriate medical category; and
- The extraordinary claim procedure whereby the claimant will be awarded an amount due to extraordinary damage decided by an independent panel. Claimants who choose the individual payment procedure will receive offers from CCR based on historical factors used to evaluate settlement claims.
After reviewing the underlying documents provided to class counsel during the settlement negotiations, the court found that the values in the compensation schedule are a reasonable reflection of the CCR defendants’ historical settlement averages and thus constituted fair and adequate compensation for the claimants. While acknowledging that “a picture-perfect negotiator for the class members might have insisted on and achieved an adjustment for inflation”, the court found that the absence of such an adjustment did not render the settlement unfair when viewed as a whole.
One of the most critical issues addressed at the fairness hearings concerned the CCR defendants’ ability to meet the financial obligations imposed by the settlement. In this regard, the CCR defendants presented credible evidence demonstrating that each was likely to meet its obligations under the initial 10-year period of the settlement agreement. In a worst-case scenario, CCR defendants’ obligations were estimated at $1.3 billion, its costs for disposing of such claims at $317 million and its liability for present claims filed through 1993 at $1.6 billion. Of the $3.2 billion needed to administer and pay such claims, slightly more than $2 billion was estimated to be available in insurance pay-outs. In assessing the financial stability of the CCR defendants, the court assumed that only $750 million of the $2 billion was questionable due to coverage disputes with the defendants’ insurers.
Given this substantial reliance on insurance proceeds, any future court decisions that substantially limit the financial obligations of CCR’s insurers may place the settlement at risk. Nevertheless, the court found that given the relative financial stability of the CCR defendants, it was likely that they could meet their obligations under the settlement during the initial 10-year period.
The court also rejected all arguments that the settlement smacked of collusion between class counsel and the CCR defendants. Even though class counsel and their affiliates settled their inventories of over 10,000 pending lawsuits and claims with the CCR defendants for $215 million during the class action negotiations, the court concluded that this alone did not compromise counsel’s ability to bring the Georgine class action and negotiate its settlement. The court found that class counsel worked diligently to negotiate what they considered to be the best possible settlements achievable for each group of claimants. In the court’s view, the very fact that class counsel are leaders of the asbestos bar, representing a significant number of present clients, gave them credibility to negotiate on behalf of a future inchoate class. Accordingly, the court found that the Georgine settlement was the product of arm’s length, good faith bargaining.
In sum, the court concluded that the Georgine settlement was fair and reasonable to the class as a whole and that class counsel were qualified to represent the class and acted appropriately and without conflict of interest in negotiating the settlement.
As a result of the court’s approval of the Georgine settlement, objectors are likely to appeal on constitutional grounds the issues first raised and addressed in the court’s decision of 6 October 1993, in which the court found itself to have subject-matter jurisdiction over the action. Specifically, the objectors may again argue the following:
- That the plaintiffs have no standing to bring the action;
- That the court lacks jurisdiction because plaintiffs failed to meet the minimum amount in controversy requirement;
- That there was collusion between class counsel and the CCR defendants; and
- That the procedures for notice to the class failed to meet applicable due process requirements.
Because of the case or controversy requirement in Article III of the US Constitution, federal courts have jurisdiction to hear only those cases where the plaintiff has standing–a personal stake in the outcome of the controversy. The standing requirement prevents federal courts from passing judgment on ill-defined controversies in which the alleged injury is not sufficiently concrete to allow the court fully to understand the consequences of its decision. To establish standing, a plaintiff must demonstrate that:
- Te personally suffered a concrete injury;
- The injury is fairly traceable to the challenged conduct; and
- The injury is likely to be redressed by a favourable decision.
The objectors contended that numerous class members who were exposed to asbestos but who have not yet manifested an asbestos-related condition lack standing because they have not sustained a concrete injury in fact. In support of this proposition, the objectors cited several state and federal cases which have held that exposure-only plaintiffs lack sufficient actual damage to sustain a cause of action under tort law. The court concluded that these cases were inapposite to the instant action because the question of whether exposure-only plaintiffs have standing is not dependent in any way on whether they have a valid cause of action under the applicable tort law.
