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by Kendra S. Langlois Imagine that you discover that you are a winner of a class action lawsuit and are due a modest damages award. You would be pleasantly surprised, right? Now suppose that upon further examination you discover that your claim was actually worth more than what you will recover under the settlement award, that the reward will come in the form of coupons that require you to buy more of the product that entitled you to damage awards in the first place, and that the fee award that the class attorney arranged as part of the settlement agreement will not only reduce your award, but will also force you to pay the class attorney more than the award amount you will receive! Given these additional insights, needless to say, you are not nearly as thrilled with the outcome of this settlement agreement. Although the facts above are a bit extreme, such self-serving settlement agreements negotiated by class attorneys at the expense of class members actually do exist. For example, a settlement with General Mills over its use of an illegal pesticide on the oats used in its Cheerios resulted in class members receiving coupons that could be exchanged for more cereal while six law firms split almost $2 million in costs and fees, plus interest. (1) An even more perverse settlement agreement arose after lawyers brought a class action against Bank of Boston on behalf of 700,000 Bank customers who "claimed the bank was keeping too much of its customers' money by placing their funds in escrow accounts and denying them interest." (2) The judge approved a settlement that forced the Bank to pay $8.5 million in attorneys' fees and $10 to each customer. (3) In an interesting twist, however, the attorneys' fees amounted to $100 per customer and the agreement required the Bank to deduct the fees from each customer's account. (4) The lawsuit thus cost each class member $90! Courts have long struggled to discover the mechanism to employ in class action litigation that will best enable class members to monitor their counsel and therefore prevent such egregiously unfavorable settlement awards. (5) The overarching goal of any method used to manage class action suits is to establish "monitoring mechanisms to substitute for the ordinary attorney-client relationship." (6) By simulating this relationship, the court, society, and the plaintiff class will be better assured that class counsel will make litigation decisions out of concern for the interests of the plaintiff class and not themselves. (7) In the typical attorney-client relationship, the client retains the power to accept or reject any settlement and has the power to negotiate the lawyer's compensation in advance. (8) These constraints, however, are not present in class action litigation: "Plaintiffs' attorneys typically do not rely on named plaintiffs for vital testimony, do not bargain with named plaintiffs over the fees they will be paid, and do not require named plaintiffs' approval of the terms on which they propose to settle class actions." (9) The conflicts of interest inherent in class actions have led critics to claim that class action attorneys are more interested in maximizing their fee when settling a case than in attaining a fair award for class members. (10) The primary tool that courts use in class action litigation to simulate the traditional attorney-client relationship is the selection of both the class counsel and the class representative. Rule 23(a) of the Federal Rules of Civil Procedure requires the court to ensure that the "representative parties [lead plaintiff and lead counsel] will fairly and adequately protect the interests of the class." (11) Traditionally, the court has had discretion to choose the lead plaintiff and counsel, and judges either approve a private agreement among lawyers to determine who will represent the class, or in cases where there is no agreement, decide who should serve as lead counsel. (12) This selection process, however, has recently become subject to intense scrutiny because of the introduction of two new selection methods: judicial auctions and the "empowered plaintiff" provision of the Private Securities Litigation Reform Act of 1995 (PSLRA). (13) Both the Task Force on Selection of Class Counsel appointed by the United States Court of Appeals for the Third Circuit and the United States Judicial Conference Advisory Committee on Civil Rules have recently considered and evaluated different methods for selecting class representatives. (14) Professors Elliott J. Weiss and John S. Beckerman proposed that one way to reduce the conflict of interest between class members and their counsel in securities class actions is to use market forces to encourage and appoint more qualified lead plaintiffs to oversee lead class counsel. (15) Congress implemented this strategy in the PSLRA. (16) Congress created a system in which the lead plaintiff would choose the counsel for the class, subject to review by the court. (17) The best choice for lead plaintiff is presumptively the member of the class who has the largest financial stake. (18) The theory, which Weiss and Beckermen argued and which Congress adopted, is that institutional investors, because of their large financial stake in the outcome of the litigation, will have an incentive to monitor lead counsel and will also "have or could readily develop the expertise necessary to assess whether plaintiffs' attorneys are acting as faithful champions for the plaintiff class." (19) This model appears to more closely align the interests of the plaintiffs' attorneys with the interests of the plaintiff class than traditional court-appointment methods. Recent studies and cases show that institutional investors are beginning to take a more active role in securities class actions under the PSLRA and are achieving higher settlement amounts. (20) In light of this development, this Note argues that the provisions of the PSLRA requiring (1) that the lead plaintiff be more credible and involved in the litigation and (2) that the lead plaintiff choose lead counsel create a better framework for ensuring adequate class representation in Rule 23(b)(2) class action lawsuits for money damages than allowing the court to directly appoint class counsel or conduct auctions. (21) For class actions such as mass tort and small claims litigation in which the lead plaintiff provision will not be more effective, many reform alternatives exist that will improve the class' ability to monitor its counsel. Mass tort class litigation could be improved by increasing the opportunity for class members to opt out in response to an inadequate settlement agreement. Small claims class actions would benefit from (1) providing judges with more information with which to review settlement agreements, (2) employing a loser-pays fee shifting mechanism, (3) imposing sanctions on class counsel who enter into abusive settlement agreements, and (4) subjecting settlement agreements to greater scrutiny by the public. This Note critically analyzes current class action reform proposals and the probable outcome of employing the lead plaintiff provision in more types of class action litigation. By way of background, Part I provides insight into the rationale for class action litigation and the challenges it presents. Part II discusses and evaluates the PSLRA and current class action reform proposals. Part III discusses successful elements of the lead plaintiff provision in securities class actions and the types of class actions in which the provision can be most successfully employed, namely antitrust actions. Having proved that the lead plaintiff provision can be extended to some class actions, Part IV provides some insights into alternative reform measures for those areas in which it cannot be similarly extended. I. HISTORY AND SCOPE OF CLASS ACTIONS UNDER RULE 23 OF THE FEDERAL RULES OF CML PROCEDURE Although the exact motivation behind the drafting of Rule 23 of the Federal Rules of Civil Procedure remains unclear, (22) it has effectively allowed class members to pursue litigation and receive damages for claims that involve such small losses that they could not realistically be pursued individually. (23) Some argue that the original intent of the drafters was to "enable litigation that could not be brought on an individual basis, in pursuit of larger social goals such as enforcing government regulations and deterring unsafe behavior." (24) The reality, however, is that the majority of class actions, and those which are the focus of this Note, involve damage class actions brought under Rule 23(b)(3) rather than social reform actions seeking injunctions pursuant to Rule 23(b)(2). (25) Damages class actions typically involve the areas of (1) consumer cases alleging fraudulent business practices or antitrust violations, (2) mass tort claims, and (3) securities class action suits. (26) Indeed, in 2000, "almost one-third of the class actions pending in federal courts were securities cases" commanding "more judicial time than any other category of class action." (27) Rule 23 requires "large numbers of parties (often termed the `numerosity' requirement), brought together by common issues of law or fact (`commonality'), represented by individuals or entities whose claims or defenses are typical of those they represent (`typicality'), and who may be relied on to protect the interests of the latter (`representativeness')." (28) Historically, private attorneys have assumed the role of finding legal violations, identifying individuals to serve as lead plaintiffs, and filing class actions on behalf of the group. (29) This role has evolved because of (1) the lack of incentive and resources individuals who suffer small harms have to bring a suit individually or to fred others who have suffered similar harms to bring an action collectively and (2) a strong incentive for attorneys to bring the suits because of the fees that they will receive if their suit is successful. (30) Attorneys' fees are more attractive in class action suits than in ordinary litigation because judges determine the amount an attorney will receive from a "common fund," which consists of a pool of damages resulting from settlement or litigation. (31) Lawyers receive compensation from the fund for "creating it [the class action], as well as a risk premium for bearing all the financial risks of litigation." (32) This differs from ordinary litigation in which the parties themselves negotiate fee arrangements with their attorneys before the litigation has concluded. (33) "Common fund cases" create strong incentives for lawyers to negotiate the size of their fees as part of settlement negotiations, which in turn are subject to approval by the judge. (34) Many believe that the publicity regarding class action results, in which the plaintiffs' attorneys received much larger amounts than class members, contributed to judges assuming a more active role in scrutinizing settlement fee provisions, controlling attorney fees, and appointing lead counsel. (35) The importance of settlement agreements and easy abuse by class action attorneys becomes clearer in light of two important facts. First, similar to most civil lawsuits, most class actions do not go to verdict but instead end in a settlement agreement. (36) Second, lead counsel typically do not seek or require class members' approval of the terms on which they propose to settle class actions. (37) Rule 23(e) charges judges with approving settlements and determining whether settlements are "fair, adequate and reasonable." (38) Because of the volume of settlement agreements resolving class action suits and the slim judicial review of settlement agreements, (39) it is not surprising that critics have argued for better devices to monitor lead counsel in negotiating settlement agreements that will be (or are) in the best interests of the class and not in the best interest of counsels' fees. II. ANALYSIS OF ADEQUACY OF REFORM PROPOSALS FOR SELECTING CLASS REPRESENTATION A. Traditional Appointment Procedures For comparison purposes, this analysis will first discuss the methods courts have traditionally employed in selecting the class counsel and the lead plaintiff. Most courts usually appoint the attorney who files the first complaint as lead counsel. (40) Other courts, however, allow all lawyers who have filed suits containing the same or similar claims to determine among themselves a voluntary plan to allocate lead counsel responsibility, or, when this "private ordering" fails, the court appoints lead counsel. (41) Both of these scenarios reward lawyers who file early and, thus, usually result in what is commonly known as a "race to the courthouse." (42) Criticism abounds of courts awarding lead counsel position to the first lawyer to file a complaint. (43) Chief among the criticisms is that (1) the practice encourages attorneys to file "skeletal" complaints based on skimpy research, and (2) filing first is not a good predictor for the quality of the attorney's representation. (44) In October 2001, the Third Circuit Task Force, (45) charged with evaluating methods for selecting lead counsel, recommended not only preserving the court appointment procedures regarding lead counsel, but also enhancing the selection criteria by requiring courts to consider more than simply which attorney filed the complaint first. (46) The Task Force submitted a list of factors the court should consider in selecting class counsel, most notably: the amount of pre-filing investigation the attorney conducted, the attorney's reputation in handling class action litigation, and the effectiveness of the counsel's representation thus far. (47) The Task Force's recommendations closely match those of a proposed amendment to Rule 23, 23(g), which would require the court, when appointing an attorney lead counsel, to consider: (i) the counsel's experience in handling class actions and other
