The Increasing Use of Compensation Funds

Gerard Magliocca

Gerard N. Magliocca is the Samuel R. Rosen Professor at the Indiana University Robert H. McKinney School of Law. Professor Magliocca is the author of three books and over twenty articles on constitutional law and intellectual property. He received his undergraduate degree from Stanford, his law degree from Yale, and joined the faculty after two years as an attorney at Covington and Burling and one year as a law clerk for Judge Guido Calabresi on the United States Court of Appeals for the Second Circuit. Professor Magliocca has received the Best New Professor Award and the Black Cane (Most Outstanding Professor) from the student body, and in 2008 held the Fulbright-Dow Distinguished Research Chair of the Roosevelt Study Center in Middelburg, The Netherlands. He was elected to the American Law Institute (ALI) in 2013.

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5 Responses

  1. Ken Rhodes says:

    Fascinating question(s); non-lawyer (opinion) answers:

    (1) Lawmakers are subject to the politics of public opinion, as well as the willingness of the party at fault to cough up a lot of money to avoid potentially larger costs. Those mass-loss situations are infrequent enough that they each seem somewhat unique, not subject to categorical generalizations.

    (2) The recent examples give a mixed answer, I think. I am guessing that the 9/11 fund worked OK, the BP spill fund did not, and the State Fair probably will. I note that there is a difference in the BP disaster which probably influences my answer–the disaster was not local, it was wide-spread. I’m not sure that ought to be a critical factor, but it may be.

    (3) Good point, and perhaps under-recognized. Juries have heard a lot of propaganda about “litigation reform,” with statements by some politicians that the courts are rife with outrageous awards. The existence of a compensation fund feeds into that propaganda, tending to cast the “greed” of the plaintiffs in a bad light.

    (4) What sort of political revolution would it take to make me give up my right to what I perceive as a proper avenue for redress of a wrong done to me? So I don’t know about “should,” but I bet against “could.”

  2. Jim Stengel says:

    These funds also reflect, I suspect, the fact that the bar and to a somewhat lesser extent, the bench have gotten comfortable with the trust structure via the asbestos bankruptcy trust experience per 524(g). With the death of mandatory settlement classes as a result of Amchem and Ortiz, there has been a dearth of structural options for global peace and those that exist seem to invite abuse (asbestos and Phen fen-S. Todd Brown has a great recent article on the dark side of these structures) or raise serious ethical issues (e.g. Vioxx). Francis McGovern has a couple of good articles about the asbestos trusts as does Georgene Viaro.

  3. Dear Gerard:

    Thanks for the post. In my other life, before becoming a Torts professor myself, I worked with Ken Feinberg in the design and administration of the September 11 Victim Compensation Fund. Because I teach and write in this area, I was particularly interested to read your post.

    There is some really nice scholarship on legislatively-created funds, much of it prompted by the prominence of the September 11 Fund, itself, but I think there’s also lots more work to be done. Robert Rabin has written some nice pieces comparing different kinds of ad-hoc funds. See, e.g., Robert L. Rabin, The Renaissance of Accident Law Plans Revisited, 64 Md. L. Rev. 699 (2005); Robert L. Rabin, The September 11th Victim Compensation Fund: A Circumscribed Response or an Auspicious Model?, 53 DePaul L. Rev. 769 (2003); see also, Franklin, Rabin, & Green, Tort Law and Alternatives 874-890 (9th ed 2011). As Jim Stengel notes, Professors Georgine Vairo and Francis McGovern have written nice articles describing general features of mass compensation funds — some public, some private. See Francis E. McGovern, The What and Why of Claims Resolution Facilities, 57 Stan. L. Rev. 1361, 1384 (2005); Georgene Vairo, Why Me? The Role of Private Trustees in Complex Claims Resolution, 57 Stan. L. Rev. 1391, 1392 (2005). Jim Stengel, himself, has written on the ongoing efforts to create a legislative fund to resolve asbestos claims. James Stengel, The Asbestos End-Game, 62 N.Y.U. Ann. S. Am. L. 223 (2006). (A shameless plug for my stuff on these subjects: Adam S. Zimmerman, Funding Irrationality, 59 Duke L. J. 1105 (2010); Adam S. Zimmerman, Distributing Justice, 86 N.Y.U. 500 (2011); Adam S. Zimmerman & David M. Jaros, The Criminal Class Action, 159 U. Pa. L. Rev. 1385 (2011)).

