the district court's ruling that acquittals in a criminal antitrust trial were a material change in circumstances influencing the prospect and amount of settlement in the related civil litigation.)
Prior to the hearing, this court allowed some discovery; one of plaintiff's co-lead counsel responded in expedited fashion to three of four contention interrogatories filed by Phelps Dodge. Phelps Dodge also requested leave to depose plaintiffs' co-lead counsel, other counsel for plaintiff class, and at least one named plaintiff. The court denied these depositions on the ground that, if the court were to determine that Phelps Dodge had the right to terminate its settlement and the case against Phelps Dodge then went to trial, plaintiffs would be unduly prejudiced if Phelps Dodge had compelled testimony under oath concerning plaintiffs' litigation strategy, estimated potential recovery, and so on. On May 21, 1985, Phelps Dodge formally abandoned its option to seek termination and thereafter contended only that it was entitled to partial refund of the $2.5 million paid in settlement plus accrued interest; it renewed its request to take depositions of plaintiffs' counsel and compel plaintiffs to respond fully to the unanswered contention interrogatory. But this court did not permit additional discovery because plaintiffs might still proceed to trial against those defendants whose settlements have not been finally approved. Additionally, because Phelps Dodge had an ample opportunity to decide to seek a partial refund rather than terminate its settlement agreement, this court viewed Phelps Dodge's untimely renewal of its discovery requests as a delaying tactic designed to undermine the court's decision not to postpone the evidentiary hearing.
The court remains of the view that determination of the Phelps Dodge status prior to the final hearing on approval of settlement and attorneys' fees is in the interest of the members of the class.
The evidentiary hearing was held on May 24 and May 28, 1985. At this hearing the court took judicial notice of proceedings in the related criminal trial and of prior proceedings in this civil litigation.
ENFORCEMENT OF THE MOST FAVORED NATIONS CLAUSE
There are two types of most favored nations clauses. The traditional most favored nations clause is an unconditionally worded clause that prohibits plaintiffs from making a later settlement with remaining defendants on terms more favorable than the settlement plaintiffs made with an early-settling defendant, without giving the early-settling defendant a refund to equalize the earlier and later settlements. The Manual for Complex Litigation criticizes this type of most favored nations clause as an impediment to subsequent settlements. Manual for Complex Litigation § 1.46 (5th Ed. 1982). See also, In re Chicken Antitrust Litigation, 560 F. Supp. 943 (N.D.Ga. 1979) (granting motion to strike unconditional most favored nations clauses from settlement agreements).
A qualified or conditional most favored nations clause permits flexibility because of financial or other differences among defendants, or a material change in circumstances relevant to the litigation. The purpose of a qualified or conditional clause is to ensure an early settling defendant that plaintiffs will vigorously pursue their case against remaining defendants.
This type of most favored nations clause is not considered in The Manual for Complex Litigation ; it was enforced by the district court in In re Corrugated Container Antitrust Litigation, 1983-1 Trade Reg. Reports (CCH) P 65,451 (S.D.Tex. 1983), rev'd, 752 F.2d 137 (5th Cir.) (remanding for evidentiary hearing), cert. denied, 53 U.S.L.W. 3904 (July 1, 1985).
The clause at issue here is of the latter type; Phelps Dodge's option to enforce the clause applies only to similarly situated defendants and only if circumstances have not materially changed. Plaintiffs concede (and Cerro does not dispute this concession) that Phelps Dodge and Cerro were similarly situated defendants. It is also undisputed that Phelps Dodge's $2.5 million settlement represents a 2.4% ratio of settlement to 1979-82 sales of $102.7 million, and that Cerro's $3,825,000 settlement represents a .88% ratio of settlement to 1979-82 sales of $434.3 million. The only issue before this court is whether Phelps Dodge can enforce its most favored nations clause to obtain a partial refund of its settlement amount,
or whether the most favored nations clause is inoperative because circumstances had materially changed from August 23, 1983 (when Phelps Dodge entered into its settlement agreement) to February 7, 1985 (when Cerro entered into its settlement agreement) so that plaintiffs could reasonably conclude that the prospect or amount of ultimate recovery from Cerro was substantially reduced.