complex litigation, (ii) the work counsel has done in identifying
or investigating potential claims in this case, and (iii) the
resources counsel will commit to representing the class, and
[would allow the court to] consider any other matter pertinent
to counsel's ability to fairly and adequately represent the
interests of the class. (48)
| | Proposed Rule 23(g)(2)(A)would also encourage the court to require attorneys seeking appointment as lead counsel to apply for the position within a "reasonable period after the commencement of the action..., although the court would retain discretion." (49) Both the Third Circuit Task Force and the Advisory Committee on Civil Rules also recommend stricter review of attorneys' fees. (50) They encourage courts to monitor the work of class counsel throughout the litigation. (51) These reform measures, however, fail to solve the problems associated with judicial review of appointing lead counsel and settlement agreements. Defendants virtually never challenge the appointment of lead counsel or settlement agreements. (52) This is because both plaintiffs and defendants want their agreement to be accepted during the settlement hearing. (53) Without the adversarial process to expose improper fee arrangements and settlement agreements, even the most motivated judges are ill-equipped to evaluate an agreement's reasonableness. (54) They are also constricted by the limited record that is compiled during settlement negotiations between the parties and therefore face further difficulties in evaluating its fairness. (55) Encouraging judges to more strictly review negotiation agreements and select lead counsel is ineffective because the reform measures do not provide judges with increased access to information that would enable them to make better decisions. Without access to better information in appointing lead counsel, judges will, by necessity, continue to rely on such inadequate factors as primacy in filing a complaint and personal past experience with the attorneys who seek to serve as lead counsel. (56) These reforms, therefore, do not cure the inability of judges to effectively monitor lead counsel and thereby prevent unreasonable fee awards in settlement agreements. B. Auction Method Judge Vaughn R. Walker was the first to use the auction method in In re Oracle Securities Litigation (Oracle I). (57) The principal goal of lead counsel auction is "to emulate the arrangements and decisions that the class itself would make were it able to negotiate [for legal services]." (58) Through a competitive bidding process, prospective lead counsel submit proposals to the court by a specified deadline. The courts often require proposals to include a combination of monetary and nonmonetary factors. (59) Usually, however, because the candidate firms are so similar with respect to their experience and background regarding class action litigation, the price the firm will charge is the deciding factor in selecting lead counsel. (60) "The cardinal assumption underlying lead counsel auctions is that the best ways to maximize plaintiffs' net recovery are to reduce the price of legal services through competition and to encourage attorneys to contain their costs as much as possible." (61) Although there have been variations on the lead counsel auction method employed by Judge Walker in In re Oracle Securities Litigation (Oracle II), it still illustrates the essential mechanics of the method. In Oracle II, Judge Walker conducted a sealed-bid auction and solicited bids from any firm wishing to act as lead counsel for the class. Firms had to prepare and submit their bids within a three-week period and discovery was neither taken nor allowed during this time. Judge Walker selected the lowest bidder within two months after the bids were submitted. (62) Despite the novelty of the bidding approach in simulating a competitive market and relieving the court of any obligation to regulate attorneys' fees, it has not gained widespread acceptance. Only five district courts and seven judges have employed this method of selecting lead counsel (63) and only in securities (twelve cases) and antitrust (two cases) class actions. (64) Proponents argue for increased use of the auction method because it lowered attorneys' fees in some cases, thereby providing a larger portion of the settlement award to each class member. (65) For example, lead counsel's $3.5 million fee in In re Amino Acid Lysine Antitrust Litigation (66) amounted to 7% of the $49 million settlement. (67) Professor Joseph Grundfest of Stanford University asserts that early evidence demonstrates the auction method's effect of lowering attorneys' fee awards. (68) In an ongoing study, Grundfest found that the average fee award for securities class action cases in the 1990s was about 30% of the settlement amount. (69) This is consistent with a 1996 study conducted by the Federal Judicial Center which found that attorneys' fees for all class actions typically fell between 27 and 30% of the settlement amount. (70) In contrast, Grundfest discovered that in the few cases that employed the auction method, the attorneys' fee awards ranged from 7 to 21.2%, a markedly lower percentage. (71) This range is also lower than the normal range of between 25 and 33% that judges typically award in class actions that do not utilize the auction method; this difference raises questions about whether the normal range accurately simulates market-driven fee awards. (72) Judges are among the most enthusiastic supporters of the auction method because, they argue, it conserves judicial resources by quickly resolving cases that would have otherwise stayed on the docket for years. For example, Judge Shadur originally considered early resolution of Amino Acid Lysine (73) to be improbable. After selecting lead counsel and establishing attorneys' fees using the auction method, however, the case settled within months. (74) Judge Walker contends that the auction method reduces "the amount of judicial time it takes to monitor and administer large class action cases and to determine an appropriate fee for class counsel at the successful conclusion of such cases." (75) Although class members may benefit from the more expeditious conclusion of their case, they may also pay the price for the resource-saving benefits of the auction method because it can reduce the quality of their representation and the overall monetary amount that class members ultimately receive. A principal criticism of auctions is that the lowest price is not necessarily an indicator of the quality of the representation. (76) The quality of representation is likely to suffer because auctions diminish the incentives for lead counsel to adequately invest in litigation. (77) This is because the auction process does not take into account the possibility that a higher bidder may have budgeted for more resources to be invested in the action, or is simply a higher quality firm that would have a better chance for recovery of a higher settlement. (78) Also, if firms underbid, they could resort to settling too early or expending fewer resources on the case in order to maintain a profit margin. (79) Auctions also dampen incentives for lawyers to discover potential claims because there is no assurance that they will succeed at auction and thereby recover their expenses. (80) Even more, the investigating firm will probably lose the bid because it starts the bidding process with a disadvantage. It must factor its investigatory expenses into the bid whereas a competing firm, which has the benefit of the already filed complaint, has no investigatory expenses, and therefore can submit a lower bid. (81) Consequently, higher-quality firms will have less of an incentive to represent a plaintiff class in cases where they will have to compete to serve as lead counsel because their efforts will not be rewarded if noninvestigating firms consistently win the auction. (82) Indeed, this process has already been termed the "lemon" problem: "[H]ighquality firms are unwilling to represent victims of fraud and incur bidding costs to enter an unwinnable auction, leaving the court to select from a motley crew of `lemon' lawyers." (83) There is already evidence that "plaintiffs' lawyers may simply vote with their feet" and abandon any class action case in which the court will employ the auction method to select lead counsel. (84) A shortage of qualified bidders seriously undermines the ability of the auction process to function. In addition to the diminished quality in representation, the auction method may also cause class members to receive a smaller settlement award. Poorly designed bidding rules can create huge disincentives for the winning bidder to maximize recovery for the class. (85) For example, in Amino Acid Lysine (86) one firm entered a bid in which it would receive the following declining percentages: 20% on the first $5 million recovered, 15% of the next $10 million, and 10% of the next $10 million. (87) The firm would therefore receive 0% of amounts greater than $25 million and a maximum of only $3.5 million, even if recovery exceeded $25 million. (88) Predictably, the case settled for exactly $25 million "after only minimal discovery had been completed and before the labor-intensive deposition phase." (89) The $25 million amount in this case is an example of what is commonly referred to as a "fee cap." Many critics warn that fee caps reduce class members' recovery amounts because they depress plaintiffs' counsel's incentives to incur the risks associated with pursuing a higher settlement amount. (90) Furthermore, the fee cap provides strategic information to defendants because they can "conduct an expensive war of attrition" and force the plaintiffs' counsel to exceed their budgeted expenses and incur un-reimbursed costs. (91) Even more alarming, if defendants know that the winning bid used a declining-percentage-of-the-recovery formula, the defendants will know that plaintiff's counsel will have "little to gain from holding out for a larger settlement." (92) Many, therefore, strongly argue against using fee caps or the declining-percentage-of-the-recovery formula. Instead, some, including Professor John Coffee, an expert in class action lawsuits, (93) recommend encouraging competing counsel to submit bids using an increasing-percentage-of-the-recovery formula so that plaintiffs' attorneys will receive greater portions of the recovery as the recovery exceeds certain benchmarks. (94) This type of formula could be designed to prevent windfalls by limiting the maximum percentage recovery to forty percent which will still provide attorneys with incentives to achieve the greatest recovery possible for the class. (95) Critics also contend that in contrast to the purported beneficial reduction in the percentage of attorneys' fee awards caused by using auctions, "[n]on-auction cases have also resulted in fee awards below traditional benchmarks ... and auctions do not guarantee reasonable fees." (96) The most often cited illustration of auctions not guaranteeing reasonable fees involves the fee award in In re Cendant Corp. Securities Litigation. (97) The district court overrode the contractual fee agreement that the class counsel and lead plaintiff had negotiated as part of the settlement agreement. Instead, the court approved a $262 million fee award using the fee formula that it determined during the auction for lead counsel. (98) This award exceeded the fee amount that the parties had negotiated by $76 million, and the award constituted about 8.4% of the settlement. (99) The result in Cendant Corp. supports the argument that fee awards established by the courts during the auction conducted at the beginning of litigation should be reviewed for reasonableness after the parties reach a settlement agreement. Many judges assert that this is especially true for securities class actions because the PSLRA instructs courts to ensure that "[t]otal attorneys' fees and expenses awarded by the court to counsel for the plaintiff class shall not exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class." (100) In perhaps the most detailed analysis of the issue, Judge Ellis explained in In re Microstrategy Inc. Securities Litigation (101) that the fee amount should not be finalized through an auction. | |
The ultimate fee structure is within a district court's control
throughout the litigation, because, at the conclusion of the
litigation, a district court has a statutory obligation to ensure
that the ultimate award of attorney's fees is reasonable....