    Finally, Michelle Landis Daubert, has some great historical work on the topic of compensation funds. See Michele L.
    Landis, “Let Me Next Time Be ‘Tried By Fire’”: Disaster Relief and the Origins of the American Welfare State 1789–1874, 92 Nw. U. L. Rev. 967 (1998). As she notes, large compensation funds aren’t sui generis as they seem, but rather, have a long history. In the early 1800s, Congress passed laws designed to compensate victims of natural disasters, the Revolutionary War, and other calamities. Commissioners oversaw public funds that resembled modern administrative agencies, assuming broad authority to evaluate claims, accept evidence and distribute money according to well-defined rules. Early examples include public funds created in the wake of the Whiskey Rebellion, the Haitian “slave insurrection,” and the War of 1812. In so doing, she explores the underlying policies, motivations and moral dimensions of the public’s decision to compensate people for collectively felt harm.

    I had two other general thoughts in response to your questions. First, with respect to the question of why legislators create funds, I don’t know if we’ll ever see a clear pattern. I think the increasing reliance on focused, ad-hoc funds, as opposed to more comprehensive permanent compensation schemes, like workers’ compensation, social security, or even the health insurance reform, reflects the extraordinary political clout and capital needed to accomplish broader social reforms. I think it’s because of these kinds of political difficulties that legislative funds stand a better chance only when (1) the class is narrow, (2) the claims asserted are discrete, and (3) the the population seeking compensation from Congress is considered “more deserving.” But even that’s no guarantee. The recent near-demise of the James Zadroga Act, which re-opened the September 11 Fund for the discrete claims of a very sympathetic class of people (rescue and recovery workers at ground zero), and the failed efforts to create a legislative fund to resolve asbestos claims, despite repeated calls by the Supreme Court to do so, demonstrates that the stars really have to align for a legislature to create a fund.

    Second, I guess that’s one reason why our Tort system remains so durable; it’s our only remaining default system designed to serve very similar values; that is, it attempts to compensate narrow, discrete and deserving claims for compensation, and it does so, generally, without the same obstacles of a political process. But I suppose that also explains why the real action for publicly created funds is taking place not in Congress, but in anoother branch of our political system: the executive branch. Over the past ten years, in a variety of high profile corporate scandals, prosecutors, states attorneys general and agencies (like the SEC, OCC, FTC, and FDA) have sought billions of dollars in restitution for crimes and regulatory violations ranging from environmental dumping and consumer scams to financial fraud. Those public actors then distribute that money to groups of victims like a civil class action, through large public compensation funds. Because these “executive branch” compensation funds may act more quickly than Congress, and because they enjoy a more powerful moral narrative (they take money directly from wrongdoer for the benefit of a victim), they have been growing with far more frequency than legislative funds.

    But, as you note, the overlap of public funds with our private litigation system creates new problems of duplication, transparency and fairness. Private attorneys, regulatory agencies, state attorneys general, and criminal prosecutors often commence duplicative actions seeking the same funds against the same defendant, for the same conduct, and on behalf of the same set of victims. Moreover, many of these kinds of public funds lack critical safeguards for victims entitled to compensation. While public actors are encouraged, and in some cases, required by statute, to provide victim restitution, they often lack adequate rules to (1) hear victims’ claims, (2) identify conflicts between different parties, and (3) divide the award among victims. I think this is, in part, because commentators have largely ignored how the convergence of these legal regimes inform or alter the responsibilities of public actors to provide compensatory justice to private parties.

    Finally, if you’re interested in thinking about incorporating Funds into your Torts classes, I have some great projects involving BP, the September 11 Fund and the September 11 litigation. In one of my torts classes, I have a negotiation where students represent the Port Authority and/or a September 11 Victim, and must choose between the (a) offered settlement, (b) litigation, or (c) filing with the September 11 Fund. It’s a great way to explore the underlying legal merits of a tort claim itself, as well as to get students thinking about the way no-fault funds influence the settlement process in light of their clients’ different goals and interests.

  4. Gerard Magliocca says:

    Thanks Adam. Fantastic comment.