Damage Averaging—How the System Harms High-Value Claims

The disappearance of the American civil trial has paved the way for a new order of dispute resolution—one marked by alternatives such as arbitration, mediation, and, above all, settlement. Nowhere has that shift been seen more than in tort cases, where today less than 1% of all mass tort cases proceed to trial. As a consequence of the vast majority of mass tort cases being settled by agreement between the parties, allocation of the settlement proceeds has become a massive undertaking. When one or a small number of claimants settle with a defendant, it is relatively easy to determine how the proceeds of the settlement are to be split; it is far more difficult when a defendant establishes, for example, a $4.85 billion settlement fund for almost 50,000 claimants, as Merck & Co. did to settle nationwide multi-district litigation (MDL) over the drug Vioxx. As can be imagined, those claimants took Vioxx for various periods of time; had drastically diverse medical histories, employment opportunities, and family situations; and exhibited numerous other differences. To account for such factors, the individual settlement awards were based on the calculation of “points” pursuant to formulas, grids, and matrices. Such an allocation method, known as “damage averaging,” provides an efficient, objective, and equitable (both horizontally and vertically) system for apportioning settlement proceeds among claimants; however, it may inadequately compensate those claims which our legal system should value most—the high-value claims of the most seriously injured claimants.

In this Note, Kishinevsky further defines and explains damage averaging as well as investigates why high-value claims are likely undervalued under such a system, while, conversely, low-value claims are typically overvalued. He then explains why damage averaging use has greatly expanded in mass tort settlements and examine the benefits and negatives of a damage averaging allocation method, before discussing alternatives to damage averaging and presenting an argument for why damage averaging is the best current arrangement for the distribution of settlement proceeds. Finally, he recommends solutions to ensure that high-value claims are accurately valued—proposals that have the potential to reduce (or even eliminate) undervaluation of such claims and meaningfully improve the outcomes of damage-averaging apportionment.