Instead, a district court should approve plaintiff's choice of lead
counsel based solely on that counsel's competence, experience,
and resources, saving the question of fees until the conclusion of
the litigation. (102)
| | Professor Coffee has recommended a compromise position with respect to auctions and attorneys' fee awards. He suggests that auctions clearly generate useful information about the actual market rates for various levels of risk. (103) Courts, therefore, should conduct auctions regarding attorney fees at the outset of litigation and use the information to generate presumptive fee formulas that will be based on real market conditions. These market-based formulas, Professor Coffee argues, will be superior to the arbitrary percentages ranging from twenty-five and thirty-three percent that judges have used over the last ten years. (104) Another significant problem with auctions involves comparing bids that use different formulas and tactics. For example, in Wells Fargo II (105) one of the firms offered to absorb all of its litigation expenses in exchange for higher fee percentages; (106) whereas "[t]he winning bidder proposed to deduct its litigation expenses from the total amount of any recovery before application of its fee percentage." (107) Another problem involves comparing a flat percentage fee formula with either a declining-percentage-of-the-recovery formula or an increasing-percentage-of-the-recovery formula. Professor Coffee notes that for judges to compare the different formulas, they must make a prediction about the likely settlement value of the case, thereby causing them to compromise the court's neutrality. (108) In general, the majority of commentators have not approved of the auction method for selecting class counsel. The Third Circuit Task Force charged with evaluating the use of auctions strongly recommended against it. (109) The Task Force concluded that auctions fail to replicate the private market for legal services because they do not adequately account for factors other than price, such as "reputation, experience, firm resources, particularized competence, prior track record in similar matters, personal qualities, preexisting lawyer-client relationship, relationship of counsel to other parties and their lawyers, and commitment to a prompt resolution of [the] matter" that play an important role in selecting counsel. (110) C. Lead Plaintiff Provision of the PSLRA In response to growing discontent with traditional methods of appointing lead counsel, who in turn would recruit lead plaintiffs, Congress enacted the PSLRA (111) in 1995 to reform securities class action lawsuits. (112) The goal of the PSLRA was to encourage institutional investors to play a more active role in securities class action litigation by monitoring class counsel. (113) Congress hoped that closer monitoring would increase the probability of obtaining better settlement outcomes in the interests of the class members and that it would reduce the number of frivolous securities class actions. (114) To accomplish this, as part of the PSLRA, Congress developed the lead plaintiff provision which allows the lead plaintiff to "select and retain counsel to represent the class." (115) The statute stipulates procedures for the court to adopt in selecting the lead plaintiff who is the "most capable of adequately representing the interests of class members." (116) The court is to presume that the most adequate plaintiff is the one who has the largest financial interest in the relief sought by the class. (117) A member of the purported plaintiff class is the only person who may rebut the presumption by showing that the presumed most adequate plaintiff "will not fairly and adequately protect the interests of the class," (118) or is "subject to unique defenses that render such plaintiff incapable of adequately representing the class." (119) It is clear, therefore, that the PSLRA shifts the court's focus from the selection of lead counsel to the selection of a lead plaintiff who will assume the court's traditional role of monitoring lead counsel and negotiating the attorney's fee. (120) In other words, the PSLRA advances the "client-driven" model of class action. (121) 1. The Lead Plaintiff as a Trustworthy Monitor The reason courts have not historically focused their resources on appointing an adequate lead plaintiff instead of lead counsel is due to economic incentives. "[T]he small size of ... individual claims creates enormous free-rider effects: no rational plaintiff would take on the role of litigation monitor because she would incur all the costs of doing so but would realize only her pro rata share of the benefits." (122) Professors Weiss and Beckerman, however, were able to convince Congress that institutional investors in securities class actions are more capable than typical figurehead plaintiffs at effectively monitoring lead counsel because (1) they have large financial stakes in the outcome of the litigation, and (2) they have, or could readily develop, the necessary expertise to determine whether "plaintiffs' attorneys are acting as faithful champions for the plaintiff class." (123) They determined that serving as lead plaintiff would put institutional investors in "the most advantageous position" to monitor lead counsel. (124) This is because as lead plaintiff, the institutional investor could appoint his attorney to serve as lead counsel, as opposed to being a passive member of the class where he would have to hire and pay another attorney to challenge a settlement after it had already been reached. (125) Because courts are rarely receptive to objectors' claims and frequently force them to bear their own attorneys' fees, an institutional investor who is just another member of the class faces huge disincentives to become more active in monitoring lead counsel by challenging settlement agreements. (126) In contrast, the institutional investor--acting as lead plaintiff--could monitor settlement negotiations as they are made, thus saving the expense of challenging the agreement after it has already been reached. 2. Institutional Investors as Lead Plaintiffs The success of the PSLRA in encouraging institutional investors to become more active in securities class actions by assuming the role of lead plaintiff and monitoring lead counsel is still somewhat unclear. It appears, however, that institutional investors are beginning to take a more active role, as illustrated by the University of California's role as lead plaintiff in the much publicized class action suit against Enron, (127) despite early reports that institutions continued to remain "on the sidelines." (128) Two years after the PSLRA was enacted, the Securities and Exchange Commission (SEC) conducted research revealing two primary reasons why institutional investors are reluctant to serve as lead plaintiffs: (1) institutions are concerned that acting as lead plaintiff "could expose them to liability to other class members" (129) and (2) institutions obtain higher returns by bringing their own individual suits. (130) At least the second phenomenon is still occurring among institutional investors because investors feel that they can present a stronger individual claim than class members can establish in a class action. (131) Past reluctance, however, may be diminishing as new evidence shows that the benefits institutional investors receive from being lead plaintiffs is greater than they initially predicted. Recently, for example, in In re Cendant Corp. Litigation, (132) two institutional investors served as lead plaintiffs and secured a $3.1 billion settlement. (133) Evidence further shows that the "average post-Reform Act settlement is $17.5 million, compared to just $5 million before [the PSLRA was enacted]--a 300% increase." (134) The large beneficial impact institutional investors are having on settlement recoveries appears to be reversing the tide of passivity. In addition to the financial incentives for monitoring lead counsel, Professors Weiss and Beckerman also think that the expertise of institutional investors who serve as lead plaintiffs can be an important factor in effective monitoring. Indeed, the Fifth Circuit recently held that the PSLRA raises the standard Rule 23(a) adequacy threshold. (135) The court held that the PSLRA requires "that securities class actions be managed by active, able class representatives who are informed and can demonstrate they are directing the litigation." (136) It determined that the correct legal standard is to determine whether lead plaintiffs will "take an active role in and control the litigation" (137) and demonstrate that they "know more than that they were `involved in a bad business deal.'" (138) The court summed up the purpose of ensuring that lead plaintiffs are better informed and have more expertise with the following: "Class action lawsuits are intended to serve as a vehicle for capable, committed advocates to pursue the goals of the class members through counsel, not for capable, committed counsel to pursue their own goals though those class members." (139) After its emphatic insistence on informed lead plaintiffs controlling the litigation, the court completely vacated the class certification and remanded the case, sending a clear message that it will closely scrutinize the capacity of lead plaintiffs to control securities class actions now and in the future. (140) The greatest strength of the PSLRA in terms of providing incentives to institutional investors for assuming the role of lead plaintiff is its provision allowing these investors to appoint lead counsel. This provision encourages institutional investors to play a more active role because it affords them the opportunity to work with counsel with whom they are familiar. (141) Representatives of institutional investors who testified before the Third Circuit Task Force claimed that "shotgun marriages" of plaintiff with counsel whom it did not choose discourages prospective plaintiffs because they will have to take into account the risks of being "deprived of their choice of counsel or their preferred fee arrangement." (142) Congress intended for the court to disturb the lead plaintiff's choice of counsel only if it appears "necessary to protect the interests of the plaintiff class." (143) The SEC supports, at maximum, a "floating test" in those rare circumstances where the court may need to exercise greater scrutiny of the lead plaintiff's choice for counsel. "Greater scrutiny is warranted where it appears that the lead plaintiff has not played an active, effective role in choosing counsel." (144) The SEC, however, urges the courts to trust the judgment of a lead plaintiff who "possesses the qualities and acts in the manner contemplated by Congress" because "failing to do so could enhance counsel's control of the litigation, which is contrary to Congress' intent" and could also "deprive institutional investors of a core reason for serving as lead plaintiff." (145) III. EXTENDING THE PSLRA TO OTHER TYPES OF CLASS ACTION LITIGATION A. Successful Elements of Lead Plaintiff Provision in Securities Class Actions The success of the lead plaintiff provision in monitoring lead counsel and ensuring better settlement outcomes supports arguments for extending the provision to other damages class action litigation. The feasability of such an extension, however, requires considering the various unique aspects of securities class actions and their role in the PSLRA's success. Shareholders bring most securities class actions claiming damages against a company for fraudulently affecting or misrepresenting their stock price. All of the shareholders suffer the same type of damage, although to varying degrees depending on the amount of shares they own. Because damages can be so objectively and fairly quantified, "an automatic allocation formula exists, thereby usually reducing intra-class tensions." (146) Lack of class tensions is important because conflicts among class members and between class members and their representatives (lead counsel and plaintiff) are the biggest obstacles to effective class representation. (147) Internal conflicts, for example, can impede the ability of lead counsel to represent the entire class if factions within the class are fighting over allocation of the settlement. (148) If some class members have more at stake than others, they may be more risk-averse and more eager to accept a settlement than those who have less at stake and prefer to risk going to trial. (149) This can significantly impair the lead plaintiff's ability to protect the best interests of the class if it is willing to tolerate less risk. Even more, lead counsel themselves may be biased by their own risk-aversions resulting from significant opportunity costs created by the amount of time and financial resources they have invested in bringing the lawsuit. (150) Fortunately, in securities class actions, many of these conflicts are not present or have minimal impact. The fact that class members suffer the same type of damages reduces fighting about the allocation of the settlement because of the innate and objective allocation formula discussed earlier. (151) There is a difference in the level of risk that the lead plaintiff is willing to tolerate compared to the class members because the lead plaintiff under the PSLRA is usually the investor who has the largest financial stake in the litigation. (152) The number of large institutional investors who choose to opt out of class action suits and bring individual suits separate from the class is evidence of this. (153) Given the recent success of institutional investors in securing large settlements in class actions suits, however, it appears that this disparity in risk tolerance is not a significant obstacle. (154) Finally, the ability of a lead plaintiff to choose lead counsel in a securities class action under the PSLRA moderates lead counsel's risk preferences by keeping the preferences of the class in the forefront