Clear Sailing Agreements: A Special Form of Collusion in Class Action Settlements

Abstract

A clear sailing agreement (or clause) is a compromise in which a class action defendant agrees not to contest the class lawyer's petition for attorneys' fees. This Article argues that clear sailing provisions often facilitate collusive settlements in cases involving non-pecuniary relief or claims-made common funds that return all unclaimed monies to the defendant. Because these types of settlements present difficult valuation problems, trial courts lack a clear benchmark for calculating attorneys' fees. Defendants and class can exploit this uncertainty by presenting an inflated settlement value to the court (to justify higher attorneys' fees) while simultaneously reducing the true cost imposed on the defendant. Although courts purportedly apply "heightened scrutiny" to settlements involving clear sailing agreements, this approach rarely threatens the underlying settlement. As a result, clear sailing agreements tend to undermine the deterrence function of class action by producing settlements that are systemically too low. This Article proposes a per se ban on settlements that rely upon clear sailing provisions. In addition, this Article recommends the appointment of guardian ad litem to litigate the issue of attorneys' fees in all cases involving non-pecuniary relief or a claims-made reverter fund.

Keywords: Class actions, clear sailing agreements, settlements

JEL Classification: K1