Injury Equity: The Rise of Future Stakes Settlements
In a changing environment in which class action defendants are turning to aggressive strategies to contain the cost of lawsuits, including using bankruptcy proceedings to limit their liability, plaintiffs’ attorneys are fighting back by seeking new ways to recover damages from illiquid and functionally judgment-proof companies. The latest development is the “future stakes settlement,” unveiled in the agreement to end a privacy law class action lawsuit against the startup Clearview AI. Under this novel mechanism, a defendant grants a privately traded equity stake to the class in exchange for a release of all claims.
Future stakes settlements, though similar to existing mechanisms in class action and bankruptcy law, offer distinct benefits and costs. Through a future stakes settlement, the class may recover against a cashless defendant and receive a larger payout than would be possible through a traditional cash damages fund. But this recovery is uncertain, as the value of a future stake can fluctuate. Furthermore, by transforming injured parties into shareholders, future stakes settlements pose serious moral quandaries.
Existing guidance for settlement agreements under Federal Rule of Civil Procedure 23(e) is insufficient to handle the high degree of risk associated with future stakes settlements. This Comment recommends additional standards that courts should apply when evaluating these settlements. Through these additions, courts can prevent defendant gamesmanship, ensure future stakes settlements are fair to the class, and fulfill the dual purposes of compensation and regulation in class actions.