and forcing lead counsel to consider them in addition to his own desires. Another challenge that securities class actions are able to overcome by their very nature is the influence that an institutional investor as lead plaintiff is able to exert. Simply because the lead plaintiff is allowed to appoint lead counsel does not mean that lead counsel will abide by the lead plaintiff's wishes. Indeed, lead counsel easily could argue that once appointed, her job is to serve the best interests of the class and not solely the interests of the lead plaintiff. She could, therefore, override the lead plaintiff's desires in settlement negotiations by justifying her actions in the name of serving the class. The PSLRA does not secure the lead plaintiff's influence over the appointed counsel. In fact, "[t]he PSLRA is silent as to whether the lead plaintiff has any ability to dismiss the counsel it retains" if a conflict develops. (155) The most important source of influence for institutional investors is the likelihood that, because they hold so many securities, they will have the opportunity to repeatedly serve as lead plaintiffs in securities class actions and select counsel in the future. Reputation, therefore, is an extremely powerful enforcement device in securities class actions, forcing the lead counsel to consider the lead plaintiff's opinions and desires. Finally, perhaps the most obvious aspect of securities class actions playing a role in the success of the PSLRA is that the institutional investor with the largest financial stake in the litigation is presumed to be, and usually is, the most adequate lead plaintiff. (156) Choosing the institutional investor with the largest financial stake as lead plaintiff is easy for the court, thereby reducing the drain on resources, and generally resulting in the most sophisticated member of the class becoming lead plaintiff. (157) Furthermore, institutional investors have adequate financial resources with which to monitor the litigation and lead counsel. (158) In other class actions, determining the most sophisticated plaintiff who has the expertise, motivation, and financial resources to monitor the lead counsel may not be as easy to objectively determine. In summary, several major factors have made the lead plaintiff provision successful in securities class actions: (1) the plaintiff's homogenous damages that can be fairly and objectively allocated in a settlement agreement, (2) the probability of repeat performances by institutional investors as lead plaintiffs, which increases their influence over lead counsel, and (3) an objective factor, the size of the investor's financial stake, that a court can use in accurately determining the most adequate plaintiff in terms of both sophistication and financial resources. B. Extending the Lead Plaintiff Provision to Antitrust Class Actions The lead plaintiff provision could be expanded to class actions in which (1) members of the class suffered from similar types of damages, so that settlement allocation would only have to account for quantitative differences, (2) the lead plaintiff has some mechanism available for exercising influence over lead counsel, and (3) an objective or closely objective test could be employed to fairly and accurately determine the most adequate plaintiff. Antitrust class action lawsuits most closely meet the above criteria. (159) Class members have usually suffered some economic loss due to collusion or other monopolistic activity that results in higher prices to the consumer. Therefore, all class members will suffer the same type of damages (economic loss) with the only differences being the amount of loss each class member suffered. This quantitative difference creates a simple method for allocation of the recovery and an objective method for determining who should be the lead plaintiff--presumably the class member who has suffered the greatest loss. The largest antitrust class action lawsuit brought against the airlines in the past decade illustrates how the lead plaintiff provision of the PSLRA could have prevented a settlement that outrageously favored class attorneys at the expense of class members. (160) Four airlines were accused of violating federal antitrust laws by colluding to fix prices through an elaborate scheme in which they "conducted complex negotiations, offered explanations, traded concessions with one another, took actions against their independent self-interests, punished recalcitrant airlines that discounted fares and exchanged commitments and assurances, all to the end of reaching agreements to increase fares, eliminate discounts and set fare restrictions." (161) The suit's class included people who flew on any of the named airlines between January 1, 1988 and August 7, 1991, and who flew through one of twenty-three hubs of operation. (162) The airlines agreed to settle the charges of illegally setting ticket prices by paying $44 million in cash and $368.5 million in discount fare coupons. (163) Although on its face the settlement appeared generous, in reality it cost the class members more than they gained and meanwhile provided their attorneys with $16 million in fees and expenses. (164) Fliers who received the discount coupons had to purchase tickets in order to use the coupon and thereby benefit from the settlement. (165) For example, "a $10 certificate [could] only be used to purchase a roundtrip ticket costing $50 or more" forcing the plaintiff "to spend at least $40 of his or her own money to get benefits worth $10" (166) The maximum recovery allowable to an individual class member was $150 worth of certificates that could be used to purchase a roundtrip ticket of $1,500 or more. (167) The cash portion of the settlement, on the other hand, was "spent on administrative expenses surrounding these coupons ... given to charities, and ... went for attorneys' fees ...." (168) A lead plaintiff charged with representing the class interests in this case would have prevented the egregious disparity between class member and attorney recovery. Analogizing to the PSLRA, the lead plaintiff for this case would presumably have been the class member who had spent the most on airline tickets between January 1, 1988 and August 7, 1991. Interestingly enough, similar to the institutional investors in securities class actions, this class member would likely have been an "institution," a travel agency or other business engaged in the travel industry. Thus, such a corporate lead plaintiff could exert substantial influence over the settlement amount because they regularly do business with the airlines and because of their potential to serve as repeat plaintiffs in future class actions against airlines. Due to the potentially large amount of economic loss that this one individual class member or institution could have sustained, such a lead plaintiff has great incentives to monitor the lead counsel and any settlement negotiations to ensure that the recovery amount will cure the losses the class sustained. Certainly if there had been a lead plaintiff, the lead counsel would never have been able to agree to a settlement that would force class members to pay even more money to the airlines in order to recover their previous economic loss! C. Adapting the Lead Plaintiff Provision to Other Class Actions Extending the lead plaintiff provision of the PSLRA to class action lawsuits other than those involving antitrust or securities claims requires the court to discover and appoint the plaintiff who most closely resembles the securities class action institutional investor. Because a class member's financial stake in the litigation is a factor unique to securities (and possibly antitrust) class actions, the court will have to consider more than this one objective characteristic. The Third Circuit Task Force suggested that in determining whether the lead plaintiff possesses the requisite experience and incentive to monitor counsel and negotiate a reasonable fee, the court should focus on the relationship between the prospective counsel and plaintiff to determine: | |
(1) whether the party has exercised control over the litigation to
date; (2) whether the party has experience in managing
litigation; (3) whether the party has experience in acting as a
fiduciary; (4) any pre-existing lawyer-client relationship,
including in prior class actions; and (5) whether the party has
the financial resources and time to commit to managing the
litigation. (169)
| | These recommendations, however, introduce an element of subjectivity that could create problems similar to those associated with traditional judicial selection of lead counsel. (170) In order for the lead plaintiff provision to work effectively, the lead plaintiff must be able to exert influence over the lead counsel. Most class actions outside of securities litigation do not involve repeat players such as institutional investors. It is unlikely, therefore, that the lead counsel's interest in preserving his or her reputation will be a powerful tool for lead plaintiffs. A substitute tool might be for the lead plaintiff and counsel to enter into a contractual agreement. Such an agreement might allow class representatives to replace lead counsel in the event or a disagreement over the adequacy of the settlement; the original lead counsel would "then be entitled to immediate repayment of the litigation expenses ... and to eventual payment of a reasonable contingent fee based on the originally proposed settlement." (171) The disadvantage to such a contract, however, is that the dismissed counsel would be forced to rely on the successor counsel to negotiate a large enough settlement to cover his contingency fee, the successor's contingency fee, and a reasonable recovery for the class members. (172) This disadvantage, however, should not severely affect the applicability of the lead plaintiff provision to other class actions for two reasons: (1) the lead plaintiff and counsel may be able to reach a contractual agreement that, while it may not as fairly balance their interests, will not suffer from such heavy financial pressures, and (2) such a contract, despite its onerous disadvantage (maybe even because of it), may be just as powerful of a tool as reputation in deterring lead counsel from ignoring the lead plaintiff's desires. D. Lead Plaintiff Provision is a Superior Alternative to Other Reform Proposals Although the increased subjectiveness of selecting the lead plaintiff and the need for contractual arrangements between the lead plaintiff and counsel may weaken the effectiveness of the lead plaintiff provision in other class action suits, it still remains a better alternative to traditional lead counsel appointment methods and auctions. In class actions in which a member of the class has the motivation, expertise, and financial resources to monitor lead counsel, the lead plaintiff provision is a superior alternative to traditional methods of appointing lead counsel for several reasons. First, it is more effective for the lead plaintiff to challenge settlement terms on behalf of class members as they are made rather than leaving the entire class to oppose the settlement agreement ex post when their objections are likely to be ignored by the judge. (173) Second, lead plaintiffs are better advocates of class interests than judges because they have access to information that judges lack. This enables them to more adequately evaluate settlement agreements. (174) Finally, allowing lead plaintiffs to monitor lead counsel preserves vital court resources that would have to be employed to obtain the some amount of effective representation. (175) The lead plaintiff provision is also more effective than auctions. First, lead plaintiffs consider more than price in selecting lead counsel (176) and, therefore, are better able to simulate the process that clients in normal litigation use in selecting their counsel. By using the lead plaintiff provision, the class will also be able to obtain one of the benefits of the auction method, namely expeditious settlement, without sacrificing quality representation. (177) Second, the lead plaintiff provision avoids the problem of "shotgun marriages" that shift control back to the lead counsel. (178) Third, in contrast to the disincentives auctions create for class counsel to investigate and pursue claims, the lead plaintiff provision ensures that attorneys will still be able to recover their fees and thereby preserves their willingness to participate in and discover class action claims. Indeed, the lead plaintiff provision creates an incentive for quality firms to develop relationships with recurring lead plaintiffs, analogous to institutional investors in securities class actions, because it increases their chances of being selected to serve as lead counsel in future litigation. The lead counsel's interest in preserving this relationship also fosters more reasonable fee awards and a better overall settlement award for the class than the auction method, especially if the auction awarded the bid to a firm restricted by fee caps. (179) Finally, the lead plaintiff provision is more efficient than conducting an auction for the purpose of selecting lead counsel because it eliminates the time, costs, and difficulties associated with collecting bids and comparing them. (180) E. Types of Class Actions in Which the Lead Plaintiff Provision Cannot be Successfully Employed The primary obstacle to applying the lead plaintiff provision to other class actions is not whether it will be more effective than other alternatives, but whether it is a practical alternative. Effectively applying the lead plaintiff provision to other class actions requires the class action to contain (1) members who have suffered similar damages, and (2) motivated members who have the financial resources to monitor lead counsel. These requirements significantly limit the class action landscape to which PSLRA-like reform is applicable. (181) At one extreme, many class actions are comprised