Reconsidering Reverters: The Benefits of Reversionary Funds in Class-Action Settlements

Reconsidering Reverters: The Benefits of Reversionary Funds in Class-Action Settlements

In any class-action settlement, the fate of unclaimed funds can be pivotal. For instance, with a common-fund settlement (with an agreed amount deposited into a common fund for distribution to class members), a significant portion of the fund may remain after distributions are made depending on how payments are calculated and distributed. And even with a “claims-made” settlement (with the amount paid equaling the sum of the claims filed), there will usually be some settlement checks that go uncashed. What happens to the unclaimed or undistributed money?

One option is for unclaimed funds to revert to the defendant. Particularly with a common-fund settlement, many plaintiffs’ lawyers and some courts may object to this. But such a reversion may provide a unique opportunity to resolve an otherwise intractable case by allowing the parties to agree on a settlement amount they might not otherwise.

To begin with a cautionary note, an agreement that unclaimed funds revert to the defendant is considered one of the three “subtle signs” that “class counsel ha[s] allowed pursuit of their own self-interests to infect negotiations,” at least in the Ninth Circuit.[1] The other signs are a “clear sailing arrangement (i.e., an arrangement where defendant will not object to a certain fee request by class counsel)” and allowing class counsel to receive a disproportionate distribution of the settlement.[2] Thus, in considering a reversionary settlement fund, counsel would do well to minimize the presence of other so-called signs of collusion. Furthermore, if a class has not yet been certified, any settlement agreement will be subject to heightened scrutiny for evidence of conflicts and collusion.[3]

Reversionary funds can create a risk that class counsel’s recovery will be disproportionate to that of the class. In a common-fund settlement without reversion of unclaimed funds, an award of 25% of the fund for attorneys’ fees is considered an appropriate “benchmark.”[4] But in claims-made and reversionary settlements, courts are split as to whether attorneys’ fees should be evaluated for fairness by viewing them as a percentage of the total amount that is available to be claimed by the class or of the amount actually paid to the class.[5] Moreover, the benefit to the class in such settlements cannot be determined until the claims-form process is complete.

One effective mechanism for ensuring a measure of proportionality is to establish a floor that will be paid to the class regardless of the claims filed.[6] For example, the parties might agree to a Gross Fund (the maximum amount defendant will have to pay) of $2.2 million with $660,000 (30% of the Gross Fund) going to class counsel and another $125,000 going to administration and litigation costs and enhancement awards. The remaining $1,415,000 (about 64% of the Gross Fund) might be available to class members filing claims as the Net Fund. And, importantly, at least 50% of the Net Fund (32% of the Gross Fund) might be guaranteed to be distributed to the class regardless of the number of claims filed. This would ensure that at least half of the Net Fund is actually paid to the class and does not revert back to the defendant, even if the number of class members who file claims is low.

But despite the complications they can entail, settlements providing for reversion of unclaimed funds are routinely approved in the Ninth Circuit[7] and have several advantages that may appeal to the parties, counsel, and the court in getting cases settled. First, unlike a claims-made settlement where the defendant lacks the certainty of an all-in number, a Gross Fund establishes a worst-case scenario.[8]

A reversionary fund also may be attractive to plaintiffs’ counsel and individual class members because it may result in a larger gross fund (pre-reversion) than the defendant would have agreed to in a common-fund settlement with no reversion. Put another way, defendants may be more likely to agree to a larger settlement sum if the deal includes a reversion—effectively bridging a material gap. For the plaintiffs, a larger gross fund may support a larger fee recovery and larger distributions to the class members who do file claims and allow plaintiffs’ counsel to present the settlement as a win.

Thus, while not common, reversionary gross-fund settlements should not be overlooked: their advantages could eliminate important barriers to an otherwise favorable settlement.

–Sarah Gohmann Bigelow

[1] Allen v. Bedolla, 787 F.3d 1218, 1224 (9th Cir. 2015) (internal quotation marks omitted).
[2] Id. (internal quotation marks omitted).
[3] Id.
[4] Allen, 787 F.3d at1224, n.4 (internal quotation marks omitted).
[5] Tait v. BSH Home Appliances Corp., 2015 WL 4537463, at *5 (C.D. Cal. July 27, 2015), appeal dismissed (Jan. 13, 2016).
[6] While this approach will likely still result in a fee award that is larger than the 25% actually paid out to the class, it can be used to ensure that the amount recovered by class member is equal to or greater than the amount paid in fees, which has been sufficient to satisfy some courts.
[7] See, e.g., Nur v. Tatitlek Support Services, Inc., 2016 WL 3039573, at *3 (C.D. Cal. Apr. 25, 2016) (collecting examples of courts approving reverters in wage-and-hour cases).
[8] It is important to carefully consider the likely claims rate for your class. Bear in mind that the class members with the largest claims may also be most likely to return claim forms. For example, a 20% response rate could account for recovery of 60% of the Net Fund and reduce the reverter.