Plaintiffs contend that the December 22, 1984 acquittals of Phelps Dodge, Cerro and other remaining defendants in the criminal antitrust trial constituted a material change in circumstances that substantially reduced the ultimate value of the civil antitrust cases arising out of the same allegations of unlawful price fixing in the copper water tubing industry. Phelps Dodge responds that whatever detrimental effect the acquittals might have had on plaintiffs' case was not material and was more than compensated for by additional evidence of an unlawful conspiracy involving Cerro that plaintiffs obtained through discovery conducted after the criminal trial.
To explicate the parties' interpretation of the most favored nations clause, we examine the record of correspondence between counsel for plaintiff class and counsel for Phelps Dodge. On June 28, 1983, Seymour Kurland, Esquire, co-lead counsel for plaintiff class, confirmed in a letter to Andrew Hartzell, Jr., Esquire, who with Henry Reath, Esquire was counsel for Phelps Dodge, that the parties agreed to settle Phelps Dodge's potential liability in this antitrust litigation for $2.5 million. Mr. Kurland also wrote that Mr. Hartzell would prepare the first draft of the settlement agreement and enclosed for his use a copy of a settlement agreement used in the Corrugated Container case. (Pl. Ex. 3). The Corrugated Container settlement contained a conditional most favored nations clause.
Mr. Hartzell sent to Mr. Kurland on July 12, 1983 a draft settlement agreement containing a traditional, unconditional most favored nations clause. (Pl. Ex. 4). On July 26, 1983, Mr. Hartzell sent to Mr. Kurland a revised version of the settlement agreement; this version contained a partially conditional most favored nations clause. It provided that Phelps Dodge's option to terminate the settlement or seek a refund would exist only if plaintiffs settled more favorably with a similarly situated defendant but contained no provision rendering the clause inapplicable on account of changes in material circumstances.
Mr. Kurland responded on August 4, 1983 and enclosed plaintiffs' "final draft" of the settlement agreement. This draft contained a conditional most favored nations clause:
Plaintiffs agree that, unless present circumstances materially change so that plaintiffs reasonably conclude that the prospect or amount of ultimate recovery from any similarly situated defendant is substantially lessened or reduced, they will not enter into a settlement of the class actions in Master File No. 82-4921 with any such similarly situated defendant that is more favorable to such defendant insofar as it relates to the payment provided for in paragraph 5 of the Agreement (such determination to be based upon the ratio of the amount paid by a defendant in settlement of such actions to the defendant's sales of copper water tubing during the calendar years 1979-82), without offering similar terms to PDI [Phelps Dodge]; provided, however, that if PDI [Phelps Dodge] accepts said offer, it agrees to pay such additional amount as necessary to make the aggregate amount paid by PDI [Phelps Dodge] proportionately equal to the aggregate amount paid by such other similarly situated defendant.
In his accompanying letter, Mr. Kurland wrote, "with respect to the most favored nations clause, we are willing to give you a stronger clause if it is limited solely to Cerro." (Pl. Ex. 6). Mr. Hartzell testified he did not agree to limit the clause to Cerro because he wanted to "keep it open [to include other defendants]." (5/28/85 Tr. p. 252).
The final agreement contained Kurland's qualified clause, applicable to all defendants, but the proviso subjecting Phelps Dodge to the risk of having to increase its settlement amount was eliminated. The final clause stated:
Plaintiffs agree that, unless present circumstances materially change so that plaintiffs reasonably conclude that the prospect or amount of ultimate recovery from any similarly situated defendant is substantially lessened or reduced, they will not enter into a settlement of the class actions in Master File No. 82-4921 with any such similarly situated defendant that is more favorable to such defendant insofar as it relates to the payment provided for in paragraph 5 of the Agreement (such determination to be based upon the ratio of the amount paid by a defendant in settlement of such actions to the defendant's sales of copper water tubing during the calendar years 1979-82) or to any other protective provisions based on federal legislation which effectively overrules Illinois Brick Co. v. Illinois, 431 U.S. , 729, [52 L. Ed. 2d 707, 97 S. Ct. 2061] (1977), without offering similar terms to PDI [Phelps Dodge]. In such event, PDI [Phelps Dodge] shall have the option of accepting such more favorable terms and receiving proportionate reimbursement from the Fund, or terminating this Agreement.