of a large number of claimants with small losses. (182) In these small claim class actions it is highly unlikely that any member will be willing to outlay the necessary time and financial resources to monitor lead counsel because such monitoring will either cost more than the loss or the actual loss will not be large enough to motivate any one class member to monitor the lead counsel. (183) At the other extreme, according to the Administrative Office of the United States Courts, 10.7% of all class action suits filed in 1998 involved mass tort litigation. (184) Mass tort class actions are significantly different from other class actions in that individual members suffer diverse injuries and damages. This diversity makes intra-class conflict more likely and makes it virtually impossible for one class member to effectively represent the entire class. (185) The lead plaintiff provision, therefore, is probably not suitable for class actions in which one of the elements--either homogenous damages or members who have the financial resources to monitor lead counsel--is absent, such as mass tort and small claim class actions. The lead counsel provision will be most effective when both elements are present; its effectiveness will correlate to the degree that each of the elements are satisfied. A class action, for example, which has a willing and able lead plaintiff but which also has slight differences among class members with respect to the substance and size of damages, might still be able to effectively utilize the lead plaintiff provision to monitor lead counsel. Such minor differences will most likely not be great enough to overpower the lead plaintiff and counsel's ability to fairly allocate the settlement. Some class actions involving employment discrimination exemplify this scenario. In these suits, employees and/or employee applicants ban together to allege that they suffered similar damages from an employer's alleged policy of intentional discrimination. In 1998, employment class action filings comprised 31.2% of all civil rights class actions which comprised 14.1% of all class actions. (186) Two recent cases illustrate this type of class action involving employment discrimination: Smith v. Texaco, Inc. (187) and Osgood v. Harrah's Entertainment, Inc. (188) In Smith, the named plaintiffs, representing a class of approximately two hundred other salaried black employees, asserted that their employer, Texaco, and its subsidiary, Star, discriminated in giving "promotions, compensation, and other benefits and privileges of employment." (189) The plaintiffs sought "monetary damages including ... compensatory and punitive damages." (190) Likewise, Mary Osgood, a caucasian female, brought an individual and class action suit against her employer, a casino, for discriminating by "deny[ing] [] employment opportunities such as job positions, promotions, potential for advancement and management training on the basis of the race of the applicant or employee." (191) As did the class plaintiffs in Smith, Osgood sought monetary relief. (192) The damages suffered in each case were identical in the sense that the employer discriminated against the plaintiffs. The plaintiffs suffered different damages, however, in the manner in which the employer discriminated against them, such as through hiring, firing, promoting, and demoting their employees. The damages among class members also differed with respect to the amount that would fairly compensate each individual for emotional and other intangible injuries. Despite these differences, the lead plaintiff provision could be an effective tool for the plaintiff classes because all of them suffered damages from discrimination and pursued compensation for emotional or intangible harm. Because the law focuses more on the degree to which the employer discriminates and the amount of harm it causes to the employee than on the way in which the employer discriminates, it is very unlikely that intra-class conflict will arise between class members because the employer discriminated against them differently. Moreover, because lead plaintiffs have suffered the same injury as their class members, the only obstacle with respect to damages will be allocating the damage award to reflect the degree to which each member suffered. This is very similar to the scenario a lead plaintiff faces in a securities class action; the only difference being that a securities damage award is objectively allocated based on the amount of securities each member owns in contrast to a damage award from an employee-discrimination class action which must be allocated on a subjective compensatory basis. Employee discrimination class actions, therefore, would be a good candidate for the lead plaintiff provision because the damages are relatively homogenous and given the emotional nature of the claim, it is likely that a class member will be willing to serve as lead plaintiff. There are, however, several obstacles to the success of applying the lead plaintiff provision to such Title VII class actions that suggest using caution before extending it to these cases. Although the emotional nature of the claim increases the willingness of a class member to serve as lead plaintiff, it is uncertain that the volunteer member will possess the necessary expertise and financial resources to adequately supervise lead counsel and protect the interests of other class members. Additionally, because the class members suffer almost equivalent damages, the court must select the lead plaintiff pursuant to subjective criteria. Therefore, although the lead plaintiff provision could improve the quality of representation in some employment discrimination class actions, it is not clear that it will be as effective as it will be for class actions that more closely resemble securities litigation, such as antitrust class actions. IV. ALTERNATIVE REFORM SUGGESTIONS FOR CLASS ACTIONS UNSUITABLE FOR LEAD PLAINTIFF PROVISION There are other alternatives beyond judicial appointment and auctions that could increase the probability of class members receiving fairer settlements in class actions that are not conducive to the lead plaintiff provision. As previously discussed, the goal of class action reform is to implement mechanisms that will simulate the attorney-client relationship between the lead counsel and class members in class actions. (193) The problem, however, is that lead counsel and class members often have competing interests. (194) The source of these competing interests is partially a result of the fact that the attorney, by financing the class action, becomes a joint venturer who has more at stake than the individual class members. (195) The attorney, therefore, has a lower threshold for taking risks and seeking a larger settlement on behalf of class members. (196) Professor Coffee explained the dynamics between the different class action players as follows: | |
Motivated by a contingent fee, class counsel would particularly
not want to risk being replaced by a successor counsel if class
members elected to take a long-shot gamble on trial. Class
counsel's rational fear would be that after it had funded the
action for years, it might be replaced on the brink of trial and
victory, because it rationally counseled caution. Class members
in turn would fear that plaintiffs' counsel, the defendants, and
a trial court that was usually inclined to prefer settlement over
trial might conspire to strike a deal that ignored the class's own
preferences. (197)
| | Under Civil Procedure Rule 23(c)(2), class members must be given notice of the action and the opportunity to opt out. (198) Because opt-outs reduce the size of the settlement, however, lead counsel has an incentive to set the opt-out deadline prior to the approval of the proposed settlement. (199) Currently, therefore, the only course of action available to those who object to the settlement terms is for them to hire an independent attorney to challenge the agreement during the settlement hearing. As discussed previously, for a variety of reasons these contests usually fail. (200) Professor Coffee, therefore, recommends delaying the opt-out deadline until after the approval of the proposed settlement to give objectors an additional, and perhaps more effective, course of action in expressing their disagreement with counsel actions. (201) The greatest strength of the class is in their number; the larger the class, the greater their chances for recovery and the higher the settlement amount. It is, therefore, lead counsel's greatest fear that class members will defect, upset settlement negotiations, and also reduce the likelihood that the counsel will recover his fee. (202) On the other hand, while opt-outs have the opportunity to band together and bring a separate class action, the time and expense of doing so would act as a sufficient deterrent to foolishly defecting. (203) Thus, increasing the class members' opt-out power could be an extremely useful tool in deterring lead counsel from proposing an inadequate or unattractive settlement. A. Suggested Reform for Mass Tort Class Actions Increasing class members' opt-out power would be most applicable to mass tort class action suits. These suits are usually a collage of members who have widely different claims with regard to substance and size; (204) therefore, mass tort class action litigation remains extremely controversial. (205) In simplistic terms, the controversy usually surrounds arguments that individuals suffer such unique damages and usually could bring independent claims, and therefore, such class actions should be prohibited. "Although collecting such cases might be more efficient than litigating them individually, say the critics, it will deny these individuals the right to decide whether and when to litigate, to control the course of their litigation, and to obtain individually crafted case outcomes." (206) It is not hard to predict, therefore, that mass tort litigation classes suffer from significant intra- and inter-class conflict that the Supreme Court has held justify dividing the class into individually represented subclasses under Rule 23(c)(4)(B). (207) The major disadvantage to sub-classing an action with serious internal conflicts is that it encourages holdouts who will opportunistically seek a greater share of the settlement by withholding their consent. (208) Coffee, therefore, recommends abandoning the representative model for class action suits when there are serious internal conflicts and instead increasing the flexibility for opt-out provisions. (209) This solution is more efficient in terms of reducing the role of the court and letting the class members sort out their needs for themselves by pursuing their own litigation when the class action settlement does not meet their needs. (210) Making the opt-out provision more available to class members, however, is not any more effective than the lead plaintiff provision at helping class members who have small individual claims. This is because members with small claims who opt out of the litigation may not have an independent claim strong enough to bring by themselves; if a large number defected, they would seriously reduce their own chances for any recovery. Small claimants also do not have any incentive to oppose a settlement agreement that is not as large as possible because as long as it is greater than or equal to their loss (which is not a difficult criterion to meet for such a small claim) they do not have an incentive to defect and incur the extra expense of bringing a separate action. These factors have historically made these types of class actions subject to the greatest abuse by lead counsel and are therefore in the greatest need of reform. (211) B. Suggested Reforms for Small Claim Class Actions Unfortunately, developing better monitoring mechanisms for small claim class litigation is very difficult. Because of the free-rider and collective action problems that inherently plague such actions, market mechanisms will probably fail. This is consistent with most general free-rider problems in the economy and is usually when government regulation is most justified. In this context, therefore, creating a greater role for judicial review of settlement agreements in small claim class action litigation is justified. As discussed earlier, the reform measures the Third Circuit Task Board and the Advisory Committee on Civil Rules suggested are inadequate to cure some of the traditional problems with entrusting settlement review to the judiciary. (212) The major problem with the reforms is that they do not provide judges with the necessary information to make better evaluations of settlement agreements. (213) One solution might be to develop and enforce a rule or regulation that would require the parties to file supplemental pleadings that reveal more detailed information about each side's claim. To avoid jeopardizing settlement negotiations, these supplemental pleadings could be kept confidential and available only to the judge prior to reviewing a proposed settlement. Professor Deborah R. Hensler, Senior Fellow at RAND Institute for Civil Justice, and Professor Thomas Rowe propose a more radical and controversial solution. They suggest requiring the loser of the lawsuit to pay the winner's legal expenses such that if the plaintiff class loses, the attorneys for the class would be liable for defendants' fees, but only up to the amount of their own reasonably calculated fees to date. (214) Likewise, if the plaintiff class wins, defendants would pay a separate amount directly to class counsel for class counsels' fees and expenses. This would effectively result in courts awarding a premium to class counsel on top of the fees and expenses they are usually awarded under the "common fund" system. (215) Requiring the loser of a lawsuit to pay the winner's fees is known as the English Rule, and it has been widely adopted throughout the world and consequentially, is sometimes called "the