The court also rejected the objectors’ argument that injury in fact means an injury that is diagnosable, manifest or compensable. Following the reasoning of other mass tort class action settlement cases, the court ruled that mere exposure to asbestos constitutes the necessary injury in fact to give plaintiffs standing to sue. The court found that in situations where a plaintiff has been exposed to the toxin asbestos, injuries may be presumed to have actually occurred, even though awareness of those injuries may not occur until some future time. Further, the court concluded that the plaintiffs’ injuries were fairly traceable to the defendants’ conduct in manufacturing asbestos and asbestos-containing products (a point which the objectors did not dispute) and that money damages would adequately redress their injuries. Thus, the court found plaintiffs had demonstrated the essential elements of standing.
Amount in Controversy
In order for a federal court to exercise subject-matter jurisdiction based on the federal diversity statute, the matter in controversy must exceed $50,000. For class actions, each class member must individually meet the amount in controversy requirement.
The objectors argue that exposure-only claimants fail to satisfy the $50,000 minimum requirement because (i) where an asbestos-related condition is not diagnosed, claimants can recover no more than the cost of medical monitoring; and (ii) the proposed settlement itself demonstrates that exposure-only claims are valued at less than $50,000.
The court rejected this argument. It noted that the amount in controversy is determined by any good faith sum claimed, including claims for punitive damages, unless it appears to a legal certainty that the jurisdictional amount cannot be met. The court noted further that, while the settlement limits medical monitoring costs to $10,000 per claimant, the plaintiffs alleged in the complaint that the amount in controversy for each member of the plaintiff class, including punitive damages, exceeds $100,000 and that it therefore did not appear to a legal certainty that the jurisdictional amount could not be met. Once again relying on other mass tort class action settlement cases, the court found that the jurisdictional minimum was met taking into account only claims for medical monitoring and punitive damages.
The court also rejected the objectors’ argument that the settlement’s range of compensation values for medical conditions (many under $50,000) itself demonstrated that the amount in controversy did not exceed the jurisdictional requirement. The court reasoned that because the amount of a settlement is often less than plaintiff’s expect to and might conceivably receive, a settlement for less than the jurisdictional amount does not undermine the court’s jurisdiction. Accordingly, the court held that the class members satisfied the amount in controversy.
It is well-established that the case or controversy requirement in the constitution prohibits any action that is friendly or collusive in nature. The objectors argued that the class members and CCR defendants are not true litigants, but rather collusive parties merely seeking to have the court ratify their settlement. Noting that the proposed settlement and the complaint were filed simultaneously, the objectors contend that the parties’ dispute was resolved before the filing of the complaint.
Citing the parties’ profoundly adverse interests, the nature of the controversy and the long, arduous, complex and arms-length negotiations that led to the settlement, the court concluded that a genuine dispute existed. Further, because the settlement required judicial approval to become binding on the parties and calls for prospective relief, including ongoing adversarial claims, the court found the settlement agreement did not render the case moot. In reaching its decision, the court recognized that any contrary ruling would discourage pre-litigation negotiations by requiring parties to wait an “appropriate time” after commencing the action before filing a proposed settlement.
The final point on which the settlement was challenged centred on whether the notice plan satisfied constitutional due process requirements. The Georgine objectors contend that potential class members who have not yet manifested asbestos-related injuries could not have received constitutionally adequate notice of their right to opt-out of the settlement. In approving the notice plan, the court held that the extensive programme for dissemination of notice, which ranged from advertisements in union publications to television commercials and a free telephone helpline, constituted the best notice practicable under the circumstances and was sufficient to satisfy due process.
The Georgine settlement is an important response to the growing asbestos litigation crisis. Although criticized for its treatment of pleural claimants and its limitations on compensation, the settlement does provide a workable alternative for resolving and compensating future asbestos claims. However, the settlement remains vulnerable on appeal to renewed challenges that the court lacks jurisdiction over the matter and that its approval of the agreement amounts to nothing more than judicial legislation. An unfavourable ruling to the settling parties on either of these issues could unravel the settlement forcing them to start from scratch in their negotiations. Moreover, because of the controversial nature of the settlement, it remains to be seen whether the settlement will serve as a model for future asbestos agreements. Given the settlement’s novel approach to resolving future asbestos claims, its impact on the asbestos crisis warrants special attention.