rest of the world rule." (216) Indeed, courts in Great Britain and Western Europe have applied the rule for many years and many think that it would vastly improve America's legal system, which generally requires that litigants pay their own attorneys' fees regardless of the outcome of their cases. (217) Several countries, most notably Australia and Canada, have incorporated loser-pays attorney fee shifting, as the English Rule is sometimes called, into their class action system. In Australia, for example, the class representative or members of the plaintiff class who actually commenced the litigation must pay the winning party's out-of-pocket expenses and attorneys' fees. (218) This provision has caused plaintiffs' lawyers to select a straw class representative who has no assets from which the defendants can recover their costs. (219) In return, defendants request courts to order the plaintiffs to pay the court a security of the estimated costs of the proceedings. (220) Similarly, in Canada when a class loses, the representative plaintiff is the only one liable for the defendant's legal fees and other costs. (221) So far, representative plaintiffs have avoided paying the costs because most cases are settled, but analysts are concerned that the rule creates a strong disincentive for qualified class members to serve as the class representative. (222) In the early 1990s, former President Bush's Council on Competitiveness led the civil justice reform movement and urged the states to implement the English Rule. (223) Indeed, one study "found 1,974 fee shifting statutes in the fifty states and the District of Columbia," (224) and federal law contains over two hundred statutes that shift fees to encourage enforcing public policies such as civil rights, consumer protection, and environmental laws. (225) Alaska has used the English Rule since the nineteenth century, and its Civil Rule 82 "entitles the prevailing party in a civil lawsuit to partial compensation of his or her attorney's fees from the losing party." (226) The limited use of the English Rule by both federal and state law, particularly in Alaska, shows both the advantages and disadvantages of applying the rule in the class action context. Martha Pacold best explains the advantages of fee shifting: | |
Under statutory fee shifting the loser pays the fees, while under
the common fund doctrine the victorious class pays them.... Under
fee shifting, the court awards fees in addition to whatever
primary relief it grants the plaintiffs, and the amount of fees
does not change the amount or type of the plaintiffs' relief. In
contrast, under the common fund doctrine, as fees are
subtracted from the fund, the amount available to satisfy class
members' claims diminishes. The size of the fees therefore
affects the size of the class members' relief. (227)
| | The payment of an attorney's fees under the common fund doctrine creates conflict between the class and its attorney because the class and attorney fight over how to divide the fund. Fee shifting, however, eliminates this conflict because the defendant will have to pay the attorney's fees and costs separately in addition to any monetary judgment award for the class. (228) The greatest advantage to fee shifting in the class action context, therefore, is its ability to obviate conflict between class members and their attorney because the defendant, instead of the class, will compensate the class attorney. The biggest weakness to the fee-shifting strategy is that most fee-shifting statutes require that to receive an award of attorneys' fees and costs, the party must "prevail." (229) Whether a class has prevailed when they settle, however, is a complicated and unsettled question. (230) This creates enormous incentive for plaintiffs' attorneys to settle at the expense of their clients because class attorneys, who are forced to compensate the defendant's attorney if they lose the case, are much more risk adverse than their client class. (231) This reintroduces a conflict between class members who have much less to lose by proceeding to trial than their class attorney who faces enormous costs if she loses (not only will the class attorney be unable to recover her own out-of-pocket expenses, she will also have to pay the defendant's costs and expenses). (232) Class attorneys may prematurely settle the claim thereby lowering the class' recovery. (233) The evidence, however, does not conclusively support the proposition that fee shifting creates undue pressure to settle. A study of Alaska's cases found that depending on the context, fee shifting "increased the value of reasonable cases, pushed strong cases toward trial and caused some plaintiffs to discount their claims." (234) Some even argue that this is actually an advantage because "the English Rule ... is supposed to depress the settlement value of a suit that is likely to fail," and likewise, effectively encourage the parties to bring only the strongest claims to trial. (235) As Hensler and Rowe suggest, more investigation into the potential success or failure of this proposal needs to be conducted. (236) There are many ways that loser-pays attorney fee shifting could be improved to be a better tool for monitoring class counsel. For example, allowing plaintiffs who settle in certain cases to be considered "prevailing" might reduce the incentive to settle and in turn, reduce the conflict between the class and its counsel in certain situations. It might also be possible to adjust attorneys' fees that are awarded under the shifting regime to "equalize the expected results of judgment to match those of settlement." (237) Despite the possible conflicts that fee shifting might create, it could very well prove to be a more beneficial monitoring tool for class members in small claims class actions than the American Rule. For example, the English Rule may better serve consumer claims for relatively small amounts of money. Under the American Rule, "the fee charged by the [class attorney] may exceed the amount of recovery." (238) "Under the English Rule, a defendant would be more likely to replace or provide a refund for the cost of a consumer good if he knew he would have to pay the plaintiff's attorney fees in addition to any judgment awarded." (239) As opposed to the current system, therefore, the English Rule could assist plaintiffs in receiving better settlements. Another less radical alternative is to increase class members' ability to monitor their counsel in small claims class actions in conjunction with increased judicial oversight. This proposal would allow a judge to impose sanctions on plaintiffs' attorneys who propose a settlement that contains excessive attorneys' fees and/or is not in the class' best interests. This proposal is essentially an extension of Rule 11 of the Federal Rules of Civil Procedure which allows courts to impose sanctions on attorneys for filing frivolous lawsuits. Congress, when drafting the PSLRA, in order to strengthen Rule 11's application, required "the court to include in the record specific findings, at the conclusion of the action, as to whether all parties and all attorneys have complied with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure." (240) By encouraging courts to enforce Rule 11 more frequently, Congress intended to reduce the number of meritless securities lawsuits. (241) Evidence suggests that since passing the PSLRA, courts have been applying this heightened Rule 11 provision. (242) Analogously, Congress or the Federal Rules Committee could enact another rule or amend Rule 11 to allow courts to impose sanctions on attorneys who accept a settlement that is clearly unfavorable to the class, including, but not limited to, settlements that provide class counsel with exorbitant attorneys' fees. Increasing the court's enforcement ability against settlement awards which unjustly favor class counsel at the expense of class members in small claim class actions could have a deterrent effect similar to that of applying the heightened Rule 11 provision in securities class actions. Finally, another less drastic alternative that Marc Gross suggested in response to Hensler and Rowe's fee-shifting proposal is to subject settlement agreements to greater scrutiny by the public through posting the agreements on the Internet. (243) Gross argues that increasing disclosure to public citizens, watchdog groups, and the press will deter frivolous and abusive settlements. (244) Indeed, Congress has already implemented a similar provision that mandates sufficient disclosure of antitrust settlements in cases brought by the government to ensure that settlements are in the public interest. The Antitrust Procedures and Penalties Act, also known as the Tunney Act, (245) requires that the Justice Department file a "competitive impact statement" with the court explaining any proposed settlement and how it will affect competition in the relevant market. (246) The public has sixty days to submit comments after the statement is filed, and the Department must file its responses with the court and publish them in the Federal Register during this sixty-day time period. (247) The court then holds a hearing and rules on whether the proposed settlement is in the public interest. (248) The statute has been enforced as illustrated by a suit brought by the American Antitrust Institute (AAI) claiming that the competitive impact statement filed by the Justice Department associated with the Microsoft settlement needed to be supplemented with additional information. (249) The AAI desired information such as the alternative remedies considered and rejected, details about the Department of Justice's evaluation, and an explanation of how the settlement would affect private antitrust lawsuits pending against Microsoft. (250) These are just a few suggestions for resolving this problem. It is clear, however, that small claims class actions require a regulatory solution instead of a market-based solution, as even fee shifting would require a statutory or regulatory mandate. Reformers, therefore, should focus their efforts on creating a regulatory mechanism that will allow judges, and maybe even the public, to more effectively review settlement agreements on behalf of class members. V. CONCLUSION For class actions in which a lead plaintiff provision analogous to the PSLRA's provision would be effective, it is the optimum tool for emulating the ordinary attorney-client relationship. Not only does it conserve judicial resources that would otherwise be needed to select and monitor class counsel, it also ensures fairer settlements for class members, including more reasonable attorneys' fees. Alternative reform mechanisms, such as increasing judicial oversight in selecting class counsel, reviewing settlement agreements, or selecting class counsel through conducting auctions, do not provide adequate safeguards to class members' interests. Many judges do not have adequate time or information to conduct an investigation into a settlement agreement. Likewise, settling parties have a strong disincentive to reveal any information that would jeopardize gaining the court's approval of their agreement, especially one that generously compensates class counsel. Selecting lead counsel through a bidding process does not adequately protect class interests because the lowest bidder may provide lower quality representation, be reluctant to expend more than he can recover due to a fee cap in the bidding contract, and be risk-averse to pursuing a larger settlement that would actually be a truer reflection of the class action's worth. There are several factors that have made the lead plaintiff provision successful in securities class actions: (1) homogenous damages that can be fairly and objectively allocated in a settlement agreement, (2) the probability of repeat performances by institutional investors as lead plaintiffs, thereby increasing their influence over lead counsel, and (3) an objective factor, namely, the size of the investor's stake, to use in easily determining the most adequate lead plaintiff in terms of both sophistication and financial resources. Based on these factors, the lead plaintiff provision could be expanded to class actions where (1) members of the class have suffered from similar types of damages so that the settlement allocation would only have to account for quantitative differences, (2) the lead plaintiff has some mechanism available for exercising influence over lead counsel, and (3) an objective or nearly objective test could be employed to fairly and accurately determine the most adequate lead plaintiff. Antitrust class actions most easily meet these criteria because generally all of the class members are consumers who have suffered the same type of damage, namely economic loss, from a provider's monopolistic activities. Moreover, any damages recovered could easily be allocated based on the quantitative differences in suffered losses, and the lead plaintiff could be objectively determined as the class member who suffered the greatest loss. Effectively applying the lead plaintiff provision to other class actions requires the class action to contain (1) members who have suffered similar damages and (2) motivated members who have the resources to monitor lead counsel. The effectiveness of the lead plaintiff provision in other class actions decreases as class damages become less similar. As illustrated by employee discrimination class actions, however, the lead plaintiff provision remains an effective tool for class actions in which there are only slight differences among class members with respect to the substance and size of their damages. At the extreme, however, damages suffered by class members of mass tort litigation are so diverse that it is impossible for one class member to effectively represent the entire class as lead plaintiff. The lead plaintiff provision is also unsuitable for small claims litigation because the other necessary element, motivated members who have the resources to serve as lead plaintiff, is missing. Small claims litigation violates this second requirement because the time and cost involved in serving as lead counsel outweigh the damage recovery a class member is likely to receive. There are other reform alternatives for mass tort and small claims class actions, however, that will better serve to protect class members' interests than the current system. For mass tort class actions, increasing the ability of class members to opt out of the class actions after the approval of the proposed settlement would be a more effective monitoring tool. For small claim class action litigation, providing judges more information with which to review settlement agreements, employing a loser-pays fee-shifting mechanism, imposing sanctions on class counsel who enter into abusive settlement agreements, and subjecting settlement agreements to greater scrutiny by the public are all options worthy of consideration. The reform proposals mentioned in this Note, especially extending the lead plaintiff provision to other types of class actions, are just a few of the ways to effectively reform class actions and better protect class interests. The success of the PSLRA lead plaintiff provision in securities class actions and its potential to help class members in other class actions better monitor their class counsel and attain better settlement awards, should spur Congress and state legislatures to employ this provision in more class action litigation, especially antitrust suits. Indeed, rulemaking bodies can no longer sit idly by or continue to advocate traditional oversight procedures that allow lawyers to recover windfall profits at the expense of their class. Without reform, the value of class action litigation will amount to little more than a free box of cereal. (1.) Herb Field, Cereal Suit Only an Aid to Class-Action Lawyers, HARRISBURG PATRIOT & EVENING NEWS, Apr. 5, 1995, at A7 ("The total retail value of this offer is supposed to amount to at least $10 million."); Tony Kennedy, General Mills is Proposing a Giveaway to Settle Lawsuit, STAR TRIB., Feb. 28, 1995, at Al; Saundra Torry, Going to the Head of the Class Action Settlement, WASH. POST, Apr. 8, 1996, at F7. (2.) Sherman Joyce, "Class Action" Clients Often Fleeced by Greedy Lawyers, LAS VEGAS REV. J., May 7, 1998, at 13B; see also Marcia Coyle, Class Action Abuses May Get High Court Review, NAT'L L.J. May 5, 1997, at A12. (3.) Joyce, supra note 2. (4.) Id. (5.) THIRD CIRCUIT TASK FORCE OF THE SELECTION ON CLASS COUNSEL: FINAL REPORT 1, [hereinafter THIRD CIRCUIT TASK FORCE FINAL REPORT], available at http://www.ca3/ uscourts.gov (last visited Sept. 1, 2002). (6.) Id. at 10. (7.) Jill E. Fisch, Aggregation, Auctions, and Other Developments in the Selection of Lead Counsel under the PSLRA, 64 LAW & CONTEMP. PROBS. 53, 56 (2001) (discussing how monitoring has the potential to improve litigation procedures and to reduce costs). (8.) Elliott J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 YALE L.J. 2053, 2065 (1995). (9.) Id. (footnotes omitted). (10.) Id. (11.) FED. R. CIV. P. 23(a)(4); see also A.J. STEPHANI & GLEN WEISSENBERGER, WEISSENBERGER'S FEDERAL CIVIL PROCEDURE 2000 LITIGATION MANUAL 170-71 (2000). (12.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 6; Third Circuit Judge Convenes Task Force to Study Selection of Lead Class Counsel, 69 U.S.L.W. (BNA) 2489 (Feb. 20, 2001). (13.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 1; see 15 U.S.C. [section] 78u-4(a)(3) (2000). (14.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 1; Minutes, Mar. 12, 2001, CIVIL RULES ADVISORY COMM. 9, at http://www.uscourts.gov/rules/Minutes/CRACMM01.pdf (last visited Sept. 1, 2002) (discussing the draft for the attorney appointment Rule 23(g)). (15.) Weiss & Beckerman, supra note 8, at 2107. (16.) 15 U.S.C. [section] 78u-4(a)(3); S. REP. 104-98, at 11 n.32 (1995). (17.) 15 U.S.C. [section] 78u-4(3)(B)(v). (18.) Id. [section] 78u-4(a)(3)(B)(iii)(I)(bb). (19.) Weiss & Beckerman, supra note 8, at 2095. (20.) William S. Lerach, Achieving Corporate Governance Enhancements Through Litigation, Keynote Address Before the Council of Institutional Investors Spring Meeting (Mar. 27, 2001) (discussing how participation by institutional investors is increasing settlement recoveries which in turn is encourages more participation by institutional investors), available at http://www.enronfraud.com/pdf/corp-gov.pdf (last visited Sept. 1, 2002). See generally Joseph A. Grundfest & Michael A. Perino, The Pentium Papers: A Case Study of Collective Institutional Investor Activism in Litigation, 38 ARIZ. L. REV. 559, 559-64, 582-84,599-604 (1996) (explaining the reasons institutional investors are reluctant to become lead plaintiffs and how the PSLRA provides incentives for institutional investors to overcome this reluctance). (21.) For an opposing view regarding the effectiveness of auctions, see Charles H. Gray, Note, An Economic Analysis of the Private Securities Litigation Reform Act: Auctions as an Efficient Alternative to Judicial Intervention, 44 WM. & MARY L. REV. 829 (2002). (22.) See DEBORAH R. HENSLER ET AL., CLASS ACTION DILEMMAS: PURSUING PUBLIC GOALS FOR PRIVATE GAIN 12 (2000). Scholars continue to debate how the Rule 23(b)(2) revisions drafters intended for it to be used. It is relatively clear, however, that given the context in which Rule 23(b)(2) revised in 1966, Rule 23(b)(2) was designed to afford racial minorities an easier avenue by which to effect social transformation. Cf. STEPHEN C. YEAZELL, FROM MEDIEVAL GROUP LITIGATION TO THE MODERN CLASS ACTION 238-39 (1987). It is less clear, however, that the rule drafters intended Rule 23 to permit class action lawsuits that would act as "private, market-driven supplement[s] to governmental regulation of the economy" or "private-attorney-general-suits." Id. at 239, 248. According to Yeazell, Rule 23 was not intended to achieve these goals because Rule 23(b)(3) makes it more difficult for classes to seek monetary damages and subjects these lawsuits to more judicial discretion than the injunctive relief suits of Rule 23(b)(2). Id. at 247. Others frame the debate over the Rule's goals in terms of whether it was meant to be a tool of social policy or just a procedural tool for the aggregation of claims. | |
The justifications that led to the development of the class action
include the
protection of the defendant from inconsistent obligations, the
protection of the
interests of absentees, the provision of a convenient and
economical means for
disposing of similar lawsuits, and the facilitation of the
spreading of litigation
costs among numerous litigants with similar claims.
| | United States Parole Comm'n v. Geraghty, 445 U.S. 388, 402-03 (1980) (citations omitted); see also Class Action Lawsuits: Examining Victim Compensation and Attorneys' Fees: Hearing before the Subcommittee on the Administrative Oversight and the Courts of the Committee on the Judiciary United States Senate, 105th Cong. 33 (1997) (statement of Hon. Paul V. Niemeyer, U.S. Court of Appeals for the 4th Cir.). (23.) HENSLER ET AL., supra note 22, at 51; YEAZELL, supra note 22, at 248. (24.) HENSLER ET AL., supra note 22, at 48. (25.) See id. at 52-61. Rule 23(b)(2) primarily is used to bring civil rights actions seeking injunctive relief: "[T]he party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole...." FED. R. CIV. P, 23(b)(2). In comparison to Rule 23(b)(2), class actions seeking damages pursuant to Rule 23(b)(3) are much more difficult to pursue given the many factors that the court must consider before allowing the suit. The text of Rule 23(b)(3) is as follows: | |
An action may be maintained as a class action if the prerequisites
of subdivision
(a) are satisfied, and in addition ... the court finds that the
questions of law or
fact common to the members of the class predominate over any
questions
affecting only individual members, and that a class action is
superior to other
available methods for the fair and efficient adjudication of the
controversy. The
matters pertinent to the findings include: (A) the interest of
members of the
class in individually controlling the prosecution of defense of
separate actions;
(B) the extent and nature of any litigation concerning the
controversy already
commenced by or against members of the class; (C) the desirability
or
undesirability of concentrating the litigation of the claims in the
particular
forum; (D) the difficulties likely to be encountered in the
management of a class
action.
| | Id. 23(b)(3). Title VII of the Civil Rights Act of 1964 as amended by the Civil Rights Act of 1991, however, is a statutory provision separate from Rule 23 that permits a class to bring disparate impact claims against a discriminatory employer and seek both an injunction and a damage recovery. 42 U.S.C. [section] 2000(e) (2000). (26.) See HENSLER ET AL., supra note 22, at 52-68. (27.) Phyllis Zipka Skupien, Esq. & Robert Woodman McSherry, Do Auctions Work? The Controversial Method for Choosing Class Counsel and Setting Fees, 11 No. 4 ANDREWS' PROF. LIAB. LITIG. REP. 1, Dec. 19, 2001, at 1, 2. (28.) HENSLER ET AL., supra note 22, at 13. (29.) Id. at 71. (30.) Id. at 71-72. If they lose, however, the attorneys must cover their own expenses. (31.) YEAZELL, supra note 22, at 248-49 ("[C]lass suits seeking money damages carry the potential for high fees ... from that so-called common fund.... By contrast, in a suit that seeks only injunctive relief, there will be no common fund and thus no fee to be recovered from it."); see also HENSLER ET AL., supra note 22, at 77. (32.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 4. (33.) HENSLER ET AL., supra note 22, at 77. (34.) Id. at 78-79. (35.) THIRD CIRCUIT TASK FORCE ON THE SELECTION OF LEAD COUNSEL: DRAFT REPORT 5 (on file with author). | |
The Task Force suspects, but cannot be certain, that the adverse
publicity
associated with some class action results, particularly the cases
in which the
plaintiffs receive apparently little and the lawyers apparently
much, have
affected not only the judicial willingness to approve settlements
but might also
have incited in some judges the desire to become more actively
involved in
controlling attorney fees. This may have contributed to an interest
in some
judges in using the bidding process for appointment of lead
counsel.
| | Id. (36.) HENSLER ET AL., supra note 22, at 75. (37.) Weiss & Beckerman, supra note 8, at 2065. (38.) FED. R. CIV. P. 23(e); see also HENSLER ET AL., supra note 22, at 76. (39.) Weiss & Beckerman, supra note 8, at 2067 ("[J]udges generally feel pressured to move their dockets and have an interest in approving settlements.... Lacking any incentive to probe deeply, and lacking the time and information necessary to do so, it is not surprising that courts tend to approve almost all class action settlements."). (40.) Id. at 2062. (41.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 6. Private ordering is subject to approval of the court, which is usually granted. Id. (42.) Weiss & Beckerman, supra note 8, at 2062. (43.) See, e.g., H.R. CONF. REP. NO. 104-369, at 33-35 (1995) (lamenting that speed supplanted diligence in drafting complaints for class action suits that ultimately were lawyer-driven). (44.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 99. (45.) The Task Force was "made up of members of the judiciary, academics, plaintiff and defense lawyers (including representatives of institutional investors such as pension funds), and attorneys who are experts on the economics of the practice of law." Id. at 13. (46.) Id. at 99-101. (47.) Id. (48.) FED. R. CIV. P. 23(g)(2)(B) (proposed July 2001), in PROPOSED RULES AMENDMENTS PUBLISHED FOR COMMENT: REPORT OF THE CIVIL RULES ADVISORY COMM., at 33 [hereinafter REPORT OF THE CIVIL RULES ADVISORY COMM.], available at http://www.uscourts.gov/rules. (49.) Id. (50.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 101-02; FED. R. CIV. P. 23(h), in REPORT OF THE CIVIL RULES ADVISORY COMM., supra note 48, at 14-16. (51.) FED. R. CIV. P. 23(h) committee note (proposed July 2001), in REPORT OF THE CIVIL RULES ADVISORY COMM., supra note 48, at 46; THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 101. The Third Circuit Task Force also recommends that judges "direct counsel to propose the terms for a potential award of fees" to "provide a helpful structure for the court when it conducts its reasonableness review at the end of the case." Id. at 101. (52.) See Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. CHI. L. REV. 1, 46-47 (1991) ("[S]ettlement hearings are typically pep rallies jointly orchestrated by plaintiffs' counsel and defense counsel."). (53.) See id. at 46. (54.) Id. at 45-46. (55.) Id. at 46. (56.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 10-11. (57.) 131 F.R.D. 688, 698 (N.D. Cal. 1990) [hereinafter Oracle I]. (58.) In re Wells Fargo Sec. Litig., 157 F.R.D. 467,468 (N.D. Cal. 1994) [hereinafter Wells Fargo III. (59.) Glen DeValerio, Appointment of Lead Plaintiff and Lead Counsel under the Private Securities Litigation Reform Act of 1995, in 1 PLANNING STRATEGIES FOR THE NEW MILLENNIUM [section] III(B) (May 2000) (ALI-ABA Course of Studies Materials Course No. SE82, May 2000), available at http://www.bermanesq.condpdf/DeValerioALI_ABA.pdf; see, e.g., In re Wells Fargo Sec. Litig., 156 F.R.D. 223,228-29 (N.D. Cal. 1994) [hereinafter Wells Fargo I]. The court cited the following in support of its appointment decision: | |
1) The firm's experience, and those of the attorneys, 2) the firms
qualifications,
including its willingness to post a "completion bond or other
security for the
faithful completion of its services to the class," 3) the firm's
malpractice
insurance coverage, 4) the percentage of any recovery the firm will
charge in
the event of recovery, 5) other terms of the proposed fee
arrangement, 6) certain
certifications on behalf of the firm regarding bid procedure.
| | Id. at 229. (60.) Developments in the Law--The Paths of Civil Litigation, 113 HARV. L. REV. 1827, 1839 (2000) [hereinafter The Paths of Civil Litigation]. (61.) Id. at 1839-40. (62.) In re Oracle Sec. Litig., 132 F.R.D. 538,539 (N.D. Cal. 1990) [hereinafter Oracle II]. Judge Walker selected a bid in an order dated October 18, 1990. He had ordered the bid on August 3. Oracle I, 131 F.R.D. at 697. (63.) Skupien & McSherry, supra note 27, at 7. The five district courts are the Northern District of California, Northern District of Illinois, District of New Jersey, Southern District of Florida, and Southern District of New York. (64.) Id. To date, the following class action lawsuits and judges have used auctions to select lead counsel: In re Auction Houses Antitrust Litig., 197 F.R.D. 71 (S.D.N.Y. 2001) (Kaplan, J.); In re Comdisco Sec. Litig., 141 F. Supp. 2d 951 (N.D. Ill. 2001) (Shadur, J.); In re Commtouch Software Ltd. Sec. Litig., No. C 01-00719 (N.D. Cal. 2001) (Alsup, J.); In re Quintus Sec. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001) (Walker, J.); In re Bank One S'holders Class Actions, 96 F. Supp. 2d 780 (N.D. Ill. 2000) (Shadur, J.); In re Lucent Tech., Inc., Sec. Litig., 194 F.R.D. 137 (D.N.J. 2000) (Lechner, J.); Sherleigh Assocs., LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688 (S.D. Fl. 1999) (Lenard, J.); Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999) (Walker, J.); In re Network Assoc., Inc. Sec. Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999) (Alsup, J.); In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998) (Walls, J.); In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190 (N.D. Ill. 1996) (Shadur, J.); In re Cal. Micro Devices Sec. Litig., 168 F.R.D. 257 (N.D. Cal. 1996) (Walker, J.); Wells Fargo II, 157 F.R.D. (Walker, J.); Oracle I, 131 F.R.D. (Walker, J.). (65.) Skupien & McSherry, supra note 27, at 8. (66.) 918 F. Supp. 1190 (N.D. Ill. 1996). (67.) Lowell E. Sachnoff & Jeffrey T. Gilbert, Auctioning the Role of Lead Counsel in Class Action Cases to the Lowest Bidder, in POST-GRADUATE COURSE IN FEDERAL SECURITIES LAW: ABA-ALI COURSE OF STUDY 541 (ALI-ABA Committee on Continuing Professional Education ed., 1997). (68.) Joseph A. Grundfest, Attorneys Fees in Class Action Securities Fraud Litigation: A Proposal for Addressing a Problem that Has No Perfect Solution [An Outline of A Work in Progress], in THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at app. B (June 1, 2001) (testimony of Joseph A. Grundfest). (69.) Id. at 6. | |
The average fee award in 733 federal class action securities fraud
cases filed
between January 1991 and May 1999 was approximately 30.12 percent
of the
settlement amount. Thus, of the total $6.1 billion in settlements
in these
actions, approximately $1.837 billion was paid to class counsel and
$4.263
billion was retained by members of the class.
| | Id. (footnote omitted). (70.) Kathryn Kranhold & Richard B. Schmitt, To Rein In Fees, Some Judges Ask Attorneys to Bid, WALL ST. J., Dec. 6, 2000, at BI. The 1996 study followed 400 class action suits. Id. (71.) Grundfest, supra note 68, at 7 (noting that the lowest fee was awarded in the $30 million settlement of In re Network Associates, Inc. Securities Litigation, 76 F. Supp. 2d 1017 (N.D. Cal. 1999), and the highest fee was awarded in the 1995 Wells Fargo settlement for $13.5 million. Wells Fargo II, 157 F.R.D. 467,467 (N.D. Cal. 1994). Grundfest cautions that these percentages are derived from cases "involving hard bargaining by competent, named plaintiff[s]." Grundfest, supra note 68, at 7. He also cautions against complete reliance on the data because it is derived from a small sample of cases (the fourteen cases in which auction methods have been employed) and because of the significant variance in the auctioning procedures used by courts. Id. (72.) Grundfest, supra note 68, at 6. Grundfest explained: | |
I am currently in the process of tracing back the roots of the 25
percent to 33
percent norm, and have as yet discovered no persuasive argument
that the
norm was ever a reasonable approximation of the fee that would
result from an
arm's length bargain over representation in a securities fraud
class action
lawsuit.
| | Id. at 9. (73.) 918 F. Supp. 1190 (N.D. Ill. 1996). (74.) Sachnoff & Gilbert, supra note 67, at 541. (75.) Id. at 539 (quoting Judge Walker). (76.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 46. (77.) See id. (78.) Id. at 42. (79.) Id. at 45. (80.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 52-54; The Paths of Civil Litigation, supra note 60, at 1843-44. (81.) Darren J. Robbins & Fred B. Burnside, The Race to the Bottom: Bidding for Lead Counsel and Its Impact on Securities Class Actions, in ADVANCED SECURITIES LAW WORKSHOP, 2001, at 311,361 (PLI Corp. Litig. & Practice Course Handbook Series No. BO00UE). (82.) Id. at 361. (83.) Id. at 362 (footnote omitted). (84.) The Paths of Civil Litigation, supra note 60, at 1844. In Wenderhold v. Cylink, 188 F.R.D. 577 (N.D. Cal. 1999), after Judge Walker requested competitive bids for the position of lead counsel, only one of the six firms submitted a bid. Id. Furthermore, the law firms that have become "gun shy" are those that specialize in class actions because they consider the risk of investing resources into developing claims "too great in light of the statistical probability that they will lose in the bidding process and go uncompensated for pre-bid work." Robbins & Burnside, supra note 81, at 363. This lends further support to the theory that auctions are discouraging the more experienced law firms and leaving class members to be represented by "lemon" lawyers, if at all. (85.) John C. Coffee, Jr., Securities Class Auctions, 21 NAT'L L.J., Sept. 14, 1998, at B6. (86.) 918 F. Supp. 1190 (N.D. Ill. 1996). (87.) Coffee, supra note 85; Scott Medintz, Big Suits: Lysine Antitrust Settlement, 18 AM. LAW. 114 (1996). (88.) Coffee, supra note 85; Medintz, supra note 87, at 114. (89.) Medintz, supra note 87, at 114 (1996); Coffee, supra note 85. (90.) Coffee, supra note 85. (91.) Id. (92.) Id. (93.) See Class Action Lawsuits: Examining Victim Compensation and Attorneys' Fees: Hearing Before the Subcomm. on Administrative Oversight and the Courts of the Senate Comm. on the Judiciary, 105th Cong. 30 (1997) (statement of Lewis H. Goldfarb). Professor Coffee also "served as legal consultant and adviser to the White House's Office of General Counsel during the PSLRA's consideration and passage...." Robbins & Burnside, supra note 80, at 350-51. (94.) Coffee, supra note 85. (95.) Id. (96.) Skupien & McSherry, supra note 27, at 8. (97.) 109 F. Supp. 2d 285 (D.N.J. 2000). (98.) John C. Coffee, Jr., The PSLRA and Auctions, 225 N.Y. L.J., May 17, 2001, at 5; Kranhold & Schmitt, supra note 70. (99.) Kranhold & Schmitt, supra note 70. (100.) 15 U.S.C. [section] 78u-4(a)(6) (2000). The conference report to the PSLRA also encourages ex post review of fee awards because it expressly states that "[b]y not luring the percentage of fees and costs counsel may receive, the Conference Committee intends to give the court flexibility in determining what is reasonable on a case-by-case basis." H.R. CONF. REP. NO. 104-369, at 36 (1995). (101.) 110 F. Supp. 2d. 427 (E.D. Va. 2000). (102.) Id. at 438 (citation omit). (103.) Coffee, supra note 98. (104.) Id. (105.) Wells Fargo II, 157 F.R.D. 467 (N.D. Cal. 1994). (106.) Sachnoff & Gilbert, supra note 67, at 542. (107.) Id. (108.) Coffee, supra note 85. (109.) THIRD CIRCUIT TASK FORCE FINAL REPORT, supra note 5, at 59. (110.) Id. (111.) 15 U.S.C. [section] 78u-4(a)(3) (2000). (112.) S. REP. No. 104-98, at 8-10 (1995). (113.) H.R. CONF. REP. NO. 104-369, at 32 (1995) (emphasizing that the Act is "intended to increase the likelihood that parties with significant holdings in issuers, whose interests are more strongly aligned with the class of shareholders, will participate in the litigation and exercise control over the selection and actions of plaintiffs counsel"). (114.) Id. at 34 (explaining that Congress wanted to encourage institutional investors to take a more active role in securities class action lawsuits which would "ultimately benefit shareholders and assist courts by improving the |
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